Navient Corp

NASDAQ:NAVI

Earnings Call Analysis

Navient Boosts Outlook Amid Strategic Progress

Navient reported a GAAP EPS of $0.32 for Q2 2024, with a core EPS of $0.29 impacted by restructuring and regulatory costs. The company's strategic actions include a significant expense reduction of hundreds of millions annually, transitioning 900 employees to MOHELA, and ongoing discussions on divesting its Business Processing Solutions. Net interest margins faced pressure due to increased loan prepayments. Navient updated its 2024 EPS guidance to $1.35-$1.55, reflecting continued strategic progress and anticipated expense efficiencies.

Navigating Strategic Waters: Recognizing Current Challenges

Navient's recent earnings call reveals a company in the throes of strategic transformation. CEO David L. Yowan articulated a clear commitment to enhancing operational efficiency, with a structural shift aimed at reducing the workforce by approximately 80% to 90% as part of their cost-cutting strategy. The company's efforts in outsourcing servicing operations to MOHELA indicate a transition to a flexible cost model and signify a deeper understanding of the market dynamics they face.

Performance Snapshot: Earnings and Margins

In the second quarter of 2024, Navient reported a GAAP earnings per share (EPS) of $0.32, with core EPS at $0.29. The decline in net interest margin of 36 basis points to 55 basis points was driven primarily by significant loan prepayments. Prepayment activity surged to $2.5 billion, up from $1.6 billion in the previous quarter, indicating a notable shift in borrower behavior that may influence future earnings. The company estimates a full-year EPS guidance ranging between $1.35 and $1.55, a downward adjustment primarily due to $0.19 in regulatory and restructuring costs.

Loan Portfolio Insights: Trends and Projections

Navient's federal education loans portfolio has demonstrated resilience with delinquency rates dropping to 7% and charge-off rates improving to 14 basis points. However, the rising prepayment levels have posed challenges to future net interest income. Looking ahead, Navient projects a net interest margin in the high 40s for the FFELP portfolio by year-end, reflecting an adaptation to market conditions and borrower behavior. Current guidance does not anticipate a continued increase in prepayments, acknowledging the volatility surrounding recent loan forgiveness policies.

Consumer Lending: Sustained Growth amid Uncertainties

In the consumer lending segment, originations soared by over 40% to $278 million compared to $197 million a year earlier. Such growth suggests an effective strategy to attract high-quality borrowers, although this is contrasted by a slight decline in net interest margins at 289 basis points from 297 a year ago. Stable credit metrics further bolster confidence, as late-stage delinquency and forbearance rates remained relatively flat.

Divestiture Plans: An opportunity to Unlock Value

Navient is actively engaged in discussions to divest its Business Processing Solutions (BPS) division, which would be crucial for realizing the company's objective of substantial cash flow maximization. This divestiture is seen as beneficial, not just in terms of allocating cash proceeds productively but also in streamlining operations and enhancing shareholder value. The company aims to provide insights on potential proceeds and expense reduction impacts during the second half of the year.

Effective Capital Management: Prioritizing Shareholder Returns

The company’s disciplined capital management is evident through strategic asset-backed securitizations and a targeted reduction in share count by 2% via repurchase of 2.5 million shares. With a tangible book value of $18.81 per share, which currently reflects a 20% discount to market value, shareholders can expect focused efforts on leveraging cash flows and optimizing capital resources.

Regulatory Landscape: Navigating Legal and Financial Challenges

Ongoing legal challenges, specifically related to the CFPB lawsuit, have necessitated significant regulatory expenses amounting to $0.08 per share. The company has allocated over $100 million in total reserves, emphasizing the impact of regulatory scrutiny on financial performance. Future provisions for mitigating these costs will be evaluated as new developments unfold.

Outlook: Strategizing for Resilience and Growth

As Navient proceeds into the latter half of 2024, it remains committed to its strategic objectives, focusing on expense reductions while exploring avenues for growth, especially within the Earnest business. The anticipated improvement in the economic landscape may bolster refinancing opportunities, contingent on interest rate shifts. Overall, the company's narrative focuses on efficiency, regulatory navigation, and shareholder engagement, compelling investors to monitor progress closely.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Navient Second Quarter 2024 Earnings Conference Call.

[Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Jen Earyes, Vice President, Investor Relations. Please go ahead.

[Jen Earyes, executive]

Hello. Good morning, and welcome to Navient's earnings call for the second quarter of 2024. With me today are David Yowan, Navient's CEO; and Joe Fisher, Navient's CFO. After the prepared remarks, we will open up the call for questions. A presentation accompanies today's discussion, which you can find on navient.com/investors.

Before we begin, keep in mind our discussion will contain predictions, expectations, forward-looking statements and other information about our business that is based on management's current expectations as of the date of this presentation. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company's Form 10-K and other filings with the SEC.

During this conference call, we will refer to non-GAAP financial measures, including core earnings, adjusted tangible equity ratio and various other non-GAAP financial measures that are derived from core earnings.

Our GAAP results, description of our non-GAAP financial measures and the reconciliation of core earnings to GAAP results can be found in Navient's second quarter 2024 earnings release, which is posted on our website.

Thank you. And I now will turn the call over to Dave.

[David L. Yowan, executive]

Thanks, Jen. Good morning, everyone. Thank you for joining the call and for your interest in Navient. I will start by providing an update on the 3 strategic actions we announced 6 months ago. I'm pleased that we've completed several key steps in our journey to becoming more focused, flexible and efficient. Further, we're aggressively and deliberately making meaningful progress on future milestones. We remain confident that we can achieve the significant expense reductions we presented in January.

These are in the hundreds of millions of dollars annually. We're already beginning to deliver on these planned reductions and believe we can attain these expense goals within the original 18 to 24-month time frame. During the quarter, we're pleased we completed major steps in our first strategic action, our servicing outsourcing agreement with MOHELA. Outsourcing is a key facilitator of our ability to achieve lasting expense reduction. Nearly 900 Navient employees have now transferred to MOHELA and our very cost servicing model is in effect.

Our more than 2 million borrowers will continue to use the same account numbers, phone numbers and payment plans. We've transferred several proprietary and customized technology tools and solutions to MOHELA. As we've previously shared with you, we will provide a limited number of services and activities under transition services agreements. We expect to complete substantially all of this initiative by the first half of next year.

Moving to our second strategic action. We remain engaged in active and encouraging discussions about the divestment of our Business Processing Solutions division. At this point, the interest we have received from potential acquirers gives us confidence that we will achieve our objectives. We're actively evaluating our options to finalize the strategy designed to maximize shareholder value. We expect to be able to provide more information about the divestment process, potential proceeds and the implications for our expense reduction time line during the second half of this year. We did not wait for the BPS divestment process to be completed to get started on our third strategic action to reduce our shared service infrastructure and corporate expense footprint.

With outsourcing well underway and the BPS divestment process becoming clear, we took decisive action during the second quarter to deliver on this initiative objectives. A new organizational structure was effective on July 1. This management structure is flatter with fewer management layers and a smaller executive team. It establishes a clear path and accountability for accomplishing the servicing and BPS transitions and expense reductions, some of which have begun to be realized. It also establishes the organization needed to manage our going-forward businesses, including substantial reductions in our corporate footprint. Our going-forward organization is preparing for an employee account that is 80% to 90% lower than when we announced the strategic actions.

The MOHELA transfers that have already occurred represented roughly 20% of that workforce. Our results for the quarter reflect restructuring expenses, largely for transfers and job eliminations that are part of these organizational changes. We're also taking steps to reduce our facilities and IT footprints. Most of our operating expense categories will be smaller, although not at the same magnitude as the employee count.

Now turning to our Earnest business. Earnest continues to efficiently generate high-quality private student loans, both refinance and in-school loans. We also continue to explore opportunities to deepen relationships with students and college grads to deliver attractive life dynamics. We're on track to hit our growth target for lending for the year. As is always the case, we would expect further increases in refi volume if rates drop before year-end. We described 6 months ago, the potential for a substantial amount of cash flow from the combination of our loan portfolios and the divestment of our Business Processing division.

At the same time, the elevated level of felt prepayment activity as accelerated to timing of a portion of those loan cash flows. This cash will be available over time to invest, reduce outstanding debt or distributed to shareholders. We will invest that cash deliberately only which we have clear visibility in our opportunities to earn returns in excess of our cost of capital. We will also be guided by the relationship between tangible book value and market value per share. At the end of Q2, our shares had a tangible book value of $18.81 per share. Our recent share price reflects roughly a 20% discount to the tangible book value.

During a period when our investment in a substantial volume of FFELP loans is being monetized at book value, we believe that this represents an opportunity to deliver more value to shareholders. So in closing, I'd like to thank my colleagues, especially those who learned this quarter that the roles would no longer be with the company as part of the strategic actions. All colleagues have contributed with commitment and resilience to our progress on these complex undertakings. Next, Joe will show our results for the quarter, which reflects strong performance against the items within our control.

With that, let me turn it over to Joe. I look forward to your questions later in the call.

[Joe Fisher, executive]

Thank you, Dave, and everyone on today's call for your interest in Navient. During my prepared remarks, I will review the second quarter results for 2024 and provide updated guidance, underlying our outlook for the remainder of the year. In the second quarter, we reported GAAP EPS of $0.32. On a core basis, we delivered second quarter EPS of $0.29.

The results with $0.08 of regulatory expenses, primarily related to the CFPB lawsuit and our ongoing effort to put this matter behind us and $0.11 of restructuring expenses. The restructuring expenses were driven by the strategic actions we are undertaking to reshape and rightsize the expense base of the company. We are updating our full year guidance to a range of $1.35 to $1.55. This change is primarily driven by the $0.19 impact of these items. It does not include any potential future regulatory and restructuring expenses that may be incurred in the remainder of the year. I'll provide additional detail by segment, beginning with the Federal Education Loans segment on Slide 5.

The net interest margin declined 36 basis points from 55 basis points in the first quarter as prepayments increased to $2.5 billion compared to $1.6 billion in the first quarter and $600 million a year ago. As a reminder, loan prepayments reduced future net interest income but accelerate loan principle payments within our life of loan cash flow projections. This contributed to the higher cash balance in the quarter. The main driver of the decline in net interest margin in the quarter was the write-off of unamortized loan premium that accompanies higher-than-expected prepayments. The FFELP portfolio continues to perform as expected from a credit perspective. Compared to the prior year, our greater than 90-day delinquency rates improved to 7%. The charge-off rate improved to 14 basis points and forbearance rates increased to 16.8%.

Slide 6 illustrates the rise of prepayments over the last few quarters as borrowers consolidated to the direct loan program. We continue to encourage borrowers who are experiencing or have historically experienced difficulty repaying their loans to take advantage of beneficial programs that are only offered to direct loan customers. Looking forward, some of the policy actions that clearly incurred consolidation have expired. The administration continues to propose and implement additional loan forgiveness and debt reduction programs on a regular and frequent basis. Consolidation requests we received have declined very recently since the expiration of some of these policies. We cannot predict whether this decline is temporary or reflects a change in prepayment trends.

Our EPS guidance reflects a high level of prepayments over the second half of the year that is comparable to what we experienced in the first quarter of this year. As a result, we expect full year FFELP net interest margin in the high 40s. Now let's turn to our Consumer Lending segment on Slide 7. Net interest margin in this segment was 289 basis points in the quarter compared to 297 a year ago. Originations grew over 40% to $278 million compared to $197 million a year ago and are in line with our expectations as we remain focused on generating growth from high-quality borrowers.

Credit metrics in our Consumer Lending portfolio performed as expected with late-stage delinquency and forbearance rates relatively flat from the prior quarter at 2.2% and 1.8%, respectively, while the charge-off rate improved to 1.65% from 2.4%.

You can see on Slide 8 that at the end of the second quarter, our allowance for loan loss for our entire education loan portfolio is $898 million. We released $2 million for FFELP loans during the quarter as a result of the elevated prepayment activity and new private education loan origination volume contributed $6 million to the allowance.

Let's continue to Slide 9 to review our Business Processing segment. We achieved total fee revenue of $81 million in the quarter with an improved EBITDA margin of 25% compared to 10% a year ago. The results this quarter demonstrate the ability to operate this business at attractive margins while we continue to explore strategic options. The improved margin compared to the year ago quarter is a result of recently implemented efficiency initiatives as well as a decrease in expenses associated with new contract start-up costs, which impacted the year ago quarter.

Turning to our capital allocation and financing activity that is highlighted on Slide 10. We continue to maintain disciplined asset liability and capital management strategies with 84% of our education loan portfolio funded to term and an adjusted tangible equity ratio of 8.2%. During the quarter, we issued a $728 million asset-backed securitization at a targeted advance rate of 94% with spreads that were nearly 60 basis points lower than our previous refi asset-backed securitization. In the quarter, we reduced our share count by 2% through the repurchase of 2.5 million shares. In total, we returned $55 million to shareholders through share repurchases and dividends.

Let's turn to expenses on Slide 11. The strategic actions we are undertaking present opportunities over the next 18 months to meaningfully reduce expenses. We finalized our servicing agreement with MOHELA that will transition us to a more variable cost structure as the legacy portfolios continue to amortize. Total expenses for the quarter excluding regulatory and restructuring expense, were down nearly 15% to $154 million. The amount and timing of other operating expense reductions, including certain shared service and corporate footprint reductions, depends on the nature and timing of the BPS transaction.

In summary, our updated full year 2024 core earnings per share outlook of $1.35 to $1.55 reflects the strong progress we have made on our strategic actions to date while taking steps to address regulatory matters and enhance overall value for shareholders. As I close, I'd like to express my appreciation to Navient team members for their hard work delivering for our customers while executing these strategic actions.

Thank you for your time, and I will now open the call for any questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Rick Shane with JPMorgan.

[Richard Shane, analyst]

Look, clearly, working very hard to execute the initiatives you have. Interesting to hear to get the context on the size of the employee base going forward. But it does really sort of raise the ongoing question of, ultimately, like where do we see or where do you envision the growth at Navient coming from? You're playing the cards that you've been handed as well as you can, but I'm curious what the next step is going to be.

[David L. Yowan, executive]

Rick, thanks for your question. Look, I think I'd go back to -- we're still on the path that we laid out back in January. And we said then and I would say today that the first order, the first imperative for us is to get the expense reduction initiatives behind us. Those are complex undertakings. I'm really pleased with the progress that we've made and the milestones that we've achieved. We -- through the loan cash flows and through the potential divestment of EPS, we continue to expect a substantial amount of cash and we have 3 alternatives with respect to that cash largely speaking.

Again, investment growth that would largely be within earnest. We can reduce our unsecured debt footprint or we can do shareholder distributions. We'll have more to say about that when we get a clear sense of what the BPS proceeds look like and try to lay out a clear path for investors on what that is. At earnest, we continue to originate and grow high-quality loan originations. The biggest piece of that is in refi, but also in the [ Insco ] product.

In the background, you don't see it in our results. We continue to build engagement with students and college graduates. We're really pleased with some increases in engagement through our financial counseling platform that we've seen in the first half of this year. We continue to believe that, that presents an opportunity for us to attract customers at a relatively low acquisition cost, either for the existing products or for potential product extensions. We have some more work to do on that and we continue to say that we've got to be clear before we make those investments that we think we can generate returns that are in excess of our cost of equity.

[Richard Shane, analyst]

Got it. Okay. And thank you for the transparency on this. I realize it's a very complicated and challenging situation, and you guys have been very clear about the path you're taking.

[Operator]

Our next question comes from the line of Terry Ma with Barclays.

[Terry Ma, analyst]

On the updated FFELP NIM for the full year, can you kind of remind us how many rate cuts are contemplated in that and then for the elevated prepayments on the sell portfolio, do you think there will be any impact from the recent court decisions on the say program?

[Joe Fisher, executive]

So on your -- the first part of your question, and thank you, Terry, I would say that -- we do have one rate cut forecast for the back half of this year, but that is not the main driver here of what is obviously pressuring the NIM for the second half. It's the continued prepayments and what that means for the portfolio in terms of accelerating any premium amortization expense for deferred financing fees. So that driver, as you saw, contributed in the first half of this year, both the first quarter and the second quarter.

To the second part of your question, early indicators suggest we are seeing a significant decline in terms of consolidation requests. And so from the levels that we were seeing in April and May in the quarter in terms of requests coming in, in early June that has dropped off significantly, but that is not baked into our guidance. We are -- our guidance of high 40s news assumes that we have those elevated prepayment levels like you saw in the first quarter.

[Terry Ma, analyst]

Got it. That's helpful. And then the restricted cash from loan prepayments after pay down of ABS debt, I think in your slide, you called out some excess. Can you maybe just talk about your priorities for that?

[Joe Fisher, executive]

I would just echo Dave's comments from his prepared remarks and then just his response to Rick Shane. We look at it in terms of those 3 priorities of investing in the business, reducing our overall unsecured debt maturities? And then anything else would be capital distribution.

[Operator]

Our next question comes from the line of Sanjay Sakhrani with KBW.

[Sanjay Sakhrani, analyst]

Joe, on your point on the slowing of consolidation requests, I guess, what's the risk that it reaccelerates? I'm just trying to think, is it just do they extend the program because it's expired already? Or do they announce a new one? I'm just trying to think about the risks to accelerating again.

[Joe Fisher, executive]

Yes. So that's really what the volatility is, and that's what makes it so challenging from the first quarter to the second quarter is the extensions of these programs. And then to Terry's last question, the stage that we're seeing. So we're trying to -- despite what we've seen so far in terms of early indicators in late June and July, where that consolidation activity has fallen. We're trying to capture that risk if there is some type of new proposal or an extension here that brings those prepayment levels back to first quarter and potentially second quarter.

But I would say in terms of overall risk with that, the way I think about it is with the premium amortization expense itself, there's about $350 million on our balance sheet. Think about that for every $100 million that you're amortizing 1% of that, that would ultimately be accelerated, and that is the pressure that we get in terms of the basis points. I'm happy to take that off-line with you, Sanjay, if you want to get more technical, but that's a general good rule of some.

[Sanjay Sakhrani, analyst]

Okay. Great. And then I guess I have a 2-part question, sorry. One is on the BPS sale. Understand that you guys are having constructive discussions. And you guys mentioned sort of all the options you have in terms of what to do with any cash proceeds that you get from it. Is it fair to assume, though, that anything you do would be accretive to the earnings number? I'm just trying to think through the earnings impact of something that happens there. And then secondly, on that CFPB accrual that you made, I mean, like what does that mean? Like where are we in the process there because it's seemingly happening still for quite some time? Just trying to get an update there.

[David L. Yowan, executive]

Sanjay, thanks for the question. I think with respect to BPS, look, I think we feel like the macro environment for exploring strategic options in the [indiscernible] benign, if not supportive one, as we've gone out and solicited interest in those businesses on kind of a micro perspective, I think we've been -- we have been really encouraged by the level of interest that we've seen we're pretty far along in the process, and we're in active discussions with multiple buyers, and we're trying to sort through that process and hope to be able to give you the conclusion on that sometime in the second half of the year.

I think with respect to the earnings piece, I'd say a couple of things. One is, remember back in January that the outsourcing and BPS divestments are both facilitators and enablers of our expense reduction objective. We've got a lot of shared service infrastructure between servicing and BPS and pertaining BPS within our government services segment of BPS. The health care segment in BPS is much more stand-alone than the other.

So you have to think about them in terms of a package when we talk about taking out those expenses, obviously, the revenue from BPS would go away as well with the seller and [ summers ] back on a 2023 basis, 2023 actuals, was we would take out roughly $400 million of expenses across all the initiatives and the BPS revenue for 2023 was I think $320 million so that's sort of an operating impact. Again, those are 2023 actual numbers. What we're saying today is we're committed to -- we're confident in our ability to take out those expense numbers, they'll be different than the 2023 actuals. For example, BPS expenses because the business is growing, will be greater than the $280 million that they were in 2023.

And we don't view that as an over deliver. We view that as we're taking out all that category of extends. So there's accretion on an operating basis. And then the use of proceeds if we either invest the combination of investing, reducing unsecured debt or shareholder distributions could also have an accretive impact as I'm sure you can appreciate.

On the CFPB part, our total reserve now is in excess of $100 million. Those reflect the developments in the discussions that we're having during the quarter. I wasn't sure you appreciate, I'm not going to go any further than that, but that's where we are at the moment from a monetary perspective.

[Operator]

Our next question comes from the line of [ Jeff Adelson ] with Morgan Stanley.

[Unknown Analyst]

I guess maybe to ask a little bit more specifically. Could you maybe give us the latest thinking on the time line to achieving the expense reductions you're laying out, I obviously imagine completing your strategic action around the BPS sale is something that will have an impact there. And just from a modeling standpoint, the comment you made on the 80%, 90% reduction in the employee base. Like should we -- restructuring expenses aside on the way to get there, should we be thinking about a similar type of reduction to your compensation expense for that line?

[David L. Yowan, executive]

Yes. So let me -- I think you're asking 2 questions, sort of timing and the amount. Let me try to address both of them in sort of a consolidated answer. There are 3 initiatives and there's sort of 3 -- you can think of 3 different swim lanes with different time lines. We are clearly the farthest along on outsourcing. I won't say that all the heavy lifting has been done, but a lot of the heavy lifting has been done.

There are some really important borrower transitions in terms of rebranding, if you will. There's some services that we're still providing to MOHELA. Think of that as like desktop services, for example, that we need to ultimately transfer over. I don't mean to minimize those, but I think that you could think of the tail of that as thinner maybe than some of the other initiatives. I'd also remind you from an expense reduction perspective that we said this in January, outsourcing is not a near term and substantial expense reduction. It is a -- by moving to a variable cost model, we believe that it will substantially and significantly reduce our life of loan servicing expenses and the smaller the loan and borrower account become the more quickly and the larger the savings from a variable cost model becomes.

So that's not -- the implementation of that is further along. We said we'd be complete with that through the first half of the year. BPS is, as I said, it's going to depend on both the timing and the nature of any transaction that we announced. And so we have to wait and see that a variable would be, for example, in MOHELA, we transferred 900 of our employees to them. That means that we don't have to take out those 900 employees and the costs associated with them. And so that's a great thing for us. We hope it's a win from MOHELA. It's a win for the colleagues. We don't know you get in BPS.

We're not ready to describe what the nature of those deals will be, but the more costs that go with the deal than the shorter our time frame to take out the remaining costs that are associated with that. So more to come on that. The third piece is the corporate expense reduction in the shared service infrastructure. And that's where with MOHELA in place and BPS becoming more clear to us we've begun to take action. We talked about a change in the organizational structure. That's a significant change. I can tell you, the employee count is like one measure of that, I think, which tells you how meaningful the reductions are.

That tail is, I'd say, a little thicker into the end of 2025 because we still need many of our colleagues who will not be in what we would call the point of arrival organization. We very much need them in order to manage the first 2 work streams and to help us get that corporate expense reduction. So that's got a little bit longer tail into 2025. I talked when I responded to Sanjay a little bit about how to think about the amounts here. We described the $400 million in terms of 2023 actual. You can think of that as we're -- what we're saying today is we're confident we're going to take out the categories of expenses in the proportions of expenses that existed in 2023.

So we're expressing confidence about that. We've taken some steps, BPS might be a great example. Part of the $400 million that we articulated was the segment operating expenses for BPS. In 2023, those were $280 million. They will be higher this year because the business is growing, will take out more than $280 million. We're not actually thinking of that internally as greater expense reduction. We're just taking out those expenses basis today in servicing because loan count has declined in part because of the prepayments, we'll take out less dollars, but we'll take out all the expense categories in the amounts that we planned and articulated to you in January.

So I know that's a long question, but -- or a long answer, but hopefully, that gives you some color in terms of timing and how we're thinking about this.

[Unknown Analyst]

That's really helpful. And if I could just follow up on the in-school origination channel. I know David, late last year, you sort of talked about kind of reevaluating the capital contribution of that business, not exiting, but sort of reevaluating, wondering if you've given any more thought to that business? And has recent hub development from an exit of a very large player there, and what that's done to the origination channel and competition change your thinking on that sort of pause on capital allocation?

[David L. Yowan, executive]

Yes. Look, we are -- Joe will give you an update on our loan originations to date. We are confident at the moment in the full year growth across refi and in-school that we talked about. Refi, as you well know, is very dependent on the rate environment. We'll see what happens there. But at the current levels, we feel good about where we are. As you know, the install is a little bit like Christmas season for a retailer, and we're here on November 1, effectively.

So there's not a lot of visibility in that. It's all going to be packed into a short period of time. I think the way we think about it, if you think about the January presentation and the strategy, like our targeted customer segment and targeted customer profile has a couple of characteristics. This is true in refi. It's true in [indiscernible]. It tries to take advantage of the things where we think we can have an advantage and, therefore, deliver all-in economics, including capital costs, funding costs, everything else that achieve the returns that we're trying to achieve.

Those characteristics are high credit quality, relatively high balance. Those 2 things keep servicing costs and credit costs relatively low, low cost of acquisition. We're very selective on where we land. For example, we don't lend it for-profit schools, our borrower population, as we showed last year is much more heavily weighted towards graduate versus undergraduate students. And so I know we get questions a lot about competitors leaving. If I could use a swimming analogy, I just described the lane that we're in. To the extent somebody exits another lane, you shouldn't expect us to go over and try to dive into that part of the pool.

To the extent that their exit allows us to capture a bigger part of the lane that we're in, we're aggressively trying to do that. We're now on the approved lender list at over 1,000 schools, for example. We've got a team that's working really hard in that swim lane where we think we can compete effectively and generate the returns for our shareholders, and that's what you should expect us to continue to do.

[Operator]

Our next question comes from the line of Bill Ryan with Seaport Research Partners.

[William Ryan, analyst]

A couple of questions. First, in the appendix, it did show a little bit of reduction in the expected cash flows both from the FFELP portfolio and from the consumer portfolio. Joe, if you could kind of address. What gives you comfort on the sell portfolio, i.e., kind of like what are the embedded assumptions now in the updated cash flow outlook? And then if you can maybe talk about some of the revisions as it relates to what was -- what's happening in the consumer loan portfolio as well.

[Joe Fisher, executive]

So I'll start with the consumer lending portfolio and then go back to FFELP portfolio. So the biggest driver of the decline that you saw in the out years here in '25 and '26 as some of the refinancing activities that took place during this quarter. So not only I think we do the securitization that I mentioned, but also we refinanced a number of repurchase facilities that generated over $300 million worth of cash that gets accelerated into this period. So that is taken from those outer years or those next few years here and accelerated into this period.

So that's the biggest driver of that movement from first quarter to second quarter on the consumer lending side. On the FFELP portfolio and so in terms of the confidence in the numbers, I said this obviously, a lot of volatility in terms of what we're seeing from prepayments. At the end of the day, that's an acceleration of cash into those near-term periods. So we did benefit again in the quarter in terms of cash that was coming into this period, but that comes with the expense of the outer year. So you see that across each year in terms of where that's being pulled from why those are lower from '25, '26 and on versus what we saw in the first quarter. So it really is driven by that prepayment activity.

Now having said that, that cash flow, just to be clear in terms of the FFELP portfolio, we are not assuming in that appendix slide that this prepayment activity that we saw in the first 2 quarters continued third quarter and fourth quarter, but that is included in our guidance. So I just want to be clear on that in terms of what those assumptions are for the cash flows versus what our EPS guidance is.

[William Ryan, analyst]

Okay. And second question, just on the expense side. I mean, very impressive expense reduction year-to-date down to $154 million in the second quarter. It sounded like from the prepared remarks that, that may be kind of a baseline until there's a divestiture of the BP unit. But then it's also indicated there's a new organizational structure went into effect on July 1, but that we may not really see the full benefits of that until 2025. So -- is the $154 million kind of like a good baseline for the next couple of quarters until we get resolution of the BP unit?

[Joe Fisher, executive]

Yes, I think that's a good way to think about it. Obviously, Dave went through the various moving pieces and the timing component. But as we think about the next couple of quarters, you don't get the full benefit of the restructuring expenses as that has to do more with timing of departures. So some of those departures have not yet occurred. So you will still see similar expense levels in that third and fourth quarter.

One thing I would say, though, just from a seasonality perspective is on the consumer lending side. There are expenses associated just with the in-school origination. So outside of that component, I would say that [indiscernible] will be fairly consistent with what we saw in the second quarter.

[Operator]

Our next question comes from the line of Moshe Orenbuch with TD Cowen.

[Moshe Orenbuch, analyst]

Great. Maybe just to follow up on a couple of those questions. I think it mentioned on the -- on your private lending segment that marketing -- a reduction in marketing was a key driver of the expense reduction. If you kind of had historical levels of originations, where would you expect those marketing costs to be relative to where they are now?

[Joe Fisher, executive]

So I would say that impact was under $10 million in terms of the lower origination costs, marketing cost side.

[Moshe Orenbuch, analyst]

Got it. And I think, Dave, when you talked about the BPS objectives, maybe you could kind of just lay out for us what the objectives are of that sale over and above kind of outsourcing the -- getting the expenses out, like are there any guidelines as to the level of value that you're going to achieve and any kind of broad strokes about the thought of the use of proceeds? Because obviously, you've got needs for debt repayment, but we have no way of knowing how you're thinking about it. So maybe is there some way you can kind of give us any sort of broad strokes on those 2?

[David L. Yowan, executive]

Yes, I'd say, Moshe, there's at least 3 motivations or objectives with respect to exploring BPS, right? We've talked mostly about in this forum about the -- they facilitate expense reduction, right? Once we've decided to outsource servicing, we look at our expense base, there's a significant proportion of our shared service infrastructure expense base that is shared between servicing and BPS. They have many of the same kinds of activities, call center, multichannel telephony, things like that.

And so pairing, once we made the decision to outsource servicing, which gets us to the variable cost model divesting BPS is a way to address the shared service infrastructure in a unified kind of once and for all way. And so that's the motivation, not just to do it but to do it now, if you will. The second is the -- within Navient, the EBITDA and the earnings that we believe the market is valuing those businesses that is substantially below what stand-alone or comparables in the marketplace would be. And so we're part of what we're trying to achieve in the divestment is to close that -- find the best value for Navient shareholders and try to achieve a higher multiple on those businesses.

I'd say, thirdly, is a scale question. And so as we think about some of the people that have interest in these businesses, we've been pleased with a combination of strategic buyers and sponsors. And so both of those, but strategic buyers in particular, could bring greater scale to the organization to be able to unlock acquisition activities that with our multiple may not have made sense for us. So those are the 3 things that I would focus on.

[Moshe Orenbuch, analyst]

No, no, I apologize, I didn't mean to cut you off.

[David L. Yowan, executive]

Yes. And then I don't think we have anything more to say on use of proceeds. There's sort of 3 buckets that we had you think about. I think what you would expect for us to do is ultimately lay out plan and a set of principles that we'll use when we think about those 3 uses. It could be a combination of those things. I think it will be a deliberate plan with respect to those proceeds. We want to be really thoughtful about it. So -- but it's dependent at this point, the expense reduction, which is our first order objective is we need to really understand what the nature of BPS divestment looks like. So we have a better sense of the work we need to do to achieve the expense reduction objectives.

[Moshe Orenbuch, analyst]

Got it. And if I could just sneak in a quick third one. Feeding off Bill's question also about the prepayments and cash flows on the FFELP portfolio. At year-end, you had $338 billion of FFELP loans with $6.2 billion of cash expected over the life, now $33 billion with $5.9 billion expected over the life and that difference of roughly $300 million is pretty much what you actually received in the 6 months. So I guess, how do we think about the risk that those -- that, that nearly $6 billion actually kind of the prepays accelerate over the remaining life, and it's less than that $5.9 billion?

[Joe Fisher, executive]

So I think the biggest things to think about is we've got about $3.2 billion of OC related to the FFELP securitizations or our secured funding and then just under $200 million of unencumbered FFELP. So think about that as principal return. So the biggest risk would be just the delta between that and the numbers you just quoted as that comes from, obviously, servicing fees along with additional interest earned. So to the extent that, that is fully accelerated into the period, you're getting that roughly $3.4 billion of principal return to you and the loss using that 100% scenario is really what's at risk.

[Operator]

Our next question comes from the line of John Hecht with Jefferies.

[John Hecht, analyst]

First one is sort of just a modeling one. The -- in the private student loan portfolio, the AOL has dropped a little bit over the past year. I'm wondering, are we at a level where you think it will be stable? Or should we expect more reductions as credit improves? Or how do we think about that?

[Joe Fisher, executive]

In terms of the allowance for loan loss, we feel pretty good about where we are. The components obviously broken out on the slide, new originations. We'll continue to add to that. So as we originate on the in-school side and the refi side, there would be a continued build just the way that the CECL accounting works, we take that all upfront. But that's something that we're reviewing quarterly. And as you can see, we added $16 million in the quarter. $6 million of that was related to new originations, $10 million was just overall outlook of the total portfolio and the credit.

[John Hecht, analyst]

Okay. And then the second question is, I guess I'm trying to just figure out how sensitive the business, the originating side and the private student loan book would be to reductions in interest rates. Does 25 basis points start moving the market? Or do we need a more significant move for the refi business? And then similarly, what happens to kind of the in-school opportunity as rates go lower?

[Joe Fisher, executive]

I don't think 25 basis points really moves the needle that much, and that's reflected in our guidance in terms of what we expect to achieve for the back half of this year or for the full year. I think where you start to see a more significant pickup as you get to 75 basis points, 100 basis points, if that becomes more meaningful to the borrower in terms of the terms that they have today, I mean the federal programs and taking advantage of that, whether it's 7,500 basis points or more lower opportunity. I think that's where you start to really move the needle.

And you can see just 3 years ago, obviously, how much more significant our loan originations were on that refi space as a result. And so that's where I think the real opportunity starts to come into play. And today, you just don't see that. A lot of borrowers are waiting on the sidelines to see any rate through and also just for updates in terms of any loan forgiveness proposals that may or may not be implemented going forward.

[Operator]

Thank you. I would now like to hand the conference call back over to Jen Earyes for closing remarks.

[Jen Earyes, executive]

Thank you, Shannon. For everybody on the call, please contact me if you have any follow-up questions. We'd like to thank everyone for joining us on today's call. This concludes the call.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.