Fitch Ratings Affirms TERI's IFS At 'A+'; Outlook Stable.

NEW YORK -- Fitch Ratings has affirmed The Education Resources Institute, Inc.'s (TERI) 'A+' insurer financial strength (IFS) rating. The Rating Outlook is Stable.

The rating reflects TERI's high level of loan volume growth, sound loan quality and good operating performance. Guaranteed loan volume through nine months ending March 31, 2004 (TERI's fiscal year ends June 30) was $1.4 billion, a 75% increase over the similar period for fiscal year (FY) 2003. This compares to high growth in loan volume during FY2003 of 54% to a then record of $965 million.

The growth can predominantly be attributed to the synergies realized as a result of TERI's strategic alliance with First Marblehead Corporation (FMC), a Boston-based student loan facilitator. TERI entered into the alliance in June 2001 and, currently, FMC-related business accounts for over 75% of TERI's guarantee loan volume.

Although Fitch recognizes the revenue benefits of the high loan volume growth, particularly in light of Fitch's belief that loan quality has not suffered, there is concern about the operational strains presented by this level of growth. TERI management has indicated that they have embarked on a multi-phase project to increase the company's loan origination system capacity and capabilities. Fitch will closely monitor the implementation of each phase of the project over the next couple of years.

As it pertains to loan portfolio quality, TERI saw the quality of its guaranteed portfolio continue to improve as virtually all of the FMC-related loans and over 93% of its new volume was with 'credit worthy' undergraduate and graduate loans. Historical cumulative default levels for credit worthy borrowers have been lower than default levels for signature only borrowers. This is due in part to the loan structure types as well as the support often provided by co-borrowers, which has historically enhanced the loan repayment performance.

TERI continues to produce sound financial results. Guarantee fees on student loans represent the majority of the company's revenues, accounting for 80.5% of the $122.8 million produced through nine of months of FY2004, ending March 31, 2004. Through the same period, TERI guaranteed $1.4 billion in loans, as compared to $965.4 million for the full fiscal year 2003. TERI's excess of revenues over expenses for the first three quarters of the fiscal year 2004 -- its net income -- was $25.5 million, up from $12.4 million in 2003.

Fitch extensively reviews TERI's historical default data as well as its current reserving methodology on a regular basis. Based on a current review, Fitch deems the current level of TERI's reserves to be adequate. Funds available to meet guarantee obligations, $255.5 million, represent 260% of the present value of expected future net defaults, as of March 31, 2004. This compares favorably to levels of between 102% and 174% witnessed from 1996 through 2002.

Fitch anticipates continued strong loan volume growth resulting in improved revenue production through higher guarantee fee volume. TERI's loan volume growth is expected to continue to focus on higher quality undergraduate credit worthy borrowers which will further diversify TERI's guaranteed loan portfolio and enhance the overall quality of TERI's book of business. Fitch also expects TERI to increase its lender relationship base, further expanding its customer base and diversifying its geographic footprint.

TERI is a private, nonprofit organization that guarantees alternative, or private, student loans. In its role as guarantor, the company must reimburse lenders for all unpaid principal and interest on defaulted loans. From its inception in 1985 through March 31, 2004, TERI guaranteed a total of 1,046,410 loans, with a total principal value of $6.8 billion. As of March 31, 2004, TERI had $276.9 million of total assets. The principal outstanding under direct TERI guarantee agreements as of the same date was approximately $4.6 billion.

TERI

-- Insurer financial strength affirmed at 'A+'/Stable.