Student loan giant Sallie Mae Corp. is bracing investors for a big hit to its balance sheet when new loan loss accounting rules go live.

The company, with a 55% market share in private education lending in 2018, expects to have to boost by as much as 313% the reserves it sets aside to cover losses on loans under the major new accounting standard taking effect in 2020. This significant boost will lower earnings, the company said.

The standard will require companies to look to the future, assess current conditions, and consider past experience to calculate losses and set aside corresponding reserves to cover them. Most financial institutions have disclosed that they expect to have to increase the losses they book, but no business so far has made an estimate as large as Sallie Mae’s.

The impact of the current expected credit losses (CECL) standard will be so significant the company plans to develop a tailor-made, unofficial accounting metric to better convey its financial health.

“We think it is, over a period of time, much more representative of the quality of the franchise than the CECL distortion,” CEO Raymond Quinlan told analysts during the company’s second quarter earnings call July 25.

Why So Much?

Sallie Mae’s triple-digit estimate of CECL’s impact is eye-popping compared to the disclosures so far from other financial institutions. The company said in its July 24 quarterly filing that if it had adopted the standard on June 30, its allowance for loan losses would have increased by between $950 million and $1.2 billion.

Compared to its current loss reserve of $383.9 million, that’s a boost of between 247% to 313%.

The company’s huge increase is due to several reasons, starting with the central premise behind the post-financial crisis accounting change: Companies have to look into the future to estimate losses instead of waiting for customers to miss payments.

When a college-bound freshman takes out a loan, he or she doesn’t start paying it back for at least four years. It could be even longer; many companies offer two-year post-graduation grace periods before the graduate has to make payments.

The longer the life of the loan, the bigger the window for customers to miss payments or forgo them altogether. That adds up to more potential losses for the lender.

There’s also uncertainty about how the borrowers’ post-graduation fortunes shake out.

“Somebody could have huge loans for Yale and be a barista at Starbucks,” said Paul Noring, managing director at Navigant Consulting Inc. “You don’t really know that today until they graduate.”

History of Defaults

Plenty of other types of loans also run long: Just look at a 30-year mortgage.

But the new rules also call on companies to consider past experience when estimating losses. This is where Sallie Mae gets zinged.

Sallie Mae’s experience shows that many of its customers default on their loans. In its July 25 earnings call, Quinlan told analysts the company typically writes off 1% to 1.5% of its loan portfolio every quarter.

This adds up to a big impact on the loan loss reserve, said Sanjay Sakhrani, managing director at Keefe Bruyette & Woods, Inc.

“They have very long-duration loans—and over their life they charge off a decent amount,” Sakhrani said.

Inventing Performance Measures

The effect of CECL on Sallie Mae’s financial reporting will be so significant that the company plans to turn to non-standardized measures to convey its financial health. It plans to introduce what it calls adjusted core earnings as an alternative to generally accepted accounting principles.

The number will represent GAAP earnings minus any impact to the loan loss provision, plus the current losses experienced in that period, and with the tax effects associated with those movements, the CEO said in the earnings call.

Sallie Mae said in its second-quarter filing this metric would recognize all loan losses upon actual charge-off, which happens when a loan is 120 days delinquent. It said it would present the adjusted metric next to its GAAP-sanctioned results.

The company’s reliance on non-GAAP measures didn’t surprise Noring.

“They have to because it distorts their results so much,” Noring said of CECL.

Outlook for Competitors

One of Sallie Mae’s main competitors, Navient Corp., has yet to disclose how it expects CECL to affect its finances. In its Aug. 2 quarterly filing, the company said it expected its loan loss reserves to increase. In its July earnings call, the company said it would give an estimated range in the third quarter.

SoFi Inc. and MOHELA, other big players in the student loan market, are privately held companies. The Financial Accounting Standards Board is considering allowing private companies extra time to comply with CECL, which would mean SoFi and MOHELA would not have to account for loan losses the same way as Sallie Mae or Navient until 2023.

Because Sallie Mae has communicated the major change ahead of the 2020 deadline, investors shouldn’t be too caught off guard once the new accounting goes live, Sakhrani said.

“It really is an accounting change rather than affecting the true cash flows of the loans,” he said.

That said, investors who aren’t entrenched in the nuances of accounting may do a double take when they see how Sallie Mae’s finances will shift under the new accounting rules.

“Here’s me, someone who looks at it pretty routinely, and then there’s other people who are like, ‘What’s CECL?’” Sakhrani said.