Dept. of Education Names 6 Firms Vying for the Big Enchilada: The Direct Lending Servicing Contract (Update)

Here is today's announcement and here are the firms selected to participate in phase II of this two phase process (in alphabetical order):

ACS Education Solutions, LLC (the current DL servicer)
AES/PHEAA (American Education Services, Pennsylvania Higher Education Assistance Agency
Great Lakes Educational Loan Services
Nelnet, Inc.
Sallie Mae
Wells Fargo

This contract has taken on a greater importance in light of Obama's recent budget blueprint which envisions a 100% shift to Direct Lending in 2010-11.  The process for this solicitation kicked off in January and was intended to help service the loans that the Department of Education will likely purchase through the Loan Purchase and Participation program (up to 20 million loans).  As described below, the contract may be up to 10 years in length.  This contract is the game-changer that will determine the landscape for student loans in the years to come.  

In light of this, it is not surprising to see Sallie Mae come out with the following announcement after Obama's budget plan was unveiled: 

"We also note that the budget proposal looks to obtain "high-quality services for students by using competitive, private providers to service loans." Sallie Mae is the largest and lowest-cost provider of student loan services, and we deliver the highest quality for students, schools and families."

The most interesting question to ponder is how many servicers the Department of Education will select to carry out this contract.  Select too few and the potential for oligopoly exists, select too many and you may sacrifice the efficiencies and cost savings that come from outsourcing to the largest providers.  'One of the Q&As put out by the Department had an estimate of an April 1st selection date.

In order to make it to Phase II, these servicers were required to demonstrate the following (the evaluation factors listed below are listed in descending order of importance): 

(1) Demonstrate the capacity to process a minimum of 500,000 additional student loan sales conversions annually and service at least 2,000,000 additional student loans, no later than August 31, 2009. 

(2)  Demonstrate the willingness to develop and/or enhance offeror system(s) to accommodate the additional volumes stated above, in compliance with all standards and constraints, at no cost to the Government, or an alternative business arrangement that limits the Government’s liability.

(3) Estimated Cost to the Government. (Estimated costs will be evaluated for realism.)

Here are some other details about the solicitation:

• The Need:  With the current economic and liquidity uncertainty facing financial markets, many student loan lenders are dropping out of the market.  With more than $65 billion in 2008-09 loans and approximately $130 billion in eligible 2003-07 student loans on bank balance sheets and auction rate securitizations, the capital markets are currently unable to generate adequate funds at prices that will ensure 2009-10 loans can be made.Recent legislation including the College Cost Reduction Authorization Act of 2008 (CCRAA) (Pub. Law 110-84) and the Ensuring Continued Access to Student Loans Act of 2008 (ECASLA) (Pub. Law 110-227) enabled the Department to accept former Federal Family Education Loan Program (FFELP) loans in the form of additional Direct Loan (DL) capacity, and to purchase FFELP loans as far back as 2003, in an effort to bring liquidity and stability back to the student loan market.  With the sudden increase in current and potential loan volume that the Department will be responsible for servicing, the need for increasing the Title IV student aid servicing vehicles is determined appropriate at this time. 
  

• Duration of contract:

The Department anticipates awarding one or more Indefinite Delivery/Indefinite Quantity (IDIQ) type contracts with a total potential 10-year ordering period with provisions for task orders.  Task order types and durations may be determined on an order-by-order basis.

• Potential loans to be put to Department of Education:

"The Department has recently stated publicly that more than 13 million loans could be sold to the  Department of Education for the 2008-09 academic year alone, and other industry participants also believe the volume of “puts” could be in this range."

Update:  The value of this servicing contract will be diminished greatly should lenders en masse choose to sell their 2008-09 loans into the conduit plan proposed by the Department of Education (see here and here for posts describing this plan).  The apparent advantage of selling into the conduit is that lenders would retain servicing rights on those loans.  

Related posts: 

• Direct loan servicer smackdown:  Vying for the big prize

 

Comments

[Feudi Pandola]

You would think the Obama Administration would have more sense than to get rid of FFELP given the history of such quasi-governmental companies such as Fannie Mae and Freddie Mac. Ten years after we're all on Direct Loan, we'll rue the day we killed FFELP. It makes no business sense...NONE... to disconnect the lender from the servicer, as this proposal will do. Whenever you're dealing with Other Peoples Money, any incentive to be efficient goes out the window. Sallie Mae is well on the way to becoming the next decades version of Fannie and Freddie. We will be sorry...