The Department of Education announced today (June 17, 2009) that they would be awarding the contract to service FFELP loans sold to the Department to four vendors. The servicers awarded the contract are Great Lakes, Nelnet, PHEAA and Sallie Mae. Notable in their absence from this list is Affiliated Computer Services (ACS) who is the current contractor for the Direct Loan program. Wells Fargo, the sixth finalist, chose not to participate in the final round.
Here is the announcement that appears on the Department's purchasing website:
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TBD
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Sallie Mae wasted no time in getting a press release out this afternoon. Here are a few excerpts:
- Confirms that four vendors were selected: "...announced that the U.S. Department of Education has selected Sallie Mae for its Federal Student Aid Title IV Student Loan Management/Servicing procurement. Sallie Mae was one of four contract awardees."
- Describes what the contract covers: "The contract is for the servicing of federal student loans owned by the Department of Education. It does not include loan origination or other Title IV services. The five-year contract is expected to begin in mid-to-late August 2009, and provides for one five-year renewal option at the Department’s discretion."
- No announcement about how the contract will be allocated although Sallie Mae didn't waste the opportunity to tout the capacity of their servicing operations: "Although the Department has not yet announced its immediate plans for
allocating the initial servicing accounts, Sallie Mae has the immediate
scale to add readily more than $100 billion in new volume."
- As posted earlier, SLM has quite a scale advantage over the other servicers, as this chart indicates. I would expect they will get a significant portion of this contact, which the market seems to sense also as the stock price is up over 10% in aftermarket trading at 8.55
0.86 (11.18%) at 5:36PM ET
- As posted earlier, SLM has quite a scale advantage over the other servicers, as this chart indicates. I would expect they will get a significant portion of this contact, which the market seems to sense also as the stock price is up over 10% in aftermarket trading at 8.55
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Nelnet's press release provided some additional color to what the contract will mean to Nelnet (Nelnet's stock price was also up over 10% in after hours trading to
9.26 1.12 (13.76%) 5:43PM ET:
- Initial allocation of loans to be set by Department; future allocations based on loan defaults and customer service (for full description of performance-based contract, see earlier SLA post).
- "Servicing volume will initially be allocated by the Department to servicers awarded a contract; however, performance factors such as customer satisfaction levels and default rates will determine volume allocations over time."
- Operating margins for Nelnet expected to be lower for this business, as compared to other servicing contracts:
- "Servicing loans under this contract further diversifies Nelnet's revenue and customer base while leveraging its operating infrastructure for both its existing servicing clients and the Department. Excluding start-up costs of $5 to $10 million, the company anticipates the contract will be accretive to net income; however, operating margins are expected to be lower than historical levels achieved in the Loan and Guaranty Servicing Segment."
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Here are some excerpts from the Department of Education's press release:
- Scope of contract: "...to service a portion of the approximately $550 billion outstanding federal student loan portfolio held by the Department. The selected contractors will also service loans originated by and sold to the Department in the future."
- Expected growth in servicing of Direct Loans: "...the Department will be acquiring a large volume of federally guaranteed loans in the coming months. In addition, the President's FY 2010 budget proposes originating all new federal student loans through the Direct Loan Program starting in 2010."
- Describes various terms of the contract, including its performance elements: "The contracts have a base ordering period of five years with an optional five-year ordering period. The minimum contract award for compliant and performing firms is valued at $5 million, with a maximum assignment to service up to 50 million student loan borrowers over the five-year ordering period. Ultimately, revenues generated under these contracts will be driven by contractor performance as measured by customer satisfaction and default aversion."
- Indicated impact of ECASLA programs: "This year, the Department financed over 60 percent of the loans issued by private lenders through the authority granted the Secretary by Congress under the Ensuring Access to Student Loans Act.
- Provided growth figures for Direct Loan program: "...the number of loans originated under the Department's own Direct Loan Program has grown by 63 percent over the prior award year primarily as a result of schools choosing to switch to the Direct Loan Program."
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So, the one outstanding question at this point is: How is the servicing pie going to be split up? With initial implementation on this contract just months away, I suspect we won't have to wait long for an answer.
I guess the other question would be what the pricing on the contract will be. Recall that the Department had asked the bidders to sharpen their pencils and provide final, final pricing by Friday of last week. With ACS not on the list of awardees, it kind of makes me wonder whether they sharpened their pencil enough. As the current prime contractor for DL, there may have less of an incentive for them to bid at a lower price than their existing contract. Mere conjecture on my part but I do find it interesting that the vendor with the most knowledge of Direct Loan servicing was the only bidder not awarded a piece of the contract.
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So what might the actual contract allocation look like?
Since we don't know how the contract will be allocated, I thought it would be useful to look at data on the size of each of these servicers. This data comes courtesy of Nelnet, who provided this in their latest 10-K:
There is a relatively large number of lenders and servicing organizations who participate in the FFEL Program. The chart below lists the top 10 servicing organizations for FFELP loans as of December 31, 2007 (the latest date information was available from the Department).
| Top FFELP Loan Servicers (a) | ||||||
| Rank | Name | $ billions | ||||
| 1 | Sallie Mae |
$ | 127.4 | |||
| 2 | PHEAA |
34.4 | ||||
| 3 | Nelnet |
32.2 | ||||
| 4 | Great Lakes |
32.1 | ||||
Given SLM's relative market share (they are almost 4X bigger) than each of the other servicers awarded the contract, I would suspect they are going to receive the lion's share of this contract. What is just as important as current servicing volumes is the ability to scale up quickly, which again should favor Sallie Mae. They mentioned in their press release that they could add $100 billion to their existing capacity. If you were just to base allocations on existing FFELP servicing volume (and I have no knowledge that this is the case), the percentages would look like this: Sallie Mae (56%), PHEAA (15%) and Nelnet and Great Lakes each 14%. However given the implementation risk of having to get this program up and running quickly, I suspect that these numbers will not be too far off.
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