With the Department of Education releasing pricing data on Friday for the Title IV servicing contract, I thought it was worth providing a back of the envelope estimate for the value of the DL servicing contract over its initial five year term for the four servicers awarded the contract; Great Lakes, Nelnet, PHEAA and Sallie Mae.
Here are a few observations from the model used to estimate the value of this contract:
- SLA estimates the value of the contract at a range of $1.3 billion to $1.5 billion over its initial five year period. Among the estimates/assumptions necesssary to calculate this figure:
- Since the servicers will be servicing all new DL loans originated after August of 2010, my model assumed that ALL federal loans would be serviced through these four servicers starting on that date.
- Model assumed that a certain percentage of 2008-09 and 2009-10 FFELP loans would be "put" to the Department through the ECASLA legislation. Assumed that 2003-07 FFELP loans will be sold through the conduit facility and not serviced through this contract.
- Estimated the number of new unduplicated federal loan borrowers and growth in new borrowers on annual basis.
- Modeled how a given portfolio will age among various categories (in-school, current in repayment, forbearance and deferment, etc.) by analyzing student loan trust data
- Over 60% of the contract value comes from the "out" years 4 and 5:
- Since the contract's unit cost is based on the number of borrowers, the contract value grows as the cumulative number of borrowers increase. With a minimum loan term of 10 years + an in-school period, the number of borrowers increases each year as new federal loan borrowers are added with little leakage among existing borrowers.
- The servicers' compensation per borrower doubles when they enter repayment going from $1.05 per month during the in-school period to $2.11 during grace period or while current in repayment. As the direct loan portfolio ages, the percentage of borrowers in repayment will increase thereby driving up servicer compensation.
- The value of the 5-year option on this contract in 2014 will likely have double the value of the first five years as the cumulative number of borrowers continues to grow each year.
The Department of Education has not released information about how the initial batch of loans will be allocated among the four servicers. It should be noted that the August 2010 allocation decision is much more important given the dramatic increase in borrowers if the entire federal loan program moves to the DL servicing platform at that time. The allocation at that time will be based on the 5 criteria described in this post.
If you are interested in specific information about the model used to value this contract, please contact Tim Ranzetta at tranzetta@studentlendinganalytics.com.
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