Ever since the bombshell announcement last week that four servicers (AES/PHEAA, Great Lakes, Nelnet and Sallie Mae) had been awarded the Title IV servicing contract (see post here for value of contract) from the Department of Education, I have been wondering what happened to ACS, the current Direct Loan servicer. Here is what Reuters had to say:
In a statement, ACS spokesman Ken Ericson said the company is assessing the government's decision, and will continue providing services under its existing direct loan contract, which it said may last another four years."
So that made me wonder how ACS went from the sole servicer of the Direct Lending program today to potentially out of the program by August, 2010 (more on that later). I was thinking there might be a few possibilities to explain how they ended up in this predicament. First, when given the opportunity by the Department of Education to agree to common pricing (as all finalists were) they chose not to while the other four servicers did. This could have been due to their belief that the other bidders would not agree to this common pricing in which case the Department would accept higher common prices OR they felt that agreeing to this common pricing would have a spillover effect, reducing the value on their existing contract (which I assume is at a higher unit price) with the Dept. OR they may have felt that they couldn't earn a reasonable return at the common prices (given their significant servicing volume if ACS can't earn a reasonable return then some of the other servicers should be concerned). To provide some context of the importance of this contract to ACS, the $190 million extension that ACS received in 2009 (see below) on this contract represented about 3% of their 2008 revenue figure.
I also wondered if there may have been dissatisfaction with ACS's performance on the existing DL contract. However, as this post noted in February 2009, ACS had just recently received a one-year extension valued at $190 million based on performance:
"ACS begins the sixth year of the Common Services for Borrowers contract, which consists of a five-year base period followed by three potential performance-based award years and then two option years."
It could get interesting in 2010 as policymakers compare the costs of the old contract vs. the new one. If the new contract has significantly lower costs, policymakers will feel the pressure from taxpayers to save money by folding the existing DL portfolio into the new contract. Sallie Mae officials alluded to the tenuous position that ACS finds itself in during a recent Straight Talk conference call when they said that the Department of Education had not specified what would happen to loans already on the ACS platform. Of course, one would have to balance these potential cost savings against the implementation risk of shifting the entire DL portfolio in 2010 at the same time that all new federal loan originations (if Obama plan goes through) AND 2009-10 FFELP loans "put" to the Department would have to be absorbed by these four servicers. As the stock market has catapulted Sallie Mae's (up 52% in last month) and Nelnet's (up 61% over same period) stock prices higher recently, there seems to be a growing realization that "maybe servicing isn't such a bad business after all."
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