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August 20, 2009

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awake citizen

You’ve provided some interesting figures and insights, but I have a different take on the impact the elimination of FFELP will have on the loss of jobs.

Impact of loss of loan origination. No new FFELP loans does not only mean a reduction in those departments that specifically support loan origination and disbursement, which typically represent about 10-15% of a servicer’s or guarantor’s workforce. It will also immediately reduce staffing needs in sales and marketing (which will be limited to private loans), disbursement clearinghouse operations (also limited to private loans), payment processing (the bulk of payments requiring human intervention are returns of funds from schools), accounting (for lines of credit and bond transfers), IT (support for separate O & D systems), and compliance (If FFELP goes away, will ED promulgate any new rules for it?). It will also result in proportionate reductions for overhead functions. When all of this is taken into account, the job loss related to the loss of O&D functions will be greater than the 20-30% you project. It will also not take years to take effect: reductions related to the loss of these functions have already occurred and they will accelerate after June 30, 2010.

Loan servicing costs. I don’t believe the “tail” of servicing revenue that would support continued employment to be as long as you suggest. As a loan holder’s balance of receivables declines, so does its revenue. Receivables will decline much faster than the number of active borrowers. The servicer’s costs of servicing are primarily borrower-based and not balance-based. This is because most servicing activity relates to a borrower: billing statements, payments, phone calls (in and out), claims filed. Servicing costs, expressed as a percentage of receivables, will increase sharply. Who bears this increase depends on the nature of the servicing contract. A holder will bear it if the servicer bills a monthly fee for each borrower. The servicer will bear it if it charges a percentage of the outstanding principal of the serviced portfolio. In either case, a decision point is quickly reached. Either the holder will decide that it will no longer reduce the funds available to investors and will sell its loans to a larger holder (or the U.S. under an expansion of ECASLA), or the servicer will recognize that it is on a slippery slope to unprofitability and get out of the business. Both types of action are already occurring and will accelerate after next year.

Federal student loans as a growth business. Of course, the demand for federal loans will continue to increase, but this does not translate into increases in servicing jobs. There is no indication that ED intends to use more than the four servicers it selected in June. Only those companies servicing more than 2 million borrowers were eligible to bid. I believe this limited the pool to seven servicers. One did not bid, one dropped out of the bidding process, and one did not make the final cut. Furthermore, smaller servicers would not be able to sustain operations under ED’s contract terms. For all servicers but the four selected and, perhaps, ACS, student loans ceases to be a growth business after June 30, 2010.

Impact of College Access and Completion Innovation Fund. The primary beneficiaries of this legislation will be the states, and it is hard to envision a scenario in which a state agency would the relinquish any of its funding to pay employees of private – and, in many cases, for-profit – lender servicers when it can qualify for funding through the existing outreach functions of its state guaranty and scholarship agencies. I believe that states will decide that the greatest political traction for this spending will be in increasing grants to students and postsecondary institutions and not in increasing state payrolls. This translates into far fewer than the 4,000 – 5,000 jobs that you project and virtually none for private corporations.

Guaranty agency financing. Two points:

1) A guarantor has to worry not only about its Operating Fund, but also its Federal Fund and the interrelation between the two. In its Federal Fund, a guarantor is required to maintain a reserve ratio of 0.25% of the combined original guarantee amounts of its outstanding loans. At the end of FFY 2007, all guarantors who were not exempt from the requirement had ratios at or above 0.25%. This, however, is not sustainable. While there are several sources for the Federal Fund, the primary one is the Default Fee (1% of the guaranteed amount). This source will end abruptly with the last FFELP disbursement. From the Federal Fund, the guarantor spends money on the gap between the amount it pays on a default claim and the reinsurance it receives for that claim (a net loss of 2-3% of the claim payment) and on the Default Aversion Fees it channels into its Operating Fund. Although FFELP rules call for a protocol of corrective action when a guarantor falls below the 0.25% threshold, they also give ED broad powers to wrest control of the Federal Fund (considered a federal asset) when it is in the best interests of the United States. Such an action would put a guarantor out of business. A guarantor has the option of bolstering its Federal Fund with money from its Operating Fund, but this is an unlikely and only temporary solution.

2) Impact of Collections. It is important to recognize the disconnect between the sources and uses of a guarantor’s Operating Fund. While recovery operations (regular collections, AWG, rehabilitation, and default consolidation) bring in about 50% of a guarantor’s revenue, the staffing required to generate that 50% represents far less than 50% of the average guarantor’s workforce; most collections is outsourced to third-party vendors. To stay healthy for as long as possible, a guarantor will reduce staffing for all the non-recovery functions.

Incidentally, I believe Mr. Farber was speaking from his position as President of the New Mexico Educational Assistance Foundation, which services its own loans and provides service to the New Mexico Student Loan Guarantee Corporation (the guarantor). I don’t believe that the NMSLG’s own employees combined with the headcount attributed to servicing guarantee operations total 44 positions.

Where jobs are lost. We should be concerned not only about the number of jobs lost, but also where they are lost. Many jobs will be lost in communities where the opportunities for white collar employment are very limited. This increases the "misery factor" of job losses.


John Doe

One thing that is left out are the funds in SAFRA for school construction and modernization. Won't they create jobs as well? What about the investment in early learning programs, community colleges, and minority serving institutions?

My hunch, for what it's worth, is that SAFRA is a net job creator.

Ed from dryer lint brush

Great stuff man. I`ve been searching for this for a long time. I was lucky with google


Brian Diez

This is real good news. I know this could help a lot. I also found great aid from here, http://www.build-credit.net/

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