Sallie Mae executives are on a barnstorming tour this week in Muncie, Indiana and Wilkes-Barre,Pennsylvania to try and build support for their student loan proposal. The stories published in newspapers in those communities provide details about Sallie Mae's plans should the FFELP program be eliminated.
First, let's go to the highlights from the Wilkes-Barre Times-Leader:
- Company urged employees at their servicing center to get involved politically:
- Company expects to be 2/3 the size should FFELP be eliminated [earlier version of post said 1/3 the size which is incorrect]:
- SLA Note: This is the first time that the company has put an estimate like this out there. It seems a bit premature since the allocations for the servicing contract they were recently awarded have yet to be determined. Here is the response they gave to this same question during their recent 2Q earnings call:
- "Obviously some redesign of our business would be appropriate. We are very well along in assessing that. I think it really is premature at this point to dig into those numbers. As you would expect we’re very, very much aware of what the affect of this legislation would create.
- Company plans to bring another 1,400 jobs back on-shore, in addition to the 2,000 previously announced:
- The company continues to move forward on adding 600 jobs to the Wilkes-Barre facility:
Meanwhile in Muncie, Indiana, here is how the Muncie Star Press saw it:
- About 200 of the 700 jobs (or 28%) at Sallie Mae's Muncie facility could be impacted:
- Sallie Mae seems to have changed their tune about impact of the federal reform effort:
A few points about jobs because there seems to be some confusion out there about this issue:
- Based on a survey compiled by NCHELP which included input from FFEL trade associations, Consumer Banker's Association, NCHELP, Education Finance Council and Student Loan Servicing Association there are 30,000 people currently involved in the FFELP program [an earlier version of this post indicated that the survey was conducted by Consumer Banker's Association however, while they participated in the survey, the information was compiled by NCHELP]. The Education Finance Council has a news release listing the figure at 35,000. I cannot explain the difference, but for the reasons described below I think it is hard to fathom that "all of these jobs will be lost" as some have suggested. The two stories above provide a more nuanced picture of what happens if FFELP disappears. At two of Sallie Mae's largest facilities, we see one in Wilkes-Barre adding 600 jobs and the other in Muncie, potentially losing 200 or 28%.
- Sallie Mae has now announced that they are moving 3,400 jobs to the U.S. that that they had previously been outsourcing in other countries. Assuming that most of these jobs involve FFELP activities, this represents over a 10% increase in industry jobs (using the CBA figures). As I argued in an earlier post, Sallie Mae probably had three good reasons for bringing these jobs back:
- It would improve customer service
- ED's servicing contract that they were bidding on at the time (and were eventually awarded with three other vendors) for all intents and purposes required vendors to carry out the activities in the U.S.
- It would play well politically
- The College Access and Completion Innovation Fund should also be a net jobs producer (or at least prevent the elimination of jobs that otherwise might disappear) by providing funding of $500 million per year for five years for a range of activities including financial literacy and college outreach. Assuming a fully loaded cost of $100,000 - $125,000 per FTE that would work out to about 4,000 to 5,000 jobs supported for a five year period.
So, where will the job losses come from. Let's look at some of the likely candidates:
- Loan servicing. Unlikely to see much, if any, of a decrease in jobs. Why?
- Set-aside in the current legislation is designed to protect sub-scale non-profit and state agency servicers where job losses may have occured.
- Servicers who don't get a piece of the ED servicing contract or a set-aside will still have a loan portfolio to service given the long tail of student loans. I would suspect that over time there would be consolidation of the mid-tier servicers as more efficient servicers take over their portfolios. This could lead to some job losses which would be offset by the fact that...
- Federal loans are a growth business. Latest figures from ED showed 20%+ growth in loan volumes for 2008-09 and SLA estimates are for continued double-digit growth with FAFSA growth being a good leading indicator.
- While not pretending to be an expert on guarantor operations, I have spent some time over the past several weeks analyzing their operating results for FY08 to try and discern how they might be impacted by a shift to Direct Lending:
- Almost 50% of their revenue comes from Collections
- With defaults rising and the recent sharp rise in new FFELP loan originations (which have doubled since 2002), even if the guarantor's portfolio goes into runoff mode, there would appear to be an increasing inventory of loans that will need to be collected over the next few years. As of May 2009, the porfolio of defaulted federal student loans had climbed 14% over the last twelve months.
- 20% of income, Default Aversion Fee and Account Maintenance Fees, are based on the guarantees on the books of the guarantee agencies
- This revenue source will decline over time as there would be no new guarantees to replace those coming off their books.
- 10% of income is derived from Loan Processing and Issuance Fees, which would be eliminated as there would be no new guarantees.
- They likely have already felt 1/2 of the impact here as estimates are that 50% of FFELP loans for 2008-09 will be sold to the Dept. through the ECASLA programs.
- 20% of income is categorized as Other Income which has dropped 31% in 2007 and 14% in 2008. I have assumed that this would continue to decline in double digits going forward.
- Almost 50% of their revenue comes from Collections
- Here is how one guarantor described the impact of the legislation; note that job losses would likely be less dramatic if NMSL were to benefit from the set-aside in the current legislation which would allow them to continue to service new loans originated by students at New Mexico institutions:
- Loan origination
- These would be the jobs most impacted, as the current legislation proposes using ED's COD (Common Origination and Disbursement) platform to originate all federal loans so a conservative assumption would be that all jobs related to this area would be lost.
So, what is the point of all this analysis?:
- Based on the information provided below, the number of U.S. based jobs related to federal student loans is likely to range from a net increase of 300 jobs to a net loss of 4,750 over the next several years:
- The increase in jobs includes the 3,400 jobs that Sallie Mae is bringing back into the country and the 4,000-5,000 jobs funded through the Innovation fund. This would amount to a range of 7,400 to 8,400 new jobs being added in the U.S.
- My best estimate for job losses would be a range of 8,100 - 12,150 jobs over the next several years based on a range of assumptions:
- The current distribution of employees among servicing (40-50% of total employees), guarantee (20-30%) and origination (20-30%) activities
- Expected job losses in servicing (none), guarantor (25-35% decrease) and origination activites (100% decrease)