On the same day that the House debated over the Student Aid and Fiscal Responsibility Act, Al Lord, the Vice-Chair and CEO of Sallie Mae riffed about recent events in Washington at a Barclays Capital investor conference.
What follows below is a paraphrased transcript of his comments (I should have taken steno in high school):
Background on legislative efforts to end FFELP: As you are probably all well aware, President Obama and certain very influential Congressman are very interested in ending the private sector participation in the student loan program called FFELP. More specifically, the plan would have the government take over the origination function which is roughly an $85 billion a year business.
CBO scoring: The original premise of this takeover was that it would save taxpayers $95 billion over 10 years with the savings used to promote other types of spending on higher education, principally Pell Grants. Later the CBO, the official scorekeeper, rescored it at some $87 billion savings..which made for a tall hill for us to climb. After dissecting the numbers, we recognized that the $87 billion in savings is coming from the government's low cost of borrowing (virtually nil) and students paying 6.8% or higher for their federally guaranteed loans. So, the savings is virtually all spread income [the difference between student's cost and government's cost to borrow].
Current savings under ECASLA: Understand that in the current fiscal year, the government will earn $11 billion because of this wider spread. So, this $87 billion in savings doesn't seem too far-fetched since they will save $10 or $11 billion in this year alone.
CBO score of Student Loan Community Proposal: We thought that we could save in the same range with the industry proposal. Last Friday, CBO scored our proposal and said it saved exactly the same amount, $87 billion. Now those two numbers are what the CBO refers to as mandatory savings, that is savings on programs where they are mandated to spend the money. That is where the debate has been last 20 years. Once the numbers came out even, CBO decided to also measure discretionary spending, which is less mandatory I suppose. Ultimately, CBO concluded it would cost the private sector $20 billion to deliver over $1 trillion of credit over the next 10 years while the government's proposal would only cost $7 billion leading to a $13 billion advantage to government.
Disputes CBO finding: We think that both numbers need refinement. We know that the $20 billion cost for the private sector proposal over 10 years is vastly overstated. The real story is that that the differential and the political talking points have gone from a $90 billion difference to a $13 billion difference. And yet on Monday I read some analyst reports and media is reporting that the game is over and frankly over the last six months I believed that the game was over too. However, I believe that our odds have changed dramatically. Now, I am not predicting success at all that would be foolhardy but the fact is that our odds have changed dramatically. Real difference in two programs could be less than zero; it could cost taxpayers less for us to do it. The $13 billion is being studied by the House and Senate now working with the CBO. The black box that CBO operates in has now opened a little bit and we are getting far more factual information in this process. Details about the assumptions that we used to evaporate the difference aren't all that relevant. The fact that we have 30% lower defaults in the scoring, I am not sure how they dealt with this. We believe that they have scored the cost of defaults lower for the government proposal than the industry proposal. They also don't take into account the 35% tax rate that they earn in any payment they make to us.
Highlights transition risk of shift to DL: In order for them [government] to generate savings, they have to transition 4,500 schools to their system or 600 schools/month. Not sure they
have done 600 schools in a year. We see and we believe they tend to overlook the massive transition risk. If they put off transition for even a year, some $10-$15 billion of savings would go away so the $13 billion difference would evaporate. We could just go forward under existing law and all their savings would be realized. Scoring process more transparent. I like our facts enough to be hopeful. Only suggesting hopeful, and again these are my comments are only mine. Two weeks ago I wasn't very hopeful...this was almost open and closed. I don't see it that way anymore.
Impact of new servicing contract: The new servicing contract won't be significant for 2-3 years.
Planning for worst-case scenario: If worst case takes place and FFELP originations disappear...we become a smaller company...our number of employees and physical sites would shrink. We have 26 sites today which would likely shrink to single digits. In our cost-cutting efforts we could have 2,000 fewer employees [according to their 2008 10-K, Sallie Mae had approximately 8,000 employees]. Costs will go down.
On timetable for decision: We are coming to a close on this process. We should have political answer by Thanksgiving. Some say sooner. I hope to enjoy my Thanksgiving dinner. Will end
the uncertaintly.
Al Lord speculating on the outcome: These are my speculations and are incredibly imprecise. I think there is a 25% chance that worst case happens and that it [FFELP] goes away by mid-2010. I think there is a 25% chance of a far more benign result, such as extending the status quo, ECASLA, indefinitely. Government may realize savings [from ECASLA] that may even exceed their proposal. Or they may adopt the community proposal 25%. Somewhere in the middle is 50% chance of something between the two proposals. Overall, I think we will be originating loans longer than they are talking about now, but not forever.
Comments