One trend that seems to have escaped most people's attention is Sallie Mae's market share gains in the FFELP program and its implications in the recently announced servicing contract. For the just-completed 3Q 2009, Sallie Mae and their lender partners originated $7.83 billion in FFELP loans (according to this Earnings Supplement). Meanwhile analysis of the FSA Data Center information for Total FFELP disbursements over that same period yields a figure of $13.4 billion, giving Sallie Mae a 58% share. As one other data point, Sallie recently announced on their 3Q conference call that they had $18 billion of loans they were servicing and Secy. Duncan in his recent letter to schools indicated that $46.3 million in loans were sold to the Department under ECASLA, indicating that SLM is servicing approximately 39% of the total.
Here are their loan origination figures and market share for the last three years:
| FY07 | FY08 | FY09 | FY10(Est.) | |
| Sallie Mae loan originations | 9,002 | 14,256 | 21,211 | 17,167 |
| Total FFELP originations | 56,726 | 63,209 | 57,601 | 37,400 |
| Market Share | 16% | 23% | 37% | 46% |
There is nothing nefarious about these gains as Sallie Mae (and Nelnet) stepped up their commitment to fund all federal loans to all students during a period of time when other FFELP lenders pulled back. For example, in the most recent quarter (September 2009) where Sallie Mae saw a 25% increase in FFELP originations, Citibank's Student Loan Corporation had a 10% decline.
So, what is so worrisome about these market share increases? Isn't this just the inevitable consolidation of the FFELP market as lenders pull back given the legislative risk that it may be eliminated?
A few comments:
- Under the current DL servicing contract, Sallie Mae (and the other DL servicers) will service the loans that they originate through the 2009-10 academic year, so SLM's dominant position in originations will carry over to the servicing side (i.e. if they were to originate 46% of FFELP loans, they will service at least 46% of FFELP loans). They also indicated in their 3Q conference call that they also expected to pick up some third-party (non-Sallie Mae) loans also so this share could grow even larger.
- This advantage will persist also in future years, since as this clause in the servicing contract indicates, every attempt will be made to avoid split servicing of borrowers: "The servicer’s percentage of new volume will determine the percentage of new borrowers that will be
sent to the servicer for servicing (loans for existing borrowers may, to the maximum extent practicable, be sent to the servicer already holding that borrower’s other loans)." So, once a servicer gets a borrower they remain with the servicer throughout, which makes sense since the servicers are compensated on a per borrower basis. New borrowers each year will be a fraction of the installed base, so this early market share advantage will persist.
- Given that there are scale economies to be had with loan servicing (i.e. bigger players tend to be more efficient), this chart from a Nelnet 10-K demonstrates how Sallie Mae is almost 4X larger than all of the other servicers they will be competing against (PHEAA, Nelnet and Great Lakes). Combining their FFELP servicing with their DL servicing, ACS would appear to be at least Sallie Mae's equal if not quite a bit larger, but as you may recall they were the only finalist who was not awarded a piece of the new Direct Lending contract (they will continue to handle new DL originations through 2010).
From Nelnet's 10-K:
There is a relatively large number of lenders and servicing organizations who participate in the FFEL Program. The chart below lists the top 10 servicing organizations for FFELP loans as of December 31, 2007 (the latest date information that was available from the Department).
| Top FFELP Loan Servicers (a) | ||||||
| Rank | Name | $ billions | ||||
| 1 | Sallie Mae |
$ | 127.4 | |||
| 2 | PHEAA |
34.4 | ||||
| 3 | Nelnet |
32.2 | ||||
| 4 | Great Lakes |
32.1 | ||||
| 5 | ACS |
31.0 | ||||
| 6 | Wells Fargo |
11.7 | ||||
| 7 | JPMorgan Chase |
11.4 | ||||
| 8 | Express Loan Servicing |
8.7 | ||||
| 9 | Edfinancial |
7.7 | ||||
| 10 | KHEAA (Kentucky) |
5.5 | ||||
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So, where am I going with this?
- Among the four servicers in the DL contract, Sallie Mae's scale advantage coming in was significant. If that was not enough, their sharp increases in market share of FFELP originations for the 2008-09 and 2009-10 academic years will give them a significant advantage that will likely persist over the five year contract period. The three other servicers are likely to be left splitting up the 50% of the contract that Sallie Mae doesn't control.
- Sallie Mae's position as a servicer will create enormous benefits for them on the private loan side also (note that they are the only one of the four servicers that has a significant private loan origination business)
- Sallie Mae management noted on their recent conference call that they would maintain a sales and marketing team focused on the school channel, which the other major private student lenders will not match since they are not a DL servicer.
- An industry expert noted that "they will have a tremendous advantage in knowing how students at particular schools perform and this could help them in their pricing and school targeting"
Has "too big to fail" come to the student loan market also?
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Methodology:
FY based on September 30th fiscal year end (federal government's fiscal year)
FY07 and FY08 from Top 100 originators from Dept. of Education
FY09 SLM loan originations from 10-Q filings and include lender partners and internal brands
FY09 FFELP originations based on disbursement data on FSA - Data Center site for 4 quarters ending 9/30/2009.
FY10 figures only assume three quarters of activity through June 2010 quarter end.
FY10 Sallie Mae loan originations based on $25 billion company estimate for 2009-10 academic year less September quarter end of $7.8 billion.
FY10 Total FFELP originations assume 15% decline from FY09 levels. Most recent quarter (9/30) had 17% year-over-year decline.
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