Sallie Mae Using Jobs Issue To Build Support For Their Federal Loan Proposal; SLA Takes A Stab At Expected Job Losses

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:

"Al Lord [CEO] addressed most of the 900 employees at the Hanover Township facility, asking them to sign a petition, contact their elected representatives and become energized in the face of Obama administration plans to shift all student loans into the government-backed direct lending program."

• Company expects to be 2/3 the size should FFELP be eliminated [earlier version of post said 1/3 the size which is incorrect]:

“If student loan reform legislation is passed as currently drafted (the Miller bill), we would need to dramatically restructure our business,” Holler said. “Our total work force would have to shrink by about one-third, and we would need to re-evaluate our geographic footprint.”

• 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:

"On Tuesday, he [Al Lord] said he plans to return 1,400 more from offshore sites."

• The company continues to move forward on adding 600 jobs to the Wilkes-Barre facility:

“We remain committed to Wilkes-Barre,” Lord said. “We were here in April to announce 600 new jobs coming here and 300 are here already ahead of schedule and 300 more will be here soon.”

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:

"Although it's believed that 200 of the 700 jobs at Muncie's Sallie Mae office could be directly affected by the changes on the federal level, Sallie Mae officials have not ruled out the possibility that the entire facility could be shuttered and remaining jobs moved to Sallie Mae's offices in Indianapolis or Fishers."

• Sallie Mae seems to have changed their tune about impact of the federal reform effort: 

"Sallie Mae told The Star Press in March that it didn't expect the federal reform effort to adversely affect the lender's operations. But in recent weeks, Sallie Mae has begun a campaign to win support for its proposed alternatives. The campaign includes Thursday's rally in Muncie and one Friday morning in Fishers."

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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. 

What does this analysis mean?  Guarantors would take an immediate 5-10% hit to their  bottom line.  While their other revenue streams will trend downwards over time, I would suspect the decline will be more gradual as their portfolio goes into runoff mode.  Bottom line:  I would conservatively estimate job losses overall at 25-35% over the next 2-3 years based on these calculations. 

• 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: 

"Elwood "Woody" Farber, president of New Mexico Student Loans, said that if the measure is approved, roughly a quarter of his staff -- about 44 people -- would lose their jobs next fiscal year. Thereafter, he said, New Mexico Student Loans would lose 20 percent of its work force a year as staffers continued to service old loans. The organization has an annual payroll of about $8 million."

• 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)

Comments

[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.

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