What's Ben Worried About?

"I wish he worried as much about our jobs."  This might be both a very rational and justifiable lament coming from one of the 2,000 Nelnet employees who have lost their jobs since Senator Ben Nelson of Nebraska voted "aye"  to pass the College Cost Reduction Act in October of 2007. 

Many readers may know of my skepticism regarding the "SAFRA job loss estimates" now being bandied about by industry lobbyists (see posts here and here for SLA's analysis) aware of the pressure on Washington to create jobs and solve the severe unemployment issue.  Given this economic backdrop and the mid-term elections just a few months away, I was not entirely surprised to see six Democratic Senators come out today with a letter indicating their concerns about SAFRA (from The Hill): 

"In a brief letter dated Tuesday, Democratic Sens. Bill Nelson (Fl.), Tom Carper (Del.), Blanche Lincoln (Ark.), Jim Webb (Va.), Mark Warner (Va.) and Ben Nelson (Neb.) describe reform to the country's "higher education funding" system as a "priority."

But the group of centrist Democrats also express concerns the Senate's lending bill could ultimately result in local job loss."

What is surprising, however is seeing Nebraska Senator Ben Nelson's name as one of the signatories of the letter (Remember that Nebraska is the headquarters of student lender, Nelnet, which based on at least one survey from last year has 891 student loan jobs there). 

So, why am I surprised to see Senator Nelson's name on the list?  I wasn't sure if he was listening to the same Nelnet investor calls or had read the same recent SEC filings that I had perused recently.  I wasn't sure if he knew that Nelnet had spent the past three years diversifying their revenue stream away from the federal student loan business, undergoing a wrenching restructuring in 2007-08 and now finding themselves in position to grow their fee-based businesses.  Oh and the company has been helped by being named one of the four servicers to manage the Direct Loan contract. 

Don't trust me though.  Let's go to the transcripts and 10-Ks and hear from company executives:

4Q conference call (March 2010): 

Operating costs going up usually indicates new hires, which in this case seems tied to the rapid expansion in Direct Lending contract: 

"We would expect operating expenses to grow slightly as we increase volume under the government contract as evidenced by the slight growth in operating expenses compared to the third quarter." 

• Direct Lending contract now has Nelnet servicing $4.4 billion in incremental federal loan volume (10-K (March 2010):  "As of December 31, 2009, the company was servicing approximately $3.4 billion of loans on behalf of the Department, of which approximately $1.5 billion was incremental volume previously serviced by other companies. As of March 1, 2010, servicing volume for the Department has grown to $6.3 billion, up from $177 million on September 30, 2009."
• In fact, Nelnet's career site listed 67 opportunities available, including 20 at their Lincoln, Nebraska location. 

What impact would elimination of FFELP have on corporate overhead?

Terry J. Heimes (Nelnet CFO): Sure Mike this is Terry, if you think about it our loan and guarantee servicing is a relatively mature business. We've added new activity with the government contract but it is a relatively mature business.  Our tuition payment and campus commerce is also a more mature business. You can see that we've gained a little bit in terms of operating leverage over the past year but not significantly.  Our enrollment services is probably is our least mature business in terms of opportunities to continue to look for leverage areas, et cetera.

As it relates to the corporate overhead we've made significant improvements this past year in terms of reducing that corporate overhead with changes in the business environment.  We will continue to look for ways that we can drive that down, you know, as the changes with legislation continue to become clear we will continue to look for opportunities or ways that we can either reduce or re-deploy resources into revenue generation activities (emphasis added). 

November 2009 notes from 3Q earnings: 

The focus for the company going forward:  "We continue our transformation to a fee for service processing company that we look forward we are focused on meeting our primary objectives of growing and diversifying our fee for service businesses and maximizing the value of our existing portfolio."

On the impact of the elimination of FFELP (Q&A from conference call): 

"Sameer Gokhale,  Keefe, Bruyette & Woods:  "Then the other thing is on the operating expenses. I know there’s some commentary about outlook for OpEx and how they might stabilize, but let’s say the FFELP were completely eliminated. How much more in additional cost? Could you takeout of your system related to FFEL Program going forward?"

Terry Heimes (Nelnet CFO):  Sameer, this is Terry. I mean obviously, we will pretty proactive in our approach when the legislation changed. So we’ve taken a substantial cut at our operating expenses, given the change in our business operations. We will probably be able to eliminate some additional marketing and origination cost, but I don’t think it would be substantial (emphasis is mine). 

Lack of concern about what happens with student aid reform bill: 

"In July, the House passed the bill similar to the President’s proposal with the senate has yet to debate legislation. Regardless of the outcome other budget proposal, we have positioned our business to be successful by helping families, schools, international institutions, navigate increasing complex education system.

We have no doubt. The fundamentals of our business model remain strong. We are stable, well established, fee for service businesses with recurring revenue. We’re generating significant cash flow from our businesses and our student loan portfolio. We believe we are well positioned for growth in a very dynamic education services market."

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Tracking Nelnet's employee count since 2006 provides insights as to the timing of their restructuring. Keep in mind that the College Cost Reduction Act passed in October of 2007.

2006:  As of December 31, 2006, the Company had approximately 4,000 employees.

2007: As of December 31, 2007, the Company had approximately 2,800 employees.

2008: As of December 31, 2008, the Company had approximately 2,200 employees.

2009:  As of December 31, 2009, the Company had approximately 2,000 employees.

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So, I guess that Senator Nelson might have a bit more credibility on the issue of saving jobs had he not voted "Aye" to the College Cost Reduction Act in 2007 which, in tandem with the credit crunch,  led Nelnet to shed 2,000 jobs over the past three years.  So, now that company executives are using words like "don't think it will be substantial" in regards to job losses, with reqs. open for over 3% of jobs within the company, and with the company now servicing $4.4 billion more student loans under the new DL contract, Senator Nelson might want to test out a new talking point to explain his opposition to the bill.