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March 11, 2010

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Craigie

There seems to be a confusion about the difference between "originator," "servicer," and "holder." Origination is not impacted by the "four new servicers." That is completely-separate functionality. "Run-off" mode may describe loan holders but does not describe loan servicers. Their business model is to receive loan servicing fees from the loan holder. That would not change if new originations of FFELs were to end. It would be like any other business out there which receives payments from existing clients but is not growing. What would be "harvested"? They don't own the loans, they service them. It is true that some entities are performing multiple functions. That was a business decision they made in the past which may or may not turn out well for them. The "$100 billion" is not clear, nor why Sallie Mae, Great Lakes, Nelnet and AES/PHEAA would be considered the "big four." A very small handful of servicers, including those four, are servicing almost 100% of the FFEL portfolios which are not at the guarantor or at DoEd. There are hardly any remaining "sub-scale players" out there, unless FFEL servicers like Great Lakes, ACS, Citi, Wells Fargo/Wachovia are considered "sub-scale."
Why would someone want to pay a servicer a higher fee the deeper the borrower fell into delinquency? That would be the old FFEL incentives which in many cases seemed to encourage defaults. It sounds like it is not necessarily an issue of cost but rather an apparently-difficult paradigm shift for those who are accustomed to doing things one way. In the 1990s FFELP loan holders told Treasury that servicing costs were about 32bp for in-school & deferment and about 95bp for repayment (Stafford/PLUS) and 47bp for repayment (consolidation). The current contract pricing is publicly available on DoEd's web and is generally double or triple those rate levels. Moreover, there is nothing nearly as low as $0.90 except for extreme late-stage delinquency.

Tim Ranzetta

Craigie,
Thanks for your comments. The main point of my post was that there are many moving pieces here at a time when the economic environment is straining borrowers. Put another way, the deck chairs are being rearranged for the post-FFELP world at the same time that default rates are spiking due to the economy. The opportunity for service levels to borrowers to be impacted are quite high given the uncertainty swirling.

I would argue that a servicer that has no new volume coming in the door is not investing in the business anymore and will focus on maximizing cash flow even more than they might have previously (one need only look at SLM's comments that they "cut servicing costs." If that means reducing call center time per call then so be it.

On the issue of servicer fees at various stages of delinquencies, I am not suggesting that they should be paid more. I just find it curious that a servicer who signed the contract with the Dept. now seems to want to recut the deal. And if they are serious that they can't service at those prices, well students will suffer.

Finally, your data about rates being double or triple, what assumptions are you making about average loan size per borrower. If average loan held per borrower is about $10,000 and in-school repayment rate is $1.05 per month, that would appear to be a rate of about .12%. Even if I am off by factor of two, that still only gets me to 0.24%. Loans in repayment are $2.11 so double that number so I have trouble getting to 2X the 1990 figures.

Eddie Meboy

Great article and it really points out the perfect storm in default rates that are on the horizon. Servicers were given a take it or leave it deal from ED and to think that they will do anything more then is required is farcical. Add to that the constant movement of accounts between originating lender, Ed servicer and new direct loans, in an economy that is struggling and an extra year for borrowers to default and you have set the table for an enormous rise in default rates. In the case of SLMA the fox is watching the hen house. As a servicer they make next to nothing or maybe even loose money but as a collector on defaults… well that has been their bread and butter for a long time. It is important that institutions step in and assist their current and prior students during this period. The Department while concerned about default rates seems oblivious to the problems that their “solutions” have created. When asked about assisting students with split servicing their answer has been that “it’s the student’s responsibility to know where their loans are.” Well they know where they took them from they just have no idea where ED PUT them. Servicer’s deficiencies have already been documented, so the institution is left as the sole source to actually assist the student. They have a skin in the game as well; the more students that default the higher their institutional cohort default rate will climb. Add to that the new formula for calculating rates that gives borrowers an additional year to default and the importance of institutional involvement becomes clearer. For students that borrow for college keeping track of their lender will be akin to herding cats, as they get there eye on the locations of some loans others will move. I wish them luck.

Paul Combe

Tim, you raise a good point that lies at the heart of this whole issue - “What is the incentive (for servicers). . . to take the extra time to explain IBR and collect the necessary information from the borrower when a forbearance is so much easier.” Answer: There is none. The goal of student loan servicers is to collect payment in the most efficient and cost-effective manner possible. It is NOT about taking additional time and resources to make sure borrowers understand their options. Even with realigned incentives, like the “bounty” you suggest, servicers will always have a vested interest in the repayment solution that the borrower chooses. Some of those solutions benefit the borrower, while some may benefit the servicer/holder more in the long-run (more interest paid, loan kept in portfolio a longer time, etc.). And as you point out, the picture gets even murkier if the servicer has financial ties to private collectors and gets a “second bite at the apple.” That’s why I’ve always argued that borrowers need third-party, independent advocates (see borrowersrights.org) to provide neutral counseling, in addition to regular servicing. And the counseling must be proactive, before payment problems occur. If we are focused on contacting borrowers only after they are severely delinquent, we have already failed them.

C. Cryn Johannsen

I am enormously concerned, and that's why I continue to advocate for the indentured educated class. Have you seen my latest interview? It's a great clip that provides information about TICAS.org, my advocacy work, and so forth - http://www.youtube.com/watch?v=ArC6UHatvzY&feature=player_embedded#

C. Cryn Johannsen

Tim - my response to your outstanding piece above. http://alleducationmatters.blogspot.com/2010/03/quick-post-please-join-support-group.html

Jeremy

Craigie,

I was looking for the pricing information in the RFP. The only thing I could find was in the Redacted / Signed RPF Responses the following table under B.13.N:

Borrowers in In-school $ 1.050
Borrowers in Grace or Current Repayment
Status 1 3,000,000 $ 2.110
3,000,001 UP $ 1.900

Borrowers in Deferment or Forbearance
1 1,600,000 $ 2.070
1,600,001 UP $ 1.730

Borrowers 31-90 Days Delinquent $ 1.620
Borrowers 91-150 Days Delinquent $ 1.500
Borrowers 151-270 Days Delinquent $ 1.370
Borrowers 270+ Days Delinquent $ 0.500

I don't see any $.90 number specifically, but it seems like this lines up with what Sallie Mae is saying.

See: https://www.fbo.gov/spg/ED/FSA/CA/FSA-TitleIV-09/listing.html
Look for "Title IV Redacted Contract Awards"

Mark Russell

I am a newcomer to this blog, so you may have already covered this topic... Why is the cost of private education rising so rapidly? I have to assume that educational labor costs (professors, admin support, etc.) are rising in line with the increase in inflation, so what's causing the other costs to rise well above the increase in inflation?

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