From the following article on Huffington Post, despite legions of critics crying out against it, it appears the feds are going to renew SallieMae’s (SLM) contract to administer federal loans. I thought President Obama’s policy change was to cut out the middleman on US federal loans.
I am apparently missing something in light of this contract. If you have information to fill in the gap as to why SLM is apparently continuing as a middleman for the US Department of Education, please say so in the comments section.
Education Department To Renew Sallie Mae Contract, Despite Allegations Of Wrongdoing
Posted: 11/29/2013 9:34 am EST | Updated: 11/29/2013 10:32 am EST
Student loan giant Sallie Mae is currently under fire from lawmakers, federal regulators, consumer groups and student advocates for allegedly violating numerous consumer protection laws. The company is facing accusations that it cheats soldiers on active duty, engages in discriminatory lending, pushes borrowers into delinquency by improperly processing their monthly payments, and doesn’t provide enough aid to borrowers in distress.
But to the Department of Education, Sallie Mae remains a trusted partner. In a previously unreported Oct. 25 letter, the contents of which were described to The Huffington Post and confirmed by the Education Department and by Sallie Mae, the agency said that it is moving to renew the student loan servicer’s federal contract, which is currently set to expire in June.
The new contract, which would run through June 2019, is potentially worth hundreds of millions of dollars. Last year, Sallie Mae recorded $84 million in revenue from its Education Department contracts. But the company wants more.
In its latest annual report, released in February, Sallie Mae told investors that in the 2013 fiscal year, the Education Department was projected to originate more than $121 billion in new loans and dole out more than $1 billion in servicing and other fees — a large slice of which Sallie Mae hoped to capture.
“The opportunity to significantly and profitably expand the services we can provide … directly to [the Education Department] or otherwise, remains an important component of our business services growth strategy,” the report said.
Sallie Mae spokeswoman Martha Holler referred questions about the Oct. 25 letter to the Education Department. A spokesman for the agency, Chris Greene, said he saw no reason its contract with Sallie Mae shouldn’t be renewed.
“If the Sallie Mae entity with whom the department has a loan servicing contract has been determined to have violated any laws, regulations, policies or other contractual terms or conditions, then the department will assess the findings and determine the most appropriate course of action, in accordance with the contract terms and conditions, statutes, case law, and the federal acquisition regulation,” Greene said. “At this time, the department is not aware of any issues that would prevent us from exercising this extension.”
News of the Education Department’s intent to renew its contract with Sallie Mae came as a surprise to consumer advocates. Deanne Loonin, director of the National Consumer Law Center’s student loan borrower assistance project, said her group has “very big concerns” with the decision.
It is problematic, she said, “because of ongoing investigations like those against Sallie Mae, but also because we continue to see huge problems with the way servicers are working with our clients and others like them.”
Sallie Mae, the nation’s largest company in terms of student loans owned and serviced, is facing criticism from at least three federal agencies and powerful lawmakers in Washington for a variety of alleged misdeeds. The company says the Federal Deposit Insurance Corp. has already told it to expect to be publicly sanctioned for alleged wrongdoing. The Consumer Financial Protection Bureau and the Department of Justice are also probing Sallie Mae over allegations it violated the Servicemembers Civil Relief Act, which is intended to ease financial pressures on active-duty members of the military, and broke other laws.
These are just the latest in a long line of examples of suspect behavior on the part of the company. In 2007, after New York’s attorney general raised allegations related to the improper marketing of federal student loans, Sallie Mae agreed to make changes to address conflicts of interest, as well as contribute to a fund to educate young people about paying for their education. In 2008 and earlier this year, federal inspectors general accused the company of violating its contracts with the Treasury and Education departments by failing to document certain decisions, inform borrowers of their rights and report verbal complaints.
Sallie Mae didn’t specify in its quarterly securities filings whether the investigations and planned enforcement actions target its handling of private student loans or those backed by taxpayers. If regulators conclude that the company has violated the rights of federal student loan borrowers, the Education Department likely would face pressure from student advocates and members of Congress to cancel its contract with Sallie Mae.
Rohit Chopra, the CFPB’s assistant director and student loan ombudsman, suggested last month that many of the “troubling” practices that plague the $165 billion private student loan market, such as the misallocation of payments and maximizing of fees and penalties, may also jeopardize borrowers with some $1 trillion in federal student loans from the Education Department’s Federal Family Education Loan and Direct Loan programs.
News that a company under investigation for harming student borrowers soon will be rewarded with more taxpayer-provided business comes at a particularly fraught time for the Education Department, which is battling accusations from lawmakers, consumer groups and student advocates that it has coddled and refused to punish a company with a history of alleged transgressions.
The agency has yet to respond to a Sept. 19 letter from Sen. Elizabeth Warren (D-Mass.) criticizing it for its apparent inability to hold Sallie Mae accountable, despite what Warren described as a “pattern of breaking the rules and ignoring its contractual obligations.”
If Sallie Mae’s past actions have not warranted an end to its federal contracts, Warren asked Education Secretary Arne Duncan, under what circumstances would the department terminate a contract with a law-breaking company?
Education Department officials have previously said that they could not recall any instances in which the department has levied fines on a student loan servicer or revoked its contract as a result of wrongdoing or poor servicing.
Greene told HuffPost the department’s decision to renew its agreement with Sallie Mae came after consideration of several factors, including the department’s conclusion that its contractors have a “satisfactory record of integrity and business ethics.” All four of the department’s main student loan servicers — Sallie Mae, Great Lakes Educational Loan Services, Nelnet Servicing, and the Pennsylvania Higher Education Assistance Agency — received similar letters.
Though Greene emphasized that the contract has not been formally renewed, and that the Education Department is not obligated to order services from Sallie Mae beyond June 2014, contracting experts said the department’s letter essentially promises the company future work orders from the Education Department.
“They haven’t committed themselves to giving work under the contract, but they’ve renewed it,” said Charles Tiefer, a professor at the University of Baltimore School of Law who specializes in government contracting. “For the same reason they gave work to Sallie Mae the last five years, they’re going to give work the next five years.”
Tiefer, who served on the U.S. Commission on Wartime Contracting, said that the choice to renew was entirely at the Education Department’s discretion. “If they were looking for an easy way to dump Sallie Mae, they just wouldn’t renew the contract,” he said.
Consumer advocates said the fact that Greene’s statement focuses on the specific Sallie Mae entity the Education Department has a contract with, rather than on the loan servicer as a whole, leaves open the possibility that it will ignore loan servicing violations by other parts of the company.
Sallie Mae this year announced plans to split itself into two, with one unit focusing on servicing federal student loans and the other — Sallie Mae Bank — specializing in private student loans.
The National Consumer Law Center’s Loonin said she and other advocates are unable to assess servicers’ performance under the contracts due to a lack of information provided by the Education Department, nor are they able to determine the criteria that led the department to preliminarily decide to extend the contract.
But analysts who follow Sallie Mae on behalf of investors said the move was expected — a formality, one said. It’s the largest company of its kind, borrowers whose taxpayer-backed loans it services for the Education Department are among the least likely to default, and just in case they do, a Sallie Mae subsidiary, Pioneer Credit Recovery, is among the best at recouping defaulted debt.
The company’s shares are up more than 56 percent over the past year, nearly double the gain in the Standard & Poor’s 500 Index, as investors have bet that Sallie Mae will put its regulatory woes behind it and increase profitability. On Wednesday, Sallie Mae shares closed at $26.60, the highest level since December 2007.
“Despite all the headlines that surround Sallie Mae, which aren’t surprising given its share of the market, you have to look at servicing performance,” said Michael Tarkan, a Compass Point Research & Trading senior analyst who recommends investors buy Sallie Mae stock. “And historically Sallie Mae has been the number one servicer in terms of default rates, so clearly they’re doing something right.”
While Sallie Mae scores well when it comes to how the Education Department measures default rates — the agency averages the number of borrowers in each of a year’s four quarters who miss payments by at least 360 days — it fares poorly in Education Department surveys. As a result, in each of the past two years Sallie Mae has scored last among the department’s four main servicers of federal student loans.
Despite the abysmal rankings — earlier this year Sallie Mae told investors it wasn’t “pleased” with its 2012 performance — the company still receives a new batch of loans to service every year, giving it a steady taxpayer-provided revenue stream.
The number of federal student loans Sallie Mae is servicing under its Education Department contract has jumped 39 percent over the past year, to 5.7 million loans as of Sept. 30, according to its securities filings.
“Maybe the Education Department is OK with it, or willing to move beyond it, because Sallie Mae has demonstrated strong default statistics,” Tarkan said of the company’s pending enforcement actions and ongoing federal investigations. “Sallie is such a dominant presence in the market it would be surprising to see them cut out.”
But unless Sallie Mae significantly improves how it treats borrowers with student loans, consumer groups and student advocates hope to disrupt the company’s plans. In recent weeks, both the Institute for College Access & Success and the National Consumer Law Center urged the CFPB to investigate Sallie Mae on the grounds that its practices are harming borrowers.
Earlier this month, the United States Student Association, Jobs With Justice and the Student Labor Action Project wrote Duncan a joint email urging him and other senior Education Department officials to change the servicing contracts in hopes that struggling borrowers would be better served and taxpayers would have a better sense of how their money was being spent.
In a sign of how servicers such as Sallie Mae are dealing with troubled borrowers, roughly 100,000 borrowers with federal Direct Loans entered default during the three-month period ending in September, about the same number as enrolled in the Education Department’s three income-linked repayment plans, department data show.
Student advocates reckon that since even borrowers with no income qualify for the plans — enabling them to stay current by paying nothing on their outstanding debt — there is little reason for a distressed borrower to default other than poor servicing. A default can trigger aggressive debt-collection methods that include fees, wage garnishments and withheld tax refunds, in addition to hurting a borrower’s future job prospects and ruining their credit history.
One in 10 recent borrowers defaulted on their federal student loans within the first two years, the highest default rate since 1995, according to the Education Department.
The consumer law center said companies such as Sallie Mae have been poorly serving taxpayers and the borrowers whose loans they service by not putting them in affordable repayment plans and failing to explain the numerous options available to distressed borrowers. The “lack of sufficient supervision” by federal agencies such as the Education Department is partly to blame, the law center said.
According to Loonin, servicers such as Sallie Mae give her clients and others like them false information regarding repayment options, repeatedly demand documents that have been provided numerous times, and push them into repayment plans that require less attention and are therefore easiest for the servicers, but often leave borrowers worse off.
The CFPB earlier this year proposed a new rule that would allow it to supervise non-bank student loan servicers for the first time. At the Education Department, enforcement of federal consumer protection laws has been effectively nonexistent, federal officials and student advocates have said. The CFPB is now poised to regulate and examine private and federal student loan servicing.
Simply put, the existing contract isn’t working to benefit borrowers, Loonin said.
“I don’t get the sense these people know how bad it is,” she said of federal officials.