Sallie Mae Protests U.S. Move to Award No-Bid Pact to Rival
The U.S. Department of Education and SLM Corp., the mammoth student lender known as Sallie Mae, are embroiled in a contract dispute that could delay efforts to shore up the student-loan market.
The hostilities revolve around who will be paid to process federal student loans that the Education Department buys from private lenders. After getting congressional approval in May, the department announced it would begin buying the loans to pump liquidity into the market, which has suffered in the credit squeeze.
Sallie Mae filed a protest last month with the U.S. Government Accountability Office over the department's decision to steer its new loan-processing business to Affiliated Computer Services Inc., without seeking competitive bids. Affiliated, a Dallas-based company, has provided other loan-processing services to the department since 1993.
Federal agencies are permitted to award and extend contracts without competition in certain circumstances, such as a national emergency. But Sallie Mae alleges that this deal was done improperly, and that the additional processing will "vastly expand" the scope of ACS's existing contract.
The case reflects the financial pressures facing private lenders as they grapple with subsidy cuts and struggle to raise lending capital. More than 100 lenders have stopped participating in the Federal Family Education Loan Program, or FFELP, in which the government guarantees loans made by private lenders. Lenders that remain "are in a very difficult situation, so they are trying to get revenue any way they can," says Mark Kantrowitz, publisher of Finaid.org, a Web site devoted to financial-aid issues.
In its complaint to the GAO, which has jurisdiction, Sallie Mae asked the government to suspend the additional loans processed by ACS. The company also asked the department to either put such processing work out for bid or let private lenders service the loans they sell to the government.
The value of the processing fees in the dispute is unclear. Based on fees typically paid for processing other student loans, Mr. Kantrowitz estimated that about $228 million in processing fees would be involved if the government bought all $65 billion in new FFELP loans expected to be issued during the 2008-09 school year. In one scenario, federal officials estimated the government would purchase half of all FFELP loans this school year if market conditions don't improve.
Authority for the department's loan-purchase program is set to expire after the 2008-09 school year. But Monday night, the House of Representatives voted to extend the effort for another year. The Senate is expected to take up the issue as early as this week.
In a memo filed in the case, Michael Whisler, an Education Department contracting officer, wrote that putting the business out for bid could take as long as 90 days. Letting multiple private lenders do the processing also would lead to a loss of control of federal assets, he wrote.
He warned against any disruption of the loan-buyback program. "Of great concern, is that any perceived wavering by the department in its commitment to purchase these loans could further destabilize the already fragile credit markets, bringing student lending to a halt just as students return for their fall semester," he wrote.
Sallie Mae spokesman Tom Joyce said the company services student loans for more than 10 million borrowers, including those with in an automotive management degree program. "We want to fulfill our commitment to those customers, and to service the business we have already earned in the open marketplace," he said. "There is a substantial cost to students, families and taxpayers when service is disrupted after a loan is made."
Samara Yudof, a spokeswoman for the department, declined to discuss details of the case. "We are in the process of fully and completely responding to the issues raised by Sallie Mae in its protest and are confident in our position," she said.
Through a spokeswoman, ACS declined to comment.
The GAO plans to issue a decision in the form of a recommendation by Dec. 1. Such GAO recommendations aren't binding, but federal agencies generally abide by them.
In 2001, Sallie Mae filed a so-called agency-level protest over a different ACS contract. After a department hearing officer ruled in Sallie Mae's favor, the business was put out to bid in 2003, and ACS won the contract, which was worth an estimated $1 billion over five years.
Sallie Mae has said it expects to originate about $20 billion in FFELP loans this school year. Absent a market turnaround, it plans to sell some or all of them to the Education Department, according to a person with knowledge of the situation. But its effort to hold on to fee revenue comes as growing numbers of borrowers are shunning FFELP loans in favor of the direct-loan program, which doesn't involve private lenders.
As of Sept. 4, students and parents had borrowed $15.32 billion through the direct-loan program for the 2008-09 school year, up 49% from the previous school year. Meanwhile, borrowers took out $26.47 billion in FFELP loans, down 4% from a year earlier.
By: Robert Tomsho
Wall Street Journal; September 17, 2008
