Sallie Mae’s Full Court Press

The U.S. Department of Education will soon make a decision that could fundamentally reshape the student loan marketplace.

The Department has chosen six companies, including the student loan giant Sallie Mae, to compete for a lucrative contract to service tens of billions of dollars of Federal Family Education Loans (FFEL) sold to the government under the Ensuring Continued Access to Student Loans Act (ECASLA). But in the wake of President Obama’s proposal to eliminate FFEL and provide federal loans entirely through Direct Lending, the stakes have been raised significantly. The winning bidders could be the last student loan companies standing, in charge of servicing all loans made in the future under the Direct Lending program.

As Tim Ranzetta recently wrote on his well-respected blog Student Lending Analytics, “This contract is the game-changer that will determine the landscape for student loans in the years to come.”

Given the high stakes involved, you would think that the Department would do all that it could to ensure that the loan companies it is considering have spotless records when it comes to servicing and collecting on student loans. But judging by some of the companies that are involved in the competition and comments recently made by the agency official in charge of the bidding process, this does not appear to be the case.

Take Sallie Mae, which is making a full-court press to win the contract. Last week, for instance, the company made a huge media splash with its announcement that it was returning 2,000 call center and information technology jobs it had outsourced to India and other countries to the United States. While Sallie Mae’s Congressional allies hailed the company’s “patriotism,” it’s clear that other motivations were in play. Department officials have indicated that companies with significant offshore operations are unlikely to obain the contract. [It’s unclear what this means for Affiliated Computer Services (ACS), which currently services the Department’s Direct Loan portfolio, and is one of the other finalists for the new contract. As its competitors like to point out, ACS engages in a signifcant amount of outsourcing.]

Because of the size and scale of its operations, Sallie Mae is expected to have an upper hand in the competition (it remains unclear how many companies will ultimately be chosen.) But we believe that it is entirely fair to question why the company is even being considered. After all, serious allegations have been raised over the last several years about Sallie Mae’s federal and private student loan servicing and collections practices.

Two separate federal lawsuits have been brought against Sallie Mae over the last several years, accusing it of systematically growing student loan debts by routinely placing borrowers who are delinquent on their loans into forbearance without getting their consent. While being in forbearance allows borrowers to temporarily stop making payments, interest continues to accrue on the loans, increasing the size of the borrowers’ total debt load.

As we’ve reported previously, a former Sallie Mae employee filed a false claims lawsuit against the company charging it with exploiting its closely-intertwined relationship with the student loan guaranty agency USA Funds to “balloon” the total debt delinquent borrowers owe — as well as the amount the guarantor can collect if the loans ultimately go into default. According to the lawsuit, Sallie Mae employees working at USA Funds “routinely falsified borrower requests for forbearances, often just dialing a borrower’s telephone number and letting the line sit open for a few minutes, so that the company’s computers would record an apparent conversation.” Lenders are required to send a written confirmation to borrowers that they have agreed to enter forbearance, but, as The Chronicle of Higher Education reported last fall, “it doesn’t require any proof that the letter was received.”

Meanwhile, a class-action lawsuit filed last year by shareholders in the Federal District Court in Southern New York alleges that between January 2007 and January 2008, Sallie Mae “aggressively and systematically pursued and manipulated its forbearance process” on delinquent private loans to hide “the deteriorating nature of its private loan portfolio.” According to the lawsuit, Sallie Mae reported a 73 percent increase in the volume of private loans that it put into forbearance during that time, “compared to an increase of only 8 percent in delinquent loans for that period.” By removing loans from delinquency status and putting them into forbearance, the company was able to limit the amount of money it held in reserve to cover anticipated losses on “uncollectible loans,” the lawsuit states — which artificially boosted its earnings and made the company more attractive at a time when its leaders were trying to put it up for sale. It was, after all, only after Sallie Mae’s deal with J.C. Flowers & Co. collapsed that the company came clean about the losses it was about to incur on expensive subprime private loans made to high-risk students attending for-profit trade schools.

Sallie Mae denies these charges. But surely the Department should conduct a thorough examination of the charges before agreeing to exponentially expand the company’s federal student loan servicing business.

Unfortunately, this doesn’t seem to be in the cards — at least according to comments made recently by Mike Whisler, the Department official in charge of the bidding process. In an interview with a consumer lawyer (the contents of which were posted — apparently over his objections — on Facebook), Whistler appeared to suggest that the Department has been under such a time crunch to get the contract out that it hasn’t had time to adequately vet borrowers’ complaints about the companies. Asked if the agency had any plans to seek input from borrowers who were victims of predatory loan servicing practices, “he seemed to dismiss this suggestion, stating that a decision had to be made quickly,” according to the lawyer’s account of the conversation. [Editor’s Note: a Department spokeswoman turned down Higher Ed Watch‘s request to interview Whisler, saying that agency officials were not allowed to comment on an open bidding process.]

The Department is certainly in a rush. The original request for bidders was put out in January; the six finalists were selected last month; and the winners are expected to be announced any day now.

While we understand the pressure the agency is under, we don’t think that that is an adequate excuse for overlooking serious allegations that have been made about a company’s past loan servicing and collection practices. At the very least, the Department should think twice about awarding the contract to Sallie Mae until the company can prove that it has been falsely accused.