Sallie Mae Seeks Competitive Bidding

By Jason Delisle and Stephen Burd

The Wall Street Journal reported yesterday that Sallie Mae is in a contract dispute with the U.S. Department of Education over the agency’s plan to purchase federal loans from private lenders that are struggling with liquidity as a result of the credit crunch.

According to the newspaper, Sallie Mae has filed a formal protest with the Government Accountability Office over the Department’s decision to put its current Direct Loan servicer, Affiliated Computer Services Inc., in charge of collecting on these loans for the government without putting the contract out for bid. In other words, Sallie Mae is saying that the Department should have held an auction for the contract to service those loans.

Oh, the irony is rich here. Sallie Mae is making the case that a government program run by private businesses should be subject to competitive bidding, so that the lowest cost and best equipped company for the job is ultimately hired. Surely Sallie Mae is arguing that this competitive approach saves money for taxpayers. Too bad the student loan giant has rejected this same argument when policymakers proposed using a competitive bidding process to determine the rates at which the government subsidizes lenders in the Federal Family Education Loan (FFEL) program.

Sallie Mae and other lenders prefer to have Congress set the subsidy rate arbitrarily through the political process. They favor this approach because it makes it easier for them to influence Congress when it sets the subsidy.

Here at Higher Ed Watch, we have argued that federal officials should use an auction mechanism to set the subsidy rate paid to FFEL lenders making student loans. Whether the best approach would be to hold an auction for the right to make federal loans in the first place, such as the PLUS loan auction pilot program will do, remains to be determined.

So is Sallie Mae finally coming around to our side on this issue? Might they now support competitive bidding for both servicing and subsidies in the federal loan program?

It’s more likely that they want their cake and to eat it too. With their size and economy of scale, they’d likely be the favorite to win the servicing contract from the Department. As a result, they’d be able to unload their loans on the Department when they have difficulty selling them to anyone else, and still profit by servicing these loans on behalf of the government.

But policymakers should not let Sallie Mae speak out of both sides of its mouth. If competitive bidding would bring great benefits to loan servicing, then imagine the improvements it would bring to the federal student loan program overall.