Sallie Mae might be the most unpopular entity in education (just look at social media if you think otherwise). As a recent post by Rohit Chopra at the Consumer Financial Protection Bureau notes, the Delaware-based loan giant had the worst overall performance record among the four companies that won competitive contracts to service new federal student loans. In response, Sallie Mae’s contract to service federal loans says the company will get fewer loans to work with next year (meaning they get paid less) and other servicers get more.
Meanwhile, the U.S. Department of Education is required to give a completely different group of servicers a free pass, even if their results may be substantially worse than the four competitively chosen companies. And it pays them more per borrower than Sallie Mae, too. But this is no accident. It’s an intentionally wasteful policy vigorously sought after by several members of Congress.
Not-for-profit but politically connected
These companies are known as nonprofit loan servicers. Many of them used to be loan companies back when students could borrow through either the bank-based federal loan program or the government run Direct Loan Program. But after Congress ended the bank-based option in 2010, saving taxpayers $68 billion in the process, all new loans were supposed to be made by the government and serviced by companies that won a competitive contracting process.
Enter Congress. Several members demanded that a role be maintained for their local loan companies, which were nonprofit and often quasi-state agencies. As a concession, legislators agreed to guarantee these nonprofit loan companies would each receive a minimum of 100,000 borrower accounts to service instead of the four competitive winners. It was a straight politics play to keep directing federal subsidies to home companies based upon political connections and cloaked in claims of local expertise. There were no demands for results or accountability. It was a kickback calculated in students to provide the same services already contracted for elsewhere.
Paying more, often for the same product
In addition to getting a guaranteed allocation regardless of results, these agencies also received a special allocation in the bill that gave them this earmark—about $1.2 billion more over 10 years to service a fraction of the loan volume that the bigger companies are overseeing. As the table below shows, this includes paying the nonprofit servicers about 22 percent more than the large ones for borrowers that are in their grace period of current repayment status. For the 100,000 accounts, that’s as much as an extra half a million dollars a year for servicing borrowers who are just doing what they should be.
Not only are taxpayers paying more for these nonprofit servicers, but in many cases those dollars are buying the same platform as the cheaper companies that won competitive contracts. Looking at the publicly posted contracts of 11 nonprofit servicers shows that in nearly half the cases the government is simply paying more money for a product they are already getting from the competitively determined contractors. Five of the 11 servicers indicated an initial plan to subcontract with Nelnet or the Pennsylvania Higher Education Assistance Authority (PHEAA) to use their platforms, but getting paid at a price that is between 10 and 32 percent higher than what those two companies are receiving per borrower.
Since those initial plans, consolidation among nonprofit servicers means that over 70 percent (five of the remaining seven) are getting more money to use other companies’ platforms. The Department announced in July that the platform run by Campus Partners and EdManage, which are owned by the South Carolina Student Loan company would be shutting down. In addition to EdManage, three other providers—COSTEP in Texas, EDGEucation in North Carolina, and KSA in Kentucky—had planned to use this platform. As a result, the loans of the Texas, North Carolina, and South Carolina servicers are being transferred to MOHELA and the loans serviced by KSA are being moved to Aspire. But these companies are already using PHEAA’s servicing platform, just increasing the extent to which nonprofit servicers are relying on a product the government is already getting for less. That does not sound like the local expertise many of these companies cited in trying to justified their continued existence to Congress during negotiations on the 2010 bill.
What about results?
Judging how well these servicers are actually doing is not an easy task. The 100,000 accounts each got were randomly assigned, but they all came from the company that used to service all of the government-held student loans back when there were two competing federal loan programs. Because of this competition, the loans held by this company had some characteristics that could make it different from the broader loan population. First, it was from schools that had been in the government-based system for longer, which means the quality of loans would be affected by the types of schools the bank-based program was able to recruit to participate versus those with riskier loans it may not have wanted to serve as much. Second, these were likely not new borrowers, so they may have already been in repayment or even defaulted. Third, the sample could include some of the bank-based loans that were sold to the government during the credit crunch, which are generally among the worst debts in the program. Comparing the nonprofit servicers to the competitively determined ones is also not easy because only two of the five different metrics each is measured upon are in common—measures of borrower and federal personnel customer satisfaction. None of the information on actual outcomes is consistent across the two groups.
Students don’t seem happy...
Comparing nonprofit and competitive servicers on the metrics they do have in common suggests that the extra money spent on the former is buying little more than unhappier students. This is measured by a survey of borrowers done under the framework of the American Customer Satisfaction Index, which can be uniformly applied across a range of sectors and types of industries. The table below shows the average scores on the borrower satisfaction measure over the last two quarters of the 2012-2013 year for all servicers that had received marks for at least three quarters. Presenting the data in this way ensures servicers are not judged based upon only their first score, which tends to be a bit lower, and have the results partially smoothed out. For reference, the national average is about 76 and a “good” score would be in the 80s.
As the table shows, the competitively determined contractors scored as high as or higher than every single one of the seven nonprofit servicers with data. The five additional servicers that lacked enough data would also have come up well short, with most having scores in the mid to high 60s. And the two most liked serivcers—Great Lakes and Nelnet—scored approximately 10 points higher than the worst nonprofit, an offshoot of the South Carolina Student Loan Corporation. Even Sallie Mae, the bane of students everywhere (or at least on Twitter) bested every nonprofit with data for this period.
...Federal personnel think things are only OK
Below is the same table, but for the federal personnel scores. The results are a bit more tightly clustered, with Utah-based CornerStone even exceeding three of the competitive winners. But the bottom group, especially the Oklahoma result, is not pretty.
Now it is possible that maybe some of the scores are affected by the quality of a given servicer’s sample—defaulted borrowers may look more negatively upon their servicer than someone in active repayment. But regardless of the scores, the saddest thing across the two tables is that no one appears to be providing above average customer service.
Outcomes vary, but unclear why
Since there’s no way of knowing whether the borrower populations across each servicer are equivalent, it’s hard to tell whether variations are the result of differences in quality or the underlying borrowers. It could be that only 72 percent of loans in repayment or delinquent status overseen by the Kentucky Higher Education Student Loan Corporation’s servicing arm were current or in grace status at the end of the fourth quarter of 2012-13 because it received a disproportionate number of defaulted loans, while Aspire’s 93 percent mark on the same metric could be a result of having more borrowers at flagship public four-year schools. There simply aren’t enough data to know for sure. Because of those caveats, the table below simply shows the results on the three outcome metrics for all servicers in the fourth quarter of 2012-13 for all entities that had servicing results for at least two quarters.
Sequestration Silver Lining
The number of nonprofit servicers in the program—and thus the size of the giveaway—would likely be even larger were it not for sequestration. Funding limitations stemming from that process have prevented the Department from giving any additional volume to nonprofit servicers (see slide 10 for more). But it’s unclear if more companies will come on board if funding conditions improve.
What are we paying for?
The continuation of nonprofit servicers in the student loan program was a much debated concession made in the heat of negotiations over not just ending the bank-based system but reforming health care as well. It was politically expedient and of dubious policy merits. But with three years of hindsight we now have a clearer picture of just what this set of exemptions bought taxpayers and students. For a 10-year investment of more than $1 billion we are getting servicing that is less liked by students than even Sallie Mae, on platforms that in most cases were already available for less money. The data are less clear on how these entities actually perform in terms of loan results, but given the first two conditions, they would certainly have to be substantially better than what the bigger servicers are doing to even remotely justify this continued giveaway.