March 26, 2009

Dear Valued Customer:

Congress has begun debating the President's budget proposals. As you know, the President wants to achieve a substantial amount of taxpayer savings from restructuring the federal student loan program. As we have stated before, we pledge to stand together with you, our school customers, as Congress considers the President's proposals. We feel strongly that common ground can be found to produce taxpayer savings needed to substantially increase Pell Grants while also preserving institutional choice, competition, and the other strengths of FFELP.

One of the most important strengths of FFELP is the set of incentives it provides to work with students and schools to prevent defaults. As I mentioned on the national Straight Talk forum we held this week, it is clear that Congress and the President will best serve students and taxpayers by building on what works today in default prevention activities performed by Sallie Mae, other lenders, and the guarantor community.

Effective default prevention provides significant benefits to students and taxpayers. Students avoid the severe and lasting impact of loan default and taxpayers save billions of dollars. These benefits are even more critical in today's economic environment. To better estimate the value to students, schools and the federal government of applying best-in-class student loan default prevention strategies on a wide scale basis, we performed an analysis of our default experience and compared it to the Direct Loan program.

Today, we are releasing a new report (PDF, 295KB) showing that Sallie Mae's successful default prevention incentives in conjunction with its guarantor partners helped thousands of college students avoid loan default and saved hundreds of millions of dollars for American taxpayers. According to the report, which was based on U.S. Department of Education's most recent official cohort default rate data, Sallie Mae's servicing and default aversion incentives resulted in 30-percent fewer defaults than those loans serviced in the Direct Loan program. The data suggest that the structure of FFELP, in which the lender has a financial interest in the asset, assumes financial penalties when a loan defaults, and works in partnership with guaranty agencies, can provide powerful incentives to help individual student loan borrowers avoid default.

The results were consistent across all school types:

• At public four-year institutions, where nearly two-thirds of Direct Loan recipients go to college, Sallie Mae's cohort default rate is 27 percent lower than that of Direct Loan borrowers.
• At private not-for-profit institutions, where Sallie Mae services quadruple the number of borrowers as Direct Loans, Sallie Mae's cohort default rate is less than half that of Direct Loans.
• At Historically Black Colleges and Universities, Sallie Mae-serviced borrowers are 43 percent less likely to enter default compared with Direct Loans.

As policymakers consider changes to the funding structure for federal student loans, it is important to bear in mind the effects of such changes on default rates, student credit histories and taxpayer costs. For example, had Sallie Mae managed the entire Direct Loan portfolio for borrowers entering repayment in 2005 and 2006, more than 15,000 borrowers would not have defaulted on $200 million of student loans, saving them millions in federally prescribed fees and penalties and preserving their credit from the many adverse impacts of default. Conversely, if the Direct Loan program had served Sallie Mae's borrowers, an additional 30,000 borrowers would have defaulted on nearly $400 million of loans. This does not have to become the new reality, however, if we ensure schools continue to have access to the effective default prevention practices and other services provided by the private sector. Sallie Mae is ready to work with Congress and the Administration to make that happen.

As always, we encourage you to engage in this important debate about the future of the federal student loan program. Sallie Mae is committed to working closely with you, the President and Congress, to develop a winning solution that prioritizes the needs of students and their families. From our perspective, there is one fundamental question the higher education community should consider: If Congress can achieve the taxpayer savings it needs to meet the President's objectives of making college more affordable by extending federal funding to all student loans and also maintain the hallmarks of FFELP that harness the benefits of competition and the incentives and drive of the private sector, shouldn't we do that?

Sincerely,

Barry Feierstein