Moderator: Dennis Wentworth
September 24, 2009
Operator: Good afternoon, my name is (Valerie) and I will be your conference call Operator today. At this time I would like to welcome everyone to the Sallie Mae Straight Talk conference call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be question-and-answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.
I would now like to turn the call over to our host, Mr. Wentworth. Sir, you may begin.
Dennis Wentworth: Thank you operator and good afternoon everyone. Welcome to today's Sallie Mae Straight Talk event. My name is Dennis Wentworth and I am President of Sallie Mae National Sales and I have the pleasure again of kicking off today's discussion.
I want to start by thanking each and every one of you for joining us on today's call. We are very pleased to have well over 500 participants from all across the country that are on this call today.
If your colleagues were unable to join us today please let them know that there will be a replay of this call and it will be posted on our www.salliemae.com website with a backslash straighttalk at the end so that they can easily access it at a later time.
Again the public website is www.salliemae.com/straighttalk.
As always we view these Straight Talk events as an open forum to prompt a good amount of discussion from all of you. With that in mind, we are opening today's call with some brief remarks and then we will turn to the important part of the call which is really answering the questions that you have.
Speaking from Sallie Mae's headquarters in Reston, Virginia, we have Mr. Barry Feierstein, Executive Vice President of Sales and Marketing and Jack Remondi, who is our Vice Chairman and Chief Financial Officer and also two individuals who have been a part of this Straight Talk event from the first time that we started them.
So without any further ado here, let me turn the call over to Mr. Barry Feierstein, my colleague.
Barry Feierstein: Thanks, (Denny). I'm always impressed by the level of support and interest that these Straight Talk events attract. And especially at this time of the year, we know how busy you are helping students and families and the feedback from these calls continues to be how important you believe it is to receive timely information to help make decisions that impact your institutions.
So, I'm really pleased to say that we have almost 500 school customers on this call today. I'm really going to try to keep my comments brief so I can turn the call over to my colleague, Jack Remondi, and then we can get to your questions as (Denny) said.
A couple of days ago, I hope you all received a letter that went out from Sallie Mae under my signature. And as I said in that letter, we believe there have been very promising developments in the Federal Student Loan debate that we want to discuss with you today.
All of us here at Sallie Mae, and I suspect all of you on the phone, are here because we care about making college more accessible and affordable. That is why Sallie Mae is so passionate about helping our customers with far more than just loans. And that’s more than just lip service.
If you think about our one, two, three approach that we use to help students think through paying for college or to use free money first and then federal loans. And then this is the gap private loans.
If you think about our Education Investment Planner tool or our be debt savvy website or our ground breaking surveys in partnership with the Gallup Organization and how America saves for college and how America pays for college.
Or our industry leading default diversion practices. And the list could go on. The point is its all about helping students and families achieve their dreams of a higher education.
So let me set the table with some facts that I hope will frame today's discussion.
So as we all know this country is about to make the most significant changes to our student aide system in decades. We all understand that we have to seize on this opportunity to put the federal student loan program on sure footing to help make college more affordable for the most needy among us.
So I thought it would be useful to establish all the common ground that already exists between multiple proposals out there, what the President has proposed. What the House passed recently, what was in the community proposal.
I think this list of common ground will surprise you and it'll help inform this discussion. You'll notice that all of my next points start with the phrase "we agree".
So first we agree to the federal student loan program must be reformed and that there is need for a significant increase in programs. We agree that lender subsidies should be eliminated in favor of a fee for service model which just happens to be the current structure used today with the private contractors in the Direct loan program.
We agree that the credit markets are still not functioning in a way that private sources can economically and reliably fund the nearly $100 billion in student loans that students depend on each academic year.
We agree that the government can borrow money cheaper than any other entity in the world, certainly less expensively than any private lender. So we agree that federal student loans should be funded by the government.
And that’s a highly successful Ensuring Continued Access to Student Loans Act, more commonly referred ECASLA, proved that federal funding does work for schools and students.
We agree that having the Department of Education own all of the new federal loans generates significant budget savings to fund the Pell Grant.
We agree that this should no longer be different steps of loan terms depending on what college you attend. There should be one set of loan terms in the federal loan program. And they should be the same as currently exist today in the Direct loan program.
We agree that any fees paid to administer the future of federal loan program should be set at market competitive rates. And we agree that the private sector brings expertise that cannot be matched by the federal government which is why the Department of Education currently contracts with private sector companies to originate service and collect student loans under the Direct loan programs.
So we know that private sector — we know that private sector competition drives innovation, responsiveness, and lowers default rates. And we believe, interesting enough, that there are direct parallels to the emphasis going on in today's healthcare debate about the need from competition and choice.
In our industry, Direct lending would be the equivalent of the healthcare public option and companies like Sallie Mae would provide a private sector alternative. This is the system that has existed and coexisted so well since 1993.
So in conclusion, lots of common ground but there's one fundamental area where there is disagreement and I'm going to turn the call now over to my colleague, Jack Remondi, who is going to discuss where that one piece of fundamental disagreement lies. Jack?
Jack Remondi: Thanks, Barry, and thanks to all of you for taking time out of your busy schedules to participate in today's discussion. As most people know, Sallie Mae quickly supported the President's call for reform because we saw how much common ground there was.
Based on what we've learned from implementing ECASLA, we recognize that there was an opportunity to build a student loan program based on the best features of both programs.
As Barry's comments illustrated we are very close to accomplishing this common goal. But as he said there is one area of fundamental disagreement that is driving much of the political consideration on both sides. But before I get to the one area of disagreement, I want to discuss a few key issues so there is no misunderstanding.
The first is on lender subsidies. Recently major media outlets have focused on the need to end "wasteful lender subsidies." What is missing from these stories is that when all the fees in the student loan program are considered, over the past several years lenders have actually paid billions more in fees and taxes to the government than the government has paid to lenders.
In fact, the $87 billion in estimated budget savings is generated from counting the future interest payments to borrowers, in other words the profit from making loans, directly to the federal government, not from actually eliminating any subsidies.
The important point however is that we agree that the old style program formula should be eliminated. To be clear, in contrary to some claims, Sallie Mae and other lenders are not fighting to maintain the old style program for lender subsidies.
Instead we're supporting the community proposal that builds off of the foundation, several funding, of the President's proposal. In fact, the much anticipated Congressional Budget Office announces of the community's proposal, confirms that the primary driver in creating taxpayer savings is the federal ownership of the student loan asset.
The Congressional Budget Office, or CBO, concluded that the mandatory savings of $87 billion over ten years can be achieved by the community proposal, which as you know is the exact amount of mandatory savings produced by the House bill, HR3-221 or the Student Aid and Financial Responsibility Act of 2009.
With the CBO score now available, Congress can move forward and decide how best to administer the program and at what cost. While we believe CBO vastly under estimated the savings on the mandatory side and over estimated the administrative costs in the community proposal, there remains a total difference compared to the House bill of $13 billion over ten years or about one percent of the expected $1 trillion plus of student loans that will be made during that timeframe.
Ignoring our issues with the savings and the cost estimates, the $13 billion identified by CBO represents the value of the services to students and schools that are at risk of being lost under there proposals being contemplated in Congress.
These services, which include financial literacy, default prevention, counseling, and customer service, just to name a few either have to be paid for at a later time, at additional taxpayer costs, replaced by schools at your costs, or will simply be eliminated.
We believe the debate can take a major step forward now that it is clear that the community's proposal will achieve the major objective announced by the Administration, billions in savings for additional need base gauge.
And it does so in a way that it's guaranteed to work. It requires no school to convert. And in a way that preserves the services and default performance that the majority of schools in this country depend on for their students.
One of the advantages of the community proposal is that the projected administrative costs are now out in the open in full view whereas the total cost of administrating the Direct loan program are not completely captured by CBO. A large portion of these costs of originating loans in the Direct loan program in fact is transferred to schools.
Congress will ultimately decide how much the services you value today are worth, which is why they need to hear from you. Whatever the gap in savings between the House passed bill and any alternative that may be produced in the Senate, it represents the value of services that are worth preserving.
We believe that schools and students understand best what you — that you get what you paid for. And to put this in some perspective, let's look at a couple of examples. Although Sallie Mae currently handles about the same level of loan volume as the entire Direct loan program, we have four times the number of customer service representatives answering student's loan origination calls.
In addition, those students benefit from the extensive default diversion programs we offer. These programs produce very real results. In fact, at Sallie Mae our default rates are about 30% lower than the default rates in the Direct lending program.
For taxpayers and schools, the benefits are obvious. For borrowers avoiding default can mean the difference between having access to credit to buy a car, maybe to rent an apartment or even landing a job. The value to these success stories is priceless.
We know that service levels matter to our customers and so we dedicate the resources necessary to provide superior service and prevent default. Keep in mind as well that it appears that CBO did not include the savings that lower defaults would produce for taxpayers. Even a modest improvement in default prevention could easily produce over $10 billion in additional taxpayer savings.
We feel strongly that preserving a competitive student loan program will deliver lower default and Sallie Mae and other private service providers can deliver these additional savings because we do it today.
Another important point to make about the recent CBO analysis is that it does not account for the cost or the risks of moving over 4,000 schools to a new processing system. Because the Legislation would eliminate help, CBO has no choice but to assume that all loans will be made by the Direct loan program beginning July 1st 2010, whether that’s a realistic assumption or not.
The community proposal maintains a process that we know already works. It avoids the massive risk and cost of requiring thousands of schools to make the switch to Direct loans in just a few short months, a risk that many of you have begun to warn Congress of.
In addition, a transition delay could also potentially wipe out as much as $10 billion of the projected savings in the House passed bill, not to mention the risk that students might not get their loans on time. However, this is not factored in to the CBO projections.
Now after making you wait let's address the one area of disagreement that is at the heart of the debate. It is where the Congress will decide to eliminate the ability of schools to pick their service providers in favor of having the Department of Education determine that for you.
That is the heart of the debate. Everything else we agree on. We know that maintaining choice and competition in loan origination and servicing is important to schools. With so much common ground, we believe there is a (path) forward that with the help of your voices, as you are the real experts, we can make it happen.
By preserving competition and choice in loan delivery, the community proposal insures that innovation, customer focus and value-added in loan origination and default prevention will continue. It also means that thousands of jobs across the country would be preserved.
Competition has produced innovations in loan delivery technology and in financial literacy and default prevention programs. Over the past 16 years, competing side-by-side, with Direct lending and other lenders, we know competition makes us better. It makes us — makes our competing lenders better, and it makes Direct lending better.
So what comes next? As you know, the House of Representatives voted to approve H.R. 3221 last week. This vote, however, was only the initial step in a long process. The legislation now moves to the Senate. The Senate Health, Education and Labor and Pensions Committee is in the process of developing their version of the legislation, which they will release and vote on before the Senate has a whole considers it.
And as the process turns to the Senate the voices of schools and financial aid administrators continues to be critical. If you and your colleagues continue to warn the immense risk, the cost and the massive confusion that will come from forcing 1000s of schools and millions of students to transition to a new federal loan program in a short period of time the Senate will listen.
If you continue to voice your support for maintaining the ability to select the best service providers, based on the support and services provided to your students, the Senate will listen. The result, a student loan program that could work — that's works best for students, families, schools, and taxpayers.
One final point, this is a political issue, there is no doubt to that. You should know that your voices can be delivered constructively without the need of speaking out publicly. We are aware that many of you have been asked not to raise your voice in the public discussion on this topic.
A short telephone call or e-mail to your senators, helping them understand how your institution and your students are best server, can however be very affective.
With that I'd like to turn the call over to the operator to your questions. Thank you.
Operator: At this time ladies and gentlemen if you would like to ask a question please press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster.
Your first question comes from (Linda Pestal).
(Linda Pestal): What would the cost be to schools for the financial literacy component, which you're talking about, the private lenders do so well? How much would that cost to schools to have that type of service before it was given by lenders?
Male: That's an excellent question. It's one of the points that Jack raised, which is embedded in that $30 billion of services that Congress need to decide whether they exist or not. If the decision is that they're not going to exist, I think it's going to be up to individual schools to decide how they would, if they would contract with private companies to provide those services. So there is no answer to your question that I am aware of and I think that's the heart of the debate. Jack?
Jack Remondi: Well, I think that the (inaudible), but the hard part is and one of the benefits you have of companies with some scale and capabilities, as we can invest millions of dollars that get spread out against 1000s of schools.
A example of this is our education investment planning product. This is a product that we developed not for just the thousands or hundreds of students at a particular school, but the millions that attend schools across the country. And it's free for students who (inaudible) schools, Direct lending schools, customers of Sallie Mae or customers of somebody else. And it helps — helps them, and their families plan for college, understand the full cost of attending, and understand how much savings and borrowing they may need to incur over that process.
And give them the tools that allows them to make informed decisions as to what — or what might be too much borrowing relative to their educational needs. So, it's a — it's really a great tool and it's those types of things that we think will get lost in a transition to the House bill.
Operator: Your question comes from the line of (Adrian Hog).
(Adrian Hog): Hello.
Female: Hello. How do the changes in the FFELP lending affect SLMs private student loan business?
Male: They are really unrelated topics. The federal loan program and the private loan program are completely unrelated here. As you know, the private loan program Sallie Mae bears all of the risk, unlike the government program — what is reinsurance. We fund all the loans ourselves in the private loan program. So regardless of what happens with the federal loan program, Sallie Mae will continue to invest in its new Smart Option product that we're extremely proud of, and we plan to bring many new innovations to market for that product next year.
(Adrian Hog): Thank you.
Operator: Your next question comes from (Debra Debov).
Male: Hello. Hello. Can you hear?
Operator: (Debra) your line is open. Your next question comes from the line of (Stephanie Hunt).
Male: Hi, (Stephanie).
(Stephanie Hunt): Hi. I've been (lending) industry — in the school industry long enough to remember this, (Mike) (inaudible) a really good point that back in the day Direct lending would not work with lenders who have default rates that are too high and it seems like default rates are gone up all over the place.
If this passes and we are stuck with Direct lending, is it possible that schools will not be able to participate in the loan programs, if their default rates are too higher. They are going to be cut off and these schools are going to have to shutdown?
Male: Right. It's an excellent question, and it's one of the many valuable services that get made in the FFELP sector that are not in the Direct lending component. You are correct, in the federal loan programs and this is true as both FFELP and Direct lending that a school's — if the school's cohort default rate exceeds a certain level, they can lose eligibility for federal student loans and that includes not just Stafford and PLUS loans, but also other forms of federal financial aid.
And what we do and — but we think we do better than anybody else and it's because we have — we're sharing the risks of how these loans perform, the financial risks. We work harder and go above and beyond the federal minimum standards that are set forth for servicing and helping students avoid default. And this is done by both lenders, servicers and our — and guarantee agency partners.
These services do in fact produce the real result, I mentioned in my comments. Today students who borrow from Sallie Mae default at about a 30% lower rate than students on the Direct lending program and this is when measuring students attending similar types of school.
So attending community colleges, for example, default at very different rates, but our rates are lower because of these default diversion activities. And it's not just the impact to the school, right, of eligibility, it's also, I think, the impact to the borrower and how their live changes because they were not aware of income-based repayment as an option to help avoid default, for example. These are very real costs that we think get lost in this process.
Operator: Your next question comes from the line of (Al Robe).
Jack Remondi: Good afternoon.
Operator: (Al), your line is open.
Jack Remondi: Next question operator.
Operator: Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from (Leon Claire).
Jack Remondi: Hello.
(Leon Claire): Hello. My question is about default prevention. Will schools see any changes with our current servicing that we had up in Sallie?
Male: Under — help me understand your question, current changes under what scenario?
(Leon Claire): Yes. I mean, we suspect that default rates will rise, and basically, the services that we're currently receiving where borrowers are being notified borrows or — and then the schools have their due diligence as well, would there be any significant changes or no change at all to what we're currently going with?
Male: Right now, I can tell you that we are not planning any changes to the services we are providing. In fact, they are more critical now than ever. You all saw the rise in cohort default rates that came out nationally, and don't forget those are measured lag two years. So, as the next two years' measures rolloff given this economy, default diversion is going to become more and more important.
If your question is, what happens to those services under a decision by Congress to modify the FFELP, eliminate the FFELP program, do something different to student lending. It's one of the big unknowns right now. We can't answer that question as we don't know. And it's — again, its — those services are among the ones embedded in that $13 billion. Again, remember that 13 billion is over 10 years. Those are the services embedded and that part of what Congress has to decide is what level of service is warranted and who is going to provide them and at what cost?
So I wish I had a better answer for you, but that really is at the heart of the debate right now. So it's a neck-to-neck question.
Jack Remondi: We are — in the community proposal there is a teacher that says, any servicer who service his loans for this new federal loan program, which would be owned by the government, would share in the financial risk or the performance of that loan, and if that loan defaults, that servicer would have to eat the first three percent of loan losses.
We are — we, the industry, are so confident in our abilities to keep default rates low that we're willing to take that financial exposure. And as a result of that, we think default rates will continue to be lower in the FFELP — like they are in the FFELP version of the program today — in the future. But that's a future that is lost in the President's proposal and in the — a House bill that was passed. There is no risk sharing.
The servicers that have been selected here are only four, and so competition and choice gets eliminated, and those performance issues just become — they are not paid for in that process, and therefore, the ball rates we think would rise.
(Leon Claire): Thank you.
Operator: Your next question comes from the line of (Ronald Johnson).
Male: Hi Ron.
(Ronald Johnson): Hi, (John), how are you? I just had a question regarding the transition to Direct lending for 2010, '11. Is there a realistic expectation that 4,400 — 4,400 schools can transition on that particular date to Direct lending and is anyone contemplating if, in fact, schools must go Direct lending, some sort of transition period that would be similar to when Direct lending first came into being where they had a year-one, year-two, year-three type transition.
Male: (Ron), I think that's another excellent question and it's another question that has to be decided. So, here is what we do know. What we know is the administration's position now is that there will be no phase-in and that all schools will be required to — by July 1, 2010 convert over to the Direct lending software pipe (CODS) system, which is really what this is all about.
But those of you on the phone who are in an academic year environment, you're going to have to be up and running by February at the latest if you're going to start packaging students for the '10, '11 academic year. So that gets to Jack's comment a minute about just several months. So the administration's view is there is no phase-in, it's not necessary that schools can't make the transition. Personally — and I think I can speak for Sallie Mae, we're dubious of that only because it's never been done before.
I think the number was something like 600 schools may be transitioned all of the last year. We're talking about taking that up to four — to over 4,000 schools, and I suspect the ones that did transition had a lot more help because you had more resources. If you dilute that across 4,000 schools, there's a lot of risk there, a lot of execution risk.
The other piece to that is, if that is what's required and it doesn't happen and you have to go out to 2011, then there is about $10 billion of the 87 billion in savings that's not going to materialize, because the program won't be operational. So, again, I think Jack said it really well. When you look at the totality of this, the current system today work and there is zero risk of leaving the current system, the structure of it in place.
As I said early on, I want to summarize that it's a good point to do it. If there is agreement around government's funding of the loan, if there is agreement of government ownership of the loan, if there is agreement around one set of loan terms, no more sell versus DL, no more 7.9 percent versus 8.5, for example in the PLUS program, if there is agreement that the government, because they own the loans, will control the servicing on the backend of the loan.
If there is agreement in lender subsidies and agreement to pay lenders on a fee-based market rate, that's a massive amount of agreement. And as Jack so ably said that this agreement, which is upfront on your point (Rob), of all schools have the right to chose which lender, and therefore, essentially what service provider and software platform, they want to use to get loans to their students.
Again, loans, they will funded by, owned by, serviced by the government. So that's where we're up to and I can't emphasize enough what we believe as just a massive amount of risk that we'll be undertaking and strain on folks on this call of forcing a July, 2010 cut off.
Male: And in a piece to — (Barry) to — to add to (Barry's) comment is we won't be able to help because we — the FFELP program will not be shut down affective that date as well. So it's not as if the existing lender community can step in and fill that gap if Direct lending does not pickup and carry that — carry all those lenders over into the new program.
So, it will not be — can you hang around Sallie Mae and provide loans, because DL doesn't work? We won't be able to do that by law. At the same time of course we are committed to lending and making loans available up until the last day.
(Ronald Johnson): Thank you.
Operator: Your next question comes from (Dean Polwaski).
Male: Good afternoon.
(Dean Polwaski): Good afternoon. And I think (Ron) kind of stole my question there. So thank you (Ron). But I guess I will follow it up with, I think as schools as we are preparing for the future we are looking to try to — I think February, may even be too late to make a decision. What is the likelihood that — that — that Senate will move this through or is it there will be some decision made by — if we want to say February, I would back it up to December or January even, what is — what do you see is that likelihood?
Male: Well as (Barry) said the administration is saying they don't need this. They don't need a transition period here. But this where and why your voices are so important. We can't — we've made the case and we are told that both Congress and the House and the Senate that this transition risk is huge with maybe claims to the administration, but ultimately they need to hear it from you, the schools.
They need to know that you can do it and some of you have started that process and you know we can tell you, your voices are being heard. We hear the comments back on our trips to the Hill that they're hearing from you. And that is, they are taking into consideration and they understand that this cannot happen. But you know with one side saying it's not a problem you need to hear — they need to hear it from all of you. And you know they — that's why we say, it's just a short phone call or e-mail to your senators to make your voices heard, can be very, very effective.
(Dean Polwaski): Even with that though understanding that, is there some type of a deadline within the Senate to have this concrete decision or vote to be done by?
Male: Well the budget rules would require that the direction be laid out by October 15. But those are internal — I mean those are Senate and House rules and they can certainly wave them if necessary. So, no, there is no deadline to that.
(Dean Polwaski): OK. Thank you.
Male: Operator, are there other questions in queue?
Operator: Your next question comes from the line of (Ira Rosenthal).
Male: Good afternoon.
(Ira Rosenthal): Yes. Hi. Hello?
Male: Hello, we're here.
(Ira Rosenthal): OK. I work for a foreign institution and currently Direct lending we're not eligible for it and we've never been eligible for it. Is there anything in the provisions that allow or would allow schools like mine to exist even after July 2010?
Male: Yes, it's an excellent question. So the answer to the question is yes. In the House bill that was passed, I am fairly certain there was a provision that would extend the — what the FFELP community does now for schools like yours into the new federal loan program. So you would be taken care of.
(Ira Rosenthal): And one thing though that currently being a foreign institution, the maximum our students can receive in Stanford is limited to 20,005, would that extend — would we get the extension like every other U.S. school out there to get more money than that for our students or are we still going to be limited at 25?
Male: It's our understanding that there is no provision to change that upper limit. So, that would be something that if you feel strongly and obviously you do, to make your voice heard to say this is something that needs to be addressed, if the U.S. citizen is attending schools abroad then they should be entitled to funding like every other student who is entitled to.
(Ira Rosenthal): I have been arguing that for the last couple of years and all I get is because we are considered a foreign institution that's all they look at, they don't care if it's the U.S. citizen going to Israel or everywhere ever to go — to get their medical school studies or — unfortunately...
Male: Yes. We —believe me we hear you and all — the only advice we can give you is, there is probably many voices we provided a lots of funding to your peer institutions and combined your voices are more powerful than just yours alone. So my advice would be try to have as many of those institutions as possible, make those calls and say — please amend this, if you are amending the entire program, fix this. What I — hearing from your perspective it's an injustice.
(Ira Rosenthal): Thank you.
Operator: Your next question comes from (Ana Mendez).
Male: Good afternoon.
(Ana Mendez): My question — good afternoon. My question is in reference to servicers. Is that possible that some schools will end up with multiple servicers?
Male: Yes. In fact, it's unclear and I'm looking at my colleagues. I don't believe there is any guidance given yet on how there will be an allocation of schools or borrowers to servicers. So, there are four servicers going forward, Sallie Mae, Nelnet, PHEAA and Great Lake. And I spent a lot of my time with schools and being with schools. And I get that question constantly and I don't have an answer.
The only thing we can tell you is, what we know to be fact, which is you know the loans that Sallie Mae had under the participation in PUT program, those loans will remain serviced by us, but going forward we do not know how schools will be matched to servicers or how borrowers might be matched to servicers.
Even without that the shear numbers of servicers is going to shrink dramatically from several 1000 today to four and so by definition, for example, all students at Direct lending schools are going to have their loans split because ACS was not part of the new award contract. Some of them — that maybe addressed later on as the department might choose to move some of those loans around, but that's not clear.
But you know entities, large servicers like ACS, like Citibank those are entities that will not be servicing loans in the future and so anyone who have loans there by definition will be split.
Operator: Your next question comes from the line of (Gen Chimboli).
(Gen Chimboli): Good afternoon.
Male: Hi.
(Gen Chimboli): Hi. I have a question specifically about the PUT program and how it relates to this. My understanding is that PUT program was only funded for a year and if the Senate goes longer than October or November then what happens?
Jack Remondi: Well, just want to add one more comment to what I said earlier about the split servicing. In the community proposal that actually would not take place, so that that only would happen in the administration's proposal. In the PUT program here, the loan program continues to operate and fund through June 30th of 2010 and we and many other lenders continue to make loans there.
Our commitment is that we will make every eligible loan that applies to us from every school in the country during that timeframe, and that pledge will continue right up until the program — if this — if the President's bill passes, would terminate on June 30. Beyond that, we would have no opportunity to continue to lend because that we would be prohibited from participating in the federal loan programs.
Male: Does that answer your question?
(Gen Chimboli): Yes. I guess that if they extend — I guess the only thing I want to add, so if they extend this and maybe say, well, maybe they'll take two years to transition everybody, which I hope they slow down and take their time, my — I guess what they would have to do is extend that PUT period for two years, correct?
Jack Remondi: That is a possible — you know, it's certainly a possible outcome, but at this stage in the game the administration is saying that it's not necessary. And frankly, unless they hear from you all, you know, it's not clear they will consider that.
(Gen Chimboli): Thank you.
Operator: Your next question comes from the line of (Lynn Loresnsky).
Donna Sobie: Actually it's Donna Sobie from Loyola Stritch School of Medicine. My question is regarding again the July 1. If our students have loans processed prior to July 1 and have half of it dispersed before July 1, could you then continue to disburse? You originally said, "No, you wouldn't be allowed to do anything after July 1," but if it was guaranteed prior to July 1, would you be able to...
Jack Remondi: If the first disbursement occurs prior to July 1, we would be eligible to make the second disbursement, so that students whose loans are partially disbursed would not be impacted, it would be for our new applications coming in.
Donna Sobie: But if your— if a loan is guaranteed before July 1, but not disbursed at all until after July 1, can you do it then?
Jack Remondi: We'll have to follow-up on that. I don't...
Donna Sobie: Yes.
Jack Remondi: These are highly technical question, it's beyond my knowledge base. We'll follow-up with you and get you that answer.
Donna Sobie: I would appreciate that because our students do start by July 4. So we're kind of wondering what's going to happen. Thank you.
Operator: Your next question comes from the line of (Harry Zabaky).
(Harry Zabaky): Yes. Thank you, (Ron). My question is in regard to what position or comments would Sallie Mae have in regard to the elimination of the current Perkins program in this bill. And many of the institutions that have Perkins loans, the biggest concern we have is the change in the bill that would eliminate the students that do not have to pay interest while in school would now start paying interest in school and also the elimination of numerous cancellations under Perkins?
Male: Again, that's an excellent policy question. So the positive is the program goes up to at least $6 billion for the funding. The negatives, I've heard the same from many institutions that the details around the program, the way it need to be packaged all change and my understanding is that there is lots of dissatisfaction with that.
That's really a policy question that's probably out of our scope. So I think the answer would be, again, it's an excellent opportunity while all this is under debate to raise your voices today. There are unintended consequences. We all support providing more Perkins loans to very needy students, but unintended consequences means the following things happen. So, again, it's an excellent chance while all these programs are still being formulated to advocate for changes.
(Harry Zabaky): Thank you.
Operator: Your next question comes from the line of (Al Dorfes).
(Al Dorfes): How are you doing?
Jack Remondi: We're doing all right.
(Al Dorfes): My question was, if the Administration Proposal bill is through and the July 2010 cutover happens, what role in spending will the four selected servicers play at the COD process? And if they don't have a role with the COD process, then what will the actual role of the servicers be?
Jack Remondi: That's a great question. Under the current contracts that we have, we would be taking on loans for servicing after they were dispersed and funded through the COD process. So we would have no role and participating with the origination of loan delivery. We would be simply picking up the loan on the backend after proceeds have been delivered to the school.
(Al Dorfes): Thank you.
Operator: Your next question comes from the line of (Dorothy Simpson).
(Dorothy Simpson): Good afternoon. My question is regard to the (EasyXpress) software. Normally you see the virtues of that sort of early on, and I am wondering if schools have to be open and running by February 2010, will they also have received the (EasyXpress) software in time to draw down and import the (packages)?
Male: So that — the answer to that question is very similar to what Jack just answered in the following question. We have — we as a servicer have no role in the origination process, sure the House Bill passed. And then — so therefore, all loans would run through (CODS). So that software communication package you are talking about, Sallie Mae would be powerless to do anything about that. That would have to be an issue addressed by the department with the private contractor running the (CODS) system.
So I — sorry, but I can't help you with that, but it illustrates other — and as to you know the risk factors that are present here and trying to get 4,000 plus schools to move from a system that works to a system that never handled this kind of loan volume before in such a short period of time.
Operator: Your next question comes from (Michael Forcasa).
(Michael Forcasa): Good afternoon.
Male: Hello. I just actually had a quick question about the private loan. Currently Sallie Mae have switched to the Smart Option private loan, and then, of course, now it's due (inaudible) while they are in school and most of our students aren't interested in that because the reason they are going for the private loans is that they can't afford to pay while they are in school anyway. So I was wondering if there is any possibility that Sallie Mae may be thinking about changing that sales signature model?
Male: The answer to that is no. We're not going to change that sales signature model.
Jack Remondi: The answer to that is, no, we’re not going to change back to the old (Signature) model. I will tell you that we’ve had an overwhelmingly positive demand in the market for the Smart Option one. Even in this very difficult economy the requests for loans coming into us are dramatically above our last year. I understand your point, though.
So I think we can get at your concern. Your concern really is, look, people are concerned about the ability to pay the interest only payments that we’re asking them to do to avoid negative amortization. So we are looking at a variety of mechanisms when we roll out this product for the next year to work with students. And I can’t give you specifics on this call, but we are aware there are — there are (circulations) where you'd want to have some ability to accommodate a student. But the overall premise of having students make the interest payments on their loans is something that we’re very strong on, because it’s — it is — makes a dramatic difference in their ability to repay the loans.
I can tell you I was at a school yesterday — I won’t name it, of course — and I was there early, so I had a chance to go grab a coffee. And there was an unnamed coffee shop close to the campus, not related to the campus. And I watched streams of students going into that coffee shop buying average $4 cups of coffee. And my comment to my colleagues was, you know, if you do that once a day for 30 days or 20 days in a month, that more than offsets the interest payment on your loan.
So we feel pretty strongly that the paradigm of student lending to shift. And if you're going to borrow a private loan as your last dollar financing, after you exhaust federal loans and free money in grants and scholarships, that making the interest payment on that is just good financial practice. And of course we understand it’s not for everyone. And I hear your point and your point is valid for some families. So probably been on my soapbox a bit, but as you can tell, we feel pretty strongly about it. But we will be making some enhancements next year I think to address some special circumstances.
Male: OK, thank you.
Operator: Your next question comes from (Martin Miles).
(Martin Miles): Yes, hi, Jack. Jack, I’d like to get your opinion on this. Why do you think that the political opposition against this whole move from Direct to (inaudible). My school used to be a Direct school. I mean, years ago. And we transitioned out of Direct. But, now, why do you think the political opposition against it has been — has been so relatively weak?
When you look at the grass root movements against what the government has been doing with nationalizing the banks, the auto industry, cap in trade, energy, and even the most recent debate, health care, what has happened here with the student loan industry? That’s one comment. And the other is what do you think the chances are of a possible filibuster? Is there any — do you see any signs or any hopes whatsoever from Capitol Hill that can still probably divert this thing? Or are we just so far gone with this that we (should just) stand up and just march right through the Direct line?
Jack Remondi: Look, thank you for your comments. I mean, we share your frustration that it does some to be almost a Thelma And Louise type thing of heading off the cliff without knowing what’s beneath them. You — this is why we’re saying your voices are heard. We do not think it’s too late, that there is time. I mean, there’s not a lot of time here.
We’re talking about a week or two before the Senate considers this bill. But in the Senate there is a — you know, the political count is, you know, 60 to 40 in terms of one party versus the other. And what we need to do is you need to reach out to your Senators and make sure they hear your concerns, because they cannot pass this bill in a normal course without 60 votes in the Senate. And if they go through budget reconciliation processes (or a) parliamentary maneuver, they need 51.
(Martin Miles): Right.
Jack Remondi: But that’s the point, is we need — your voices need to be heard on this front. And I do believe there is still time, we are still educating people, the Senate members are looking for information, they want to hear what the different components and the different sides or points of view are, they want to hear and understand how complicated this is for schools, or if not that it’s not complicated for schools. They want to understand are these services that the private sector provides really valuable. And, you know, that can only be told — that can best be told, I should say, by the users, the consumers of those services, the beneficiaries of them. And I think, you know, particularly people who have experience in both programs can add even more insight into that.
(Martin Miles): Thank you.
Operator: Your next question comes from (Janey Burns).
Jack Remondi: Hello.
(Janey Burns): Hello. I administer a non-term program. It’s modular based. And I would (be) processing, say, for example starting in May. And my first disbursement would not come until half way through the loan period. The second disbursement is after the loan period. This question was asked before, but I want to make sure. Does — if I certify the loan in May but my disbursements don’t — aren’t scheduled until after July 1, I still will receive those disbursements. Is that correct?
Jack Remondi: We don't know. I believe in order to be eligible under (inaudible) it would have to be first dispersed before June 30. And that would be the termination date. But we — but to be sure we will — we will get the answer to that and post that to our Straight Talk so that everyone has access to that, the correct answer.
(Janey Burns): So it has to be fully dispersed? What about if the first disbursement comes in the (inaudible).
Jack Remondi: We just got the answer. It has to be first dispersed before July 1, (inaudible).
(Janey Burns): Before July 1. And that’s fully dispersed or just (inaudible).
Jack Remondi: The first disbursement.
(Janey Burns): OK. So the second disbursement can come after July 1?
Jack Remondi: Correct.
(Janey Burns): All right, thank you so much.
Jack Remondi: You're welcome.
Operator: Your next question comes from (Alex Sartrin).
Jack Remondi: Hello.
(Alex Sartrin): Hello. I had a question as far as how the PUT program and the servicing works. If a student is — already has an existing loan with Sallie Mae and Sallie Mae then receives a loan through the PUT from another lender, are those loans serviced separately or is there still a combined billing?
Jack Remondi: The — under the Department of Education servicing contract, if the borrower has a loan owned by Sallie Mae and a loan owned by the Department of Ed, they will be required to be serviced separately.
(Alex Sartrin): OK, thank you.
Jack Remondi: It’s not an option first.
Operator: Your next question …
Jack Remondi: (inaudible) the proposal we could continue to service those loans together.
(Alex Sartrin): OK.
Male: Operator.
Operator: Your next question comes from (Deborah) (inaudible).
(Deborah): I have a question regarding the transfer of servicing from the Direct program to, say, i.e. Sallie Mae. Will it be done when the loan is fully dispersed or by disbursement? In some cases our school does three disbursements. Some programs do two disbursements. So how — do you have at this point any idea of how that will be done?
Jack Remondi: Typically we pick up — once the loan is dispersed, it gets set up on the system and then subsequent disbursements get added to that and we expect that — that that would be the same process here.
(Deborah): OK. So if we had a student drop, then we would have to be looking at both sources until the loan was fully moved?
Jack Remondi: And so the second disbursement you know did not get funded?
(Deborah): Correct.
Jack Remondi: That would be communicated to us by the CODS system.
(Deborah): OK, great. Thank you.
Operator: Your next question comes from (Maria Williams).
Jack Remondi: Good afternoon.
(Maria Williams): Good afternoon. My question is that my institution has yet to establish a (cohort) default rate. Under the Direct loan program, will that limit our participation in regards to servicers?
Jack Remondi: I don't believe so. When you say your participation with regard to servicers, I think what you're asking is because you don't have a cohort default rate yet because you're new into the Title IV program, will that in some way have your school treated differently than any other school. And I think the answer to that is no.
(Maria Williams): OK, thank you.
Jack Remondi: Sure.
Operator: And your next question comes from the line of (Deborah Wilkenson).
(Deborah Wilkenson): Hi. Can you all hear me?
Jack Remondi: Yes, we can.
(Deborah Wilkenson): OK. I have been — I work at a school that’s been in FFELP forever. And we’ve enjoyed it up until about a couple of years ago when the economy began to turn where most of our lenders left doing business with us. And that was a huge disservice for our students. Do you have a recommendation or has anything been proposed about what might happen in the future if we were to stay with the FFELP program?
Jack Remondi: Well, I think your underlying question is should Congress vote to maintain the private sector in the origination side. I think the key takeaway here is there will be no FFELP program going forward. There will be one unified federal loan program, and there may or may not be private sector participation in the front end origination. So if there is private sector participation as the community proposal is suggesting — and of course we are supporting — I think your question is under that model do you run the risk of having problems retaining and keeping lenders.
So one of the things that is unclear is we are required under that scenario to have multiple lenders. If the government’s funding and owning all the loans and all the terms and conditions are the same, is there a reason to have multiple lenders or a lender list for federal loans. I don't know the answer to that. But I would suspect that you won’t have an issue going forward, because, well, again, there’s no funding concerns and there will be a process in place that’s going to be (of a) new plan approved by Congress with a very long time horizon on it. And we’re not going to go through the credit crisis we’ve been through and some of the other disruptions.
(Deborah Wilkenson): OK.
Jack Remondi: I also think in the — in the — you know, what happened in — beginning in 2008 was really a function of could financial institutions borrow and — to make loans available, can the construct of the community proposal eliminate that whole feature. And so everyone is now on a fee for service basis. And those types of situations you know wouldn't — or economic crisis would not create the same kind of outcome. In addition, you know, in the — in the administration’s proposal there is only one place to go. And if there are problems there — you have no choice to turn to.
In the community proposal if Sallie Mae is doing a bad job for you or your students or you're unsatisfied for some particular reason, you could fire us and go someplace else. And that’s the beauty of what competition does. You have choice and that choice provides the incentives for entities like ourselves and others to compete and provide the service levels that you need and demand. And that’s the risk factor of the administration’s proposal. And in the past that has been problem. And we’re looking to make sure that that does not happen again.
(Deborah Wilkenson): OK, thank you.
Operator: Your next question comes from the line of (Harry Saboky).
(Harry Saboky): Yes. I know I asked the question earlier, but again going back to the (Perkins) program, I guess it surprises me that there’s very little talk about the — with this proposal the number of students that now do not have to pay interest that are going to have to pay interest, and whether or not, you know, the student body in all of our institutions and that are aware of the fact that part of this savings, it seems to me, is going to be put on the back of these students that under the new program now are going to have to be paying interest while in school.
Jack Remondi: I think your facts are correct. And, again, it comes down to a policy debate. And there — this is an ideal time while the programs are being shaped to raise your voices. I would — I think the motivation to increase the (Perkins) program is a good and pure motivation, trying to help the most needy students with more access. I think these are just — what you're mentioning are unintended consequences of perhaps (inaudible).
(Harry Saboky): But there’s very little publication or media comments in regard to the — that that’s actually going to take place. I guess that’s one of the things that surprises me, that there isn’t being more said, that part of this savings is really additional cost to the students, which, you know, are the potential future taxpayers of the country. So I guess I'm somewhat surprised that — you know, that there isn’t more media emphasis or —
Jack Remondi: We totally agree with that. I mean, unfortunately the — most of the commentary has been, you know, we need to end lender subsidies. And as we’ve tried to make clear, I mean, the industry hasn't actually been receiving subsidies. But regardless of that point, we — we’re — the industry is in full agreement to move to a fee for service business model like Direct lending has employed. Yet the commentary continues to be, you know, we need to — we need to make this change to eliminate lender subsidies. It does not address — never do we hear commentary addressing how this is beneficial to students and families, how the schools themselves will be able to handle this transition process. And that’s, again, to point out the importance of making your voices heard.
(Harry Saboky): Thank you.
Male: Operator, are there any further questions?
Operator: There are no further questions at this time.
Male: OK, well, we are just over an hour of time on this. Let me just conclude with a few comments. First is let me thank all of you for joining at this busy time. It was an excellent set of questions. I hope we shed some light on a few things. I hope that you all take away from this the importance of raising your voices to be heard. You can do that in a public or private manner.
A phone call or an e-mail to your local Senator is very, very important and as Jack said will make a difference. If you're wondering how to find that e-mail information, you can access that through our website, Salliemae.com/straighttalk. I will also post any other information from this call on that site. And I will say thank you again for your time — for joining us today from all of at Sallie Mae. And, again, as the situation develops we will communicate with you and host another one of these calls. So thank you and good afternoon.
Operator: Thank you for attending today’s Straight Talk conference call. You may now disconnect.