Sallie Mae Seeks Competitive Bidding

Talk About Irony: What About NAF’s Fervent Support for the Direct Loan Program’s Non-Competitive Structure?

Stick with me here. This is a long post, because it needs to be. NAF should be challenged to try to take issue with any of the following facts.

For more than a decade, Direct Loan advocates have argued that the structure of the program enables it to maximize efficiency. They claim that “all major functions under direct lending are run by private companies through competitively bid contracts, minimizing the costs to taxpayers.” [Rep. Petri, NY Times Op Ed, June 14, 2004]

But this is simply not the case. In 1993, the original Direct Loan servicing contracts were awarded to Computer Data Systems, Inc./AFSA Data Corp. (CDSI/AFSA) and Electronic Data Systems (EDS). EDS was primarily responsible for managing the Direct Loan consolidation program. By November 1998, Affiliated Computer Services, Inc. had acquired Computer Data Systems, Inc./AFSA Data Corp., making ACS the lead contractor for all major functions under the program.

EDS began its loan consolidation operations in September 1996; however, problems and delays were experienced from the start of operations. On August 25, 1997, the Department of Education announced it was suspending Direct Loan consolidation operations. The resulting impact on borrowers prompted Congress to pass emergency legislation, the Emergency Student Loan Consolidation Act of 1997, to allow private lenders to consolidate Direct Loans and resolve the enormous backlog of consolidation applications sitting at EDS.

The fact is that since the consolidation meltdown, the Direct Loan program has been devoid of competitively bid contracts, with one notable exception in 2002.

Upon the announcement that the Department of Education had extended its Direct Loan Servicing System (DLSS) contract, originally awarded in 1993, through Fiscal Year 2007 with ACS, Sallie Mae filed a protest arguing that the extension violated the provisions of the Competition in Contracting Act because the extension should have been the subject of a competitive procurement.

On July 18, 2002, administrative judge Eric Andell, granted the Sallie Mae protest and ruled that the Department of Education “must procure these services through a competitive process such as full and open competition.”

Upon being forced by Sallie Mae’s protest to use a competitive procurement process, the Department of Education released a Statement of Objectives (SOO) on May 19, 2003, outlining the scope of the its new Student Credit Management/Common Services for Borrowers contract. The contract called for integrating loan servicing, consolidation, and collections business operations.

On November 20, 2003, the Department of Education announced it had awarded the contract to its incumbent contractor ACS as a result of the forced competitive bid process. In making the announcement, the Department proudly stated: “Taxpayers Stand to Save $1 Billion Under New Contract.” The Department also announced that “ACS stands to receive more than $1.038 billion over the next five years, with the Department of Education retaining the option to exercise five one-year extensions, which increase the contract’s total approximate value, including all option years, to $2.13 billion.”

Can NAF tell us what structure is in place to ensure an open, regular competitive bid process in Direct Loans, or does it rely on Sallie Mae to keep the Department of Education honest?

It’s not open for debate that had the Department of Education not been forced to competitively bid the Direct Loan contract in 2002, U.S. taxpayers would have paid $1 billion price tag. The question remains, however, if the Department of Education adequately understands the merits of competition. For example, there is no plan in place to engage in a competitive procurement process to ensure the Direct Loan program can adequately handle the enormous growth in loan volume expected this year, which was clearly not anticipated when the contract was re-awarded to ACS in 2003.

And now the Department of Education has unilaterally modified a contract awarded 5 years ago to use its only contractor ACS to service billions in FFEL loans under the loan purchase program designed by the Department of Education under the Ensuring Continued Access to Student Loans Act of 2008.

Furthermore, if NAF is supportive of competition it should consider the following: (1) This year’s dramatic infusion of Direct Loan volume to ACS will likely eliminate any legitimate chance that a competitive bidding process would ever result in this loan volume being serviced by another company other than ACS. Back in 2003, the Department of Education fought hard to defend its decision to extend the servicing contract with ACS, Inc., bypassing a competitive bidding process as required by law. It argued the no-bid contract extension with ACS was fully and adequately justified based solely on the “impracticability of competition due to excessive costs, unacceptable delays and grave risks that would be endured” if a competitive bidding process resulted in the selection of a different contractor other than ACS. At the time the Department made this argument, Direct Loans only represented approximately 25% of loan volume. Now ACS is poised to assume the servicing responsibility for as much as 45% or more of total federal student loan volume.

(2) The only real force that keeps the Direct Loan program competitive is private lenders in the FFEL program. Since the inception of Direct Loans most people have accepted that this program spurred the FFEL program to make dramatic improvements. Today, however, the reverse is true. There would be no borrower benefits/discounts in Direct Loans had private lenders not started the practice. While there is essentially no competition in the contracting process in Direct Loans, the one time since 1993 that there was competition it was because a private lender forced the government’s hand.

(3) Schools are not moving to the Direct Loan program during this credit squeeze because there have been new innovations or improvements in Direct Loans. The shift is due to an unrelated credit mess prompted by the sub-prime mortgage crisis and the legislative cuts that were made to the FFEL program.

(4) Direct Loan advocates like NAF should be concerned about the lack of competition in the Direct Loan program and the massive amount of influence one gigantic company, ACS, has over the program. The program is completely reliant on this single company. The career bureaucrats at the Department of Education have long viewed ACS as a partner, essentially an extension of the government itself. And now that influence/reliance on ACS by career bureaucrats is prompting the decision to turn exclusively to this single company again to service BILLIONS in FFEL program volume that will be sold to the Department before Sept. 30, 2009. Is it possible that Sallie Mae is doing the right thing (again) to keep the bureaucrats honest? Sure there is a financial interest involved in Sallie Mae’s decision to file its protest. But thousands of schools across the country are concerned about a process that will force student loan borrowers to move from their loans from the lender they selected to a single government contractor. There is legitimate concern about how this will impact delinquencies and defaults. In this case, Sallie Mae is on the side of students and schools.

Is NAF concerned about what this may mean for student and parent borrowers? If they are I haven’t seen it.

Another irony is that history may show that if Sallie Mae is successful in this case, and the government is not allowed to unilaterally direct BILLIONS of loans to ACS at the same time the company is taking on BILLIONS in new Direct Loan volume, Sallie Mae’s effort may turn out to not only protect the interests of students but could also prevent ACS from experiencing a total servicing meltdown that would be a blow to the Direct Loan program. That’s irony.

This ia great article! MY LOAN HAS BEEN IN THE HANDS OF EACH OF THESE LENDERS AND I AM AT THE POINT OF GETTING LEGAL HELP...bUT IS THAT IS POSSIBLE? 1 WOULD NEVER REFER A STUDENT TO USE THESE LOANS. THERE REALLY IS NO WAY OUT, BUT DEATH, NO MATTER WHAT HAPPENS IN YOUR LIFE. THERE ARE TEACHERS AND SUPERVISORS WHO CARE NOTHING ABOUT YOUR FUTURE AND IF YOU GET BAD TREATMENT YOU ARE STUCK TO DEATH WITH THE LOAN NO-ONE LISTENS, LAWYERS (THEY WANT THEIR CUT TOO AND YOU ARE ALREADY TOO MUCH IN DEBT AS IT IS. THERE SHOULD BE CONSIDERATIONS AND TWO WAY AGREEMENTS IN A CONTRACT, EXPLANATIONS OF PITFALLS, NOT JUST A SIGNATURE TO GET THESE LOANS WHEN THEY ARE OFFERED TO STUDENTS IN THE FIRST PLACE. WE KNOW NOTHING ABOUT THE ENTIRE PROCESS UNTIL WE EXPERIENCE IT. THE PRIVATE SECTOR, EVEN CREDIT CARD BANKS WILL DEAL WITH YOU BETTER THAN THESE HOLDERS. KEEP GOING, YOU ARE SMART AS A WHIP, BUT LOOK ALSO AT THE DOWN SIDE OF THESE LOANS AT WHAT ALL THEY INVOLVE WITH HIDDEN DIFFICULTIES FOR STUDENTS. THERE ARE MANY WHO FALL IN THE CRACK, BAD ECONOMY, WITH NO WAY OUT! I HAVE JUST BEEN SWITCHED TO SALLIE MAE AND WAS ACTUALLY TREATED KINDLY WHEN I CALLED TODAY AND TOLD TO WRITE A LETTER EXPLAINING THE DILEMMA. IT WOULD TAKE TOO MUCH SPACE TO WRITE IT DOWN, BUT IT INCLUDES A FEDERAL MEDIATION BECAUSE OF DISCRIMINATION AND I STILL GOT STUCK WITH THE LOAN.