Moderator: Dennis Wentworth
December 7, 2009
2:00 p.m. CT
Operator: Good afternoon my name is (Michael) and I will be your conference 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 a question and answer session. If you would like to ask a question during this time simply press star then the number one your telephone key pad. If you would like to withdraw your question press the pound key. Thank you I would now like to turn the conference over to Mr. Dennis Wentworth, sir you may begin your conference.
Dennis Wentworth: Thank you operator. Well, good afternoon everyone and thank you for waiting a short period of time here for people to dial in. I'd like to welcome all of you to Sallie Mae's Straight Talk event. My name is Dennis Wentworth and I am President of Sallie Mae National Sales and I have the pleasure today again of kicking off today's discussion.
We know that many of you are just back in your office after a very busy week away at the Department of Education's FSA Conference in Nashville, Tennessee. So I appreciate you taking the time to join us on today's call.
Frankly, we scheduled this call with that in mind knowing that there were likely some very important issues that were raised at the FSA Conference in Nashville and there were probably some topics as well that were not addressed.
We're pleased that today there are over 800-some people registered on the call and over 700 unique schools with us today. For our school customers who were not able to join us today, I would like you to know that we will have a replay of this call available on our Straight Talk website which is www.salliemae.com\straighttalk.
We also will be providing a transcript that will be available after the call as well. So if you have other people at your institution that could not join us on the call please make sure you pass on our website we will repeat it at the end of the call and also let them know that there will be a transcript available as well.
I would now like to also introduce two of our other senior executives who are leading and focusing Sallie Mae's efforts on serving our school and school student customers and they are joining us on the call today.
You will hear first from Joe DePaulo who is Executive Vice President and Chief Marketing Officer. After his remarks he'll turn the call over to our Vice Chairman and Chief Financial Officer Jack Remondi.
After Jack's remarks we'll turn to you for your questions again as we always do. And we view these Straight Talk events as a very open forum for a lot of good and prompt discussion from you as our school customers.
Please make sure that you have your questions ready, we want to spend as much time as possible addressing your questions about the current legislative environment and how it will impact you and your students in the future. Now let me turn the call over to Joe DePaulo, Joe.
Joe DePaulo: Thank you Denny. I'm pleased to participate in today's Straight Talk call and we appreciate the opportunity to continue our dialogue with all of you. Let's start by emphasizing first that Sallie Mae supports the president's call to reform the student loan program and produce historic savings for Pell Grants and other education priorities.
We also support eliminating lender subsidies and having the government own and fund loans directly. At the same time a competitive federal student loan delivery system has consistently proven its ability to meet your needs and the needs of students and families.
The most important question in this debate should be who is the customer? Is it the Department of Education in Washington or is the customer those schools and students who depend on loans to pay for college?
If the choice of service provider moves from the campus to Washington you and your students will no longer be the customer. Competition inspires us to be our best and respond to our customer's needs.
If we do not you will turn elsewhere and our students and parents will turn elsewhere. That' why Sallie Mae invests so heavily in the IT and customer service infrastructure necessary to originate and service student loans.
We invest millions each year in our origination systems to provide you with customized solutions allowing you to spend more time working with your students and less time resolving problems. Originating a loan is more then crediting the right account with the right amount of money at the right time.
For example, Sallie Mae's origination team takes care of 3-1/2 million students and parents who apply to Sallie Mae's OpenNet each year. In addition, we receive more than 2 million origination related calls and we handle them each year in our call centers.
Plus nearly 4-1/2 million emails sent about financial aid process, federal loan options, and financial literacy to guidance counselors, parents and students come across our Internet.
Finally, over a million school inquiries are handled each year in our call centers and elsewhere. Plus each year we run financial aid workshops, this year alone those workshops were attended by over 23,000 parents and 6,000 high school guidance counselors.
Most of these functions would go away under 100 percent direct loan scenario and they don't get considered when the CBO projects the cost of direct lending. Many of these functions with their costs will either be passed down to the schools or they will simply disappear all together. Students and families will find it more and more difficult to find financial aid assistance.
Put directly we think these important services should continue and we are concerned that they will not be adequately replicated by the government. And the burden of these services — the demand for which is clearly not going away — should not be transferred to schools to deal with on their own.
The good news is that there are reform options under consideration in Congress that achieve all of the president's objectives without jeopardizing these highly valued services. Clearly such options would be better for students. And for that good news I'm going to turn it over to our CFO Jack Remondi.
Jack Remondi: Thanks Joe and thanks Denny and thanks to all of you for joining us today. On these calls we strive to provide you with useful information, information that you need to manage your student loan programs.
You deserve clarity and certainty, students, and families deserve clarity and certainty. Particularly when today's economic conditions are driving growing numbers of students and families to your doors.
We know many of you were in Nashville last week looking for answers. In normal economic times by December you need to know how you will process millions of requests for financial aid. In these economic times it's even more critical than ever.
You're students and families need to know how to apply for federal student loans next year. Will your students need to complete a new application and promissory note? Will there be any changes in the origination process? Will there be any loan servicer change possibly splitting your students accounts.
Also your students and families have heard promises of increased aid through Pell Grants they'll want to know what's available. Will they be eligible for this aid and how much can they count on it being available?
Although Congress is still considering how loans will be delivered to your campus next year, we know that there is no way they will let you or your students face disruption. During Sallie Mae's 37 years there's been plenty of intense political debate about these programs but those considerations have never gotten in the way of the timely delivery of student loans.
And be sure we will continue to work closely with Congress and the department to do our part in making sure all students in schools, have access to the loans they need. Congress has the ability to act quickly and decisively. ECASLA's a good example of that, as you may recall Congress unanimously passed ECASLA in April of 2008 in a matter of weeks.
Over the past two weeks we've seen tremendous progress toward a no-risk alternative. At this point there are thousands of schools that do not have the time to seamlessly transition to 100 percent direct loans and ensure that the promise increase in Pell Grants will be there.
We are encouraged by a new Senate proposal which was submitted for CBO score by Senator Casey, a member of the Senate Health Committee and is under consideration by a number of Senators. According to the Congressional Budget Office or CBO the new Senate proposal would achieve 95 percent of the estimated savings targeted by the president's proposal.
The CBO says, "$87 billion will be saved for 100 percent direct lending over 10 years and 82.5 billion will be saved under the new Senate proposal under the same time frame." Both programs cost 7.1 billion to administer.
This alternative Senate proposal can be implemented with zero risk or expense to you or to the millions of student and parents who rely on federal student loans. Our understanding of the proposal is based on the CBO analysis.
Under this program schools would continue to choose their service providers and originators who could also service the loans they originate to minimize split servicing. Under this competitive origination environment schools would keep existing systems and loan delivery infrastructure in place, meaning no changes would be required.
According to CBO the proposal includes a program to provide services to borrowers including default prevention and financial literacy programs offered by guarantee agencies and other lenders today.
No one thought the legislative process would take this long. Very soon CBO will need to account for what is already happened in the student loan market place. So what does this mean exactly? In March CBOs estimates of savings assumed that direct loans would make up only 30 percent of all student loans.
As a result of the pressure placed on you and your colleagues, however, direct lending has over a 40 percent market share today without the passage of any new legislation. If CBO were to use this new market position it would jeopardize billions of dollars in potential savings.
CBO will release its new budget assumptions at the end of January at which time the projected savings would be re estimated for either the President's proposal or the new Senate proposal using direct lending's current market share figures.
That means Congress can't wait much longer. It also means that each of you can now look to the January 30 date which is the date attached to the new CBO estimate at the time that Congress is likely to finish its work.
If not the amount of savings and the funds available to increase Pell Grants will be substantially reduced. We don't want that, you don't want that, students who need the increase in Pell Grants certainly don't want that and Congress doesn't want it either.
In addition there's also now a backup plan on the table to help schools deal with the delay that has occurred. A bi partisan bill has been introduced in both the House and the Senate to extend ECASLA for one year.
As I said earlier the previous ECASLA extension was approved in a matter of days and by unanimous vote. This new extension bill could easily be acted on immediately added to an end of year appropriations bill if needed.
If a temporary solution is what Congress decide an ECASLA extension would give schools certainty and clarity for one year with no risk for disruptions in the financial aid process. Today however there are really four options on the table.
Option one is passing the Safford bill and although this bill has passed the House there is simply not enough time left for the Senate to develop, debate and pass a bill that does not have bipartisan support. And Senate action on such a contentious bill is not even contemplated to start until January.
In addition schools simply cannot implement the requirements of this bill in time. We understand that some schools began communicating to income — or begin to communicate to incoming students next month and many start packaging financial aid letters in February and March leaving no time to implement a new student loan system.
Second option is to simply do nothing. Simply said the consequences of doing nothing eliminates this a feasible option. Option three would be to extend ECASLA and although this would help it is only a temporary solution with significant consequences for the funds available to expand Pell Grants which brings us to the fourth solution which is pass the Senate proposal.
This proposal achieves the Presidents objective of creating over $80 billion in savings it is the only proposal that can be implemented for the upcoming academic year. It will preserve the enhanced default prevention and financial literacy programs so important to students and schools and it would pass with broad bipartisan support. So the choice is very clear.
Although the economics of the student loan community proposal are better for us than the new Senate proposal we recognize that the new Senate proposal is — has the strongest potential not to pass with broad bipartisan support and deliver the most savings for increased Pell Grants.
The Senate proposal is the only proposal that can guarantee historic savings and be implemented with no risk for students or schools while preserving vital services for students at dramatically lower defaults.
Whatever Congress does or does not do we're committed to doing everything we can so that every student receives the loans they need on time and without disruption. That is our promise the same promise we've honored for 37 years.
This weekend's Wall Street Journal summed up very well the momentum and opportunities schools have to participate and help determine the final outcome.
And I quote, "There's encouraging news on that other Washington effort to force Americans into a Government run system. The White House plan to drive private lenders out of the market for student loans is igniting a back lash on campus and on Capitol Hill."
We understand that many of you have been actively advocating for something different than SAFRA either extending ECASLA or the community proposal in the volume of communications and letters your sending to Congress is making a difference.
The reason there is even a new Senate proposal is because the Senate is seeking a solution that has — that is addressing the concerns that they have heard from you. As you continue to communicate with Congress consider this fact, the new Senate proposal is the best chance to ensure that the historic savings for Pell Grants is not jeopardized.
The key is that you remain engaged and continue to communicate your expertise on this issue. What type of solution we see this year will be determined over the next two to three weeks. To protect your students we suggest that you tell Congress how a forced transition to a direct lending monopoly will impact your students and your schools.
At this point we will now open the call up to your questions.
Dennis Wentworth: Operator if we could open the lines please?
Operator: At this time I would like to remind everyone in order to ask a question please press star one on your telephone key pad. We'll pause for just a moment to compile the Q&A roster. Once again if you would like to ask a question please press star one on your telephone key pad.
We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Lee Kanakis with Oklahoma Wesleyan University.
Lee Kanakis: Yes could you repeat the name of the Senate proposal again for me?
Jack Remondi: Right now — this is Jack Remondi, thank you.
Lee Kanakis: Hi Jack.
Jack Remondi: There is no name for it at the moment it's just — although press reports have referred to it as the Casey proposal. Senator Casey from Pennsylvania.
Lee Kanakis: OK.
Jack Remondi: It has not formally been submitted as a bill. It's only been requested that it be scored.
Lee Kanakis: OK just trying to help in terms of you know when I mention it to my senators to give reference to it.
Jack Remondi: I think if you refer to it as the Senate proposal or the Casey proposal that would do that.
Lee Kanakis: Thank you, Jack.
Jack Remondi: You're welcome. Operator next question.
Operator: One moment please for your next question. Your next question comes from the line of (Kathy Wilson) with Charmin College.
Joe DePaulo: Hi, (Kathy).
Operator: (Kathy), your line is open. (Kathy), if your line is on speakerphone, please pick up your handset or unmute your line.
(Kathy Wilson): OK, yes I was wondering, you mentioned at one point during the session as one of the questions would they need to complete a new promissory note for direct lending. Will the students — the borrowers have to do that if we switch to direct lending?
Jack Remondi: Yes. A new promissory note would need to be executed by both new students and of course returning students.
Operator: And please hold for your next question.
Jack Remondi: And to be clear, if the Senate proposal were to pass, that would not be a requirement. Operator, while we're waiting for that, we did get some questions that were emailed as well, which I will read and respond to.
The question was, "Can you clarify for me if the proposed extensions of the ECASLA would result in the sale of FFELP loans to the department via conversion to direct loans. If not, how would the capital be made available to fund FFELP loans."
And the answer to that is that if ECASLA were extended for the upcoming academic year as it was this academic year, lenders can choose to fund those loans in two ways.
They can either use their own sources of capital, which about 40 percent of lenders did or they can borrow funds from the Department of Ed to make sure that the loans are available, which about 60 percent did. And then subsequently sell those loans to the Department of Education.
The bottom line of course is that there would be an assurance of sufficient funding for all students at all schools as there was the last two academic years.
Operator: And our next question does come from the line of (Bill Spears) with Tallahassee Community College.
(Bill Spears): Good afternoon.
Joe DePaulo: Hi, (Bill).
(Bill Spears): My concern is after being in Nashville last week is that the department continues to use numbers that are old and higher than the numbers that we're hearing again today. Have there been any efforts to correct the department in the numbers that they're using so that they'll match what the current estimated dollar figures are?
Jack Remondi: That's a great question. You know the numbers are publicly available for all to see but as you know people pick and choose numbers that they want for different reasons I suppose, the numbers we quoted today are the numbers that were released last week in the latest Congressional Budget Office scoring.
So they are the most recent numbers available and as published by the Congressional Budget Office.
(Bill Spears): I will say that the secretary indicated that part of his savings was not coming from the Direct Loan Program but from some other program and I confess I don't remember which program it was, that's of a concern to me as well.
Jack Remondi: That's a good point and in addition to that, the savings that the Congressional Budget Office identified last week, they made clear that those savings were subject to risk and in our measurement of that significant risk of any delay in implementation …
(Bill Spears): Thank you.
Jack Remondi: … a big impact on Pell Grants.
(Bill Spears): Thank you.
Jack Remondi: You're welcome.
Operator: Your next question comes from the line of (Eric Garfinkle).
(Eric Garfinkle): Hi, I hope everyone's doing well. My question is if the bill were all direct — all schools must convert to direct lending takes place, how will Sallie Mae compete with that after that transpires?
Jack Remondi: Well that's a good question, I mean if the bill were to pass, if the SAFRA Bill were to pass, we would not be allowed to originate federal student loans from that point forward from its effective date forward. And all future federal loans would need to be originated through the single Department of Education run system.
We, Sallie Mae as a company would continue to be a loan servicer, both for our existing portfolio of loans as well as loans that would be originated under the Direct Lending Program. We were one of four entities that were selected to perform that function going forward.
But many of the vital programs and services that we provide today are not covered under that program and would be lost. Some examples are financial literacy programs and awareness programs, where we helped students and families understand what federal loan programs are available so that they know that they can afford to go to college.
We've run programs to make sure that they don't over borrow at the same time, so that their debt burden is consistent with the value of the education they're receiving and the program of study that they're participating in.
And then perhaps most importantly in an economic period like today, we offer far more extensive default prevention services than are called for under the Department of Education contract. And the statistics there are overwhelming.
Students who borrow and are serviced by Sallie Mae default at roughly 30 percent lower rates than students who borrow under the Direct Loan Program.
(Eric Garfinkle): I wasn't aware of that, wow.
Jack Remondi: And the reason is simple, we keep calling until we connect with the borrower and not to the point where we're trying to hound them but offer them the options that — the many, making them aware of the many different options that are available under the federal loan programs to manage their debt and of the consequences of that.
And you know if you think of the consequence to a borrower who avoids default you know they have access to credit in the form of credit cards, car loans, maybe an apartment or even utilities. And in today's world, it can even mean the difference between getting a job and not getting a job.
(Eric Garfinkle): Yes. Now, I'm sorry, fast question in addition to that, will the bill have passed for all schools to convert to direct lending, will the Sallie Mae Smart Option Loan interest rate be reduced depending on the borrower and the co-signers credit in the future or is that going to remain the same?
Joe DePaulo: This is Joe DePaulo. The Smart Option Loan is really our private loan, so it complements the federal loan and really it's used as we say, as the third option after exhausting all grant and free money and federal money.
(Eric Garfinkle): OK.
Joe DePaulo: So that program stays largely intact as it is today.
(Eric Garfinkle): OK. Thank you.
Joe DePaulo: You're welcome.
Operator: Your next question comes from the line of (Dave Lalive) with the Florida Institute of Technology.
(Dave Lalive): Can you guys hear me?
Joe DePaulo: Yes (Dave).
Jack Remondi: Yes.
(Dave Lalive): Oh good it says hold on my system great. I think it was Jack that mentioned this — Jack Remondi. If I understood what you are saying is as the participation rate and direct lending goes up, that the savings goes down per the model of CBO is that right?
Jack Remondi: That's right. The —– basically the savings — the $87 billion in scored you know estimated savings comes from earning a profit on the loans. And it's the 6.8 percent that the student pays minus the 2 percent treasury debt.
(Dave Lalive): Got it.
Jack Remondi: And CBO calculates it off of a baseline so their estimate is that 70 percent of volume would switch from FFELP to DL. And it's that 70 percent switch that generates the $87 billion.
If in fact they use a current baseline which is less than 60 percent in FFELP the pure math is the margin of profit that they earn in each loan is multiplied against the smaller dollar base and that produces less savings.
(Dave Lalive): Thank you for the explanation.
Jack Remondi: It's a pretty critical component because CBO has said that they will adjust the baseline after January 30. So we've got what, seven weeks to deal with that.
(Dave Lalive): Can I have a follow-up there as well?
Dennis Wentworth: Sure.
(Dave Lalive): Oh great, one more question related to servicing issues. We understand the current portfolio that said what ACS is it, is up for grabs basically. The ACS is not going forward as one of the four servicers is that right?
Jack Remondi: That's right, last ...
(Dave Lalive): Do you know anything about the current portfolio and what will happen to it in the future?
Jack Remondi: It really is up to the department to determine that. But we certainly expect and hope that we will have the opportunity to pick that volume up for loan servicing.
(Dave Lalive): OK, great, thank you.
Operator: Your next question comes from the line of Ira Rosenfeld with Sackler School of Medicine.
Ira Rosenfeld: Hello do you hear me?
Jack Remondi: Yes we can, good afternoon.
Ira Rosenfeld: OK, my question really deals with the participation agreement. Right now the participation agreement we have is the (recolending) actually goes into effect and I'm assuming that the Department of Ed has to then upgrade or change all participation agreements.
If this thing comes to pass on January 30 and we're not allowed to process loans or dealing until we get an updated participation agreement, is there any indication of how the DOE is going to handle that and allowing us to still service the loans until we get that updated participation agreement?
Jack Remondi: We are told that they are working on it but again it's — I mean this is exactly the point that we've been kind of hinting towards or talking about is that the passage of a SAFRA bill involves a lot of risks.
It involves risks similar to the one you're raising here on participation agreements. It causes risks of schools having to change origination among delivery platforms, causes risks of eliminating some of the valuable programs and services that lenders and guarantee agencies provide today.
Ira Rosenfeld: OK, well the one other thing though is that the school that I'm representing is a foreign institution and right now we're not eligible for direct lending. And I've been hearing from DOE that there is some implication that they're going to change that. But again there's nothing really solid.
How would I should be able to — how should I — let me correct that. How should I get ready so to speak if this thing is not even — they don't know how to handle it?
Jack Remondi: I wish I could tell you exactly what to do. I mean ...
Ira Rosenfeld: No I mean just an idea. I understand you yourself can't but is ...
Jack Remondi: Well, I think the best option is to advocate for the Senate proposal or an extension of ECASLA. Those are the programs that will give — put you know take this unnecessary short time-frame here off the table and allow the loan process to work best by using the current infrastructure.
Or giving Congress time to figure out what the best solution long-term if they can't make a decision right now.
Ira Rosenfeld: Certainly thank you.
Jack Remondi: … SAFRA and putting this unnecessary risk on students and schools doesn't seem to be a wise idea and frankly with the way we're seeing it at this point it doesn't look like the Senate views it as a wise idea either.
Ira Rosenfeld: All right, thank you.
Operator: Your next question comes from the line of Alex Zarchan with Southwestern College.
Alex Zarchan: Hi, I just have some questions as far as how the Senate bill is structured. Is the funding still all coming from the federal governments similar to direct loans?
Jack Remondi: Let me just be clear. I mean what has been — the Senate has not put forth a bill yet on either side. They have not put forth a — you know something similar to SAFRA or the Senate proposal that we have been referring to.
Both programs have been scored by CBO and so it's — I guess you'd call it a preliminary bill or if you will. Under the alternative Senate — what we're calling the alternative Senate proposal, the loans would continue to be funded by the U.S. Treasury similar to the mechanism that would be involved in SAFRA.
And the reason why that's important is the U.S. Treasury can borrow money cheaper than any other source and the fact that it can borrow money cheaper was really what drives and creates the $87 billion worth of savings. And so any solution that has $87 billion as a target has to contemplate, or utilize, or take advantage of low cost federal funding to achieve that objective.
Alex Zarchan: And then I have just of a kind of follow-up —so through that proposal as far as keeping the systems the same with the schools, the dispersing, and everything would be the same and it's the lenders pulling the money through the treasury department?
Jack Remondi: That's correct.
Alex Zarchan: OK.
Operator: Your next question comes from the line of Wendell Schick with the University of Northwestern Ohio.
Joe DePaulo: Hey Wendell.
Wendell Schick: Good afternoon, thanks for hosting this first of all. I'd just like to know if there's been any equalization to the PLUS loan interest rate 7.9 versus 8.5?
Jack Remondi: In the proposals that have been put forth under both SAFRA and the Senate alternative has been scored by Senator Casey — or for Senator Casey. The interest rates would be identical in both programs so there would be no differential going forward.
Operator: And your next question will come from the line of Kathy Borgini with Blackburn College.
Kathy Borgini: Yes, hi I was just wondering about this Senate proposal. Is this something that in this proposal they're stating that this is something they want to keep from the (inaudible) forever and the other one is just a temporary thing or how does that work? I guess I'm not sure what this proposal contains.
Jack Remondi: Oh, ECASLA would clearly be a temporary one-year extension. That is what has been submitted in both the House and the Senate at this stage in the game. The alternative Senate proposal is meant to be a permanent solution, and it wouldn't — FFEL loans and DL loans, as we know it, that distinction would be eliminated going forward.
What really is preserved under the alternative Senate proposal is the way loans are delivered to students would be similar to what's being done today. Schools can choose which system works best for them.
They can change their provider if that provider is not meeting their needs or demands. And in our view, that competition is really what would help deliver better products and services. You know some of the ones I mentioned earlier like default prevention.
Kathy Borgini: Like for instance, right now I — to service my loans we use OpenNet. You're familiar with that, I guess, right?
Jack Remondi: Yes, and that program and system would still be available under the alternative Senate proposal.
Kathy Borgini: OK, so under either of those. Now what if we have to go direct lendings?
Jack Remondi: You would not.
Kathy Borgini: It would still be — you will not.
Jack Remondi: No.
Kathy Borgini: You guys would be like servicers for that, so only if they pass Senate proposal — well that one passed, or even the temporary one.
Jack Remondi: Correct.
Kathy Borgini: Those are the only two where OpenNet would stay open.
Jack Remondi: That's correct.
Kathy Borgini: And I love OpenNet, so I don't want it to leave. OK, thank you.
Jack Remondi: All right, we love it too.
Operator: And there are no further questions at this time.
Jack Remondi: Well thank you all. First of all, we appreciate everyone for participating today, and you know as we've heard, there are — from both the comments from myself and Joe and Denny as well as the comments from many of the participants here, there's an awful lot of concern about the risk of what's on the table.
It is very clear and from the level of discussion that's occurred to date, it's very clear that it's having an impact, that your voice and you contacting your senators and congressmen to let them know what you are interested in can and will make a difference.
So we certainly encourage you to continue to do that and let your voices be heard and not be forced to accept a one-size-fits-all solution.
Dennis Wentworth: Thank you, Jack. Thank you, Joe. This is Denny Wentworth again. Just in conclusion here, I would just like to make sure that I give you the website that is available for the replay. That is at SallieMae.com/straighttalk.
And remember, there also is a transcript available for those of you who would like that as well. But if you have anybody else who could not listen to the call today or be on the call, please make sure that you go out to our Straight Talk website and the transcript is available for you.
So thank you again, all, for joining us and operator, this will conclude the conference call.
Operator: Thank you, ladies and gentlemen. This does conclude today's conference call. And you may now disconnect.
END