Obama reforms not necessarily dire for Sallie Mae in Indiana

The forecast has been dark for Sallie Mae.

But the horizon is showing rays of sun for the giant student lender’s
local operation.

President Obama’s plan to nationalize the federal
student loan program still threatens to force Virginia-based Sallie
Mae to hack its network of 26 offices down to just five. It is unlikely all three of the company’s
Indiana offices—in Indianapolis, Fishers and Muncie—would survive.

Yet Sallie Mae’s local offices hold several advantages that should
help them weather the cuts, according to site selection consultants
who help companies evaluate consolidation decisions. The local offices even have capacity to add 750
workers—if Sallie Mae decided to bring them here from offices it might close
in other states.
Or the storm could blow over entirely. An alternative
to Obama’s plan that would keep Sallie Mae and its private peers active in selling federal student
loans would achieve nearly as much in budget savings as the president’s plan, according to a report
by CongressDaily earlier this month.

Two paths to
savings

That would appeal to some U.S. senators who have objected
to Obama’s overhaul of the Federal Family Education Loan Program, or FFELP. The Obama bill was
approved by the House but has been stalled in the Senate behind health care reform legislation.

“The cause for eliminating the FFELP has maybe lost some steam,” said Sameer Gokhale,
a student lending analyst at Keefe Bruyette & Woods in New York. “If
you have delays, then that’s not necessarily a bad thing. It may give them
more time to evaluate the alternative proposal.”

Investors seem to feel the same. Sallie Mae, whose corporate name is SLM Corp.,
has seen its depressed stock price surge more than 30 percent
since Oct. 1.

Still, Sallie Mae executives aren’t backing away
from their dire warnings. Since the House approved Obama’s plan in September,
they have steadfastly predicted it would force them to slash 2,700 jobs, or about one-third of their
U.S. work force.

But Jon Kroehler, Sallie Mae’s
highest-ranking executive in Indiana, said a late-November trip to Washington, D.C.,
to meet with Sen. Evan Bayh, D-Indiana, and other legislators, was encouraging.

“Last week was a good week,” Kroehler said the day he returned
to his office in the company’s massive 450,000-square-foot office building
near Interstate 69 and 116th Street.

But just
in case the Obama plan becomes law, economic development officials from Fishers and Muncie and
the state of Indiana have been talking to the company about its needs.

And it won’t hurt the local cause that Gov. Mitch Daniels’ chief
of staff, Earl Goode, sits on Sallie Mae’s board. Goode declined
to comment directly on Indiana’s chances, but of the actions in Congress, he said, “I’m
optimistic there’ll be some middle ground.”

Under current
law, the federal government pays private lenders like Sallie Mae to sell new student loans,
caps the lenders’ losses in case of default, and provides funds to
help administer these loans.

These subsidized loans make up about 70
percent of all federal student loans. The rest are made directly by the federal
government to students, using university financial aid offices as
the go-between.

Obama’s plan, first released in February, would
eliminate any new loans under the subsidized-loan program and use the
direct-loan program exclusively.

The plan would
cost Sallie Mae about one-third of its revenue and a big chunk of its profits, too. But it would save
the federal government $80 billion over 10 years, according to the Congressional Budget
Office. And because the government could offer lower interest rates, college students think it will save
them money, too.

“Students today are taking on
insurmountable amounts of debt to pay for college, essentially mortgaging their futures
with convoluted loan plans from private banks,” said Gregory Cendana, president
of the U.S. Student Association.

The roots of
Obama’s proposal date back to a seize-up in credit markets that settled in the fall of 2007. The
cost of borrowing for private lenders such as Sallie Mae spiked to the point they
were losing money on new loans—even loans mostly funded by the federal government. Scores of private
lenders exited the market.

To make sure students could
get loans, the federal government stepped in to buy loans from private lenders. Later, the federal
government expanded the size of its direct loan program. Some schools, such as Purdue
and Indiana universities, shifted to do all their student loans with the
federal direct program, cutting out private lenders entirely.

Obama’s
proposal would essentially expand that direct loan program, created in the 1990s under President Bill
Clinton, to cover the entire federal student loan market. Private lenders like
Sallie Mae would make loans only when students needed to borrow more than the federal program allows.

Kroehler acknowledges the need for change.

“It makes no sense to long for the old days,” he said.

But private lenders don’t want to see federally subsidized private
loans go away entirely. They have argued that retaining private competition would
ensure better service for students and their families, and would spare colleges and universities
the expense of taking on all the loan servicing.

Sallie Mae released a study in March that claimed default rates on federal loans
it manages are 30-percent lower than loans made directly by the federal government.

Kroehler noted that Sallie Mae collections employees, unlike their government
counterparts, work on Sundays because it’s the best time to reach students
and their families at risk of default.

Employees
at Sallie Mae’s Fishers office enter under a gold banner that reads, “Customer Service: Own
the Experience.”

The industry proposal now floating around the
Senate would pay Sallie Mae and its peers a $55 origination fee for each federal
student loan they sold. The government would also pay them an administration fee for each year of the
life of the loan.

The CBO says it would save $75.4 billion over 10
years—95 percent as much as the Obama proposal.

Local advantages

As it stands now,
few of Sallie’s 2,550 Indiana employees work directly on the federal student
loan program.

Nearly half the local employees
are information technology staff. They operate a data center used by the entire company—including
those working on federal loans. Most of the rest work on collections, originations or loan guarantees.

In Muncie, about 200 of 730 workers are involved
in collections for federal loans.

But few employees feel safe regardless
of what area they work in. Barbara O’Brien figures she might have to go if employment
takes a big hit. She directs Sallie Mae’s high school outreach program, which
helps students and parents find scholarships, fill out financial aid forms,
and pursue investment vehicles to save for college.

“Anytime
you’re looking at eliminating a third of your employees or more, there will be a
consideration of, ‘Do we have the money to spend on that kind of outreach?’”
O’Brien said, adding, “People are definitely worried.”

So O’Brien threw herself into Sallie Mae’s petition drive, meant to sway senators
against the Obama plan. During Halloween, she went trick-or-treating with the petition,
pressing homeowners to sign it after they plunked candy in the bags of her son
and his friends.

O’Brien and other Indiana
employees gathered more than 81,000 signatures, part of 180,000 collected nationally to urge
Congress to pass the industry alternative. Sallie Mae officials delivered the signatures to Bayh during
their D.C. visit.

However, it’s unlikely Sallie Mae would abandon
its Fishers office—its largest single location.

Larry Gigerich,
an Indianapolis site selection consultant, said the Indianapolis area would be viewed favorably compared
with Sallie Mae’s other locations—which line the East Coast from Massachusetts to Florida,
and also dot Michigan, Nevada, Texas and Wisconsin.

The three key factors, he said, will be labor quality, real estate costs and overall business costs.

Sallie Mae owns its buildings in Indianapolis and
Fishers, whereas it leases space in Muncie and 15 of its other locations.

The Fishers office was built especially for USA Group, which Sallie Mae acquired
in 2000, and would require expensive investment to retrofit
for multiple tenants. Finding one tenant to take so much space would be highly unlikely, said Gigerich,
who is president of Ginovus LLC.

Indianapolis
has some other student lenders here, including the 380-person headquarters of Chase Student
Loans in downtown Indianapolis, a small outpost of Nebraska-based Nelnet Inc., the industry’s
second-largest player behind Sallie Mae, and locally based ISM Loans Inc.

The region is home to many financial services veterans, as well as a good
pipeline of business students coming out of Indiana colleges, Gigerich
said, providing an attractive labor pool to Sallie Mae.

“Because Indianapolis has a large real estate location already, because it has a long history,
along with Indiana, particularly the Indianapolis area, being a lower-cost location,”
Gigerich said, “all those clearly would weigh in Indiana’s favor.”•