Sallie Mae Sells Out Students’ Safety and American Jobs

March 31, 2009

By Jim Ross:

Sallie Mae, the nation’s largest student lender, is quietly processing student loans in India and the Philippines.  These are student loans, subsidized by American taxpayers to help keep college education affordable.

Sallie Mae routes payments, complaints and applications for these government-subsidized loans — containing sensitive personal and financial information — to processing centers in Bangalore and Pune, India.  Calls about collections and loan originations are also passed to centers in India, as well as Baguio, Philippines, prompting complaints like this from student borrowers:

“I just got a bill from Sallie Mae claiming that I must pay, and that I am not enrolled in school currently (an error). I called to get it taken care of and got a guy named ‘adam.’ Adam had a thick accent so I asked if he was from India. He said ‘Yes, I am.'”

After insisting the call be transferred to the United States, the caller told a Sallie Mae representative in the United States:  “I told Rick how angry I was that Sallie Mae, a US Government funded company, was outsourcing its call center to India, and that as an American, I was not comfortable talking to a foreigner about my financial information. Rick told me “Well, foreign students don’t like talking to Americans, we are an international company.”

Increased Risk of Identity Theft

Offshore call and processing centers, particularly those in India, are regularly accused of selling personal and financial information. Last week, undercover reporters for the BBC posed as fraudsters and bought the names, addresses and credit card account details of United Kingdom residents outside of Delhi. Symantec Corporation traced the “leak” to an employee of a Bangalore call center. In July, a researcher at an Indian management institute wrote:

“India is widely considered one of the most corrupted countries among the major global economies. It is even behind China, one of its major competitors in the global economy. There is a pressing need for improving transparency, particularly government departments and bribe culture; and security, particularly of intellectual property rights in the country.”

Sallie Mae Wants More Taxpayer Money for Outsourcing

Now, Sallie Mae is fighting to use its loan servicing network to keep tabs on the billions of dollars Uncle Sam is spending to prop up for-profit student lenders, including Sallie Mae itself. Six companies are currently vying for a lucrative 10-year contract to service all federal student loans.

It’s difficult to put a price tag on the contract.  The Department of Education estimates the loan servicing fees to be more than $200 million a year in revenue, according to Michael Whisler, the administrator overseeing the bidding process. The DOE plans to award the contract this spring. Work will begin in late August or early September.

Increased education spending coupled with fundamental changes to simplify student lending as proposed by President Obama will increase the number and volume of loans that need servicing, work that most likely will have to be handled by private companies, Whisler said.

President Obama said his renewed focus on education is critical to the country’s economy and the well-being of the next generation. In a March 24th speech, Obama said this in response to questions about his proposed budget:

“Now, the alternative is to stand pat and to simply say, ‘We are just going to not invest in health care. We’re not going to take on energy. We’ll wait until the next time that gas gets to $4 a gallon. We will not improve our schools.

“And we’ll allow China or India or other countries to lap our young people in terms of their performance. We will settle on lower growth rates, and we will continue to contract, both as an economy and our ability to — to provide a better life for our kids. That, I don’t think is the better option.”

Obama’s plan would fundamentally change the way student lenders, like Sallie Mae, are paid by eliminating the subsidized federal loans that have produced multi-million dollar profits year-after-year.

No Requirement to Keep Jobs In the U.S.

The education department contract is designed to handle the federal bailout of student lenders, not the increased funding and reform proposed by Obama. Unlike the bank bailout, the education contract doesn’t require recipients to buy American.

The contract, however, does require “all personnel” to complete a federal background clearance based on their position risk level. Preliminary clearances must be completed for high-risk positions prior to working on the student aid system.

Still, two of the largest servicers, Sallie Mae and Affiliated Computer Services LLC (ACS) — the existing federal loan servicer — have overseas operations.

Sallie Mae uses processing centers in Florida, Indiana, Pennsylvania and Texas in addition to its processing operations in India and the Philippines.

While executives listed the offshore operations in a presentation to investors, none of the offshore facilities are depicted on a map of the United States showing “Operations Locations.” The company’s most recent annual report doesn’t use the words “India” or the “Philippines,” although Sallie Mae has been contracting overseas companies, particularly those in India, for years.

Sallie Mae’s Offshore Servicing Causes Many Complaints

Sallie Mae’s offshoring practice has spawned complaints since at least 2006 about everything from heavy accents making it difficult to communicate to providing financial information to call center employees in other countries.

As one borrower put it in February 2009, “I got out-sourced to India and felt very uncomfortable giving personal info, social, credit card numbers, etc. I expressed my concern and to be connected to an American based representative only to be hung up on over and over and over.”

Other Companies Competing

ACS provides technology and “business process outsourcing” to commercial and government clients. It operates in more than 100 countries and has 65,000 employees. It operates 12 data centers and three enterprise command centers (ECC) in Dallas, Bangalore, India and Monterrey, Mexico. These command centers perform various processing activities and provide round-the-clock support to the company’s clients.

The four other companies competing for the contract don’t publicly disclose alliances with offshore companies. They are Wells Fargo Bank; American Education Services, which is a division of the government run Pennsylvania Higher Education Authority; the Great Lakes Education Loan Services Inc. and NelNet, Inc.

A battle over which company would receive the lucrative loan servicing contract erupted shortly after President Bush signed legislation that increases federal grants and student loan amounts as well as buying back loans from private lenders under the Ensuring Continued Access to Student Loans Act of 2008.

Sallie Mae, for example, sold $1 billion in federal loans to the Department of Education in October 2008.

Sallie Mae Protests

In July 2008, the Department notified the industry that it would use existing loan servicer Affiliated Computer Services (ACS) to handle the loan processing.

A month later, Sallie Mae protested the decision, alleging the deal violated bidding laws by dramatically expanding an existing contract without engaging in competitive bidding. Sallie Mae demanded all student loan processing work be stopped immediately and that the education department put the work out to bid.

Before a government arbitrator could hear the protest, the education department capitulated. In October 2008, the education department announced it intended to put the contract out to bid in January 2009. When the bid solicitation came out, potential bidders had two weeks to respond. The contract is supposed to be awarded this spring.

Whisler, the DOE administrator overseeing bidding for the contract, didn’t respond to questions about the accelerated bidding process. And, the department didn’t respond to questions about why the contract allows outsourcing.

Since this will be an exclusive government contract, cheap foreign labor is not needed to compete with pricing of competitors. Whichever company is awarded this contract will likely have no servicing competition for the next ten years.

To follow the developments on the Department of Education’s decision, please visit the Facebook Group: FINAL SIX: Student Loan Servicing Job Up for Grabs.