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Week of 6.19.09

Sallie Mae's Response to NOW

After hearing allegations made by whistleblower Mike Zahara about Sallie Mae, our producers asked Sallie Mae for a response. Below are an official statement from Sallie Mae and email correspondence between NOW on PBS and Sallie Mae.

Sallie Mae's June 19, 2009 reaction to the NOW program and the inclusion of Michael Zahara.

Sallie Mae has made clear to PBS and its production company concerns and information about the credibility of PBS' sources, in particular Mr. Michael Zahara. Specifically, PBS has chosen to highlight the inaccurate and misleading allegations of a former, short-term employee who was terminated in 2005 for misconduct and violation of the company's Code of Business Conduct, and who has, since leaving the company, demonstrated a pattern of accusing others (including federal and state officials) of wrongdoing, regardless of merit.

Sallie Mae is proud of our strong record of helping students avoid default. We cannot nor will not ignore default prevention options prescribed under federal law to help students avoid the negative and lasting consequences of default. Under the FFEL program, the operating parameters are clearly defined regarding forbearance and all servicing aspects of the loans, and Sallie Mae takes great effort to service within those requirements. In fact, Sallie Mae's usage of forbearance is consistent with the U.S. Department of Education's for its own student loan portfolio.

Email exchanges between Sallie Mae and NOW on PBS between June 4, 2009 and June 11, 2009.



From: NOW on PBS
Sent: Thursday, June 04, 2009
To: Martha Holler
Subject: Questions about Sallie Mae student loan practices

These are the allegations directed at Sallie Mae that come up in our piece. Please let me know what your response is.

1. There are allegations that Sallie Mae debt collecting agents have told borrowers to pay their student loans before paying their rent, as a collection tactic.

2. There are allegations that some Sallie Mae collections agents have 2 minute call time limits, which impedes their ability to tell borrowers their options.

3. There are allegations that Sallie Mae had an incentive to inflate FFELP loans by putting them into forbearance, because the loan grows over the forbearance period and then the federal government (or taxpayer) pays back an inflated amount.

4. Sallie Mae loans can as much as quadruple while in a period of forbearance and deferment because of fees and capitalized interest. Can you address this question with reference to both private loans and FFELP loans. What is the method that Sallie Mae uses to capitalize interest on private loans? On FFELP loans?



From: Martha Holler
Sent: Monday, June 08, 2009
To: NOW on PBS
Subject: RE: Questions about Sallie Mae student loan practices

Thanks. As promised, here are the answers to your questions.

1. There are allegations that Sallie Mae debt collecting agents have told borrowers to pay their student loans before paying their rent, as a collection tactic.

That is neither our policy nor part of our extensive employee training.

We take these types of allegations very seriously, and if there were evidence to support such allegation claim, it would be addressed immediately with disciplinary action, up to and including termination. To that end, supervisors, quality assurance agents and compliance representatives monitor calls to ensure that collectors adhere to our established model for handling calls.

Sallie Mae encourages customers to make payments as and when they are able because it is in their best financial interest. A customer is better off making some payment, even a reduced one, rather than making no payment and negatively amortizing the loan balance.

2. There are allegations that some Sallie Mae collections agents have 2 minute call time limits, which impedes their ability to tell borrowers their options.

Sallie Mae's goal is to help customers manage their debt and avoid the negative consequences of loan default. The benefits to the customer of avoiding default are huge, which is why we invest the time to counsel customers and help them construct a payment plan that works with their financial situation.

The allegation is patently false, and the facts show that the opposite is true: the average call time for a typical customer contact is more than 5 minutes.

In fact, extremely low talk time, such as the figure you cited, indicates that a collector is not gathering full and complete customer information and would trigger corrective action by the employee's manager.

3. There are allegations that Sallie Mae had an incentive to inflate FFELP loans by putting them into forbearance, because the loan grows over the forbearance period and then the federal government (or taxpayer) pays back an inflated amount.

The allegation's logic is flawed. The company has skin in the game and loses money on a loan that defaults. In fact, the company earns more on a loan that successfully repays than on a loan that defaults.

The facts are that nearly half of our customers who default on their student loans have used no forbearance, less than 10 percent of forbearance users exhaust the maximum allowable forbearance time, and three quarters of those who use forbearance are still in good standing four years afterward.

Forbearance is used as an option of last resort after other repayment plans are explored. We emphasize the importance of paying at least interest only, although for some that is not possible, and the only remaining options are to grant forbearance or to allow the loan to default.

Still, the consequences of default are more severe and far reaching for the customer: damage to the customer's credit, which could affect ability/cost to get an apartment, a car loan, a mortgage, a job; prospect of wage garnishment; seizure of income tax returns and federal benefit payments; loss of eligibility for additional student aid; denial or loss of professional licenses; and possibility of civil litigation.

Forbearance has proven to be a successful tool for customers—particularly those who require additional time to obtain employment and income to support their obligations, and those who are faced with a hardship and need a temporary break from making payments—to avoid default.

We encourage customers' consistent repayment behavior once the loan exits forbearance, and the fact that so many who use forbearance remain in good standing afterward (see statistic above) is proof that forbearance works,

4. Sallie Mae loans can as much as quadruple while in a period of forbearance and deferment because of fees and capitalized interest. Can you address this question with reference to both private loans and FFELP loans. What is the method that Sallie Mae uses to capitalize interest on private loans? On FFELP loans?

Customers who elect forbearance are given the option of paying the interest or having it capitalized (added to the principal balance).

For those federal student loan customers who elect the latter, interest that accrues during forbearance capitalizes quarterly and at the end of the forbearance period, consistent with federal regulation. There are no fees.

For those private student loan customers who elect the latter, interest that accrues during forbearance capitalizes at the end of the forbearance period. Private loan customers have the option of paying the private loan forbearance fee up front or having it capitalized, and the majority elect to pay it up front.



From: NOW on PBS
Sent: Wednesday, June 10, 2009
To: Martha Holler
Subject: Follow-up Questions

1. Can you tell us more about your employee training methods, and specifically what measures you take to ensure your collections agents don't engage in aggressive collections tactics? Can you include documentation of those policies?

2. You say the average call time at Sallie Mae is 5 minutes. Can you explain what departments that refers to? Again, can you also send documentation showing the data you've used to ascertain the 5 minute average?

3. You have said that Sallie Mae loses more when a loan defaults than when a loan is paid back in full. Can you explain in detail how this is the case? In the course of our reporting, we have seen many examples of loans capitalizing while in forbearance, with the borrower paying interest on interest. We also know of Sallie Mae loans that have
doubled, tripled or even quadrupled over time. It is our understanding that when those loans default, the taxpayer then pays back 97% of the new capitalized balance.. Is that correct, and if so, how does Sallie Mae lose money when the loan defaults? Again, documentation would be very helpful.



From: Martha Holler
Sent: Thursday, June 11, 2009
To: NOW on PBS
Subject: RE: Follow-up Questions

Here are the answers to your follow-up questions:

The standard maximum forbearance period on federal student loans is 60 months. Again, nearly half of our customers who default on their student loans have used no forbearance and less than 10 percent of forbearance users exhaust the maximum allowable forbearance time. Further, three quarters of those who use forbearance are still in good standing four years afterward—a sign that forbearance works and successfully keeps customers from default.

The 5-minute average call time is for the entire collection division.

When a loan in the Direct Loan program defaults, taxpayers bear 100% of the cost. When a loan in the FFELP defaults, taxpayers bear 97%. The 3% risk share that a lender assumes is proportional to the very narrow spread that a lender earns on a federal student loan. Further, when a federal student loan defaults, the lender loses the origination fee that it paid to the federal government for the privilege of making the loan, any cost to acquire the customer, including the full cost of loan origination, as well as all expenses incurred when servicing the loan. As Conwey and I emphasized in our conversation, the facts show that our interest is aligned with students': our default rate is lower than both that of the Direct Loan Program and the national cohort default rate, and forbearance is used on a limited basis (see statistics above) to help students prevent default. Again, the company would be interested in seeing your documentation of the loan that quadrupled in forbearance.

With regard to training: the first objective of our proven training program is to make clear the importance of demonstrating consistent professional conduct and steadfastly following the rules of operation, including compliance with all federal, state and contract regulations. To further ensure compliance with the Fair Debt Collection Practices Act, Sallie Mae also mandates annual compliance recertification and code of conduct training to validate and uphold the performance standards of our collection staff. Our training—and the checks and balances we have in place, such as call monitoring—ensure that Sallie Mae offers the highest standards for ethical and compliant collections.

Frankly, the volume of training documentation is overwhelming because training, conduct and compliance are such points of emphasis for the company. Still, I do not understand why you would request that level of documentation when you are not seeking it from those making the allegations? Furthermore, one of the best ways to measure our quality and compliance is to take a look at how highly we are rated by the federal government on its federal student loan collection contract.

Finally, I want to let you know that Sallie Mae's General Counsel reached out to yours this afternoon.

We appreciate that your review of the information provided will ensure that Sallie Mae's position is presented accurately and fairly.

 
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