Sallie Mae 2013 Annual Report Download - page 10

behalf of Guarantors of FFELP Loans and other institutions, including the U.S. Department of Education (“ED”).
With the elimination of FFELP in July 2010, these FFELP-related revenue sources will continue to decline.
After the Spin-Off is completed, NewCo will perform substantially all of the activities of our existing
Business Services segment, other than the activities of Upromise and Sallie Mae Insurance Services, which will
be carried on by SLM BankCo.
• Servicing revenues from the FFELP Loans we own and manage represent intercompany charges to the
FFELP Loans segment at rates paid to us by the trusts which own the loans. These fees are legally the
first payment priority of the trusts and exceed the actual cost of servicing the loans. Intercompany loan
servicing revenues declined to $530 million in 2013 from $670 million in 2012. Intercompany loan
servicing revenues will decline as the FFELP portfolio amortizes. Prepayments of FFELP Loans could
further accelerate the rate of decline.
• In 2013, we earned account maintenance fees on FFELP Loans serviced for Guarantors of $38 million,
down from $44 million in 2012. These fees will continue to decline as the portfolio amortizes.
Prepayments of FFELP Loans could further accelerate the rate of decline.
• We provide default aversion, post default collections and claims processing to 15 of the 30 Guarantor
agencies that serve as an intermediary between the U.S. federal government and FFELP lenders and are
responsible for paying the claims made on defaulted loans. In 2013, collection revenue from Guarantor
clients totaled $303 million, compared to $264 million the prior year. As FFELP Loans are no longer
originated, these revenues will generally decline over time unless we acquire additional work for
Guarantor clients. The rate at which these revenues will decrease will also be affected by the Bipartisan
Budget Act (the “Budget Act”) enacted on December 26, 2013 and effective on July 1, 2014, which
reduces the amount to be paid to Guarantor agencies for defaulted FFELP Loans that are rehabilitated
under Section 428F of the Higher Education Act (the “HEA”). The precise effect of the Budget Act will
depend on the decisions of our Guarantor agency clients about their continued participation in FFELP
default collections, as well as by how the fee reduction is implemented by ED. We earned approximately
$283 million in fee income from these activities in 2013, and we currently estimate the Budget Act will
reduce fee income in 2014 by approximately $60 million.
In 2013, FFELP-related revenues accounted for 77 percent of total Business Services segment revenues, as
compared with 82 percent and 82 percent, respectively, for the previous two years. Total Business Services
segment revenues were $1.16 billion for the year ended December 31, 2013, down from $1.20 billion for the
prior year.
The end of the FFELP program will likely cause owners of FFELP Loan portfolios as well as Guarantors of
those loans to seek to further reduce their FFELP servicing costs or sell those portfolios. Given the volume of
FFELP Loans we service for our affiliates and third parties, we are, and after the Spin-Off NewCo will be,
uniquely situated to adapt to the increasing levels of education loan-specific disclosure, compliance, servicing
and collection standards which other financial institutions and servicers may not find economical to continue to
support. Acquiring additional FFELP servicing volume as others sell FFELP portfolios, exit existing FFELP
servicing businesses or seek to find lower cost providers for those services is a key component of our current
Business Services growth strategy, notwithstanding the end of the FFELP program, and, after completion of the
Spin-Off, will be a key component of NewCo’s Business Services segment growth strategy.
ED Collection and Servicing Contracts
Since 1997, we have provided collection services on defaulted student loans to ED, and these collection
services will continue to be provided by the Company, or NewCo should the Spin-Off occur. The current contract
runs through April 21, 2015. There are 21 other collection providers, of which we compete with 16 providers for
account allocation based on quarterly performance metrics. The remaining five providers are small businesses
that are ensured a particular allocation of business. As a consistent top performer, our share of allocated accounts
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