Sallie Mae, Student Loans, & Public Interest. Yet Another Lesson in Money & Politics

Tuesday, March 14, 2006 at 06:00 PM

Student loans get many a student through college, so you'd think that this administration, headed by a man trying so hard to become the Education President, would really be firmly in favor of these loans.  And looking out for the interests of the students, who only represent our future.

But not so.  The recently passed Deficit Reduction Act contains provisions that will raise the rates on most student loans, while restricting the right of borrowers to consolidate their loans to minimize overall costs.

And the hands of John Boehner, new House leader, and many of his Republican brethren are all over the laws that so heavily favor the lenders, especially Sallie Mae, now known as SLM Corporation (both Sallie Mae and SLM are used to describe the company throughout this article).

Sallie Mae And Political Clout
The story really starts with John Boehner, recently elected as Republican House leader to replace Tom DeLay.  As noted earlier on WTW, the new House leader has received more than $120,000 in donations from  student loan giant Sallie Mae.  And some commentators aren't shy about tying all the Deficit Reduction Act provisions favorable to student lenders directly to Mr. Boehner.  For example, Joel Wendland flat out states that:
These provisions, greeted initially with bipartisan opposition, were authored and inserted into legislation by newly minted House Republican Majority Leader John Boehner (R-OH).

Despite Boehner's vocal condemnations of corruption and influence peddling during his recent campaign to take the position after indicted former House Majority Leader Tom DeLay stepped down, the taint of the abuse of power and exchanging votes for cash are all over these student loan deals.
Sallie Mae, which already has the most favored lender status through special federal regulations that give it a de facto monopoly on educational lending, is expected to be the main beneficiary of the anti-consolidation rule, and certainly will profit from interest rate increases.

But Boehner is not the only politician being flooded with money from Sallie Mae.  A Joplin (Mo.) Globe story from earlier this year states that Sallie Mae:

..has been a heavy hitter in politics, giving hundreds of thousands of dollars to candidates and parties, including the man who proposed the sale,  Missouri Gov. Matt Blunt.

That same company also has given thousands to the governor's father, U.S. Rep. Roy Blunt.

A recent article quotes Michael Dannenberg, director of education policy at the nonpartisan New America Foundation, to the effect that: "There is no question that members of Congress and their staffs listen carefully to Sallie Mae, probably too carefully."

And the potential profits for Sallie Mae certainly would justify some "extraordinary" efforts on the company's part, given that it reported interest income of almost $1.5 billion in 2005.  When you're talking about numbers in that range, managing even a 5% increase in interest income means another $75 million.

And the company reportedly compensates its executives accordingly:

From 1999 to 2004, just-retired CEO Al Lord --now the lead investor in a group trying to purchase the Washington Nationals --received total compensation of $225 million. New CEO Thomas "Tim" Fitzpatrick made $145 million over the same period.

A Little Background on Sallie Mae/SLM
According to one recent news report, Sallie Mae is one of the nation's largest student loan companies, servicing about 9 million borrowers by providing federal and private student loans, including consolidation loans for undergraduate and graduate students and their parents.  Listed on the Fortune 500, Sallie Mae is headquartered in Reston, Va., has 25 offices in 18 states, currently employing 10,000 individuals at offices nationwide.  It was founded in 1973 as a government-sponsored enterprise, chartered as a secondary market to purchase student loans. It was privatized in 1997, becoming SLM corporation, and allowing it to be involved in every step of the student loan, from planning and paying for education to collecting on defaulted student loans.  In 2004, the company completely dissolved its corporate ties to the federal government.

SLM Corporation is a holding company that operates through a number of subsidiaries, so many people deal with the company without knowing it. Since the beginning of its privatization in 1997, it has reportedly "..aggressively bought out loan-provider and collection agencies throughout the nation."  SLM Corp. still uses "sallimae" in its [web domain name], and has this to say about itself in its news releases:

SLM the nation's No. 1 paying-for-college company, managing nearly $123 billion in student loans for 9 million borrowers....The company remains the country's largest originator of federally insured student loans.

Its financial statements are available online, including its 2005 10-K annual report to the SEC.  For 2005, that report shows a net interest income of $1.45 billion, and an overall net income of $ 1.38 billion.

Critics of the student loan industry--and it definitely qualifies as an industry at this point, have also voiced concerns that the private loan industry's sway with Congress has led to changes in the Higher Education Act that allow debt collectors to garnish wages and income taxes, while other legislation exempts student loan debt from federal bankruptcy.

What the Deficit Reduction Act Means for Student Loans
As noted, "The Deficit Reduction Act, passed by Congress and signed by President Bush in February, is a mixed bag for college students. But many educational analysts agree that the news for needy students is mostly bad."

A major blow to student borrowers is that they will remain subject to the Single Holder Rule that basically requires them, when all their loans are with one lender, to approach that lender when seeking to consolidate multiple loans.  And, if they have consolidated once, most are barred from consolidating a second time.  The impetus for these laws presumably is the recent flurry of loan consolidations by which students sought to take advantage of the extremely low interest rates, in the same way that homeowners save money by refinancing  mortgages in times of falling rates.  Of course, the consolidations were not good news to the companies holding the original loans at higher rates.

Nor were the laws restricting the right to consolidate student loans the only bad news to student borrowers in the Deficit Reduction Act (DRA).  Come July 1, 2006, most loans go from a variable rate to a fixed rate as of July 1, 2006, resulting in an increase for new Stafford Loans from the current 4.7% to 6.8%, and the rate on new PLUS loans (loans to parents for their children's education) set to rise from the current 6.1% to to 8.5%.

If you have billions of dollars in loans outstanding, how would your bottom line be affected by increasing the interest you receive by 2%? Well, 2% of $1 billion is $20 million, and 2% of $10 billion is $200 million.

As many observers have noted, there is no rational justification for limiting students to one consolidation of their student loans.  In fact, that policy is directly contrary to what the Bush administration and the Republican majority in congress recommend in almost every other field: free market principles.  For example, Free Market News Network (FMNN) said:

...this isn't about the economic decision Congress recently made to raise interest rates on new student loans. As much as that decision will hurt students and parents, this change is worse. They're reducing competition in the marketplace.....Can you imagine the uproar if homeowners were suddenly told that they could no longer refinance their home loans?

Writing in the Chicago Sun Times last month, Terry Savage said:

If you can refinance your mortgage to take advantage of lower rates, why not your student loan?
Some would argue that mortgages aren't being subsidized by the government, so refinancing is appropriate. But the existing student loan refinancing program really doesn't cost the government any money. Most refinancing is done by private banks. They simply agree to pay off the initial student loan, and accept a lower rate of interest.
If refinancing to a lower rate doesn't cost the government any money, why object?

Nor is there much "free market" justification for the Single Holder Rule, which has similarly been taken to task for its anti-competitive effects.  The same FMNN piece quoted above had this to say:

Borrowers whose loans are owned by a single lender have always been prohibited from shopping around for the best deal when it came time to consolidate. Congress has been promising to repeal that anticompetitive law, know as the Single Holder Rule, but the proposal was mysteriously dropped from Budget Deficit Act at the very last minute.

There is, however, lots of money at issue in consolidation, and Sallie Mae is, as usual, by far the biggest consolidator of student loans.  According to a Copley News Service story, Sallie Mae was the consolidator of $10.72 billion worth of Federal Family Education Loans.  The next nine largest consolidators together accounted for $15.03 billion.

Sallie Mae's Role in the DRA Provisions
If you think that these new laws were approved by informed legislators without influence of SLM, think again.   Terry Savage reported that "Allowing easier consolidations and reconsolidations by competing organizations could cut into Sallie Mae's profits, so it lobbied strongly and effectively for the proposal."

According to the Free Market News Network (FMNN), Tom Joyce, a Sallie Mae VP, was quoted in news reports shortly after passage of the new laws as as saying, "The consolidation loan program was never meant to be a refinancing bonanza for students," and "Smaller corporations will now think twice about getting into the student loan business."

The company's antipathy to consolidation was broached in its 10-K SEC filing for 2005, where it said:

Effects of Consolidation Loan Activity on Estimates
The combination of aggressive marketing in the student loan industry and the ability to obtain a longterm, fixed rate loan at low interest rates coupled with the rise in short-term interest rates has led to continued high levels of Consolidation Loan volume, which, in turn, has had a significant effect on a number of accounting estimates in recent years. As long as long-term interest rates remain at historically low levels, we expect the Consolidation Loan program to continue to be an attractive option for borrowers.

Sallie Mae's Record As To Business Practices, Ethics, Etc.
As you might suspect of any company that is clearly the behemoth of its industry, Sallie Mae is rapidly gaining a reputation as a cut-throat company, dedicated to its own interests and not particularly concerned with how it protects those interests.  For example:

  1. In May, 2005, SLM announced it had settled a lawsuit brought by another student lender, College Loan Corporation, based on the detrimental effect on College Loan Corp. of what it said was SLM's legally unwarranted interpretation of the single holder rule.

  2.  In July of 2005 the company announced that it had fired the chief financial officer and demoted another manager in a debt collection
agency unit for inflating revenue in a bid to achieve performance goals and collect higher bonuses.

3.  It has been accused [ of "predatory" lending practices, including charging some students effective interest rates as high as 28% when interest and fees are considered.

In addition, the Illinois Student Assistance Commission was asked by Illinois Governor Rod Blagojevich to reverse its decision to hire the financial adviser Scott Balice Strategies because of that firm's ties to lobbying firm Conlon Public Strategies, which lobbies for Sallie Mae.  Since Sallie Mae was a likely candidate to buy some of the state's $3.5 biliion student loan portfolio, there was concern, more than justified in my eyes, that the financial adviser would influence sales of the loans to Sallie Mae.

Our president tries hard to present a public image of concern over all things education.  The White House has said that  "80% of the fastest-growing jobs in the U.S. require higher education and many require math and science skills."

In a speech at Kansas State U not too long ago, he said:

I think that the key on education is to make sure that we stay focused on how do we stay competitive into the 21st century. And I plan on doing some talking about math and science and engineering programs, so that people who graduate out of college will have the skills necessary to compete in this competitive world.

He may or may not be successful in ensuring that college graduates have the skills necessary to compete, but he--or at least his party--has done everything possible to ensure that students from families with modest incomes will graduate with enough of a debt burden to really discourage them from attending college.  At a time that 80% of growth jobs require college.  But, come to think of it, discouraging students from modest income families would leave even more degrees and more jobs for the families of the wealthy.  Another thread in the rope pulling us inexorably back to the 19th century?