Ha! Ha! Ha!

The poor CPA is getting the raw end of the deal...

Steve Bowman, at 8:20 am EDT on August 6, 2007

Milking and bilking the taxpayer and students

Surprise, surprise! Another group of executives raid the public treasury! The Quarter of A Billion Dollars that Albert Lord will get is in addition to the $41,000,000 he took in stock options a few years ago. Small wonder why student debt levels are at all time highs. Companies like Sallie Mae and Fannie Mae are nothing more than taxpayer-funded corporate boondoggles for the executive/political class. They add nothing to the economy in terms of quality or productivity. If anything brings about a strong third party in American politics it will be this sort of legalized thievery. Shame on Congress!

feudi pandola, at 8:35 am EDT on August 6, 2007

Oy Sallie

The strength of empowerment through knowledge and understanding... through learning! Congratulations, All. Be not afraid.

Mary Leyendecker, at 9:50 am EDT on August 6, 2007

Student loan debt

If you buy a Cadillac you don’t blame the lender for your monthly car payments. Why does a student blame a lender for incurring massive amounts of debt when there are alternatives out there? The problem is not with Sallie Mae or other lenders although they should be taken to task for many things. The problem is that we’ve allowed the schools to jack up the cost of attendence without any repurcussions.

Nicholas J. Boyer, at 10:55 am EDT on August 6, 2007

Where’s mine?

As a previous need-based NYU student, the majority of my ($120k) debt now lies with Sallie Mae — I’ll no doubt be paying for my degrees until the day I die. After all, there’s not a whole lot of money to be had in the non-prof arts in education sector. It seems particularly unfair that so much money is being paid out by this deal and none of it goes to ease the debt of others like me.

Of course we shouldn’t be all that surprised. As anyone who has done study abroad knows, higher education in this country is not nearly as respected and certainly not as supported as it is in Europe.

Krista, The City University of New York, at 11:05 am EDT on August 6, 2007

Interesting...

I looked at the posted SallieMae PAC list. Apparently, SLM is a practical beast as well. No contribution was made to the Direct Loan King (Sen. Edward Kennedy) — or maybe they tried but Kennedy refused the contribution. Good for him!

Pam, at 1:10 pm EDT on August 6, 2007

Break it down

It would be nice to see an actual break down of how they got to where they are financially. According to what I had read, only 30%(+-) of their profits come from student loans. They also have mortgages, a consulting firm, a business office payment plan company, and an insurance company for life insurance type stuff.Not saying that even that is a nice little pocket of money but I think in fairness you have to remember it isn’t all student loans.

KAY, at 7:30 pm EDT on August 6, 2007

I Got as Well

Yup, the money I borrowed to go to NYU was from Sallie Mae as well.

I borrowed it under the impression that it wasn’t one of the private banks (e.g. Chase). I thought it was a government institution.

Swindle deLux!

Leo Klein, at 7:30 pm EDT on August 6, 2007

Sallie Mae family reunion

The thing to do would be to show up at a board of directors’ meeting with, say, a couple hundred of now deeply indebted “beneficiaries” of the company, in order to give the directors an opportunity to meet the good friends and relations who have made them so damned rich.

cabaiguan, at 10:05 am EDT on August 7, 2007

Wouldn’t it be a wonderful thing and a great example for others in higher education lending if those who are benefiting so greatly from the sale of Sallie Mae would share their gain with their student customers? A little loan forgiveness given by those who have received much would be a wonderful gift for those who are struggling to repay their student loans.

Tammy, at 12:15 pm EDT on August 7, 2007

IN SUPPORT OF A BREAK DOWN ANYONE

Ok, like i said in an earlier post, you have to look at the numbers to find out how SM made all their profits. It is not 100% student loans. In fact it is only about 30% of their total profits came from Student Loans. You have to look at all the other business ventures they are owners of. It is unfair to make it sound like they got rich off the backs of students. These students used their money to get their education. It isn’t as if the students didn’t get the product they borrowed the money for. You all make it sound like they got a lemon on the car lot. Their education was whatever they made it and what they had to borrow to accomplish that would have came from any Joe Banker. So if you have your degree or if you borrowed money towards your degree, stop complaining. Also, the part of tax payers money, I would rather my tax dollars at least make money and are used to created 1000’s of jobs and also educate students than be a total loss to me as a tax payer. Do you realize how many jobs there are because SM has taken the same program as the FDSL and made money from it? Those thousands of employees also pay thousands in taxes. Seems way better than any government run program. All those out there without a job, wouldn’t you love an opportunity for someone to be so wise so you too could have a job? I had an opportunity as everyone in this free country to buy stock in SM. I sure wish I would have now.

Kay, at 7:30 pm EDT on August 7, 2007

Point

I think Kay’s point was that in her first post it said she read someplace. Secondly she was stating that all of their profits didn’t come from student loans. Third, look how many people they have employed by taking a program created by the government yet run very poorly and yet made a huge profit while providing a product to students to get their education. I believe she was stating to break it down and that it isn’t totally student loans. I don’t think all her figures are correct but she is correct in that all of their profits are spread out from all of their other products that are not from student loans. They still may be around the college, ie the payment plan, the consulting firm (except the mortgages) they can state all of that on their web sitesince it too revolves around students. Also, other point being that the students would have had to borrow that from some place, some machine, some joe banker yet everyone wants to pick on the biggest target. I am not a part of SM but sure wish I had some stock. But I wish I would win the lotto too so instead I will get back to work. PS to the one out there that made it sound like tuition was raised many times the rate of inflation, please tell me why is that the banks fault? So is it the banks fault that cars, homes, on and on have risen because everyone can get a loan now? Give me a break.

DJ, at 9:15 am EDT on August 8, 2007

Anyone still believe in banking concepts?

No Joe, DL hasn’t lost any money. That is, unless every bank in the history of the world has lost money. Talk about a double standard! You are looking at cash accounting. Under cash accounting, every bank loses money: Bank issues $100 loan in year one. Year one therefore shows loss of $100. Wrong! The loan is neither income nor negative income. It is an asset. Banks figure out the net present value of the income (and loss) flows over the life of each loan asset. Same as DL.

Sallie Mae took 15 years to repay its original federal seed capital. Was Sallie Mae “losing $16 billion” that whole time? Of course not. Anyone who had the opportunity but backed away from investing in Sallie Mae simply because, for a while, the interest it repaid to its investors exceeded the interest it received from student loan borrowers made a grievous error in their investment strategy. A small investment in Sallie Mae when it first went public would have made you quite wealthy by now.

AD, at 5:10 am EDT on August 11, 2007

(1) That’s not accrual accounting. (2) Even if it was, interest is not the end of the story; it is only one of dozens of elements that determine what’s going on in a loan program. (3) Congressional committee staffers specifically requested GAO to look at “interest,” because they were biased and also knew that GAO’s m.o. is not to look beyond what the requester requests. (4) Since 1997 there has not been an iron wall between the two major loan programs. This has allowed lenders and GAs to take out high-quality DL paper while in turn sending delinquent and defaulted borrowers over to DL.

To look at the accrual viewpoint, you have to look at all the loans isssued during a particular year. How are those loans doing five years later, 15 years later, 30 years later? Simply looking at what is going on in 1999, for example, overall, doesn’t tell you anything. By 1999, some of the 1995 loans should be in repayment, and we should expect some payments coming in. You can’t say the same for the loans which were just issued the previous year (1998), though; most would still be in-school or grace period. Congressional committees can ask GAO to research whatever they want, but what the credit law requires is for CBO and OMB to project in 1993 how 1995’s loans will look in 2025 and make periodic reestimates along the way if it turns out their estimates are not panning out. “Not panning out” can result from a variety of things, including, changes in the HEA or regs that alter the way the programs function; inaccurate interest rate projections (not even Greenspan can predict future interest rates); and obtaining new, better data, for example, on how borrowers repay loans and how GAs collect defaulted loans.

Similarly, it would not be fair, necessarily, to look simply at how much the Treasury is paying directly to lenders and GAs in a specific year. Take 2007. The FFEL program has grown so fast that those numbers might be skewed by the fact that the roll-up is weighted towards the loans issued during 2004-07 which, as a result, have a lot of in-school interest subsidies getting paid to lenders, not to mention the problem of the new, fixed-rate Stafford and PLUS, with their special allowance burden. Instead, look at how much of the 2007 payments are tied to 1995 loans, 1996 loans, and so on. GAO was not using “real data,” any more than I would be using real data if I looked at GE’s financials in the 1990s and said Jack Welch was a really bad CEO because GE was losing money on manufacturing. Ooops, I totally ignored he was making GE a ton of money through GE finance branch. My bad.

GAO was requested to look at something specific because the requestors knew what the answer would be. A good lawyer never asks a question unless she already knows the answer. With the audit mentality, GAO’s m.o. is to work with the requestor to reduce the scope of the request, not to expand the scope of the request — and expanding the scope is what would be necessary if the analysis were to become a complete and accurate one in this case. GAO’s opinion is irrelevant on the matter anyway. This is not their playground. If you are talking Legislative Branch, then CBO is the arbiter of the student loan programs: judge, jury and executioner. Ever since federal credit reform passed in 1990, loan industry lobbyists have been frustrated with how resistant CBO is to their (nonscientific) spiel. GAO is more malleable because their mission is somewhat vague. Over a 30-year period GAO drifted from doing primarily self-initiated work to doing primarily specific work requested by individual commitees and elected officials. You can imagine a lot of their “views” shifted when the Congress changed in 1995. We might see some of the impact of the 2007 Congressional change in power during the next year as GAO finishes up old reports and moves onto Democratic committee requests. In recent couple years GAO has also beefed up hiring to try to increase self-directed project capacity.

So, why was it smart for biased requestors to tell GAO to focus on interest and ignore, for example, principal? The unanticipated arrival of the age of loan consolidation made a hash of the estimates for DL and FFEL. For DL, an increase in Stafford and PLUS borrowers consolidating their loans meant a massive, unpredicted prepayment of principal and a lower-than projected-flow of interest. Thus, money has not been “lost,” but it is just coming in in a different form than predicted. Nevertheless, if the loan programs had worked as designed, this would not have reduced interest flow for very long, because DL borrowers consolidate into DL. Then those DL consolidation loans enter repayment, resulting in payment of both principal and interest.

The new Congress changed the rules in 1997, however, and within a couple years there was a huge flow of DL assets into FFEL through consolidating. Most of this was following the new consolidation rules (at least one underlying FFEL included in the consolidation) but some was illicit consolidation consisting of all DLs. At the same time, GAs began high volumes of “collection” of defaulted FFELPs by consolidating them into DL. Lenders also used profiling to refer slightly-delinquent borrowers to DL consolidation.

During the past few years consolidation marketers have used credit bureau header data mining to target pretty accurately the “good borrowers” that they want to reach, whether those borrowers were sitting in FFEL or DL. They were good at milking the dl stafford/plus portfolio even when this was not officially authorized under the higher ed act, i.e. the law technically required at least one ffel loan to apply for a ffel consol. There was even a ‘creative’ way these marketers illicitly got around the ffel single holder rule by funneling a borrower’s slm loans, for example, through dl consolidation and then immediately re-consolidating them. That’s a prepayment in only a couple weeks! At the same time, guaranty agencies, in many cases using standard credit modeling software, have been assisting their lenders in referring “bad borrowers” directly to dl consolidation. DL consolidations that don’t consist of old defaulted ffel paper have lower default rates than ffel consols. DL consols that consist of old defaulted ffel paper have, in turn, a very high rate of default. Past is prologue. A borrower who has defaulted at least once is apparently more likely to do so again. Probably not news to those who have worked in the banking field. But apparently news to the beltway types who have more interest in competing on the Hill than competing in the business world. Scratch a ffel millionaire and you will find a former Hill staffer, not a banking or finance major.

If one loan program can operationally “recalculate” the budget estimates of the program it dislikes politically and financially by moving loan paper around at will, then this is not a “level playing field.” Were the two programs existing in parallel universes without the “cross pollination,” ffel as a rule loses head-to-head, for the highly-simplistic reason that interest and principal paid by borrowers do not go to the Treasury, they rightly go to the company that supplied the loan capital. Cutting through all the heated rhetoric, dl’s advantage, at bottom, is that the payments of interest and principal go to the Treasury. The dl advantage in the fed’l budget is so great that tactics such as billing the whole admin budget of the student aid office to dl still do not close the gap. Further, repayments and defaults are just two of dozens of factors impacting the costs of the student loan programs, so worse dl performance in these areas alone would not change the answer. Apparently ffel is desperately-afraid of competing head to head. The view times DL actually acted like a competitor, it excelled, but also got sued — for doing much less in terms of “tactics” than the ffel community did.

Note that this “recalculation” only impacts OMB’s approach. CBO does not consider consolidation loans to exist, per se. In other words, consolidation is merely a repayment plan option on the original Stafford or PLUS loan. Thus, if a borrower from a DL medical school consolidates into FFEL, then the original DL origination years continue to get “credit” for the excellent repayment habits of the physician. On the other hand, if a GA gets one of its defaulted borrowers to consolidate those defaulted FFELP loans into DL, and the borrower subsequently defaults on the new DL consolidation, then the orignial FFEL origination years continue to get “dinged” for the poor repayment track record of those loans.

Even in the Clinton era, dl was not allowed to market itself, so schools quickly left the program. The consolidation era has in turn drained much of the long term dl loan assets that the budget wonks had counted on for 10 or more years of dl interest payments. Again, dl was not allowed to respond aggressively or even passively. Why is the impending final curtain of the dl program bad for lenders and GAs? The payments to lenders and guarantors are extremely costly on both a cash and an accrual basis. However, as long as there was even a relatively-small dl program, the negative subsidy of dl offset most of the positive subsidy of ffel. With dl fading away, the only entities remaining who can pay for the ongoing ffel outlays will be borrowers, lenders and guarantors. Barring the unlikelihood that Washington steps up with income tax increases (or cuts in other, non-HEA mandatory programs such as social security & medicare), this means an endless future of gradual reductions in lender & guarantor subsidies and higher fees for borrowers down the road.

Arguably direct lending fits the definition of “private sector” more closely than guaranteed lending: everything is handled by private companies. Bureaucrats aren’t taking borrower phone calls, posting borrower payments and designing the web sites. (One reason ffel is so difficult to regulate is that there is no legal or ethical ban on lobbying of the U.S. Congress by States. States run most of the guaranty agencies and secondary markets [whose ffel loan holdings until recently earned the guaranteed 9.5% yield which has been much-criticized in the press and banking industry]. Not exactly the “private sector” here. Closer to what one would call the “State sector.") This is not to excuse poor oversight of dl contracts by USDE. The bottom line is that all the federal student loan programs are govt social programs, and not the playground of classical free market entrepreneurs. Oversight is a necessity no matter which approach policymakers choose for providing educational loan capital. The buck stops with Uncle Sam in ffel as well as dl, but, with ffel, the govt is denied access to the on-the-fly performance info it needs to answer the public’s increasing curiosity about where its subsidies are going. Eventually the public may finally tire of all the games and all the heated rhetoric and just assume widespread “fraud.”

Direct Loan Coalition? Do they even have a presence in Washington? I think their web site is just re-postings of newspaper articles and govt reports. For you to bring up an inactive, irrelevant organization and, from out of the blue, accuse it of “spewing rhetoric, lies and propaganda” suggests you are maybe from the mortgage industry and don’t know what has been going in student lending for the past 10 years. No one speaks for direct lending, because there is no benefit to anyone, except the taxpayer. The politicians have eliminated all the borrower advantages DL once had. Politicians don’t care about the taxpayer, because, even if you find something that saves taxpayers $30 billion, how much is that, divided by 300 million Americans? Not much political bang per voter. On the other hand, if you threaten to cut $18 billion over 10 years, and the 10 or 20 recipients of most of that “largesse” are in your face day-in, day-out, then you eventually throw in the towel.

George Will is right. The momentum for cutting programs is small due to the benefits of such cuts being disbursed over so many millions of voters. On the other hand, the inertia to keep the pork flowing is strong, because the relatively-few who depend on those fed’l subsidies will fight with everything they’ve got (including using some of those subsidies to hire powerful lawyers and lobbyists!) to not only keep the programs, but sweeten the subsidy flow, as we saw in 2002 and 2005.

AD, at 6:05 pm EDT on August 18, 2007

What sallie Mae has created is a bubble, plain and simple, and it is currently in the process of bursting! Their stock has PLUMMETED OVER 50% in only about 7 months. This was inevitable really, and it’s very much the same as the mortgage crisis. When you give loans to just about anyone who asks, don’t be surprised when they can’t repay the debt. This will, of course, add to the tailspin that the economy is in. But who cares right, as long as those on top got their $100,000,000 checks?

DB, at 5:15 am EDT on March 9, 2008