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Both programs lend to students at the same rate, but some argue that FFELP costs taxpayers more because the government guarantees a certain rate of return to private banks. Also, if students consolidate their loans at a low, fixed rate, the government covers the lost revenue for private lenders. All of these extra payments have been a boon to private lenders in recent years.

"They're essentially funding their profits on the backs of excessive student debts," said Ajita Talwalker, president of the United States Student Association.

Sallie Mae has roughly doubled its profit in each of the past three calendar years, closing out 2003 with a net profit of $1.53 billion on $89 billion in student loans managed. Those gains put the Reston, Virginia, lender among the most profitable publicly listed offerings on the New York Stock Exchange. Its chief executive, Albert Lord, has collected about $10 million in bonuses since he rallied support in 1997 to make Sallie Mae fully private. Despite the change in Sallie Mae's corporate classification, this year 90 percent of the company's $98 billion in student loans are federally insured. And the company can now act as lender, servicer, and collector.

illustration: Richard Borge

Along the way to becoming a private banking superpower, Sallie Mae bought several small lenders and seriously shook up student lending. "Nobody is putting any significant money into this business to improve delivery and technology," Lord barked at a Consumer Bankers Association conference in 1997. "You've got to get your tails out from between your legs and stop apologizing for making a profit."

Since then, Sallie Mae has become the country's second biggest student loan lender after Bank One, which for years has handed its loans straight over to Sallie Mae for management. So, has Sallie Mae made our lives better? Should all of us borrowers be writing the company thank-you notes? Well, that depends on whom you ask.

"It's evidenced that the fat is there," said Robert Shireman, a former Clinton education aide. He's crusading to have the government's direct-loan program replace the guaranteed program. "The government takes all the risk, and we give away the profit."

Shireman, founder of Student Loan Watch and a member of the federal advisory committee for student financial assistance, argues that taxpayers are forking over to the guaranteed program billions each year that could be used for grants or other assistance. Shireman calculates that if all of the loans given between 1995 and 2003 had been direct, then the government would have saved more than $20 billion, or enough to give an extra $4,000 grant to every low-income student in college today.

The Direct Loan Reward Act, sponsored by representatives Thomas Petri, Republican of Wisconsin, and George Miller, Democrat of California, proposes doing just that. The bill would give schools an incentive to use the direct-loan program by splitting the cost savings. Half of the savings would be channeled into grants for the participating school's students, the other half into the U.S. Treasury.

Policy and industry experts alike consider the start of the direct-loan program a wake-up call for the student loan business, which was lazy and complacent with its guaranteed returns on investment. Schools stampeded into the streamlined new system. "We just love the program," said Eileen O'Leary, director of student aid at Stonehill College, a small liberal-arts school in Easton, Massachusetts. O'Leary and other financial-aid administrators volunteer for the National Direct Student Loan Coalition.

About one-third of all student loans are direct, with around 1,100 schools participating. But private lenders, and Sallie Mae in particular, have been chipping away at those numbers. Sallie Mae has a sales force of several hundred reps that make, on average, 1,500 visits to schools each week. Many of these reps are former financial-aid officers, so they know the ropes. This marketing onslaught, combined with rising tuition costs and the schools' desire to provide discretionary loans to students, has contributed to a recent exodus from the government's direct program.

Not everyone, obviously, is a fan of direct loans. Critics cite a May report by the General Accounting Office that shows cash outflow for the direct-loan program exceeding inflow by about $10.7 billion between 1995 and 2003. Congressman Pete Hoekstra, Republican of Michigan, calls the proposal to reward the direct-loan program "an apparent admission that Direct Lending can't compete."

But is the playing field truly level between the two programs if loans from FFELP lenders like Sallie Mae are guaranteed by the government? And if their profits are subsidized? Some would call this arrangement corporate welfare.

"If you really, truly wanted a free-market program, then you'd take away all of these incentives," said the student association's Talwalker.

Eliminating lender subsidies would take a massive political fight. During his presidential campaign, Democrat John Kerry proposed that banks wanting to lend to students participate in a public auction, rather than having guaranteed interest rates set by Congress at as much as 9.5 percent. Kerry reckoned that the auction would drive down rates and save money for both students and taxpayers.

That idea worries Wall Street.

"While it is possible that the U.S. government could reduce the margins allowed on student loans (as it did in 1993), we believe this risk is relatively low during a Republican administration," Citigroup analyst Matthew Vetto, who covers Sallie Mae, told investors in an August research note.

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