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Sunday, August 12, 2007

Law - "Students pay; Sallie Mae pays off big"

The ILB has had a number of entries on Sallie Mae, the nationwide student loan scandals, and the crisis in student debt. Today the Fort Wayne Journal Gazette has an editorial about the impending $25 billion buyout of Sallie Mae, and how "officers and directors of the student loan company stand to profit handsomely from the sale of their company stock." Some quotes from the conclusion of the piece:

The Student Loan Marketing Association (commonly known as Sallie Mae) was established by Congress in 1972 out of concerns that the banking industry would not have the resources to meet student-loan demands. Sallie Mae used U.S. Treasury funds to buy government-backed loans from banks, in turn providing banks with the money to make more loans.

With the federal government’s backing, the quasi-governmental agency prospered. Its assets multiplied through the 1990s, when its top officials began earning seven-figure salaries and prompting complaints that they were prospering at the expense of students and taxpayers. In 1996, Congress voted to privatize Sallie Mae, and it became SLM Corp. It now holds almost $100 billion in student debt – 40 percent of student loan assets. At Indiana University, Sallie Mae handles 98 percent of the loan business.

Not only was it a powerhouse lender thanks to its government boost, but SLM was a first-rate political operator. It made $1.4 million in contributions to congressional candidates in the 2004 election cycle. Indiana Sens. Richard Lugar and Evan Bayh both have traveled on Sallie Mae planes.

“Sallie Mae was built to serve a public purpose, of providing student loans,” Robert Shireman, executive director of the Project on Student Debt told InsideHigherEd.com. “This level of profiteering off the corporation suggests that ultimately the deal that was struck may well have under-compensated taxpayers.”

Among the Sallie Mae directors on the profitable end of the deal is Earl A. Goode, Gov. Mitch Daniels’ chief of staff. Last year, the Indianapolis Business Journal reported the Department of Administration had awarded a $15 million no-bid contract to a Sallie Mae subsidiary. As DOA commissioner at the time, Goode excused himself from negotiations in the deal and reportedly asked the state’s ethics commission to review the potential conflict, but the commission’s ruling was never publicized.

In light of Cuomo’s probe, Congress is considering cuts in subsidies to student lenders – a measure that will come after the Sallie Mae sale and its handsome payoff. That’s too late for student borrowers, who will continue to pay for the excess Congress permitted.

See also this July 30th ILB entry, including this quote from NY Times columnist Joe Nocera:
“Sallie revolutionized the industry,” says Representative Miller, and he doesn’t mean that as a compliment. It imposed fees and penalties that added costs when students were already having trouble repaying loans — while increasing Sallie’s profits. It bought its own collection agency. It lobbied to make it nearly impossible for borrowers to escape their student debt. (It was aided along the way by occasional reports of the wealthy reneging on their student debt, thus saddling the taxpayer with the bill.) * * *

But in our obsession with the market, we had forgotten that this stock’s performance resulted in no small part from Sallie Mae — like many of its competitors — making money on the backs of struggling college graduates. It was a little like the credit card business: the “best” customers aren’t the ones who pay off their monthly charges on time; they’re the ones who can’t. For the student loan industry, the best customers are the students who take on more debt than they can handle to get through school. What’s been lost is the idea that student loans are a service with benefits that transcend the financial.

Posted by Marcia Oddi on August 12, 2007 08:09 AM
Posted to General Law Related