Sallie Mae: the privatization of student loan profits

Posted by Student on 2009/02/15 @ 0630 Comments (0) (show tags and categories)

A 2006 report by Leslie Stahl of 60 minutes investigates Sallie Mae, the program set up by Congress in 1972 that was later privatized, becoming an extremely profitable, publicly traded company. Sallie Mae is the anthropomorphic name for SLM Corporation, who are in the business of providing private and federally subsidized loans to student borrowers. In 1997, SLM began the process of ending its federal charter, which was concluded in 2004. During this process, SLM acquired a host of other businesses, including collections agencies, while maintaining strong ties to the federal government and strengthening ties to higher education. As of 2009, SLM manages more student loans than any other company.

For its lending and collection businesses, SLM Corporation enjoys unprecedented legal advantages that are not shared by any other class of financing, including many unique techniques for retrieving repayment from students who have defaulted. As a result, the repayment rate for student loans is currently 95%, which is significantly higher than in the past, and is higher than other industries. Stahl interviews several experts to figure out how SLM Corporation came to be, and uncovers a fascinating story of amazing profits and questionable expenses.

RTFA: http://www.cbsnews.com/stories/2006/05/05/60minute…

“It may be called ‘private’ by the people in the system. But it’s not private at all,” says Michael Dannenberg, who analyzes student loan policy at the New America Foundation, a non-partisan think tank.

“What do you call it?” Stahl asks.

“Frankly, it’s a socialist-like system,” he says. “It’s not as if this private entity is assuming any risks. No, no, no. The law makes sure that this so-called private entity has virtually no risk.”

On top of that, Sallie Mae also owns some of the biggest collection agencies in the country. Once a student borrower goes into default, the government pays Sallie Mae all the principle and compounded interest that have accrued.

The loan then passes into the collection phase. If Sallie Mae is the collector, it gets to keep up to 25 percent of whatever is recovered. In 2005, nearly a fifth of its revenue came from its collection business.

“Sallie Mae makes money if you pay back on time. And Sallie Mae makes money if you don’t pay back on time,” says Elizabeth Warren, a professor of bankruptcy law at Harvard Law School.

Warren says it’s a mistake to allow Sallie Mae to be both a lender and a collector.

“It shouldn’t be the case that Sallie Mae gets to play every hand at the poker table while the government is the one that keeps anteing up the money,” Warren tells Stahl. “But let’s be clear. That by itself isn’t enough. We have to decide collectively as a country: do we want to encourage the young people who are trying to get college diplomas? And if the answer to that is yes, the way to encourage them is not to double and triple the amount that they owe when they get into financial troubles.”

By law, private lenders must offer payment options, but that usually means the loans just balloon. So even though 95 percent do pay up over time, many are burdened with heavy debt. In a statement, Sallie Mae told 60 Minutes it makes far more money from those who pay on time, than from those who default

Long-term student loan inflation provided money to students, indirectly to colleges

Posted by Student on 2009/02/13 @ 0630 Comments (0) (show tags and categories)

A central component of the Student Loan Bubble thesis is the effect of over-abundant federally subsidized debt, which increased students’ access to cheap debt, and indirectly enabled colleges to charge more for tuition as a means of tapping into this debt. Richard Vedder and Andrew Gillen have written an interesting piece for Inside Higher Ed, in which they claim a 61 percent increase in the availability of this type of debt over the last decade, and dig into the ways colleges have spent that money.

Vedder and Gillen draw a parallel to the housing bubble by observing the similar financing practices that drove both bubbles. From the Student Loan Bubble perspective, the inverse observation is that the prospects for future growth in career income justified the risk of taking on student loans. This wager on future earnings downplayed the threat that young professionals might not be able to repay their debts, unless they truly earned more money through their career.

Both descriptions converge on the similarities to the housing bubble, but the conclusion is ultimately unsettling. Whereas over-extended home debtors are able to default on their mortgages, students have no home-like asset that can be repossessed by the bank. Vedder and Gillen suggest a somewhat bizarre strategy, whereby colleges purchase equity in students’ future earnings, financed by the college endowment. The suggestion is either deeply unsettling, or simply another way of saying that students will go into debt for the eduction, making repayments to the school instead of a bank. In all, it makes for an interesting read.

Excerpt from: http://www.insidehighered.com/views/2008/05/02/ved…

The 61 percent increase in inflation-adjusted federal loans over the last decade leaves virtually all their students capable of paying more in tuition. The schools can either raise tuition, using the additional money to help build a better (more prestigious) college , or could leave tuition unchanged in an inflation-adjusted sense. The decision they made is obvious from U.S. Department of Education data. Over the last 10 years, after adjusting for inflation, tuition is up 48% at public schools and 24% at private schools.

Giving schools more money to build better institutions may not seem like a bad idea, but keep in mind that their goal is to increase prestige. This means that they will not necessarily use the money to improve the education their students receive. For example, Inside Higher Ed recently reported that less than half of employees at America’s institutions of higher education are faculty, information reinforced by a new study released this week. Today’s universities are congested with vast bureaucracies that stifle innovation and waste resources. Princeton University recently constructed a fancy dorm that cost $70,000 more per bed than the median home price. This unnecessary largess should show that what increases prestige may have very little effect on the education of students. Moreover, much of the extra money for schools ultimately comes from the students, who have seen the average debt upon graduation steadily increase to over $20,000 last year.

The analogy to the housing bubble is nearly perfect. Low interest rates arising from expansionary Federal Reserve policies led to rising housing demand, rising home prices, and excessive lending to individuals with dubious credit worthiness. Similar things have happened with student loans. The federal government has provided subsidized, low interest credit, often to students whose prospects for graduating from college are marginal and whose credit histories are non-existent. Student loan defaults are rising along with tuition fees. Already, some private lenders are exiting the market and federal officials are starting to become increasingly worried about the availability of student loans. The government-induced housing bubble is paralleled by what could be thought of as a tuition-loan bubble.

Student Loan Bubble provides coverage of the student loan bubble and crisis

Posted by Student on 2009/02/09 @ 2106 Comments (0) (show tags and categories)

Student Loan Bubble is a resource for students, parents, former students, policymakers, and the media to learn more about the Student Loan Bubble. Our URL is studentloanbubble.com.

The student loan bubble is the product of decades of inexpensive loans that were made available for the purpose of purchasing post-secondary education in the United States. The widespread availability of cheap credit drove college prices up, which increased at a rate that vastly outpaced inflation, resulting in students borrowing increasingly large amounts to pay for school, year over year.

Over the course of several years, the variable rates for student loans have fluctuated, sometimes reaching double-digit annual rates. Students who have borrowed tens of thousands of dollars – perhaps more than $100,000 – are having trouble meeting loan repayment schedules this early in their careers.

Similar to the sub-prime lending crisis, financiers have speculated on the ability of students to repay debts, without having any evidence to justify this speculation. In previous generations, individuals would acquire similar debt levels to purchase a major asset, such as a house, after they had a stable career and could prove their ability to pay the loan back. On a standard financial balance sheet, these individuals would have a home asset that nearly equaled the amount of debt they acquired through their home mortgage.

The student loan bubble is unique because students have been left with serious debt and no asset to balance it. Without collateral to offset their debts, students are unable to acquire new loans for major purchases, such as automobiles and houses. With payment schedules that ensure their indebtedness well into middle age, these students have a significant financial burden for decades to come.

The true nature of the student loan bubble is yet to be understood, but it is already clear that its consequences will not merely be financial in nature, and will involve social dimensions as well.

Student Loan Bubble is dedicated to covering this crisis as it evolves, and will provide news, analysis, strategies, and a forum for discussing this topic. The goal of Student Loan Bubble is to create a valuable resource that will improve the lives of students whose futures have been affected by the student loan bubble.