Upload
others
View
3
Download
0
Embed Size (px)
Citation preview
EDUCATIONSECTOR REPORTS
Leading Lady:Sallie Mae and the Origins of Today’s Student Loan Controversy
By Erin Dillon
May 2007
ABout thE Author
ERIN DILLON isapolicyanalystatEducationSector.Shecanbereachedatedillon@educationsector.org.
ABout EDuCAtIoN SECtor
EducationSectorisanindependenteducationthinktankbasedinWashington,D.C.Itisanonprofitandnonpartisanorganizationdevotedtodevelopinginnovativesolutionstothenation’smostpressingeducationalproblems.TheorganizationseekstobeadependablesourceofsoundthinkingoneducationpolicyandanhonestbrokerofevidenceinkeyeducationdebatesinWashingtonandnationally.
ACkNowlEDgEMENtS
TheauthorthanksallofhercolleaguesatEducationSectorfortheirsupportandcontributionstothisproject.
© Copyright 2007 Education Sector. All rights reserved.
1201ConnecticutAve.,N.W.,Suite850,Washington,DC20036202.552.2840•www.educationsector.org
�EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
Thelargestandmostinfluentialplayerintheindustry,SLMCorporation,betterknownasSallieMae,hasn’tescapedthecontroversy:InthewakeofCuomo’sinvestigation,thecompanyagreedunderthetermsofasettlementwiththeNewYorkprosecutortoabidebyanew“codeofconduct”andtoput$2millionintoafundtoeducatestudentsaboutfinancialaid.YetdaysaftertheSallieMaesettlement,thepubliclytradedcompanyannouncedthatitwasbeingsoldtoprivateinvestorsfor$25billion—asumthatsuggeststheenormityofthefinancialstakesinthestudentloanindustry.
ThestoryofSallieMae’srisefromagovernment-sponsoredagencycreatedtohelpneedystudentstoaprivatecorporationwitha$142billionloanportfoliogoesalongwaytowardexplaininghowandwhythestudentloanindustryhaslandedatthecenterofcontroversy.
CreatedbyCongressin1972toincreasethesupplyoflendablefundsunderthethen-decade-oldfederalstudentloanprogram,SallieMaeformanyyearsplayedarelativelynarrowroleintheindustryasa“secondarylender,”buyingandmanagingloansfrombanksandotherlendersthatusedtheirproceedsfromSallieMaetomakenewloans.
Butinthemid-1990s,skyrocketingdemandforstudentloanspromptedbyescalatingcollegetuitions,expandingeligibilityforstudentloans,andahostofnewtypesoflendingcombinedtomakethestudentloanindustryinfinitelymorecomplex,larger,andmorelucrative.AndSallieMaeemergedastheindustry’sbiggestplayer.
Aftersheddingitsgovernment-sponsoredstatusandbecomingafullyprivate,for-profitcorporation,SallieMaeembarkedonanaggressiveexpansioncampaign.Itbought,orformedpartnershipswith,companiesworkingineverycornerofthestudentlendingindustry,fromlendingandloancollectiontoenrollmentmanagementandevencollege-tuitionsavingsplansforinfants.
SallieMaehashelpedmillionsofstudentspayforcollege,studentswhowouldnothaveotherwisebeenabletocoverthecost.ButtherelentlessexpansionofSallieMaeandotherlendinggiantsintoeverypartofthestudent-aidenterpriseandintoeveryregionofthecountrycombinedwithanoutmatchedandoftenunmotivatedfederalregulatorybureaucracy,industrypoliticalcloutthatreachesfromthehallsofCongresstocollegecampuses,andlucrativeregulatoryloopholesthatcontributetostudentlending’simmenseprofitpotentialhavecreatedaclimatethat’sripeforthequestionablemarketingtacticsandotherindustrywrongdoingthathaveemergedinrecentmonths.
Itisaclimatethathasempoweredthelendingindustrytoactaggressivelyateveryturn,placingstudentsatriskofpayinginflatedinterestratesandfeesontheirfederalloansandleavingtaxpayerstopickupthetabforwhatmembersofCongresssayarehundredsofmillionsofdollarsinexcessivesubsidiesforthestudentlendingindustry.
AstheSallieMaestorysuggests,pastisprologueinthestudentlendingindustry.Today’sproblemsaretheresultofconditionsintheindustrythathavebeenbuildingforyears.
The $85-billion-a-year student loan industry has been beset by scandal since new york attorney general andrew Cuomo announced on March 15, 2007, that his office was investigating “unholy alliances” between lending companies and college financial aid officers. Revelations of college officials accepting consulting fees from and holding stock in companies on their school’s preferred-lender lists, lenders staffing college’s financial information call centers, and close ties between U.S. Department of Education officials and lenders have been front-page news.
2EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
Opening College Doors
Thesize,complexity,andimmenseprofitpotentialoftoday’sstudentloanindustryisn’twhatCongressenvisionedwhenitcreatedtheGuaranteedStudentLoanProgram(renamedtheFederalFamilyEducationLoanProgramin1992)aspartoftheHigherEducationAct(HEA)of1965.Theprogrambeganasarelativelysmall,targetedefforttoopencollegedoorsforfinanciallyneedystudents.Theoriginalprogramprovidedloansofupto$1,000peryeartoundergraduatestudentsand$1,500ayeartograduatestudentswithfamilyincomesoflessthan$15,000(seesidebaronfederalstudentloans,page7).1
Sincethestudentsintheprogramwere,bydesign,higher-riskborrowers,thefederalgovernmentcreatedincentivesforlenderstoparticipateinthenewfederalinitiative.Itgavestatesfundstoestablish“guaranteeagencies,”whichwouldinsurelendersagainstlossesfromdefaultedloans,therebyreducinglenders’risk.Thefedsalsoguaranteedlendersa6percentinterestrateontheirstudentloans—atthetime,arateslightlyhigherthanratesformoresecurehomemortgageloans.
Theseincentiveswereinsufficienttoencouragestatestotakeontheriskofestablishingguaranteeagencieswithoutsomefederalinsuranceonloans,andthe6percentinterestratewasnothighenoughtoattractprivatelenders.Inresponse,thefederalgovernmentpursuedtwostrategiestoboostparticipationbybanksandstates:shiftingtherisktothefederalgovernmentandincreasingbanks’profitsonloans.
Congressin1968authorizedtheU.S.DepartmentofEducation(thencalledtheOfficeofEducation)topaystateguaranteeagencies80percentoftheamountoftheirlosses.Theyearbefore,theDepartmentofEducationhadestablishedtheFederalInsuredStudentLoanprogramtoreimburselendersinstateswithoutguaranteeagencies.Underthatprogram,thefederalgovernmentreimbursedlenders100percentoftheirdefaultedloans.
Toincreaseprofitstobanks,Congressquicklyraisedtheguaranteedinterestrateonstudentloansto7percent.2Butbymid-1969,interestrateschargedtothemostcredit-worthyborrowerswere8.5percent,makingthe7percentinterestrateonmoreriskystudentloansunappealingtobanks.Inresponse,Congressestablished
in1969subsidiesknownas“SpecialAllowancePayments”toensurelendersreceivedmarket-rateprofitsonloans(seesidebaronspecialallowancepayments,page12).Specialallowancepaymentsweretiedto
Student lending glossary
Government Sponsored Enterprise (GSE):afor-profit,privatelyoperatedcorporationcharteredbythegovernmenttoincreaseinvestmentsinaspecificsectoroftheeconomy.
Federal Family Education Loan Program (FFELP):afederalstudentloanprogramauthorizedintheHigherEducationAct.Loansareprovidedbyprivatelendersandinsuredbythefederalgovernment.LoanprogramsincludeStaffordSubsidizedandUnsubsidizedloans,andPLUSloans.
Federal Direct Loan Program (FDLP):afederalstudentloanprogramauthorizedinthe1992reauthorizationoftheHigherEducationAct.LoansareprovidedbytheDepartmentofEducationdirectlytostudentsthroughtheirschools,withoutprivatelendersorguaranteeagencies.
Guarantee Agency:organizationintheFederalFamilyEducationLoanProgramthatinsureslendersagainstfinanciallossesduetoloandefaults.Guaranteeagenciesarealsoresponsibleforhelpingtoadministertheprogramandoverseelenders.
Default:Defaultoccurswhenaborrowerfailstomaketherequiredmonthlypaymentsonhisorherloan.IntheFederalFamilyEducationLoanProgramandtheFederalDirectLoanProgram,aborrowerisindefaultafter270daysofnon-payment,assumingnoalternativearrangementsforpaymentweremadewiththelender.
Loan Servicing:activitiesperformedtocollectandprocessloanpaymentsduringthelifeofaloan.Theseincludecontactingandcommunicatingwithborrowers,collectingpayments,filingpaperworkwiththeDepartmentofEducation,andprovidingcollectioneffortsondelinquentloans.
Collection Agency:agencyhiredbyalenderorguaranteeagencytolocatedefaultedborrowersandrecoverpaymentsondefaultedloans.
Loan Consolidation:combiningoneormoreloansintooneloanwithasinglelender.Loanconsolidationcanallowborrowerstomakeonemonthlyloanpayment,extendthepaymentperiodontheirloans(therebyreducingmonthlypayments)andlock-ininterestrates.
Secondary Market:anorganizationthatbuysexistingloansfromabankorotherlender.Lenderssellloanstothesecondarymarketinordertoraisemoneytomakenewloans.
Enrollment Management:theprocessofusingpastenrollmentandfinancialaiddatafromaschooltopredictwhichstudentsarelikelytoapplyandenroll.Enrollmentmanagementoftenincludesleveragingfinancialaidawardstorecruitadesirableclassofstudents.
529 Savings Plans:state-sponsoredinvestmentoptionsrunbyprivateinvestmentgroupsandnamedafterSection529ofthetaxcode.In2001,Congressexemptedthesesavingsplans,whichcanbeusedforhighereducationexpenses,fromfederalincometax.
�EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
changinginterestratesandpaidlendersasmuchas3percentagepointsabovethe7percentinterestchargedtostudents.Withspecialallowancepayments,thefederalsubsidiesrosealongwithinterestrates,ensuringprofitsforbanksregardlessofinterestratechanges.
Asaresult,lenders’guaranteedinterestearningsonstudentloansjumpedfrom6percentto9percentin1969,whiletheassociatedriskdroppedtonearlyzero,makingstudentlendingaveryattractivebusiness.3
Still,thefederallendingprogramwasrelativelysimpleinthe1960s.Itinvolvedlenders,thefederalgovernment,whichprovidedsubsidiesandloaninsurancetobanksandstateguaranteeagencies,andcollegesandstudents(seeFigure1).
Increasing Cash FlowButCongresssoonexpandeditseffortstoencouragelendingtostudentsbymakingsurebankshadamplelendablecash.In1972,itcreatedtheStudentLoanMarketingAssociation(SLMA),asSallieMaewasoriginallycalled,toprovidea“secondarymarket”forstudentloans.Thenewcompanyboughtstudentloansfrombankstofreeuplendermoneyfornewloans.
CongresscreatedSallieMaeasaGovernmentSponsoredEnterprise(GSE)—afor-profit,privatelyoperatedcorporationcharteredbythegovernmenttoincreaseinvestmentsinaspecificsectoroftheeconomy.Other
well-knownGSEsinclude“FannieMae,”forthehousingindustry,and“FarmerMac,”forthefarmingindustry.SallieMaereceivedvaluablebenefitsasaGSE,includingexemptionfromstateandlocaltaxes,andaccesstolow-costfundsfromtheU.S.DepartmentoftheTreasury.SallieMaepaidonlyafractionofapercentininterestonthefundsitborrowedfromtheU.S.Treasury.SallieMae’searnings—frominterestpaymentsmadebystudentsandsubsidiespaidbythefederalgovernmentonstudentloans—werealsotiedtoTreasurybillrates.Therefore,ifinterestrateswentupSallieMaepaidmoretotheTreasuryforitsfunds,butgotevenmorebackinsubsidiesfromthefederalgovernment,givingSallieMaeaneasypathtoprofits.
CongressfurthersweetenedthepotforstatesandlenderswiththeTaxReformActof1976.Thisactauthorizedstateagenciestoissuetax-exemptbondstopurchasestudentloansinthesecondarymarket.Statesquicklytookadvantageofthisopportunity,whichallowedthemtouselow-cost,tax-exemptmoneytobuyloanswhilereapinginhighfederalinterestsubsidiesonthoseloans.Statesestablishednonprofitcorporationstoactassecondarymarketsandpurchasestudentloansfrombanks.HavingbothstatesecondarymarketsandSallieMaefurtherensuredthattherewouldbeenoughmoneyavailableforbankstokeepmakingloans,anditgavebankssecurity,knowingtheycouldselltheirloansifneeded.Congressalsoincreasedthefederal“reinsurance”ondefaultedstudentloansto100percentforstateguaranteeagencies.Withtherisktostategovernmentslargelyeliminated,thenumberofstateguaranteeagencies,whichneverexceeded26before1976,grewto50by1981.4
WiththeadditionofSallieMaeandothersecondarymarkets,thefederalloanprogrambecamemorecomplexandmorecostlyfortaxpayers.Thefederalgovernmentwasnowguaranteeingallloansat100percent,andpayingbanks,SallieMae,andstatesecondarymarketshighinterestsubsidiesonloans.In1979,AlfredB.Fitt,thegeneralcounselinthenewlyestablishedCongressionalBudgetOfficestated,“the[federalloan]programhasgonethroughpiecemealalterationsthathavetransformeditintoasystemmuchmorecostlythanadirectfederalloanprogram,withthehighercostsnotredoundingtothebenefitofstudentborrowers,butrathertothebenefitofthefinancialinstitutionsthatmaketheloans”(seeFigure2).5
Figure 1. Federal Student loan Program, circa �965
Federal Government
Students
Banks (Lenders)
Colleges and Universities
State Guarantee Agencies
�EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
Selling StockLoosenedloaneligibilityrequirements,togetherwithtwonewfederalloanprograms,increasedstudentborrowingfrom$1.8billionin1977to$12billionin1989.6The1978MiddleIncomeStudentAssistanceActeliminatedincomerestrictionsandexpandedfederalloaneligibilitytoallstudents(In1981,theReaganadministrationre-instatedfinancialneedasarequirementforreceivingsubsidizedstudentloans);theAuxiliaryLoantoAssistStudentsprogram(ALAS),approvedbyCongressin1981,extendedeligibilitytostudentswithnoparentalfinancialsupport;andCongresscreatedtheParentLoanforUndergraduateStudentsprogram(PLUS)in1980,toallowparentstotakeoutsupplementalloanstohelpcovertheirchildren’scollegecosts.
Duringthesameperiod,CongressexpandedSallieMae’sroleinthelendingindustry.Inthe1980reauthorizationofHEA,CongressauthorizedSallieMaetooffer“loanconsolidation”tostudentswithsignificantdebt,permittingthemtocombinemultiplefederalloansintosingleloanswithlongerrepaymenttermsandlowermonthlypayments.LawmakersalsograntedSallieMaepermissionbothtomakeloansdirectlytostudentsinareasofthe
countrywherestudentscouldnotgetloansfromanotherlenderandtoactasaguarantorinstateswheredemandforloansoutpacedsupply.7
Thesechanges,alongwiththenewloanprogramsandresultingboominloanvolume,meantrisingprofitsforSallieMaeandotherlenders.SallieMae’sassetsgrewfrom$1.6billionin1979to$28.6billionin1988.Inbetween,thecompanyissueditsfirstpublicstockofferingin1983,raising$357millioninprivatecapital.8Withtheinfluxofprivatecapital,SallieMaewasnolongerreliantonlyonfederalfundsforexpansion.
Risinglenderprofitsmeanthigheradministrativecostsforthefederalgovernment.Thepricetagofthefederalloanprogram,includingloansubsidiestostudentsandbanksandfederalpaymentsfordefaultedloans,grewfrom$2.7billionin1981to$4.1billionin1985.9In1986,paymentstolendersfordefaultedloansalonecostthefederalgovernmentover$1billion.
Inanefforttoreducehighdefaultrates,theU.S.DepartmentofEducationimposednewdue-diligencerequirementsonthestudentlendingindustrywhenitreauthorizedtheHigherEducationActin1986.Therequirementsdictatedthatlendersandguaranteeagenciesfollowexactingproceduresinmakingloans,processingpayments,andcollectingondefaultedloans—andrisklosingreimbursementsondefaultedloansiftheyfailedtofollowthem.Inadvertently,thedepartment’snewregulationshelpedfuelthedevelopmentoflending-industrygiantslikeSallieMaebycreatingbarrierstoentrytosmaller,newercompanieswantingtoenterthefield.
Existinglenders,whichwereoftenstateorregionalbanks,sawthenewregulatoryrequirementsasathreattotheirbottomlines.Toprotectthemselves,theybegansellingtheirloanstolargelenders,oroutsourcingloanservicing(processingpaymentsandpaperwork)andcollection(locatingandcontactingdefaultedborrowers).Asaresult,bothlendingandloanservicingbecameconcentratedinfewerandfewercompanies.10Thenumberofactivelendersinthefederalloanprogramhasdroppedfromahighof11,298in1985to3,166in2007(seeFigure3).
Theoutsourcingofloanservicingandcollectingandtheexpansionofloanconsolidation,whichCongressoriginallyonlyofferedtoSallieMaebutsoonextended
Figure 2. Federal Student loan Program, circa �976
Federal Government
Students
Banks (Lenders)
Colleges and Universities
Sallie Mae/Secondary Markets
State Guarantee Agencies
5EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
toothercompanies,createdanevenmorecomplicatedstudentlendingsystem(seeFigure4).
Warning Signs
The1990ssawmoreincreasesinbothstudentlendingvolume(from$14billionin1991to$30billionin1996)andindustryprofits.Risingtuitionsandthe1992reauthorizationoftheHigherEducationAct,whichincreasedfederalloanlimitsandintroducedunsubsidizedloans(loansforwhichthegovernmentdidnotpaytheinterestwhilestudentswerestillincollege)tostudentsatallincomelevels,11fueleddemandforstudentloans.
Butthislatestexpansionofthestudentloanindustrywasaccompaniedbyearlysignsofabusesandalackofgovernmentoversight,muchlikethestoriesmakingheadlinestoday.HearingsbytheSenatePermanentSubcommitteeonInvestigationsin1990revealed
instancesoffraudandabuseamongtradeschools,lenders,andguaranteeagencies.Chargesincludedloanservicersfalsifyingdocumentstocoverupmistakes,lendersnotpayingmandatedfeestotheDepartmentofEducation,and“diplomamill”for-profitschoolsusingtheloanprogramtomakemoneywithoutprovidingaworthwhiledegree.12Congress“didnothearofevenasinglepartoftheguaranteedstudentloanprogramthatisworkingefficientlyoreffectively,”declaredcommitteeChairmanSamNunnofGeorgia.13
Inresponsetotherevelationsofabuseintheprogramandthehighprofitsofsomelenders,CongressintroducedanewFederalDirectLendingProgram(FDLP)in1992.TheFDLPallowedthefederalgovernmenttomakeloansdirectlytostudentsthroughtheirschools,therebycreatingaformidablecompetitortobanksandotherFederalFamilyEducationLoanProgramlenders(FFELP).FDLPsupportersarguedthatbyeliminatingtheFFELPmiddlemen,thedirectlendingprogramwouldbeamoreefficientlendingsystemandlesspronetoabuse.
Figure 3. Number of Active lenders Participating in the FFEl Program, �966–2007
Activ
e Le
nder
s
Fiscal Year
0
2000
1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
4000
6000
8000
10000
12000
Note:Somelendersreportedloansundermultiplenumbers.Intheseinstanceslenderswerecountedmorethanonce.ThesecountsdonotincludelenderswhoparticipatedexclusivelyundertheFederalInsuredStudentLoanProgramwhichexistedfromFY68throughFY84.Source:U.S.DepartmentofEducation,OfficeofPostsecondaryEducation,NationalStudentLoanDataSystem.
6EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
Inamovethatsignificantlychangedtheroleofguaranteeagencies,CongressauthorizedlenderstoappealdirectlytotheDepartmentofEducationforloanreimbursement,astepprecipitatedbythecollapseoftheHigherEducationAssistanceFoundation(HEAF),oneofthelargestguaranteeagenciesinthecountry.Themovediminishedtheroleofguaranteeagenciesasguarantors—theywerenolongernecessaryforalendertoreceivereimbursementonaloan,butdidnotchangetheiroversightandadministrativeresponsibilitiesintheloanindustry.Theymuststillverifyloans,ensurethatlendershaveperformedtherequireddue-diligenceontheirloans,andverifythatlenders’defaultclaimsarevalid.
HEAFcollapsedin1990duetohighdefaultratesfromthelargenumberofloansitwasmakingtofor-profitcolleges.Toensurelendersremainedintheprogramandloanscontinuedtobeavailabletostudents,theDepartmentofEducationassumedresponsibilityforHEAF’sloansand,eventually,foralldefaultedfederalloansifalendercouldproveaguaranteeagencywasinsolvent.14
PresidentBillClintonin1993expandedthedirectlendingprogram,withthegoalofmakingallfederalloansthroughtheFDLP.TheFDLP,becauseitgotfundsdirectlyfrom
theTreasuryanddistributedthemdirectlytostudents,eliminatedtheneedforprivatebanks,guaranteeagencies,andSallieMaeasasecondarymarket.ClintonalsoimposedafeeonSallieMaethatessentiallyeliminateditsfundingadvantageasaGovernmentSponsoredEnterpriseandmandatedthatSallieMae,becauseitwasagovernment-charteredentity,actasalenderoflastresortforstudentswhocouldnotobtainloanselsewhere.15SallieMae’soperationsasaGSEwereprimarilylimitedtosecondarymarketactivities,makingitdifficultforSallieMaetorespondtocompetitivethreatsliketheFDLP.Inlightofthesechangesandincreasingnational-levelcompetitionforstudentloans,SallieMaesoughtandwoncongressionalapprovaltoabandonitsGSEstatusandbecomeafullyprivatecompany,freetoexpanditsbusinessoperationsandpursueprofitsmoreaggressively.16
CongresspassedtheStudentLoanMarketingAssociationReorganizationAct(commonlyreferredtoasthe“PrivatizationAct”)in1996.Thelawallowedthecreationofaholdingcompany—acompanythatownsmultiplecorporations—permittedtopursuebusinessopportunitiesoutsidethelimitsofSallieMae’sGSEcharter.SLMHoldingCorporationbecametheparentcompanyofbothaGSEentity—knownasthe
Figure 4. Federal Student loan Program, circa �985
Federal Government
Parents
Students
Colleges and Universities
Sallie Mae/Secondary Markets
State Guarantee Agencies
Lender and GuarantorServicing
Collection AgenciesConsolidation
Loan Companies
Banks (Lenders)
Note:Dashedlinesindicateoutsourcedservices.
7EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
“StudentLoanMarketingAssociation”—andanon-GSEcorporation—SallieMae.TheGSEwasallowedtocontinueservingasasecondarymarketforstudentloans,butwasexpectedtoenditsoperationsby2008.(TheGSEentityactuallyendeditsoperationsfouryearsaheadofschedule,inlate2004.)Meanwhile,thenon-
GSEarmoftheholdingcompanycouldpursueotherbusinessactivitiesandbuilditsoperationsintothecompanywenowknowasSallieMae.AftertwodecadesofoperatingunderitsGSEcharter,SallieMaewasfreetoexpanditsdominanceofthestudentloanindustryevenfurther.
Federal Student loans
Therearethreetypesofloansofferedthroughthefederalstudentloanprogram:Staffordloans,whichincludesubsidizedloans,need-basedloansforwhichthefederalgovernmentpaystheinterestduringschool,andunsubsidizedloans,non-need-basedloansforwhichthegovernmentdoesnotpayinterestduringschool;ParentLoanforUndergraduateStudents(PLUS)loans,whichallowparentstosupplementtheirchildren’sfinancialaid;andGradPLUSloans,anewloanforgraduatestudentstosupplementStaffordloans.
Theseloansareadministeredthroughtwoprograms,theFederalFamilyEducationLoanProgram(FFELP)andtheFederalDirectLoanProgram(FDLP).
ThedifferencebetweenthetwoprogramsisthatunderFFELP,banksandotherlendersprovidefederalloanstostudentsviatheircollegeoruniversityfinancialaidoffices,whileunderFDLP,thefederalgovernmentactsasthelender,withtheU.S.DepartmentofEducationmakingloanstostudentsthroughtheircampusaidoffices.Seventy-sevenpercentoffederalstudentloansaremadethroughFFELP,23percentthroughFDLP.
Whiletheinterestratesandtermsforallfederalloansarethesame,theprivateFFELPlendersoftenofferinterest-ratereductionsforon-timeorautomaticpaymentsthatcomedirectlyfromtheborrower’sbankaccount.
StudentsmustcompletetheFreeApplicationforFederalStudentAid(FAFSA)inordertoapplyforStaffordandGradPlusloans.Theapplicationcalculatesastudent’sExpectedFamilyContribution—howmuchstudentsandtheirfamiliesareexpectedtocontributetothecostofcollege—andastudent’seligibilityforneed-basedfederalfinancialaid.
Loan Interest rate Limits Repayment
Stafford Loans Fixed,6.8percent Undergraduatelimit:$23,000
Combinedundergraduateandgraduatelimit:$65,500
Studentsmaydeferpaymentswhileinschoolandfor6monthsafterleavingschool.
Therepaymenttermis10years.
SubsidizedLoans
Thegovernmentpaystheinterestontheseloanswhilethestudentisenrolledinschool.Whilethereisnoincomerequirementtoreceivesubsidizedloans,studentsmustdemonstrateneed,calculatedasthecostofattendance,minusotheraidandminustheExpectedFamilyContribution.
UnsubsidizedLoans
Thegovernmentdoesnotpaytheinterestontheseloanswhilethestudentisenrolled.Therearenoincomelimitsorneedrequirementstoreceiveunsubsidizedloans.
Parent Loan for Undergraduate Students (PLUS)
Fixed,8.5percent Nocumulativelimit.
Parentsmayborrowuptothecostofattendance,minusanyloan,grant,orwork-studyaidreceived.
Repaymentbegins60daysafterfundsaredisbursedandtherepaymenttermis10years.
TherearenoincomeorneedrequirementstoreceivePLUSloans.Parentsmustsubmitaloanapplicationandpassacreditcheck.Parentswithadversecredithistoriesmayhavetheirapplicationsrejected,inwhichcasethestudentiseligibleforincreasedStaffordloanlimits.
GradPLUS Fixed,8.5percent Nocumulativelimit.
Studentsmayborrowuptothecostofattendance,minusanyaidreceived.
Studentsmaydeferpaymentswhileinschool.
Repaymentbegins60daysafterfundsaredisbursedandtherepaymenttermis10years.
TherearenoincomeorneedrequirementstoreceiveGradPLUSloans,butstudentsmustsubmitaFAFSAandmax-outStaffordloanlimitsfirst.Students,likeparentsforthePLUSloan,canbedeniedaloaniftheyhaveanadversecredithistory,howevertheyarenoteligibleforincreasedStaffordloanamountsifthishappens.StudentscanconsolidatetheseloanswiththeStaffordloans.
8EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
Breaking FreeAtthesametimeSallieMaewasbreakingfreeofitsgovernmentalshackles,twonewlendingtrendsweretransformingstudentlendingfromprimarilyalocalandregionalbusinesstoanationalindustry,andmakingstudentlendingamorecompetitivemarketplaceintheprocess.
Intheearlystagesofthestudentloanindustry,lendersandguaranteeagenciesprimarilyservedtheirstates.Butasitbecameapparentthathighloanvolumecouldmeanlargeprofits,lendersandguaranteeagenciesmovedacrossstatelinesandbegantocompeteonanationalscale.SallieMae,alarge,nationalcompanywithawell-knownname,wasintheperfectpositiontoprofitfromthistrend.
Thesecondtrendwasthestart,intheearly1990s,ofdirect-to-consumerloanmarketing—wherebylenderswentdirectlytostudentsorparentstoselltheirloans,bypassingfinancialaidoffices.Thismarkedasignificantshiftintherelationshipbetweenschools,lenders,andborrowers.
Asnational-levelcompetitionanddirect-marketinggrew,bothstudentsandschoolswerefacedwithavarietyofchoicesfarbeyondtheirlocalbank.Tohandlethisnewinfluxofloaninformationandtobettercompareandbargainforloandeals,schoolsreliedon“preferred-lenderlists.”Andthelistsofrecommendedlendersgreatlyinfluencedstudents’borrowingdecisions:Thetoplenderonapreferred-lenderlistcangarnerupwardof95percentofaschool’sloanbusiness.17Thisputfinancialaidofficesinthepowerfulpositionofactingasgatekeeperstoloanbusiness.Forlenders,itcreatedasinglelocationoneverycampustomarkettheirproducts.
ForSallieMae,the“preferred-lenderlist”arrangementhasbeenaboon.Inadditiontomarketingdirectlytostudents,SallieMaehasa400-membercampus-basedsalesstaff,whichprovidesservicestoover6,000collegesanduniversities—inessence,nearlyeverycollege,university,andeducationalinstitutionintheUnitedStates.18
Direct-to-consumerconsolidationloancompaniesalsosprungupinthe1990s.Thesecompanies,takingadvantageofhistoriclowinterestrates,offeredlocked-ininterestratestograduatesanddidnotrequireanyfinancialaidofficeinvolvement.
Thenewconsolidation-onlyloancompaniesthreatenedtotakeawaytraditionalloancompanies’businessentirely.Withthelowinterestrates,studentswereconsolidatingtheirborrowingatrecordlevels,evenbeforetheygraduatedfromcollege,meaningthatacompanycouldlosealoansoonaftermakingit.FamilyFederalEducationLoanconsolidationsjumpedfrom$9billiontoalmost$54billionbetween2001and2005.19Originally,traditionallenders,includingSallieMae,attemptedtoholdbackthegrowthinconsolidationloansbylobbyingforCongresstoimplementregulationsthatlimitedthecompanieswithwhichstudentscouldconsolidate.Eventually,though,SallieMaeandotherprivatelendersjoinedthecompetitionforconsolidationloans,usingtheirdirect-marketingtechniquestoselltheirloanconsolidationservicestorecentgraduates.
SallieMaealsohasbeenanaggressiveplayerintherise,sincethemid-1990s,inprivatelending—lendingoutsideofthefederalstudentloanprogramatmarketratesandwithoutsubsidiestolendersorstudents.
Theearlyreluctanceoflenderstomakeloanstostudents,whichledtothefederalloanprogram,hadlargelyvanishedbythemid-1990s.After30yearsofexperiencemanagingfederallybackedstudentloans,bankssawprivatestudentloansasaprofitablemarket.Risingtuitionsopenedupdemandforprivateloansamongmiddle-andupper-classfamilies,andthehigherinterestratesbankscouldchargeontheseloansmadethemmoreprofitable.Asaresult,privatelendingtocollegestudentshasincreasedbyanaverageof27percentayearsince2000,fromalmost$4billiontoover$16billionin2006.20SallieMae’sprivatelendingincreasedfromlessthan$2billiontoover$7billionduringthesameperiod.21
Withtheadventofloan-consolidationcompanies,theFederalDirectLoanProgram,directmarketing,andprivateeducationlending,thestudentloanlandscapehasbecomeextraordinarilycomplexandlucrative,andincreasinglydifficultforregulatorstotrack.AccordingtoFederalStudentAid,theU.S.DepartmentofEducationprogramthatoverseesthefederalstudentaidprograms,thedepartmenttodayworkswith3,200lenders,35guaranteeagencies,secondarymarkets,72third-partyloan-serviceorganizations,andwithmanyotherindustryentities.22
ButitisSallieMaethatdominatestheindustry.Nolongerheldbackbyitsstatusasaquasi-governmentalagency,thecompanymovedaggressivelytoestablishacompetitive
9EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
presenceineverypartofstudentlending,largelybyacquiringahostofothercompanies(seeFigure5).
SallieMae’searliestpurchasesincludedNellieMaein1999andStudentLoanFundingResourcesin2000,bothnonprofitstudentlendingcorporations.23NellieMaeoriginatedover$300millioninfederalloansatthetimeSallieMaepurchasedit,makingitthe17thlargestloanoriginator.SinceNellieMaewasanonprofitorganization,SallieMaewasrequiredtocompensatethepublicforitsmarketvalue.24TheresultwasthecreationoftheNellieMaeFoundation,whichhad$395millioninassetsaftertheacquisition.25TheacquisitionofStudentLoanFundingResourcesreceivedlessattention,butinvolvedthepurchaseoftheeighthlargestholderoffederalstudentloans.
ThreeotherlenderacquisitionsexpandedSallieMae’sgeographicreach.In2003,thecompanyacquiredtheMassachusetts-basedAcademicManagementServices
Corporation,whichadded$1.4billioninstudentloans.In2004,SallieMaeexpandedtotheSouthwestwiththeacquisitionofnonprofitSouthwestStudentServicesCorporation,atop-30loanoriginator,andthentotheNorthwestwiththepurchaseofthenonprofitlender,StudentLoanFinanceAssociation.
In2000,SallieMaepurchased,for$770million,theUSAGroup,thelargestguaranteeagencyinthecountryandanonprofitlendingconglomeratewithservicesinloanorigination,enrollmentmanagement,loanservicing,anddebtcollection.26WiththeUSAGrouppurchase,SallieMaewentfrom“beingthe800-poundgorillatobeingthe8,000-poundgorilla,”inthestudentlendingindustry,saidHenryB.Howard,presidentofU.S.EducationFinance,aprivateloancompany.27
SallieMae’spurchaseofUSAGroupdidnotincludeUSAFunds,theguaranteeagencyarmofUSAGroupand
Figure 5. Federal Student loan Program, circa 2007, and Sallie Mae’s Presence in the Market*
Federal Government
Students/Parents
Private Loans
Colleges and Universities
Secondary Markets
EnrollmentManagement
529 SavingsPlans
Federal Direct Loan Programs
State Guarantee Agencies
Lender and GuarantorServicing
Collection Agencies ConsolidationLoan Companies
Banks and Lenders
†
Note:Dashedlinesindicateoutsourcedservices.*ShadedboxesindicateareasinwhichSallieMaeoraSallieMaesubsidiaryoperate.†SallieMaeprovideslendingservicestoUSAFundsalongwitheightotherguaranteeagencies.SallieMaedoesnotownaguaranteeagency.
�0EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
itslargestoperation.Becauseguaranteeagenciesarerequiredbylawtobeeitherstateagenciesornonprofitagencies,SallieMae,asafor-profitcompany,couldnotownUSAFunds.Instead,aspartofthedeal,SallieMaerequiredUSAFundstocontractallofitsguaranteeservicestoSallieMae.TheexclusiverelationshipgaveSallieMaecontrolovertheentireloanprocess,allowingittoofferschoolsmoreintegratedservicesandgivingitasizeablecompetitiveadvantage.
ThepurchasealsoallowedSallieMaetodramaticallyexpanditsdebtcollectionanddefaultmanagementservices,nowitssecondlargestbusinesssegmentbehindstudentlending.TheUSAGroupacquisitionadded$6billioninstudentloanstoSallieMae’sportfolioandincreasedrevenuenearly40percentwiththenew,fee-basedservicesSallieMaewasabletooffer.28
SincetheUSAGroupacquisition,SallieMaehaspurchasedfourotherdebtmanagementandcollectioncompanies—GeneralRevenueCorporation,PioneerCreditRecovery,ArrowFinancialServices,andGRPFinancialServicesCorporation—whichhaveexpandeditsdebtmanagementoperationsbeyondstudentloancollectionsintoothertypesofconsumerdebt,includingcreditcardsandmortgages.
Asaresultofthisshoppingspree,SallieMaenowownsacompany,orpartnerswithacompany,ineachofthecriticalareasoflending,frommakingloanstocollectingloans.Itisnowtheindustryleaderinloanorigination,loanholdings,loanservicing,andloancollecting,anditcontractsservicestothelargestguarantorinthecountry.In2006,SallieMaeoriginated,throughitsvariouslendingbrands,nearly$7billioninFFELPandPLUSloans,almost80percentmorethanthenextcompetitor(seeFigure6).Thecompany’sloanscomprised27percent29ofallfederalstudentlending,4percentmorethantheDepartmentofEducation’sentiredirectlendingprogram,and21percentmorethanthenextlargestprivatestudentlender,Citibank.30
March Toward Monopoly?SallieMae’sdramaticexpansionhelpedfuelextraordinaryenthusiasmforthecompanybyWallStreetinvestors.SallieMae’sstockhasrisenby1,900percentsince1995.
But,noteveryoneisasenthusiasticasWallStreetaboutSallieMae’srapidgrowth.IndustryobserversworrythatifSallieMaecontinuestoexpand,itcouldeliminatecompetitioninthestudentloanindustryand,mostimportantly,thebenefitsstudentsseefromcompetition,includingreducedfeesanddiscountedinterestrates.
Figure 6. loan origination Volume Among top Student lenders, �996–2006
1996 1997 1998 1999 2000 2001 2002 2003 2004 20062005
Bank of AmericaWells Fargo BankBank One
Citibank
J.P. Morgan Chase
Sallie Mae
Loan
Vol
ume
(in m
illio
ns)
0
1000
2000
3000
4000
5000
6000
7000
8000
Source:U.S.DepartmentofEducation,OfficeofFederalStudentAid,FinancialPartners“Top100OriginatorsofFFELPLoansHistoricalReports.”
��EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
“SallieMaeisonthemarchtowardmonopolyhere,”chargedBarmakNassirian,associateexecutivedirectoroftheAmericanAssociationofCollegiateRegistrarsandAdmissionsOfficers,ina2006Chronicle of Higher EducationarticleonSallieMae’spurchaseofstatenonprofitloanagencies.31
Nassirian’sconcernsareillustratedbySallieMae’spurchaseofthelendinggiantUSAGroup,whichnotonlyaddedbillionsinstudentloans,butalsoallowedSallieMaetoexpanditsoperationsintoeachpointofthestudentlendingcycle,andbya$1billionunsolicitedbidthatSallieMaemadein2005tobuythePennsylvaniaHigherEducationAssistanceAssociation,thenation’slargestnonprofitstateloanagency.
YetthebiggestpotentialformonopolymaylieinthedeclineoftheFederalDirectLendingProgram,SallieMae’sbiggestcompetitor.Thefederalgovernment’sshareofnewstudentloansthroughitsdirectlendingprogramdropped9percent—from32percentto23percent—between1999and2006,whileSallieMae’smarketsharehasincreasedby12percent—from15percentto27percent—duringthesameperiod.35
Whenthedirectlendingprogramwasintroduced,itofferedanumberofbenefitstostudentsnotavailableamongprivatelenders:faster,onlineloanapplicationandprocessing;reducedloanfees;avarietyofrepaymentplans;andnoconfusionaboutwheretosendtheirchecksbecausethefederalgovernmentwouldn’tselltheirloans.Inresponse,privatelendersimprovedtheirservices,includingofferingmoreflexiblepaymentplansandreduced,orzero,loanfees.
SallieMaecontendsthatdespiteitsexpansion,thestudentloanindustryremainsahealthy,competitivemarketplace,andthatcompetitionhasbenefitedborrowersthroughreducedinterestratesforon-timepayments,zerooriginationfees,improvedservicestoschoolsandstudents,andlowerdefaultratesfromimprovedcollectionpractices.Thecompanyalsoarguesthatitsscalehasallowedittoinvestheavilyinimprovedtechnologyandservicesthathavealsohelpedborrowers.36
Yetthedeclineinthedirectlendingprogram’smarketshare,whichispartlyduetoSallieMae’saggressivemarketingtoschoolstoswitchfromthedirectlending
programtotheprivatelendingprogram,mayeffectivelyeliminateSallieMae’sonlyrealcompetitor.
Relationship BuildingThemostsignificantpurchaseduringSallieMae’sexpansionwasthecompany’sacquisitionofUSAGroupandtheresultingdealwithUSAFunds.Inthedeal,USAFundsagreedtooutsourcethedefault-managementandloan-servicingfunctionsonitsthen-$9billionloanportfoliotoSallieMae,makingUSAFundsoneofSallieMae’sbiggestcustomers.In2006,32percentofSallieMae’sfee-based,debt-managementrevenuecamefromservicingUSAFunds’$27billionloanportfolio.37
WhilethisisagooddealforSallieMae,itmightnotbeagooddealfortaxpayers.Relationshipsbetweenlendersandguaranteeagencies—likeSallieMae’srelationshipwithUSAFunds—maycompromisetheoversightroleofguaranteeagenciesandultimatelyhurtstudentsandtaxpayers.
Guaranteeagencies,inadditiontobeingtheprimaryinsureroffederalloans,areresponsibleforensuringthatlendersperformduediligenceonloans—fulfilltheirlegalobligationstolocateandcollectdelinquentloans—beforefilingaclaimforrepayment.ThishelpspreventfraudintheFFELprogrambyensuringthatlendersdonotfilefalsedefault-reimbursementclaims.
TitleIVoftheHigherEducationActprohibitsguaranteeagenciesfromcontractingwithoutsideentitiestoperformdefaultaversionorcollectionservicesonloans,ifthoseentitiesholdorservicetheloan.38IntheSallieMae/USAFundsarrangement,SallieMae’sguarantorservicingdivisionservicesUSAFunds’loans.BecausethisdivisionistechnicallyseparatefromSallieMae’slendingentities,itdoesnotviolatetheTitleIVprohibition.Butthisdoesnoteliminatethepotentialforconflictofinterest.
TheU.S.DepartmentofEducationInspectorGeneralissuedareportin2002statingthatthisexactarrangementbetweenUSAFundsandSallieMaedid,infact,violatetheTitleIVregulation.39But,USAFundssuccessfullyarguedin2004thatSallieMae’sguaranteeservicingarmanditslendingarmconstitutedtwoseparateentities,andtheU.S.DepartmentofEducationdecidedtolettheUSAFunds/SallieMaearrangementcontinue.Thisdecisiondeviates
�2EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
fromthefindingsoftwoearlierreportsonrelationshipsbetweenguaranteeagenciesandloancompanies.
A1993reportbytheGovernmentAccountabilityOffice,theinvestigativearmofCongress,highlightedtheproblemofconflictsofinterestbetweenguaranteeagenciesandlenders:“Anenvironmentinwhichaguarantyagency’sfinancialtransactionswithlendersare‘lessthanarms-length’…mayresultinreducedattentionbyguarantyagenciestotheiroversightresponsibilities.”40Another1993report,fromtheU.S.DepartmentofEducationInspectorGeneral,concludedthat“billionsofdollars”ofFFELPloanswereatriskof“mismanagement,waste,andabuse,”becauseofguaranteeagencies’affiliationswithlenders.41Currently,however,onlynineofthe35guaranteeagenciesnationallyarenotassociatedwithalenderorsecondarymarket.42
AlongwithUSAFunds,eightotherguarantorsalsocontractedwithSallieMaetodothesametypeofworkin2006andinall,SallieMaeprocessedguaranteesfor29percentofthefederallyguaranteedstudentloansthatyear.43
Throughitspurchasesofcompaniesateachstageoftheloancycle,SallieMaehassoughttocreatea“seamless”systemforcustomers,andtoprofitfromthefeesandservicesateachpoint.SallieMaehasalsouseditsacquisitionstobuildrelationshipswithcollegefinancialaidofficersandtocross-promoteitsservicestopotentialcustomers—moresignsofitsaggressiveandsuccessfulbusinessstrategies.
TheUSAGrouppurchasemarkedSallieMae’sentryintoenrollment-managementconsultingthroughthe
SpecialAllowancePaymentsareintendedtoensurethatlendersmakeenoughprofitsonstudentloanstocontinueparticipatinginthefederalloanprogram.Thesepaymentsmakeupasignificantamountoftheprogram’sadministrativebudget,costingthefederalgovernment$4.6billioninfiscal2007.32
Congressisresponsibleforestablishingthe“SpecialAllowanceMargin,”—ineffect,theprofit—that’sguaranteedtolenders.But,toreduceprogramcosts,Congresshas,since1986,graduallyreducedthespecialallowancemarginfromahighof3.5percent.Currently,foraStaffordloaninrepayment,thespecialallowancemarginis2.3percent.
This“profit”isaddedtoareferenceinterestrate.Thereferenceinterestrateismeanttoreflectcurrentmarketrates,which,inturn,reflectthecosttolendersofmakingstudentloans.Priorto2000,thisreferenceratewasthe90-dayTreasurybillrate.ForloansmadeafterJanuary2000,theU.S.DepartmentofEducationusestheratefor30-daycommercialpaper.
Inthecurrentformula,thespecialallowancemarginisaddedtothecostof30-daycommercialpaper,andifthistotal(commercialpaper+specialallowancemargin)exceedstheinterestratepaidbytheborrower,theU.S.DepartmentofEducationpayslendersthedifference.LendersbilltheDepartmentofEducationquarterlyforthesespecialallowancepayments.
Thespecialallowancemarginonloanshasdeclinedsteadilyoverthepast10-years,exceptonso-called9.5percentloans,whichhaveprovidedafinancialwindfalltosomelenders.
Duringthedifficulteconomictimesofthe1980s,thefederalgovernmentallowednonprofitlenders,generallystate-sponsoredagenciessuchasthePennsylvaniaHigherEducationAssistanceAssociation,whichfinancedtheirloanswithtax-exemptbonds,tocollectahigherrateofreturnonstudentloans—9.5percent.Thiswasintendedtoencourage
nonprofitlenderstocontinuemakingloanstostudentsandtoprotecttheirfinancialstability.In1993,whentheeconomyhadimproved,Congresstookawaythespecial9.5percentreturnforanynewloans—orsoitthought.
WhileCongressallowedlenderstocontinuecollectingthe9.5percentmarginonexistingloans,aloopholeinthelawallowedbothnonprofitlendersandfor-profitlenderswhohadpurchasedanonprofitstudentloancompany,tomakenew9.5percentloans,throughaprocesslenderstermed“recycling.”Bymakingnew9.5percentloans,thesecompaniescoulddramaticallyincreasetheirrevenues—whileinterestratesonmostloansin2003–04werearound3percent,bankswerecollecting9.5percentintereston“recycled”loans.Thefederalgovernmentmadeupthedifference,payingbanksahugeamountinsubsidiesandgivingthemhugeprofits—profitsthatcamefromtaxpayermoneyviatheDepartmentofEducation.
ASeptember2006InspectorGeneralauditofspecialallowancepaymentson9.5percentloanstoonelarge,for-profitstudentloancompany,NationalEducationLoanNetwork(Nelnet),foundthatNelnetreceivedapproximately$278millioninimproperpaymentsfromtheDepartmentofEducation.By“recycling”existing9.5percentloansinaprogramthatNelnettermed“Project950,”thecompanyincreasedtheamountoftheseloansfrom$551millioninMarch2003to$3.66billioninJune2004.33
InJanuary2007,NelnetsettledwiththeDepartmentofEducation.ThesettlementagreementallowedNelnettokeepthe$278millioninimproperpayments;however,itprohibitedfuturepaymentstoNelnetonthoseloans.TheDepartmentofEducationalsostoppedallfuturepaymentstolendersuntilitcouldverifythattheloanswereeligibleforthe9.5percentsubsidy.Tomany,thesettlementwasinsufficient.DeclaredSenatorEdwardKennedy:“The[Bush]administrationshouldhavesettledfornothinglessthanthefullrecoveryofNelnet’sill-gottenproceedsfromtheseloans.”34
Special Allowances and the ‘9.5 Percent loan’ Controversy
��EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
acquisitionofUSAGroupsubsidiaryNoel-Levitz,thenation’slargestenrollment-managementconsultingfirm.Enrollmentmanagementusespastenrollmentandfinancialdatafromaschooltopredictwhichstudentsarelikelytoapplyandenroll,andhowfinancialaidawardscanbeleveragedtoenrollthemostdesirableclassofstudents.Noel-Levitzhasadvised1,800collegesanduniversitiesoverits30-yearhistory,workingwithschoolsonmarketingcampaigns,recruitingmethods,financialaidawards,andstudentretentionandgraduationstrategies.
ThisrelationshipallowsSallieMaetoconsultwithcollegesontheirfinancialaidstrategies,andthuspotentiallyincreasetheamountofSallieMae-providedloansthecollegeoffers.44ItisunlikelythatNoel-Levitz’sconsultingservicesdirectlydrivemuchofSallieMae’slendingbusiness.ButitdoesgiveSallieMaeanimportantrelationship-buildingtool.Evenwithincreasesindirect-to-studentmarketing,collegesanduniversitiesremaingatekeeperstostudentloanbusiness,andNoel-LevitzgivesSallieMaeanopportunitytobuildrelationshipswithfinancialaidoffices.
SallieMae’smostrecentacquisitionhascreatedanotheropportunityforthecompanytocross-promoteitsbusinesses.In2006,SallieMaeenteredintothebusinessofcollegesavingsplans.Toencouragecollegesavings,Congressexemptedso-called529SavingsPlanscontributions(namedafterSection529ofthefederaltaxcode)fromfederalincometax.Theplansarestate-sponsoredinvestmentoptionsrunbyprivateinvestmentcompanies.Thesesavingsplanshavegrownrapidlysincetheincometaxexemptionbeganin2001,and,in2006,SallieMaepurchasedUPromise,oneofthetop529savingsplancompanies.
Thepurchase,whichstockmarketanalystshailedasacoupforSallieMae,notonlyfurtherdiversifiedSallieMae’soperations,itgaveSallieMaeearlyaccesstopotentialcustomers.45Parentswhoopen529savingsplansfortheirchildrenarelikelyalsoparentsthatwillbehelpingtheirchildrendecidewhichloanstotakeoutforcollege,andco-signingprivateloans.UPromise’s7.2millionmembersprovideSallieMaewithmanysuchpotentialborrowers.
An Opportunity for ChangeWhilerevelationsofquestionablemarketingpracticesandotherpotentialwrongdoingbySallieMaeandother
lendingindustrycompaniescontinuetounfold,SallieMae’srecentsalefor$25billiontoaprivateinvestorgroupthatincludesBankofAmerica,J.P.MorganChase,andtwoprivateequityfirms,islikelytoreducepublicscrutinyofthecompanybecauseprivatelyheldcompaniesarenotsubjecttothesamelevelsofpublicdisclosureoffinancialinformationthatthefederalSecuritiesandExchangeCommissionrequiresofpubliclytradedcompanies.
ThisputsevenmorepressureontheU.S.DepartmentofEducationtooverseetheactivitiesofSallieMae,aswellastheentirestudentlendingindustry—somethingithasnotdonewellinrecentyears.“FinancialPartnershadnotimplementedanacceptablelevelofinternalcontroloveritsmonitoringandoversightofFederalFamilyEducationLoanprogramparticipants,”theU.S.DepartmentofEducationinspectorgeneralsaidinaSeptember2006reportonFinancialPartners,thearmofthedepartment’sOfficeofFederalStudentAidresponsibleformonitoringguaranteeagencies,lenders,andservicers.ThereportalsostatedthatFinancialPartners“emphasizedpartnershipovercomplianceindealingwithguaranteeagencies,lenders,andservicers.”46
RecentnewsreportshaverevealedtiesbetweentheDepartmentofEducationandthelendingindustrythatmayfurthercompromisethedepartment’soversightabilities.TheWashington Posthasreported,forexample,that“atleast20formerSallieMaeemployeeshadmovedintothedepartmentundertheBushadministration.”47Thestudentloanindustryalsospendsalotofmoneyoncampaigncontributionsandlobbying.AccordingtoTheNew York Times,Nelnet,alargelenderfoundtohaveimproperlybilledtheDepartmentofEducationformillionsofdollars,wasthe“nation’smostgenerouscorporatedonortotheNationalRepublicanCongressionalCommitteein2006.”48
Theinspectorgeneral’s2006reportnotedthathighturnoverinthegeneralmanagerpositionatFinancialPartnerscontributedtothe“weakcontrolenvironmentformonitoringandoversight.”Since1999,FinancialPartnershasseenfourdifferentgeneralmanagers.Ofthese,threehavecomefromthelendingindustry(andtworeturnedtoitfollowingtheirtimeatFinancialPartners)andonefromtheNationalCouncilofHigherEducationLoanPrograms,aloanindustrytradegroup.Thislistincludesthecurrentgeneralmanager,MatteoFontana,whoworkedatSallieMaepriortotakingthetopjobatFinancialPartners,and
��EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
whohasrecentlybeensuspendedbytheU.S.DepartmentofEducationafterdisclosureofhisownershipofstockinastudentloancompany.
Whenitlaunchedthefederalstudentloanprogramfourdecadesago,Congresswasforcedtooffersignificantfinancialincentivestobanksandotherlendersinordertogetthemtoparticipateinthestudentlendingprogram.Sincethen,theprogramhasgrownsteadilylargerandvastlymorelucrativeforlendersandotherplayersintheindustry.Yettheprogramhascontinuedtofavortheindustrythroughlendingratestructuresandgenerous,
taxpayer-fundedfinancialperksthatallbutguaranteeimmenseprofits,andthroughasympatheticregulatoryenvironment.Notsurprisingly,thelendingindustryhasrecognizedtheseopportunitiesforwhattheyareandhasmovedaggressivelytocapitalizeonthem—oftenatsignificantcoststostudentsandtaxpayers.
ButintheupcomingreauthorizationoftheHigherEducationAct,Congresshasanopportunitytostrikeanewbalanceinstudentlending,onethatservestheinterestsofstudents,taxpayers,andtheindustryinmoreequalmeasures.
�5EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
Endnotes1 RichardGeorge,“ThoughtsontheIndustry’sPastand
Present:AnInsider’sPerspective,”(paperpresentedattheconference,“FootingtheTuitionBill:NewDevelopmentsintheStudent-LoanIndustryandHowTheyAreChangingtheWayWePayforHigherEducation,”AmericanEnterpriseInstitute,Washington,D.C.,September2006).
2 AndrewRudalevige,“IrreconcilableDifferences?ThePoliticalTopographyofFederalStudentLoans,”(paperpresentedattheconference,“FootingtheTuitionBill:NewDevelopmentsintheStudent-LoanIndustryandHowTheyAreChangingtheWayWePayforHigherEducation,”AmericanEnterpriseInstitute,Washington,D.C.,September2006).
3 FredGallowayandHokeWilson,Reframing the Student Loan Costing Debate(Washington,D.C.:EducationalPolicyInstitute,2005).
4 Financial Audit: Guaranteed Student Loan Program’s Internal Controls and Structure Need Improvement, GAO/AFMD-93-20(Washington,D.C.:GovernmentAccountabilityOffice,March1993).
5 StatementofAlfredB.Fitt,GeneralCounsel,CongressionalBudgetOfficebeforetheSubcommitteeonPostsecondaryEducation,CommitteeonEducationandLabor,U.S.HouseofRepresentatives,May30,1979.
6 Trends in Student Aid(Washington,D.C.:CollegeBoard,October2006).
7 Secondary Market Activities of the Student Loan Marketing Association, GAO/HRD-84-51(Washington,D.C.:GovernmentAccountabilityOffice,May1984).
8 Ibid.9 FredGallowayandHokeWilson,Reframing the Student Loan
Costing Debate.10RichardGeorge,Thoughts on the Industry’s Past and Present:
An Insider’s Perspective.11Aggregateloanlimitswereincreasedinthe1992HEA
reauthorizationfrom$17,250to$23,000forundergraduateloansandfrom$54,750to$65,500forcombinedundergraduateandgraduateloans.Inaddition,PLUSloanlimitswereincreasedtocoverthetotalcostofattendance,minusotheraid,andlimitsonPLUSloanswereeliminated.
12ChristopherMyers,“LendersAssailedinSenateProbeofStudent-LoanPrograms,”The Chronicle of Higher Education,October3,1990.
13ThomasJ.DeLoughry,“WillColleges,StudentsBeHelpedorHurt?LongTermEffectofStudent-LoanInvestigationDebated,”The Chronicle of Higher Education,October17,1990.
14Guaranty Agency Solvency: Can the Government Recover HEAF’s First-Year Liquidation Cost of $212 Million?, GAO/HRD-93-12BR (Washington,D.C.:GovernmentAccountabilityOffice,November1992).
15MichaelJ.Lea,Privatizing a Government Sponsored Enterprise: Lessons from the Sallie Mae Experience,(IndianaStateUniversity:NetworksFinancialInstitute,April2006).
16MarkG.Overend,“ThePrivatizationofSallieMae,”(ThirdConferenceonGovernmentSponsoredEnterprises,AmericanEnterpriseInstitute,Washington,D.C.,May23,2000).
17FinAid,“IllegalInducementsandPreferredLenderLists,”availableonlineat:http://www.finaid.org/educators/illegalinducements.phtml.
18SLM Corporation Annual Report 2005(Reston,Va.:SLMCorporation).
19U.S.DepartmentofEducation,Federal Family Education Loans Net Volume by Fiscal Year, FY 2008 President’s Budget,availableat:http://www.ed.gov/about/overview/budget/studentloantables/index.html.
20Trends in Student Aid(Washington,D.C.:CollegeBoard,October2006).
21SLMCorporation,Report to the United States Securities and Exchange Commission, Form 10-K,2006.
22U.S.DepartmentofEducation,Federal Student Aid Annual Report, 2006.
23 In1996,anamendmentwasaddedtoataxbillthatmadeiteasierfornonprofitsecondarymarketstoconverttofor-profitsecondarymarkets.ThisallowedSallieMaetopurchasenonprofitssuchasNellieMaeandSLFR.
24How Nonprofit Student Loan Officials Get Rich (briefingpaper,TheInstituteforCollegeAccessandSuccess,May26,2005).
25“SLMHoldingCorp.(SallieMae)toAcquireNellieMaeCorp.,”SLMHoldingCorporationPressRelease,May26,1999.
26Disclosure:SallieMae’smergerwithUSAGroupresultedin$1billionfortheLuminaFoundation.EducationSectorreceivesfundingfromtheLuminaFoundationforitsworkonundergraduateeducation.TheLuminaFoundationdidnotfundthisproject.
27StephenBurd,“InaMergerofStudent-LoanGiants,SallieMaeWillBuyMuchofUSAGroup,”The Chronicle of Higher Education,June23,2000.
28Summary Annual Report2000(Reston,Va.:USAEducation,Inc.“SallieMae”).
29ThisnumberincludesbothloansmadethroughSallieMae’sinternallendingbrands—brandsthatareownedbySallieMae—andloansmadethrough“forwardpurchaseagreements”withoutsidebanks.
30SLMCorporation,Report to the United States Securities and Exchange Commission, Form 10-K,2006,p.15.
31StephenBurd,“SallieMaeMovestoBuyStateAgencies,ScaringCritics,”The Chronicle of Higher Education,March31,2006.
32Budget of the United States Government, Fiscal Year 2008(OfficeofManagementandBudget,February2007).
33Final Audit Report: Special Allowance Payments to Nelnet for Loans Funded by Tax-Exempt Obligations, ED-OIG/A07F0017(Washington,D.C.:OfficeofInspectorGeneral,DepartmentofEducation,September2006).
34KellyField,“LenderAllowedtoKeepFederalOverpaymentsof$278-million,”TheChronicle of Higher Education,February2,2007.
�6EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
35SLMCorporation,“DebtInvestorPresentation,FirstQuarterendedMarch31,2006,”(Reston,Va.:April21,2006).
36BasedoncommentsfromPaulCarey,formerExecutiveVicePresidentformarketingandbusinessservicesatSallieMae.OnlinechatwithStephenBurd,“SallieMaeandtheFutureoftheStudent-LoanIndustry,”The Chronicle of Higher Education,August9,2000,availableonlineat:http://chronicle.com/colloquylive/transcripts/2000/08/20000809carey.htm.
37SLMCorporation,Report to the United States Securities and Exchange Commission, Form 10-K,2006,p.17.
38U.S.DepartmentofEducation,Compilation of Student Aid Regulations,34SFR682.404(k)(4).
39Final Audit Report: United Student Aid Funds, Inc.’s Administration of the Federal Family Education Loan Program Federal and Operating Funds, ED-OIG/A05-B0033(Washington,D.C.:OfficeofInspectorGeneral,UnitedStatesDepartmentofEducation,April2002).
40Financial Audit: Guaranteed Student Loan Program’s Internal Controls and Structure Need Improvement, GAO/AFMD-93-20(Washington,D.C.:GovernmentAccountabilityOffice,March1993).
41RegionalInspectorGeneralforAuditRegionIX,“EdShouldProhibitConflictsofInterestbetweenGuarantyAgenciesandAffiliatedOrganizations,”ManagementImprovementReportNo.93-02,March15,1993.
42RichardGeorge,Thoughts on the Industry’s Past and Present: An Insider’s Perspective.
43SLMCorporation, Report to the United States Securities and Exchange Commission, Form 10-K,2006,pp.16–17.
44For Students or For-Profit?NewAmericaFoundation,HigherEdWatchBlog,October27,2006,availableonlineat:http://www.newamerica.net/blogs/2006/10/for_students_or_for_profit.
45NathanParmelee,“SallieMaeSnagsUpromise,”The Motley Fool, June2,2006,availableonlineathttp://www.fool.com/investing/small-cap/2006/06/02/sallie-mae-snags-upromise.aspx.
46Final Audit Report: Review of Financial Partners’ Monitoring and Oversight of Guaranty Agencies, Lenders, and Servicers, ED-OIG/A04E0009(Washington,D.C.:OfficeofInspectorGeneral,DepartmentofEducation,September2006).
47JonathanD.GlaterandKarenW.Arenson,“QuestionsonOfficials’TiestoLenders,”The New York Times,April25,2007.
48SamDillon,“Whistle-BloweronStudentAidIsVindicated,”The New York Times,May7,2007.
EDUCATIONSECTOR REPORTS
Leading Lady:Sallie Mae and the Origins of Today’s Student Loan Controversy
By Erin Dillon
May 2007
ABout thE Author
ERIN DILLON isapolicyanalystatEducationSector.Shecanbereachedatedillon@educationsector.org.
ABout EDuCAtIoN SECtor
EducationSectorisanindependenteducationthinktankbasedinWashington,D.C.Itisanonprofitandnonpartisanorganizationdevotedtodevelopinginnovativesolutionstothenation’smostpressingeducationalproblems.TheorganizationseekstobeadependablesourceofsoundthinkingoneducationpolicyandanhonestbrokerofevidenceinkeyeducationdebatesinWashingtonandnationally.
ACkNowlEDgEMENtS
TheauthorthanksallofhercolleaguesatEducationSectorfortheirsupportandcontributionstothisproject.
© Copyright 2007 Education Sector. All rights reserved.
1201ConnecticutAve.,N.W.,Suite850,Washington,DC20036202.552.2840•www.educationsector.org
�EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
Thelargestandmostinfluentialplayerintheindustry,SLMCorporation,betterknownasSallieMae,hasn’tescapedthecontroversy:InthewakeofCuomo’sinvestigation,thecompanyagreedunderthetermsofasettlementwiththeNewYorkprosecutortoabidebyanew“codeofconduct”andtoput$2millionintoafundtoeducatestudentsaboutfinancialaid.YetdaysaftertheSallieMaesettlement,thepubliclytradedcompanyannouncedthatitwasbeingsoldtoprivateinvestorsfor$25billion—asumthatsuggeststheenormityofthefinancialstakesinthestudentloanindustry.
ThestoryofSallieMae’srisefromagovernment-sponsoredagencycreatedtohelpneedystudentstoaprivatecorporationwitha$142billionloanportfoliogoesalongwaytowardexplaininghowandwhythestudentloanindustryhaslandedatthecenterofcontroversy.
CreatedbyCongressin1972toincreasethesupplyoflendablefundsunderthethen-decade-oldfederalstudentloanprogram,SallieMaeformanyyearsplayedarelativelynarrowroleintheindustryasa“secondarylender,”buyingandmanagingloansfrombanksandotherlendersthatusedtheirproceedsfromSallieMaetomakenewloans.
Butinthemid-1990s,skyrocketingdemandforstudentloanspromptedbyescalatingcollegetuitions,expandingeligibilityforstudentloans,andahostofnewtypesoflendingcombinedtomakethestudentloanindustryinfinitelymorecomplex,larger,andmorelucrative.AndSallieMaeemergedastheindustry’sbiggestplayer.
Aftersheddingitsgovernment-sponsoredstatusandbecomingafullyprivate,for-profitcorporation,SallieMaeembarkedonanaggressiveexpansioncampaign.Itbought,orformedpartnershipswith,companiesworkingineverycornerofthestudentlendingindustry,fromlendingandloancollectiontoenrollmentmanagementandevencollege-tuitionsavingsplansforinfants.
SallieMaehashelpedmillionsofstudentspayforcollege,studentswhowouldnothaveotherwisebeenabletocoverthecost.ButtherelentlessexpansionofSallieMaeandotherlendinggiantsintoeverypartofthestudent-aidenterpriseandintoeveryregionofthecountrycombinedwithanoutmatchedandoftenunmotivatedfederalregulatorybureaucracy,industrypoliticalcloutthatreachesfromthehallsofCongresstocollegecampuses,andlucrativeregulatoryloopholesthatcontributetostudentlending’simmenseprofitpotentialhavecreatedaclimatethat’sripeforthequestionablemarketingtacticsandotherindustrywrongdoingthathaveemergedinrecentmonths.
Itisaclimatethathasempoweredthelendingindustrytoactaggressivelyateveryturn,placingstudentsatriskofpayinginflatedinterestratesandfeesontheirfederalloansandleavingtaxpayerstopickupthetabforwhatmembersofCongresssayarehundredsofmillionsofdollarsinexcessivesubsidiesforthestudentlendingindustry.
AstheSallieMaestorysuggests,pastisprologueinthestudentlendingindustry.Today’sproblemsaretheresultofconditionsintheindustrythathavebeenbuildingforyears.
The $85-billion-a-year student loan industry has been beset by scandal since new york attorney general andrew Cuomo announced on March 15, 2007, that his office was investigating “unholy alliances” between lending companies and college financial aid officers. Revelations of college officials accepting consulting fees from and holding stock in companies on their school’s preferred-lender lists, lenders staffing college’s financial information call centers, and close ties between U.S. Department of Education officials and lenders have been front-page news.
2EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
Opening College Doors
Thesize,complexity,andimmenseprofitpotentialoftoday’sstudentloanindustryisn’twhatCongressenvisionedwhenitcreatedtheGuaranteedStudentLoanProgram(renamedtheFederalFamilyEducationLoanProgramin1992)aspartoftheHigherEducationAct(HEA)of1965.Theprogrambeganasarelativelysmall,targetedefforttoopencollegedoorsforfinanciallyneedystudents.Theoriginalprogramprovidedloansofupto$1,000peryeartoundergraduatestudentsand$1,500ayeartograduatestudentswithfamilyincomesoflessthan$15,000(seesidebaronfederalstudentloans,page7).1
Sincethestudentsintheprogramwere,bydesign,higher-riskborrowers,thefederalgovernmentcreatedincentivesforlenderstoparticipateinthenewfederalinitiative.Itgavestatesfundstoestablish“guaranteeagencies,”whichwouldinsurelendersagainstlossesfromdefaultedloans,therebyreducinglenders’risk.Thefedsalsoguaranteedlendersa6percentinterestrateontheirstudentloans—atthetime,arateslightlyhigherthanratesformoresecurehomemortgageloans.
Theseincentiveswereinsufficienttoencouragestatestotakeontheriskofestablishingguaranteeagencieswithoutsomefederalinsuranceonloans,andthe6percentinterestratewasnothighenoughtoattractprivatelenders.Inresponse,thefederalgovernmentpursuedtwostrategiestoboostparticipationbybanksandstates:shiftingtherisktothefederalgovernmentandincreasingbanks’profitsonloans.
Congressin1968authorizedtheU.S.DepartmentofEducation(thencalledtheOfficeofEducation)topaystateguaranteeagencies80percentoftheamountoftheirlosses.Theyearbefore,theDepartmentofEducationhadestablishedtheFederalInsuredStudentLoanprogramtoreimburselendersinstateswithoutguaranteeagencies.Underthatprogram,thefederalgovernmentreimbursedlenders100percentoftheirdefaultedloans.
Toincreaseprofitstobanks,Congressquicklyraisedtheguaranteedinterestrateonstudentloansto7percent.2Butbymid-1969,interestrateschargedtothemostcredit-worthyborrowerswere8.5percent,makingthe7percentinterestrateonmoreriskystudentloansunappealingtobanks.Inresponse,Congressestablished
in1969subsidiesknownas“SpecialAllowancePayments”toensurelendersreceivedmarket-rateprofitsonloans(seesidebaronspecialallowancepayments,page12).Specialallowancepaymentsweretiedto
Student lending glossary
Government Sponsored Enterprise (GSE):afor-profit,privatelyoperatedcorporationcharteredbythegovernmenttoincreaseinvestmentsinaspecificsectoroftheeconomy.
Federal Family Education Loan Program (FFELP):afederalstudentloanprogramauthorizedintheHigherEducationAct.Loansareprovidedbyprivatelendersandinsuredbythefederalgovernment.LoanprogramsincludeStaffordSubsidizedandUnsubsidizedloans,andPLUSloans.
Federal Direct Loan Program (FDLP):afederalstudentloanprogramauthorizedinthe1992reauthorizationoftheHigherEducationAct.LoansareprovidedbytheDepartmentofEducationdirectlytostudentsthroughtheirschools,withoutprivatelendersorguaranteeagencies.
Guarantee Agency:organizationintheFederalFamilyEducationLoanProgramthatinsureslendersagainstfinanciallossesduetoloandefaults.Guaranteeagenciesarealsoresponsibleforhelpingtoadministertheprogramandoverseelenders.
Default:Defaultoccurswhenaborrowerfailstomaketherequiredmonthlypaymentsonhisorherloan.IntheFederalFamilyEducationLoanProgramandtheFederalDirectLoanProgram,aborrowerisindefaultafter270daysofnon-payment,assumingnoalternativearrangementsforpaymentweremadewiththelender.
Loan Servicing:activitiesperformedtocollectandprocessloanpaymentsduringthelifeofaloan.Theseincludecontactingandcommunicatingwithborrowers,collectingpayments,filingpaperworkwiththeDepartmentofEducation,andprovidingcollectioneffortsondelinquentloans.
Collection Agency:agencyhiredbyalenderorguaranteeagencytolocatedefaultedborrowersandrecoverpaymentsondefaultedloans.
Loan Consolidation:combiningoneormoreloansintooneloanwithasinglelender.Loanconsolidationcanallowborrowerstomakeonemonthlyloanpayment,extendthepaymentperiodontheirloans(therebyreducingmonthlypayments)andlock-ininterestrates.
Secondary Market:anorganizationthatbuysexistingloansfromabankorotherlender.Lenderssellloanstothesecondarymarketinordertoraisemoneytomakenewloans.
Enrollment Management:theprocessofusingpastenrollmentandfinancialaiddatafromaschooltopredictwhichstudentsarelikelytoapplyandenroll.Enrollmentmanagementoftenincludesleveragingfinancialaidawardstorecruitadesirableclassofstudents.
529 Savings Plans:state-sponsoredinvestmentoptionsrunbyprivateinvestmentgroupsandnamedafterSection529ofthetaxcode.In2001,Congressexemptedthesesavingsplans,whichcanbeusedforhighereducationexpenses,fromfederalincometax.
�EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
changinginterestratesandpaidlendersasmuchas3percentagepointsabovethe7percentinterestchargedtostudents.Withspecialallowancepayments,thefederalsubsidiesrosealongwithinterestrates,ensuringprofitsforbanksregardlessofinterestratechanges.
Asaresult,lenders’guaranteedinterestearningsonstudentloansjumpedfrom6percentto9percentin1969,whiletheassociatedriskdroppedtonearlyzero,makingstudentlendingaveryattractivebusiness.3
Still,thefederallendingprogramwasrelativelysimpleinthe1960s.Itinvolvedlenders,thefederalgovernment,whichprovidedsubsidiesandloaninsurancetobanksandstateguaranteeagencies,andcollegesandstudents(seeFigure1).
Increasing Cash FlowButCongresssoonexpandeditseffortstoencouragelendingtostudentsbymakingsurebankshadamplelendablecash.In1972,itcreatedtheStudentLoanMarketingAssociation(SLMA),asSallieMaewasoriginallycalled,toprovidea“secondarymarket”forstudentloans.Thenewcompanyboughtstudentloansfrombankstofreeuplendermoneyfornewloans.
CongresscreatedSallieMaeasaGovernmentSponsoredEnterprise(GSE)—afor-profit,privatelyoperatedcorporationcharteredbythegovernmenttoincreaseinvestmentsinaspecificsectoroftheeconomy.Other
well-knownGSEsinclude“FannieMae,”forthehousingindustry,and“FarmerMac,”forthefarmingindustry.SallieMaereceivedvaluablebenefitsasaGSE,includingexemptionfromstateandlocaltaxes,andaccesstolow-costfundsfromtheU.S.DepartmentoftheTreasury.SallieMaepaidonlyafractionofapercentininterestonthefundsitborrowedfromtheU.S.Treasury.SallieMae’searnings—frominterestpaymentsmadebystudentsandsubsidiespaidbythefederalgovernmentonstudentloans—werealsotiedtoTreasurybillrates.Therefore,ifinterestrateswentupSallieMaepaidmoretotheTreasuryforitsfunds,butgotevenmorebackinsubsidiesfromthefederalgovernment,givingSallieMaeaneasypathtoprofits.
CongressfurthersweetenedthepotforstatesandlenderswiththeTaxReformActof1976.Thisactauthorizedstateagenciestoissuetax-exemptbondstopurchasestudentloansinthesecondarymarket.Statesquicklytookadvantageofthisopportunity,whichallowedthemtouselow-cost,tax-exemptmoneytobuyloanswhilereapinginhighfederalinterestsubsidiesonthoseloans.Statesestablishednonprofitcorporationstoactassecondarymarketsandpurchasestudentloansfrombanks.HavingbothstatesecondarymarketsandSallieMaefurtherensuredthattherewouldbeenoughmoneyavailableforbankstokeepmakingloans,anditgavebankssecurity,knowingtheycouldselltheirloansifneeded.Congressalsoincreasedthefederal“reinsurance”ondefaultedstudentloansto100percentforstateguaranteeagencies.Withtherisktostategovernmentslargelyeliminated,thenumberofstateguaranteeagencies,whichneverexceeded26before1976,grewto50by1981.4
WiththeadditionofSallieMaeandothersecondarymarkets,thefederalloanprogrambecamemorecomplexandmorecostlyfortaxpayers.Thefederalgovernmentwasnowguaranteeingallloansat100percent,andpayingbanks,SallieMae,andstatesecondarymarketshighinterestsubsidiesonloans.In1979,AlfredB.Fitt,thegeneralcounselinthenewlyestablishedCongressionalBudgetOfficestated,“the[federalloan]programhasgonethroughpiecemealalterationsthathavetransformeditintoasystemmuchmorecostlythanadirectfederalloanprogram,withthehighercostsnotredoundingtothebenefitofstudentborrowers,butrathertothebenefitofthefinancialinstitutionsthatmaketheloans”(seeFigure2).5
Figure 1. Federal Student loan Program, circa �965
Federal Government
Students
Banks (Lenders)
Colleges and Universities
State Guarantee Agencies
�EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
Selling StockLoosenedloaneligibilityrequirements,togetherwithtwonewfederalloanprograms,increasedstudentborrowingfrom$1.8billionin1977to$12billionin1989.6The1978MiddleIncomeStudentAssistanceActeliminatedincomerestrictionsandexpandedfederalloaneligibilitytoallstudents(In1981,theReaganadministrationre-instatedfinancialneedasarequirementforreceivingsubsidizedstudentloans);theAuxiliaryLoantoAssistStudentsprogram(ALAS),approvedbyCongressin1981,extendedeligibilitytostudentswithnoparentalfinancialsupport;andCongresscreatedtheParentLoanforUndergraduateStudentsprogram(PLUS)in1980,toallowparentstotakeoutsupplementalloanstohelpcovertheirchildren’scollegecosts.
Duringthesameperiod,CongressexpandedSallieMae’sroleinthelendingindustry.Inthe1980reauthorizationofHEA,CongressauthorizedSallieMaetooffer“loanconsolidation”tostudentswithsignificantdebt,permittingthemtocombinemultiplefederalloansintosingleloanswithlongerrepaymenttermsandlowermonthlypayments.LawmakersalsograntedSallieMaepermissionbothtomakeloansdirectlytostudentsinareasofthe
countrywherestudentscouldnotgetloansfromanotherlenderandtoactasaguarantorinstateswheredemandforloansoutpacedsupply.7
Thesechanges,alongwiththenewloanprogramsandresultingboominloanvolume,meantrisingprofitsforSallieMaeandotherlenders.SallieMae’sassetsgrewfrom$1.6billionin1979to$28.6billionin1988.Inbetween,thecompanyissueditsfirstpublicstockofferingin1983,raising$357millioninprivatecapital.8Withtheinfluxofprivatecapital,SallieMaewasnolongerreliantonlyonfederalfundsforexpansion.
Risinglenderprofitsmeanthigheradministrativecostsforthefederalgovernment.Thepricetagofthefederalloanprogram,includingloansubsidiestostudentsandbanksandfederalpaymentsfordefaultedloans,grewfrom$2.7billionin1981to$4.1billionin1985.9In1986,paymentstolendersfordefaultedloansalonecostthefederalgovernmentover$1billion.
Inanefforttoreducehighdefaultrates,theU.S.DepartmentofEducationimposednewdue-diligencerequirementsonthestudentlendingindustrywhenitreauthorizedtheHigherEducationActin1986.Therequirementsdictatedthatlendersandguaranteeagenciesfollowexactingproceduresinmakingloans,processingpayments,andcollectingondefaultedloans—andrisklosingreimbursementsondefaultedloansiftheyfailedtofollowthem.Inadvertently,thedepartment’snewregulationshelpedfuelthedevelopmentoflending-industrygiantslikeSallieMaebycreatingbarrierstoentrytosmaller,newercompanieswantingtoenterthefield.
Existinglenders,whichwereoftenstateorregionalbanks,sawthenewregulatoryrequirementsasathreattotheirbottomlines.Toprotectthemselves,theybegansellingtheirloanstolargelenders,oroutsourcingloanservicing(processingpaymentsandpaperwork)andcollection(locatingandcontactingdefaultedborrowers).Asaresult,bothlendingandloanservicingbecameconcentratedinfewerandfewercompanies.10Thenumberofactivelendersinthefederalloanprogramhasdroppedfromahighof11,298in1985to3,166in2007(seeFigure3).
Theoutsourcingofloanservicingandcollectingandtheexpansionofloanconsolidation,whichCongressoriginallyonlyofferedtoSallieMaebutsoonextended
Figure 2. Federal Student loan Program, circa �976
Federal Government
Students
Banks (Lenders)
Colleges and Universities
Sallie Mae/Secondary Markets
State Guarantee Agencies
5EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
toothercompanies,createdanevenmorecomplicatedstudentlendingsystem(seeFigure4).
Warning Signs
The1990ssawmoreincreasesinbothstudentlendingvolume(from$14billionin1991to$30billionin1996)andindustryprofits.Risingtuitionsandthe1992reauthorizationoftheHigherEducationAct,whichincreasedfederalloanlimitsandintroducedunsubsidizedloans(loansforwhichthegovernmentdidnotpaytheinterestwhilestudentswerestillincollege)tostudentsatallincomelevels,11fueleddemandforstudentloans.
Butthislatestexpansionofthestudentloanindustrywasaccompaniedbyearlysignsofabusesandalackofgovernmentoversight,muchlikethestoriesmakingheadlinestoday.HearingsbytheSenatePermanentSubcommitteeonInvestigationsin1990revealed
instancesoffraudandabuseamongtradeschools,lenders,andguaranteeagencies.Chargesincludedloanservicersfalsifyingdocumentstocoverupmistakes,lendersnotpayingmandatedfeestotheDepartmentofEducation,and“diplomamill”for-profitschoolsusingtheloanprogramtomakemoneywithoutprovidingaworthwhiledegree.12Congress“didnothearofevenasinglepartoftheguaranteedstudentloanprogramthatisworkingefficientlyoreffectively,”declaredcommitteeChairmanSamNunnofGeorgia.13
Inresponsetotherevelationsofabuseintheprogramandthehighprofitsofsomelenders,CongressintroducedanewFederalDirectLendingProgram(FDLP)in1992.TheFDLPallowedthefederalgovernmenttomakeloansdirectlytostudentsthroughtheirschools,therebycreatingaformidablecompetitortobanksandotherFederalFamilyEducationLoanProgramlenders(FFELP).FDLPsupportersarguedthatbyeliminatingtheFFELPmiddlemen,thedirectlendingprogramwouldbeamoreefficientlendingsystemandlesspronetoabuse.
Figure 3. Number of Active lenders Participating in the FFEl Program, �966–2007
Activ
e Le
nder
s
Fiscal Year
0
2000
1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
4000
6000
8000
10000
12000
Note:Somelendersreportedloansundermultiplenumbers.Intheseinstanceslenderswerecountedmorethanonce.ThesecountsdonotincludelenderswhoparticipatedexclusivelyundertheFederalInsuredStudentLoanProgramwhichexistedfromFY68throughFY84.Source:U.S.DepartmentofEducation,OfficeofPostsecondaryEducation,NationalStudentLoanDataSystem.
6EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
Inamovethatsignificantlychangedtheroleofguaranteeagencies,CongressauthorizedlenderstoappealdirectlytotheDepartmentofEducationforloanreimbursement,astepprecipitatedbythecollapseoftheHigherEducationAssistanceFoundation(HEAF),oneofthelargestguaranteeagenciesinthecountry.Themovediminishedtheroleofguaranteeagenciesasguarantors—theywerenolongernecessaryforalendertoreceivereimbursementonaloan,butdidnotchangetheiroversightandadministrativeresponsibilitiesintheloanindustry.Theymuststillverifyloans,ensurethatlendershaveperformedtherequireddue-diligenceontheirloans,andverifythatlenders’defaultclaimsarevalid.
HEAFcollapsedin1990duetohighdefaultratesfromthelargenumberofloansitwasmakingtofor-profitcolleges.Toensurelendersremainedintheprogramandloanscontinuedtobeavailabletostudents,theDepartmentofEducationassumedresponsibilityforHEAF’sloansand,eventually,foralldefaultedfederalloansifalendercouldproveaguaranteeagencywasinsolvent.14
PresidentBillClintonin1993expandedthedirectlendingprogram,withthegoalofmakingallfederalloansthroughtheFDLP.TheFDLP,becauseitgotfundsdirectlyfrom
theTreasuryanddistributedthemdirectlytostudents,eliminatedtheneedforprivatebanks,guaranteeagencies,andSallieMaeasasecondarymarket.ClintonalsoimposedafeeonSallieMaethatessentiallyeliminateditsfundingadvantageasaGovernmentSponsoredEnterpriseandmandatedthatSallieMae,becauseitwasagovernment-charteredentity,actasalenderoflastresortforstudentswhocouldnotobtainloanselsewhere.15SallieMae’soperationsasaGSEwereprimarilylimitedtosecondarymarketactivities,makingitdifficultforSallieMaetorespondtocompetitivethreatsliketheFDLP.Inlightofthesechangesandincreasingnational-levelcompetitionforstudentloans,SallieMaesoughtandwoncongressionalapprovaltoabandonitsGSEstatusandbecomeafullyprivatecompany,freetoexpanditsbusinessoperationsandpursueprofitsmoreaggressively.16
CongresspassedtheStudentLoanMarketingAssociationReorganizationAct(commonlyreferredtoasthe“PrivatizationAct”)in1996.Thelawallowedthecreationofaholdingcompany—acompanythatownsmultiplecorporations—permittedtopursuebusinessopportunitiesoutsidethelimitsofSallieMae’sGSEcharter.SLMHoldingCorporationbecametheparentcompanyofbothaGSEentity—knownasthe
Figure 4. Federal Student loan Program, circa �985
Federal Government
Parents
Students
Colleges and Universities
Sallie Mae/Secondary Markets
State Guarantee Agencies
Lender and GuarantorServicing
Collection AgenciesConsolidation
Loan Companies
Banks (Lenders)
Note:Dashedlinesindicateoutsourcedservices.
7EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
“StudentLoanMarketingAssociation”—andanon-GSEcorporation—SallieMae.TheGSEwasallowedtocontinueservingasasecondarymarketforstudentloans,butwasexpectedtoenditsoperationsby2008.(TheGSEentityactuallyendeditsoperationsfouryearsaheadofschedule,inlate2004.)Meanwhile,thenon-
GSEarmoftheholdingcompanycouldpursueotherbusinessactivitiesandbuilditsoperationsintothecompanywenowknowasSallieMae.AftertwodecadesofoperatingunderitsGSEcharter,SallieMaewasfreetoexpanditsdominanceofthestudentloanindustryevenfurther.
Federal Student loans
Therearethreetypesofloansofferedthroughthefederalstudentloanprogram:Staffordloans,whichincludesubsidizedloans,need-basedloansforwhichthefederalgovernmentpaystheinterestduringschool,andunsubsidizedloans,non-need-basedloansforwhichthegovernmentdoesnotpayinterestduringschool;ParentLoanforUndergraduateStudents(PLUS)loans,whichallowparentstosupplementtheirchildren’sfinancialaid;andGradPLUSloans,anewloanforgraduatestudentstosupplementStaffordloans.
Theseloansareadministeredthroughtwoprograms,theFederalFamilyEducationLoanProgram(FFELP)andtheFederalDirectLoanProgram(FDLP).
ThedifferencebetweenthetwoprogramsisthatunderFFELP,banksandotherlendersprovidefederalloanstostudentsviatheircollegeoruniversityfinancialaidoffices,whileunderFDLP,thefederalgovernmentactsasthelender,withtheU.S.DepartmentofEducationmakingloanstostudentsthroughtheircampusaidoffices.Seventy-sevenpercentoffederalstudentloansaremadethroughFFELP,23percentthroughFDLP.
Whiletheinterestratesandtermsforallfederalloansarethesame,theprivateFFELPlendersoftenofferinterest-ratereductionsforon-timeorautomaticpaymentsthatcomedirectlyfromtheborrower’sbankaccount.
StudentsmustcompletetheFreeApplicationforFederalStudentAid(FAFSA)inordertoapplyforStaffordandGradPlusloans.Theapplicationcalculatesastudent’sExpectedFamilyContribution—howmuchstudentsandtheirfamiliesareexpectedtocontributetothecostofcollege—andastudent’seligibilityforneed-basedfederalfinancialaid.
Loan Interest rate Limits Repayment
Stafford Loans Fixed,6.8percent Undergraduatelimit:$23,000
Combinedundergraduateandgraduatelimit:$65,500
Studentsmaydeferpaymentswhileinschoolandfor6monthsafterleavingschool.
Therepaymenttermis10years.
SubsidizedLoans
Thegovernmentpaystheinterestontheseloanswhilethestudentisenrolledinschool.Whilethereisnoincomerequirementtoreceivesubsidizedloans,studentsmustdemonstrateneed,calculatedasthecostofattendance,minusotheraidandminustheExpectedFamilyContribution.
UnsubsidizedLoans
Thegovernmentdoesnotpaytheinterestontheseloanswhilethestudentisenrolled.Therearenoincomelimitsorneedrequirementstoreceiveunsubsidizedloans.
Parent Loan for Undergraduate Students (PLUS)
Fixed,8.5percent Nocumulativelimit.
Parentsmayborrowuptothecostofattendance,minusanyloan,grant,orwork-studyaidreceived.
Repaymentbegins60daysafterfundsaredisbursedandtherepaymenttermis10years.
TherearenoincomeorneedrequirementstoreceivePLUSloans.Parentsmustsubmitaloanapplicationandpassacreditcheck.Parentswithadversecredithistoriesmayhavetheirapplicationsrejected,inwhichcasethestudentiseligibleforincreasedStaffordloanlimits.
GradPLUS Fixed,8.5percent Nocumulativelimit.
Studentsmayborrowuptothecostofattendance,minusanyaidreceived.
Studentsmaydeferpaymentswhileinschool.
Repaymentbegins60daysafterfundsaredisbursedandtherepaymenttermis10years.
TherearenoincomeorneedrequirementstoreceiveGradPLUSloans,butstudentsmustsubmitaFAFSAandmax-outStaffordloanlimitsfirst.Students,likeparentsforthePLUSloan,canbedeniedaloaniftheyhaveanadversecredithistory,howevertheyarenoteligibleforincreasedStaffordloanamountsifthishappens.StudentscanconsolidatetheseloanswiththeStaffordloans.
8EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
Breaking FreeAtthesametimeSallieMaewasbreakingfreeofitsgovernmentalshackles,twonewlendingtrendsweretransformingstudentlendingfromprimarilyalocalandregionalbusinesstoanationalindustry,andmakingstudentlendingamorecompetitivemarketplaceintheprocess.
Intheearlystagesofthestudentloanindustry,lendersandguaranteeagenciesprimarilyservedtheirstates.Butasitbecameapparentthathighloanvolumecouldmeanlargeprofits,lendersandguaranteeagenciesmovedacrossstatelinesandbegantocompeteonanationalscale.SallieMae,alarge,nationalcompanywithawell-knownname,wasintheperfectpositiontoprofitfromthistrend.
Thesecondtrendwasthestart,intheearly1990s,ofdirect-to-consumerloanmarketing—wherebylenderswentdirectlytostudentsorparentstoselltheirloans,bypassingfinancialaidoffices.Thismarkedasignificantshiftintherelationshipbetweenschools,lenders,andborrowers.
Asnational-levelcompetitionanddirect-marketinggrew,bothstudentsandschoolswerefacedwithavarietyofchoicesfarbeyondtheirlocalbank.Tohandlethisnewinfluxofloaninformationandtobettercompareandbargainforloandeals,schoolsreliedon“preferred-lenderlists.”Andthelistsofrecommendedlendersgreatlyinfluencedstudents’borrowingdecisions:Thetoplenderonapreferred-lenderlistcangarnerupwardof95percentofaschool’sloanbusiness.17Thisputfinancialaidofficesinthepowerfulpositionofactingasgatekeeperstoloanbusiness.Forlenders,itcreatedasinglelocationoneverycampustomarkettheirproducts.
ForSallieMae,the“preferred-lenderlist”arrangementhasbeenaboon.Inadditiontomarketingdirectlytostudents,SallieMaehasa400-membercampus-basedsalesstaff,whichprovidesservicestoover6,000collegesanduniversities—inessence,nearlyeverycollege,university,andeducationalinstitutionintheUnitedStates.18
Direct-to-consumerconsolidationloancompaniesalsosprungupinthe1990s.Thesecompanies,takingadvantageofhistoriclowinterestrates,offeredlocked-ininterestratestograduatesanddidnotrequireanyfinancialaidofficeinvolvement.
Thenewconsolidation-onlyloancompaniesthreatenedtotakeawaytraditionalloancompanies’businessentirely.Withthelowinterestrates,studentswereconsolidatingtheirborrowingatrecordlevels,evenbeforetheygraduatedfromcollege,meaningthatacompanycouldlosealoansoonaftermakingit.FamilyFederalEducationLoanconsolidationsjumpedfrom$9billiontoalmost$54billionbetween2001and2005.19Originally,traditionallenders,includingSallieMae,attemptedtoholdbackthegrowthinconsolidationloansbylobbyingforCongresstoimplementregulationsthatlimitedthecompanieswithwhichstudentscouldconsolidate.Eventually,though,SallieMaeandotherprivatelendersjoinedthecompetitionforconsolidationloans,usingtheirdirect-marketingtechniquestoselltheirloanconsolidationservicestorecentgraduates.
SallieMaealsohasbeenanaggressiveplayerintherise,sincethemid-1990s,inprivatelending—lendingoutsideofthefederalstudentloanprogramatmarketratesandwithoutsubsidiestolendersorstudents.
Theearlyreluctanceoflenderstomakeloanstostudents,whichledtothefederalloanprogram,hadlargelyvanishedbythemid-1990s.After30yearsofexperiencemanagingfederallybackedstudentloans,bankssawprivatestudentloansasaprofitablemarket.Risingtuitionsopenedupdemandforprivateloansamongmiddle-andupper-classfamilies,andthehigherinterestratesbankscouldchargeontheseloansmadethemmoreprofitable.Asaresult,privatelendingtocollegestudentshasincreasedbyanaverageof27percentayearsince2000,fromalmost$4billiontoover$16billionin2006.20SallieMae’sprivatelendingincreasedfromlessthan$2billiontoover$7billionduringthesameperiod.21
Withtheadventofloan-consolidationcompanies,theFederalDirectLoanProgram,directmarketing,andprivateeducationlending,thestudentloanlandscapehasbecomeextraordinarilycomplexandlucrative,andincreasinglydifficultforregulatorstotrack.AccordingtoFederalStudentAid,theU.S.DepartmentofEducationprogramthatoverseesthefederalstudentaidprograms,thedepartmenttodayworkswith3,200lenders,35guaranteeagencies,secondarymarkets,72third-partyloan-serviceorganizations,andwithmanyotherindustryentities.22
ButitisSallieMaethatdominatestheindustry.Nolongerheldbackbyitsstatusasaquasi-governmentalagency,thecompanymovedaggressivelytoestablishacompetitive
9EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
presenceineverypartofstudentlending,largelybyacquiringahostofothercompanies(seeFigure5).
SallieMae’searliestpurchasesincludedNellieMaein1999andStudentLoanFundingResourcesin2000,bothnonprofitstudentlendingcorporations.23NellieMaeoriginatedover$300millioninfederalloansatthetimeSallieMaepurchasedit,makingitthe17thlargestloanoriginator.SinceNellieMaewasanonprofitorganization,SallieMaewasrequiredtocompensatethepublicforitsmarketvalue.24TheresultwasthecreationoftheNellieMaeFoundation,whichhad$395millioninassetsaftertheacquisition.25TheacquisitionofStudentLoanFundingResourcesreceivedlessattention,butinvolvedthepurchaseoftheeighthlargestholderoffederalstudentloans.
ThreeotherlenderacquisitionsexpandedSallieMae’sgeographicreach.In2003,thecompanyacquiredtheMassachusetts-basedAcademicManagementServices
Corporation,whichadded$1.4billioninstudentloans.In2004,SallieMaeexpandedtotheSouthwestwiththeacquisitionofnonprofitSouthwestStudentServicesCorporation,atop-30loanoriginator,andthentotheNorthwestwiththepurchaseofthenonprofitlender,StudentLoanFinanceAssociation.
In2000,SallieMaepurchased,for$770million,theUSAGroup,thelargestguaranteeagencyinthecountryandanonprofitlendingconglomeratewithservicesinloanorigination,enrollmentmanagement,loanservicing,anddebtcollection.26WiththeUSAGrouppurchase,SallieMaewentfrom“beingthe800-poundgorillatobeingthe8,000-poundgorilla,”inthestudentlendingindustry,saidHenryB.Howard,presidentofU.S.EducationFinance,aprivateloancompany.27
SallieMae’spurchaseofUSAGroupdidnotincludeUSAFunds,theguaranteeagencyarmofUSAGroupand
Figure 5. Federal Student loan Program, circa 2007, and Sallie Mae’s Presence in the Market*
Federal Government
Students/Parents
Private Loans
Colleges and Universities
Secondary Markets
EnrollmentManagement
529 SavingsPlans
Federal Direct Loan Programs
State Guarantee Agencies
Lender and GuarantorServicing
Collection Agencies ConsolidationLoan Companies
Banks and Lenders
†
Note:Dashedlinesindicateoutsourcedservices.*ShadedboxesindicateareasinwhichSallieMaeoraSallieMaesubsidiaryoperate.†SallieMaeprovideslendingservicestoUSAFundsalongwitheightotherguaranteeagencies.SallieMaedoesnotownaguaranteeagency.
�0EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
itslargestoperation.Becauseguaranteeagenciesarerequiredbylawtobeeitherstateagenciesornonprofitagencies,SallieMae,asafor-profitcompany,couldnotownUSAFunds.Instead,aspartofthedeal,SallieMaerequiredUSAFundstocontractallofitsguaranteeservicestoSallieMae.TheexclusiverelationshipgaveSallieMaecontrolovertheentireloanprocess,allowingittoofferschoolsmoreintegratedservicesandgivingitasizeablecompetitiveadvantage.
ThepurchasealsoallowedSallieMaetodramaticallyexpanditsdebtcollectionanddefaultmanagementservices,nowitssecondlargestbusinesssegmentbehindstudentlending.TheUSAGroupacquisitionadded$6billioninstudentloanstoSallieMae’sportfolioandincreasedrevenuenearly40percentwiththenew,fee-basedservicesSallieMaewasabletooffer.28
SincetheUSAGroupacquisition,SallieMaehaspurchasedfourotherdebtmanagementandcollectioncompanies—GeneralRevenueCorporation,PioneerCreditRecovery,ArrowFinancialServices,andGRPFinancialServicesCorporation—whichhaveexpandeditsdebtmanagementoperationsbeyondstudentloancollectionsintoothertypesofconsumerdebt,includingcreditcardsandmortgages.
Asaresultofthisshoppingspree,SallieMaenowownsacompany,orpartnerswithacompany,ineachofthecriticalareasoflending,frommakingloanstocollectingloans.Itisnowtheindustryleaderinloanorigination,loanholdings,loanservicing,andloancollecting,anditcontractsservicestothelargestguarantorinthecountry.In2006,SallieMaeoriginated,throughitsvariouslendingbrands,nearly$7billioninFFELPandPLUSloans,almost80percentmorethanthenextcompetitor(seeFigure6).Thecompany’sloanscomprised27percent29ofallfederalstudentlending,4percentmorethantheDepartmentofEducation’sentiredirectlendingprogram,and21percentmorethanthenextlargestprivatestudentlender,Citibank.30
March Toward Monopoly?SallieMae’sdramaticexpansionhelpedfuelextraordinaryenthusiasmforthecompanybyWallStreetinvestors.SallieMae’sstockhasrisenby1,900percentsince1995.
But,noteveryoneisasenthusiasticasWallStreetaboutSallieMae’srapidgrowth.IndustryobserversworrythatifSallieMaecontinuestoexpand,itcouldeliminatecompetitioninthestudentloanindustryand,mostimportantly,thebenefitsstudentsseefromcompetition,includingreducedfeesanddiscountedinterestrates.
Figure 6. loan origination Volume Among top Student lenders, �996–2006
1996 1997 1998 1999 2000 2001 2002 2003 2004 20062005
Bank of AmericaWells Fargo BankBank One
Citibank
J.P. Morgan Chase
Sallie Mae
Loan
Vol
ume
(in m
illio
ns)
0
1000
2000
3000
4000
5000
6000
7000
8000
Source:U.S.DepartmentofEducation,OfficeofFederalStudentAid,FinancialPartners“Top100OriginatorsofFFELPLoansHistoricalReports.”
��EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
“SallieMaeisonthemarchtowardmonopolyhere,”chargedBarmakNassirian,associateexecutivedirectoroftheAmericanAssociationofCollegiateRegistrarsandAdmissionsOfficers,ina2006Chronicle of Higher EducationarticleonSallieMae’spurchaseofstatenonprofitloanagencies.31
Nassirian’sconcernsareillustratedbySallieMae’spurchaseofthelendinggiantUSAGroup,whichnotonlyaddedbillionsinstudentloans,butalsoallowedSallieMaetoexpanditsoperationsintoeachpointofthestudentlendingcycle,andbya$1billionunsolicitedbidthatSallieMaemadein2005tobuythePennsylvaniaHigherEducationAssistanceAssociation,thenation’slargestnonprofitstateloanagency.
YetthebiggestpotentialformonopolymaylieinthedeclineoftheFederalDirectLendingProgram,SallieMae’sbiggestcompetitor.Thefederalgovernment’sshareofnewstudentloansthroughitsdirectlendingprogramdropped9percent—from32percentto23percent—between1999and2006,whileSallieMae’smarketsharehasincreasedby12percent—from15percentto27percent—duringthesameperiod.35
Whenthedirectlendingprogramwasintroduced,itofferedanumberofbenefitstostudentsnotavailableamongprivatelenders:faster,onlineloanapplicationandprocessing;reducedloanfees;avarietyofrepaymentplans;andnoconfusionaboutwheretosendtheirchecksbecausethefederalgovernmentwouldn’tselltheirloans.Inresponse,privatelendersimprovedtheirservices,includingofferingmoreflexiblepaymentplansandreduced,orzero,loanfees.
SallieMaecontendsthatdespiteitsexpansion,thestudentloanindustryremainsahealthy,competitivemarketplace,andthatcompetitionhasbenefitedborrowersthroughreducedinterestratesforon-timepayments,zerooriginationfees,improvedservicestoschoolsandstudents,andlowerdefaultratesfromimprovedcollectionpractices.Thecompanyalsoarguesthatitsscalehasallowedittoinvestheavilyinimprovedtechnologyandservicesthathavealsohelpedborrowers.36
Yetthedeclineinthedirectlendingprogram’smarketshare,whichispartlyduetoSallieMae’saggressivemarketingtoschoolstoswitchfromthedirectlending
programtotheprivatelendingprogram,mayeffectivelyeliminateSallieMae’sonlyrealcompetitor.
Relationship BuildingThemostsignificantpurchaseduringSallieMae’sexpansionwasthecompany’sacquisitionofUSAGroupandtheresultingdealwithUSAFunds.Inthedeal,USAFundsagreedtooutsourcethedefault-managementandloan-servicingfunctionsonitsthen-$9billionloanportfoliotoSallieMae,makingUSAFundsoneofSallieMae’sbiggestcustomers.In2006,32percentofSallieMae’sfee-based,debt-managementrevenuecamefromservicingUSAFunds’$27billionloanportfolio.37
WhilethisisagooddealforSallieMae,itmightnotbeagooddealfortaxpayers.Relationshipsbetweenlendersandguaranteeagencies—likeSallieMae’srelationshipwithUSAFunds—maycompromisetheoversightroleofguaranteeagenciesandultimatelyhurtstudentsandtaxpayers.
Guaranteeagencies,inadditiontobeingtheprimaryinsureroffederalloans,areresponsibleforensuringthatlendersperformduediligenceonloans—fulfilltheirlegalobligationstolocateandcollectdelinquentloans—beforefilingaclaimforrepayment.ThishelpspreventfraudintheFFELprogrambyensuringthatlendersdonotfilefalsedefault-reimbursementclaims.
TitleIVoftheHigherEducationActprohibitsguaranteeagenciesfromcontractingwithoutsideentitiestoperformdefaultaversionorcollectionservicesonloans,ifthoseentitiesholdorservicetheloan.38IntheSallieMae/USAFundsarrangement,SallieMae’sguarantorservicingdivisionservicesUSAFunds’loans.BecausethisdivisionistechnicallyseparatefromSallieMae’slendingentities,itdoesnotviolatetheTitleIVprohibition.Butthisdoesnoteliminatethepotentialforconflictofinterest.
TheU.S.DepartmentofEducationInspectorGeneralissuedareportin2002statingthatthisexactarrangementbetweenUSAFundsandSallieMaedid,infact,violatetheTitleIVregulation.39But,USAFundssuccessfullyarguedin2004thatSallieMae’sguaranteeservicingarmanditslendingarmconstitutedtwoseparateentities,andtheU.S.DepartmentofEducationdecidedtolettheUSAFunds/SallieMaearrangementcontinue.Thisdecisiondeviates
�2EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
fromthefindingsoftwoearlierreportsonrelationshipsbetweenguaranteeagenciesandloancompanies.
A1993reportbytheGovernmentAccountabilityOffice,theinvestigativearmofCongress,highlightedtheproblemofconflictsofinterestbetweenguaranteeagenciesandlenders:“Anenvironmentinwhichaguarantyagency’sfinancialtransactionswithlendersare‘lessthanarms-length’…mayresultinreducedattentionbyguarantyagenciestotheiroversightresponsibilities.”40Another1993report,fromtheU.S.DepartmentofEducationInspectorGeneral,concludedthat“billionsofdollars”ofFFELPloanswereatriskof“mismanagement,waste,andabuse,”becauseofguaranteeagencies’affiliationswithlenders.41Currently,however,onlynineofthe35guaranteeagenciesnationallyarenotassociatedwithalenderorsecondarymarket.42
AlongwithUSAFunds,eightotherguarantorsalsocontractedwithSallieMaetodothesametypeofworkin2006andinall,SallieMaeprocessedguaranteesfor29percentofthefederallyguaranteedstudentloansthatyear.43
Throughitspurchasesofcompaniesateachstageoftheloancycle,SallieMaehassoughttocreatea“seamless”systemforcustomers,andtoprofitfromthefeesandservicesateachpoint.SallieMaehasalsouseditsacquisitionstobuildrelationshipswithcollegefinancialaidofficersandtocross-promoteitsservicestopotentialcustomers—moresignsofitsaggressiveandsuccessfulbusinessstrategies.
TheUSAGrouppurchasemarkedSallieMae’sentryintoenrollment-managementconsultingthroughthe
SpecialAllowancePaymentsareintendedtoensurethatlendersmakeenoughprofitsonstudentloanstocontinueparticipatinginthefederalloanprogram.Thesepaymentsmakeupasignificantamountoftheprogram’sadministrativebudget,costingthefederalgovernment$4.6billioninfiscal2007.32
Congressisresponsibleforestablishingthe“SpecialAllowanceMargin,”—ineffect,theprofit—that’sguaranteedtolenders.But,toreduceprogramcosts,Congresshas,since1986,graduallyreducedthespecialallowancemarginfromahighof3.5percent.Currently,foraStaffordloaninrepayment,thespecialallowancemarginis2.3percent.
This“profit”isaddedtoareferenceinterestrate.Thereferenceinterestrateismeanttoreflectcurrentmarketrates,which,inturn,reflectthecosttolendersofmakingstudentloans.Priorto2000,thisreferenceratewasthe90-dayTreasurybillrate.ForloansmadeafterJanuary2000,theU.S.DepartmentofEducationusestheratefor30-daycommercialpaper.
Inthecurrentformula,thespecialallowancemarginisaddedtothecostof30-daycommercialpaper,andifthistotal(commercialpaper+specialallowancemargin)exceedstheinterestratepaidbytheborrower,theU.S.DepartmentofEducationpayslendersthedifference.LendersbilltheDepartmentofEducationquarterlyforthesespecialallowancepayments.
Thespecialallowancemarginonloanshasdeclinedsteadilyoverthepast10-years,exceptonso-called9.5percentloans,whichhaveprovidedafinancialwindfalltosomelenders.
Duringthedifficulteconomictimesofthe1980s,thefederalgovernmentallowednonprofitlenders,generallystate-sponsoredagenciessuchasthePennsylvaniaHigherEducationAssistanceAssociation,whichfinancedtheirloanswithtax-exemptbonds,tocollectahigherrateofreturnonstudentloans—9.5percent.Thiswasintendedtoencourage
nonprofitlenderstocontinuemakingloanstostudentsandtoprotecttheirfinancialstability.In1993,whentheeconomyhadimproved,Congresstookawaythespecial9.5percentreturnforanynewloans—orsoitthought.
WhileCongressallowedlenderstocontinuecollectingthe9.5percentmarginonexistingloans,aloopholeinthelawallowedbothnonprofitlendersandfor-profitlenderswhohadpurchasedanonprofitstudentloancompany,tomakenew9.5percentloans,throughaprocesslenderstermed“recycling.”Bymakingnew9.5percentloans,thesecompaniescoulddramaticallyincreasetheirrevenues—whileinterestratesonmostloansin2003–04werearound3percent,bankswerecollecting9.5percentintereston“recycled”loans.Thefederalgovernmentmadeupthedifference,payingbanksahugeamountinsubsidiesandgivingthemhugeprofits—profitsthatcamefromtaxpayermoneyviatheDepartmentofEducation.
ASeptember2006InspectorGeneralauditofspecialallowancepaymentson9.5percentloanstoonelarge,for-profitstudentloancompany,NationalEducationLoanNetwork(Nelnet),foundthatNelnetreceivedapproximately$278millioninimproperpaymentsfromtheDepartmentofEducation.By“recycling”existing9.5percentloansinaprogramthatNelnettermed“Project950,”thecompanyincreasedtheamountoftheseloansfrom$551millioninMarch2003to$3.66billioninJune2004.33
InJanuary2007,NelnetsettledwiththeDepartmentofEducation.ThesettlementagreementallowedNelnettokeepthe$278millioninimproperpayments;however,itprohibitedfuturepaymentstoNelnetonthoseloans.TheDepartmentofEducationalsostoppedallfuturepaymentstolendersuntilitcouldverifythattheloanswereeligibleforthe9.5percentsubsidy.Tomany,thesettlementwasinsufficient.DeclaredSenatorEdwardKennedy:“The[Bush]administrationshouldhavesettledfornothinglessthanthefullrecoveryofNelnet’sill-gottenproceedsfromtheseloans.”34
Special Allowances and the ‘9.5 Percent loan’ Controversy
��EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
acquisitionofUSAGroupsubsidiaryNoel-Levitz,thenation’slargestenrollment-managementconsultingfirm.Enrollmentmanagementusespastenrollmentandfinancialdatafromaschooltopredictwhichstudentsarelikelytoapplyandenroll,andhowfinancialaidawardscanbeleveragedtoenrollthemostdesirableclassofstudents.Noel-Levitzhasadvised1,800collegesanduniversitiesoverits30-yearhistory,workingwithschoolsonmarketingcampaigns,recruitingmethods,financialaidawards,andstudentretentionandgraduationstrategies.
ThisrelationshipallowsSallieMaetoconsultwithcollegesontheirfinancialaidstrategies,andthuspotentiallyincreasetheamountofSallieMae-providedloansthecollegeoffers.44ItisunlikelythatNoel-Levitz’sconsultingservicesdirectlydrivemuchofSallieMae’slendingbusiness.ButitdoesgiveSallieMaeanimportantrelationship-buildingtool.Evenwithincreasesindirect-to-studentmarketing,collegesanduniversitiesremaingatekeeperstostudentloanbusiness,andNoel-LevitzgivesSallieMaeanopportunitytobuildrelationshipswithfinancialaidoffices.
SallieMae’smostrecentacquisitionhascreatedanotheropportunityforthecompanytocross-promoteitsbusinesses.In2006,SallieMaeenteredintothebusinessofcollegesavingsplans.Toencouragecollegesavings,Congressexemptedso-called529SavingsPlanscontributions(namedafterSection529ofthefederaltaxcode)fromfederalincometax.Theplansarestate-sponsoredinvestmentoptionsrunbyprivateinvestmentcompanies.Thesesavingsplanshavegrownrapidlysincetheincometaxexemptionbeganin2001,and,in2006,SallieMaepurchasedUPromise,oneofthetop529savingsplancompanies.
Thepurchase,whichstockmarketanalystshailedasacoupforSallieMae,notonlyfurtherdiversifiedSallieMae’soperations,itgaveSallieMaeearlyaccesstopotentialcustomers.45Parentswhoopen529savingsplansfortheirchildrenarelikelyalsoparentsthatwillbehelpingtheirchildrendecidewhichloanstotakeoutforcollege,andco-signingprivateloans.UPromise’s7.2millionmembersprovideSallieMaewithmanysuchpotentialborrowers.
An Opportunity for ChangeWhilerevelationsofquestionablemarketingpracticesandotherpotentialwrongdoingbySallieMaeandother
lendingindustrycompaniescontinuetounfold,SallieMae’srecentsalefor$25billiontoaprivateinvestorgroupthatincludesBankofAmerica,J.P.MorganChase,andtwoprivateequityfirms,islikelytoreducepublicscrutinyofthecompanybecauseprivatelyheldcompaniesarenotsubjecttothesamelevelsofpublicdisclosureoffinancialinformationthatthefederalSecuritiesandExchangeCommissionrequiresofpubliclytradedcompanies.
ThisputsevenmorepressureontheU.S.DepartmentofEducationtooverseetheactivitiesofSallieMae,aswellastheentirestudentlendingindustry—somethingithasnotdonewellinrecentyears.“FinancialPartnershadnotimplementedanacceptablelevelofinternalcontroloveritsmonitoringandoversightofFederalFamilyEducationLoanprogramparticipants,”theU.S.DepartmentofEducationinspectorgeneralsaidinaSeptember2006reportonFinancialPartners,thearmofthedepartment’sOfficeofFederalStudentAidresponsibleformonitoringguaranteeagencies,lenders,andservicers.ThereportalsostatedthatFinancialPartners“emphasizedpartnershipovercomplianceindealingwithguaranteeagencies,lenders,andservicers.”46
RecentnewsreportshaverevealedtiesbetweentheDepartmentofEducationandthelendingindustrythatmayfurthercompromisethedepartment’soversightabilities.TheWashington Posthasreported,forexample,that“atleast20formerSallieMaeemployeeshadmovedintothedepartmentundertheBushadministration.”47Thestudentloanindustryalsospendsalotofmoneyoncampaigncontributionsandlobbying.AccordingtoTheNew York Times,Nelnet,alargelenderfoundtohaveimproperlybilledtheDepartmentofEducationformillionsofdollars,wasthe“nation’smostgenerouscorporatedonortotheNationalRepublicanCongressionalCommitteein2006.”48
Theinspectorgeneral’s2006reportnotedthathighturnoverinthegeneralmanagerpositionatFinancialPartnerscontributedtothe“weakcontrolenvironmentformonitoringandoversight.”Since1999,FinancialPartnershasseenfourdifferentgeneralmanagers.Ofthese,threehavecomefromthelendingindustry(andtworeturnedtoitfollowingtheirtimeatFinancialPartners)andonefromtheNationalCouncilofHigherEducationLoanPrograms,aloanindustrytradegroup.Thislistincludesthecurrentgeneralmanager,MatteoFontana,whoworkedatSallieMaepriortotakingthetopjobatFinancialPartners,and
��EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
whohasrecentlybeensuspendedbytheU.S.DepartmentofEducationafterdisclosureofhisownershipofstockinastudentloancompany.
Whenitlaunchedthefederalstudentloanprogramfourdecadesago,Congresswasforcedtooffersignificantfinancialincentivestobanksandotherlendersinordertogetthemtoparticipateinthestudentlendingprogram.Sincethen,theprogramhasgrownsteadilylargerandvastlymorelucrativeforlendersandotherplayersintheindustry.Yettheprogramhascontinuedtofavortheindustrythroughlendingratestructuresandgenerous,
taxpayer-fundedfinancialperksthatallbutguaranteeimmenseprofits,andthroughasympatheticregulatoryenvironment.Notsurprisingly,thelendingindustryhasrecognizedtheseopportunitiesforwhattheyareandhasmovedaggressivelytocapitalizeonthem—oftenatsignificantcoststostudentsandtaxpayers.
ButintheupcomingreauthorizationoftheHigherEducationAct,Congresshasanopportunitytostrikeanewbalanceinstudentlending,onethatservestheinterestsofstudents,taxpayers,andtheindustryinmoreequalmeasures.
�5EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
Endnotes1 RichardGeorge,“ThoughtsontheIndustry’sPastand
Present:AnInsider’sPerspective,”(paperpresentedattheconference,“FootingtheTuitionBill:NewDevelopmentsintheStudent-LoanIndustryandHowTheyAreChangingtheWayWePayforHigherEducation,”AmericanEnterpriseInstitute,Washington,D.C.,September2006).
2 AndrewRudalevige,“IrreconcilableDifferences?ThePoliticalTopographyofFederalStudentLoans,”(paperpresentedattheconference,“FootingtheTuitionBill:NewDevelopmentsintheStudent-LoanIndustryandHowTheyAreChangingtheWayWePayforHigherEducation,”AmericanEnterpriseInstitute,Washington,D.C.,September2006).
3 FredGallowayandHokeWilson,Reframing the Student Loan Costing Debate(Washington,D.C.:EducationalPolicyInstitute,2005).
4 Financial Audit: Guaranteed Student Loan Program’s Internal Controls and Structure Need Improvement, GAO/AFMD-93-20(Washington,D.C.:GovernmentAccountabilityOffice,March1993).
5 StatementofAlfredB.Fitt,GeneralCounsel,CongressionalBudgetOfficebeforetheSubcommitteeonPostsecondaryEducation,CommitteeonEducationandLabor,U.S.HouseofRepresentatives,May30,1979.
6 Trends in Student Aid(Washington,D.C.:CollegeBoard,October2006).
7 Secondary Market Activities of the Student Loan Marketing Association, GAO/HRD-84-51(Washington,D.C.:GovernmentAccountabilityOffice,May1984).
8 Ibid.9 FredGallowayandHokeWilson,Reframing the Student Loan
Costing Debate.10RichardGeorge,Thoughts on the Industry’s Past and Present:
An Insider’s Perspective.11Aggregateloanlimitswereincreasedinthe1992HEA
reauthorizationfrom$17,250to$23,000forundergraduateloansandfrom$54,750to$65,500forcombinedundergraduateandgraduateloans.Inaddition,PLUSloanlimitswereincreasedtocoverthetotalcostofattendance,minusotheraid,andlimitsonPLUSloanswereeliminated.
12ChristopherMyers,“LendersAssailedinSenateProbeofStudent-LoanPrograms,”The Chronicle of Higher Education,October3,1990.
13ThomasJ.DeLoughry,“WillColleges,StudentsBeHelpedorHurt?LongTermEffectofStudent-LoanInvestigationDebated,”The Chronicle of Higher Education,October17,1990.
14Guaranty Agency Solvency: Can the Government Recover HEAF’s First-Year Liquidation Cost of $212 Million?, GAO/HRD-93-12BR (Washington,D.C.:GovernmentAccountabilityOffice,November1992).
15MichaelJ.Lea,Privatizing a Government Sponsored Enterprise: Lessons from the Sallie Mae Experience,(IndianaStateUniversity:NetworksFinancialInstitute,April2006).
16MarkG.Overend,“ThePrivatizationofSallieMae,”(ThirdConferenceonGovernmentSponsoredEnterprises,AmericanEnterpriseInstitute,Washington,D.C.,May23,2000).
17FinAid,“IllegalInducementsandPreferredLenderLists,”availableonlineat:http://www.finaid.org/educators/illegalinducements.phtml.
18SLM Corporation Annual Report 2005(Reston,Va.:SLMCorporation).
19U.S.DepartmentofEducation,Federal Family Education Loans Net Volume by Fiscal Year, FY 2008 President’s Budget,availableat:http://www.ed.gov/about/overview/budget/studentloantables/index.html.
20Trends in Student Aid(Washington,D.C.:CollegeBoard,October2006).
21SLMCorporation,Report to the United States Securities and Exchange Commission, Form 10-K,2006.
22U.S.DepartmentofEducation,Federal Student Aid Annual Report, 2006.
23 In1996,anamendmentwasaddedtoataxbillthatmadeiteasierfornonprofitsecondarymarketstoconverttofor-profitsecondarymarkets.ThisallowedSallieMaetopurchasenonprofitssuchasNellieMaeandSLFR.
24How Nonprofit Student Loan Officials Get Rich (briefingpaper,TheInstituteforCollegeAccessandSuccess,May26,2005).
25“SLMHoldingCorp.(SallieMae)toAcquireNellieMaeCorp.,”SLMHoldingCorporationPressRelease,May26,1999.
26Disclosure:SallieMae’smergerwithUSAGroupresultedin$1billionfortheLuminaFoundation.EducationSectorreceivesfundingfromtheLuminaFoundationforitsworkonundergraduateeducation.TheLuminaFoundationdidnotfundthisproject.
27StephenBurd,“InaMergerofStudent-LoanGiants,SallieMaeWillBuyMuchofUSAGroup,”The Chronicle of Higher Education,June23,2000.
28Summary Annual Report2000(Reston,Va.:USAEducation,Inc.“SallieMae”).
29ThisnumberincludesbothloansmadethroughSallieMae’sinternallendingbrands—brandsthatareownedbySallieMae—andloansmadethrough“forwardpurchaseagreements”withoutsidebanks.
30SLMCorporation,Report to the United States Securities and Exchange Commission, Form 10-K,2006,p.15.
31StephenBurd,“SallieMaeMovestoBuyStateAgencies,ScaringCritics,”The Chronicle of Higher Education,March31,2006.
32Budget of the United States Government, Fiscal Year 2008(OfficeofManagementandBudget,February2007).
33Final Audit Report: Special Allowance Payments to Nelnet for Loans Funded by Tax-Exempt Obligations, ED-OIG/A07F0017(Washington,D.C.:OfficeofInspectorGeneral,DepartmentofEducation,September2006).
34KellyField,“LenderAllowedtoKeepFederalOverpaymentsof$278-million,”TheChronicle of Higher Education,February2,2007.
�6EDUCATION SECTOR REPORTS: Sallie Maewww.educationsector.org
35SLMCorporation,“DebtInvestorPresentation,FirstQuarterendedMarch31,2006,”(Reston,Va.:April21,2006).
36BasedoncommentsfromPaulCarey,formerExecutiveVicePresidentformarketingandbusinessservicesatSallieMae.OnlinechatwithStephenBurd,“SallieMaeandtheFutureoftheStudent-LoanIndustry,”The Chronicle of Higher Education,August9,2000,availableonlineat:http://chronicle.com/colloquylive/transcripts/2000/08/20000809carey.htm.
37SLMCorporation,Report to the United States Securities and Exchange Commission, Form 10-K,2006,p.17.
38U.S.DepartmentofEducation,Compilation of Student Aid Regulations,34SFR682.404(k)(4).
39Final Audit Report: United Student Aid Funds, Inc.’s Administration of the Federal Family Education Loan Program Federal and Operating Funds, ED-OIG/A05-B0033(Washington,D.C.:OfficeofInspectorGeneral,UnitedStatesDepartmentofEducation,April2002).
40Financial Audit: Guaranteed Student Loan Program’s Internal Controls and Structure Need Improvement, GAO/AFMD-93-20(Washington,D.C.:GovernmentAccountabilityOffice,March1993).
41RegionalInspectorGeneralforAuditRegionIX,“EdShouldProhibitConflictsofInterestbetweenGuarantyAgenciesandAffiliatedOrganizations,”ManagementImprovementReportNo.93-02,March15,1993.
42RichardGeorge,Thoughts on the Industry’s Past and Present: An Insider’s Perspective.
43SLMCorporation, Report to the United States Securities and Exchange Commission, Form 10-K,2006,pp.16–17.
44For Students or For-Profit?NewAmericaFoundation,HigherEdWatchBlog,October27,2006,availableonlineat:http://www.newamerica.net/blogs/2006/10/for_students_or_for_profit.
45NathanParmelee,“SallieMaeSnagsUpromise,”The Motley Fool, June2,2006,availableonlineathttp://www.fool.com/investing/small-cap/2006/06/02/sallie-mae-snags-upromise.aspx.
46Final Audit Report: Review of Financial Partners’ Monitoring and Oversight of Guaranty Agencies, Lenders, and Servicers, ED-OIG/A04E0009(Washington,D.C.:OfficeofInspectorGeneral,DepartmentofEducation,September2006).
47JonathanD.GlaterandKarenW.Arenson,“QuestionsonOfficials’TiestoLenders,”The New York Times,April25,2007.
48SamDillon,“Whistle-BloweronStudentAidIsVindicated,”The New York Times,May7,2007.
Leading Lady: Sallie Mae and the Origins of Today's Student LoanControversy
Publisher(s): Education Sector
Author(s): Erin Dillon
Date Published: 2007-05-01
Rights: Copyright 2007 Education Sector. All rights reserved.
Subject(s): Education and Literacy
IssueLab Permalink: http://www.issuelab.org/permalink/resource/539
_______________________________________________________________________________________________________________
This social sector resource is permanently archived with IssueLab.
IssueLab permalink: http://www.issuelab.org/permalink/resource/539
Metadata last modified: 2015-06-12
Date file archived: 2007-06-13
Date this page generated to accompany file download: 2015-08-07
IssueLab, a service of the Foundation Center, works to more effectively gather, index, and share the
collective intelligence of the social sector. We provide free access to thousands of case studies, evaluations,
white papers, and issue briefs published by foundations, nonprofits, and academic research centers that
address some of the world's most pressing social problems. Visit www.issuelab.org where you can search,
browse, access, and share social sector resources.