Thursday, November 03, 2005

Washington Post editorial on student loan & the budget

"The Senate is likely to vote today on a budget reconciliation measure in which the largest source of "savings" by far comes from the student loan program.
Should anyone on the Hill care to point it out, there is an obvious source of genuine savings in the student loan program: Offer students small incentives to choose direct over subsidized loans. But are there fiscal conservatives, in either party, who are willing to risk the wrath of lenders and say so?"

1 comment:

Joe said...

Published in the Wisconsin Star:

Who is Sallie Mae?
And why won't she let me get a better deal on my student loans?

By Nancy Fay

October 18, 2005

Those folks at Sallie Mae sure are fast learners. Just a few years ago, they were a meek and mild government agency, doing the paperwork for billions of dollars in student loans.

Today, they are a fully independent multi-national corporation, complete with $37 million CEO salaries, $100 million losses trading financial derivatives, a new headquarters, and a legislative plan in Congress to quash their competition, raise prices, and dominate the $200 billion world of federally guaranteed student loans.

They are not called Sallie Mae anymore, either. Today, you can find them on the New York Stock exchange, officially known as the Student Loan Marketing Corporation – SLM Corporation

Even before they were a business, it was a great business: Writing loans without risk -- but still collecting all the fees, interest, and charges that make Sallie Mae one of the most profitable companies in America. But there was more: Sallie Mae had built-in protection that gave it an advantage no private competitor could match. The biggest was the “single holder rule” that said once you took your student loans out from one lender you couldn’t change lenders if you wanted to refinance. You had to stay with the same lender –chances are it was Sallie Mae.

Since Sallie Mae was by far the largest – six times larger than its closest competitor CitiBank-- it received the largest benefit from this legalized restraint of trade. The stakes are high as well: More than 20 million people have federally guaranteed student loans.

There’s more: Sallie Mae convinced Congress that too much competition to refinance student loans would be very messy and very inefficient. So once you refinanced your loans once, you were done.

No matter if interest rates plunged and you were holding a loan at several points above market rates, there was nothing you could do about it. Except complain and revisit the chapters in your old econ book on monopolistic profits.

Think of what would happen in America’s largest mortgage lenders tried to pull a stunt like that: They’d either go to jail, or out of business, or both. With Sallie Mae, their stock went up.

These and other legislative edges gave Sallie Mae an enormous advantage in the market place. And with that advantage, Sallie Mae wasted no time in branching out into other more lucrative areas, such as student loans to high risk borrowers, with interest rates as high as 25 percent. The Attorney General of California is taking a close look at that one.

And they have stepped up their marketing at marginal schools, where default rates were two or three times the national average. Maybe those people shouldn’t be in school, that’s not for Sallie Mae to say. But once they are there they should definitely have a federally guaranteed student loan, and Sallie Mae will go far to make sure that happens.

Sallie Mae even has an office in Liverpool. Blimey!

And that is just the tip of their marketing to what can only be called a captive audience.

Today Sallie Mae is trying to take all the advantages it enjoyed as a quasi-monopolistic government agency and pushing Congress to make them permanent.

That’s not what they say of course. But the folks at Sallie Mae are pushing changes that would have the same effect.

One new law would allow students to choose among lenders. Sounds good, until you hear the details: If you want to lock in a fixed rate, the new law says it would be several points higher than the market. That provision, by the way, will cost borrowers about $10,000 over the life of their loan, with most – but not all -- of it going to the federal government.

The new proposed legislation also says if you want to refinance, your new lender has to notify your current lender (chances are it is Sallie Mae) two times, so that it can have a chance to match your better deal. That’s another obstacle to discourage competition. It would work.

It’s no secret: Big lenders don’t like student loan financing. They make less money when their customers go into the market place to find a better loan. But when Sallie Mae and othesr stop that from happening, taxpayers get hosed too. That’s because people who consolidate their loans with better rates and better terms (and because of a loophole in the law, some can do just that despite the heroic efforts of Sallie Mae to the contrary) are better credit risks: People who do not refinance their federally guaranteed loans default on their loans three times more often than people who do.

That is a multi-billion dollar drain on the treasury. But few of the big lenders seem to care about that.

I’m not saying they should. I’m saying we should. Congress should