Fitzpatrick Out--with Cool $4 Million

CEO of Sallie Mae steps down (forced out, says Washington Post) with golden parachute full of ill-gotten gains. From Chairman Miller's statement:

“Mr. Fitzpatrick’s abrupt departure suggests that the lending industry is beginning to recognize that business as usual is no longer acceptable at Sallie Mae or any other company participating in the federal student aid programs. However, while new leadership in the industry is certainly welcome, the fact remains that simply replacing individual executives won’t stop the corrupt practices that Congress and state attorneys general have recently uncovered. ”

From the Post: J. Christopher Flowers, the investment banker who leads the takeover group, decided that the company's rocky relationships with the Democrats now in charge of Congress made keeping Fitzpatrick at the helm too risky for a company as dependent as Sallie Mae is on government subsidies, according to people familiar with the decision.

Emphasis on "dependent on government subsidies." It's time to cut off the subsidy junkies. No more dope, no methadone--cold turkey.

Rich Geezer Update!

According to USA Today,
"The growing divide between the rich and poor in America is more generation gap than class conflict, according to a USA TODAY analysis of federal government data. The rich are getting richer, but what's received little attention is who these rich people are. Overwhelmingly, they're older folks.

Nearly all additional wealth created in the USA since 1989 has gone to people 55 and older, according to Federal Reserve data. Wealth has doubled since 1989 in households headed by older Americans.

Not so for younger Americans. Households headed by people in their 20s, 30s and 40s have barely kept up with inflation or have fallen behind since 1989. People 35 to 50 actually have lost wealth since 1989 after adjusting for inflation, Fed data show...

Social Security and Medicare increasingly are functioning as a transfer of money from less affluent young people to much wealthier older people.

Because the older generation hasn't set aside enough money to cover promised government benefits, young people will have to make up the difference or older people will face benefit cuts. The financial shortfalls of Social Security and Medicare over the next 75 years are so large — $340,000 per household — that they dwarf the wealth of every age group. This hidden debt will make it a challenge for young people to accumulate as much wealth late in life as their parents have."

The difference in average net worth is not small.

"•Ages 55-59: Median net worth — the middle point for all households — rose 97% [IT NEARLY DOUBLED] over 15 years to $249,700 in 2004, the most recent year for which data is available. Median income rose 52%.

•Ages 35-39: Median household net worth fell 28% to $48,940. Median income fell 10%."

This is some dramatic Generation Debt evidence right here. For more, read The Coming Generational Storm , by Scott Burns and Lawrence Kotlikoff, too.

Outrages of the New America

From a review of Michael Moore's new healthcare flick, Sicko:

When Moore interviews Tony Benn, a leading figure on the British left, his larger concerns come into focus. Benn argues that for-profit healthcare and the other instruments of the corporate state, like student loans and bottomless credit-card debt, perform a crucial function for that state. They undermine democracy by creating a docile and hardworking population that is addicted to constant debt and an essentially unsustainable lifestyle, that literally cannot afford to quit jobs or take time off, that is more interested in maintaining high incomes than in social or political change. Moore seizes on this insight and makes it a kind of central theme; both in the film and aloud, at the press conference, he wondered whether some essential and unrecognized change has occurred in the American character.

Amen.

Secret Email: Who's Who in Student Loan Lobbying

Cross-posted from HuffPo:

Even big corporate lobbyists sometimes forget to use BCC.
The following email answers the question: "If you're a DC-based bank lobbyist trying to stop reform to student lender subsidies, who's on your email list?" Well, if you're Terry Muilenburg, former Senate staffer and lobbyist for Sallie Mae subsidiary USA Group, your list includes a veritable who's who of a) lenders, b) lobbyists and c) former Hill staffers, who are often both a) and b).

Take a look behind the curtain at the men and women working to keep billions of dollars in excessive subsidies flowing to their lender bosses at the expense of the American taxpayer and student.

Here's what's at stake.
The email refers to the 2008 Congressional budget conference report, released on May 16th 2007, which includes so-called "reconciliation instructions." Reconciliation instructions are legislative language that, in this case, will make it easier to cut subsidies to private banks and direct it to student aid with filibuster protection.
Real reform is on the horizon, yet these lenders have likely opposed the inclusion of such language in an effort to stymie legislative action. Ironically, in her zeal Ms. Muilenburg has misread the budget overview - nothing in the budget precludes Congress from using the reconciliation process to reform the loan programs.

The send-to list has been annotated with some links and quick IDs.
-----Original Message-----
From: REDACTED
Sent: Wednesday, May 16, 2007
To: REDACTED
Subject: Fw: Budget Reconciliation

------Original Message------
From: TERRY MUILENBURG ‡ Federal relations, USA Group, former Hill staffer
To: Brett Lief ‡ President, National Coalition of Higher Education Loan Providers (NCHELP)
To: Kevin Bruns ‡ ED, American Student Loan Providers (ASLP), former staffer Ed and Workforce Committee
To: jarnold@edsouth.org ‡ President, EdSouth a student loan servicing company
To: Alexa Marerro ‡ VP of Communications, Education Finance Council, former staffer for John Boehner
To: Kathleen Smith ‡ President, Education Finance Council, former staffer for John Boehner
To: Peter Warren ‡ VP of Gov't Relations, Education Finance Council, former staffer for Reps Nussle and Hoekstra
To: Joanne Razzano ‡ Communications staff, New York State Higher Education Services Corporation (NYS HESC)
To: Joan Simmons ‡ former federal relations staffer, NCHELP
To: John Dean-Law Office ‡ Lobbyist, Consumer Bankers Association (CBA)
To: Brett Lief ‡ President, National Coalition of Higher Education Loan Providers (NCHELP)
To: Karen Lanning ‡ VP of Communications, NCHELP
To: Shelly Repp ‡ Counsel, NCHELP
To: Ben Kiser ‡ spokesperson, NELNET
To: Cheryl Watson ‡ Communications, NELNET
To: Don Bouc ‡ President Emeritus, NELNET
To: SARA DAVIS ‡ Dir. of Federal Relations, Nelnet, former Sallie Mae lobbyist, former hill staffer
To: CONWEY CASILLAS ‡ Dir. of Communications, Sallie Mae, former EFC staffer
To: DEWAYNE DAVIS ‡ Dir. of Federal relations, Sallie Mae, former senior leg. asst. to Rep. Mollohan
To: SARAH DUCICH ‡ Dir. of Gov't relations, Sallie Mae
To: SCOTT BUCHANAN ‡ Lobbyist, Sallie Mae
To: TIM MORRISON ‡ VP of Gov't relations, Sallie Mae
To: TOM JOYCE ‡ Spokesman, Sallie Mae
To: BOB MURRAY ‡ Spokesman, USA Group
To: Lisa Boepple ‡ Dir. of Congressional Relations, USA Group, former Chief of Staff to Rep. Morella
To: Della Cronin ‡ VP of Legislative Affairs, Washington Partners, employee of CBA
To: Gwyn Walcoff ‡ Senior VP of Public Relations, Washington Partners, employee of CBA
To: Harrison Wadsworth ‡ Special Counsel, Consumer Bankers Association, Consultant to COHEAO
To: John Dean-HEWI ‡ Lobbyist, Consumer Bankers Association (CBA)
Sent: May 16, 2007 1:18 PM
Subject: Budget Reconciliation

The attached Democratic summary of the budget agreement says not one word about reconciliation for student loans. There is a statement that "The plan also allows budget reconciliation to be used for deficit reduction only." We will need to make that statement come back to haunt them.

Pointing the Finger at Sallie Mae

from the Chronicle (paywall):

Sallie Mae, the nation's largest student-loan provider, is enduring a new round of attacks from across the political spectrum. A pair of reports issued on Tuesday -- one by the American Enterprise Institute and the other by Education Sector -- assign Sallie Mae a leading share of responsibility for the scandals now buffeting the $85-billion-a-year student-loan industry.

"The story of Sallie Mae's rise from a government-sponsored agency created to help needy students to a private corporation with a $142-billion loan portfolio goes a long way toward explaining how and why the student-loan industry has landed at the center of controversy," Erin Dillon, a policy analyst at Education Sector, wrote in her report, "Leading Lady: Sallie Mae and the Origins of the Student-Loan Controversy."

Awesome. Although I wouldn't really call that progression a "rise." How about "The story of the private takeover of Sallie Mae and the perversion of its original mission from helping needy students to being a profit machine"?

And thinking about it, honestly, although the leadership of Sallie Mae acted badly here and there, they played mostly by the rules of capitalism as it exists. The company had a shareholder revolt and installed a CEO who cared only about profits. They manipulated the law, lawmakers, and college aid officials disgustingly, yet within the boundaries of existing campaign finance and inducement laws. I have to point the finger at our federal government, both civil servants and elected leaders, for their abdication of responsibility and pandering to corporate interests.

Dumping Defaulted Loans

A reader sent me this excellent story of yet another nefarious lender practice, discovered by the Cleveland Plain Dealer. It works like this: once a student loan goes into default, lenders get up to 98% of their money back from the federal government (the guarantee in guaranteed loans). But instead lenders offload or "dump" the defaulted loan into the Direct Loan program by initiating Direct Loan Consolidation, pressuring the borrower to go along with it.

"the borrowers' bad debt, often multiplied because of earlier delinquencies and refinancing, gets turned into a new loan - with interest, late charges and an 18.5 percent handling fee for the industry. But this new, expensive loan is no longer the industry's liability; rather, industry employees convert it into a new government loan, issued under the federal Direct Loan program."

Let's see. So if you fall behind on your $40K loan, if lenders played by the rules they'd declare default after 9 months and collect, let's say, $38K plus interest--$45K?
Instead, they let it balloon to $100K with penalties and fees. Then they "dump" it into direct loan consolidation and take home $118K of taxpayer money.

This practice is costing taxpayers $400 million a year in fees and expenses for collection, which is often futile because the loan is already in default. It accounted for 46% of the industry's so called default "recoveries" last year.
These are the wonderful boons of competition between the direct and FFEL programs.

Don't Let the Lending Industry Off the Hook

If you want absolutely authoritative commentary on student aid policy, turn to Barmak Nassirian, a giant of the field, director of the American Association of Collegiate Registrars and Admissions Officers. Here he is in Inside Higher Ed on the Spellings sideshow.

"The postmodern moment was at hand when the Republican Congressional leaders — whose previous 12-year tenure in majority will forever be remembered as the Gilded Age of loan industry rapacity — indicated that they, too, would introduce legislation to restore integrity to the system they had done so much to create. They even joined the Democrats to pass emergency loan legislation, if only to quickly declare the endemic problems of the loan program resolved and to prevent more meaningful reform of the corporate welfare program they have set up for their political supporters in the loan industry. The point of this street theater of contrition, atonement and conversion, of course, is not real change, but a sufficiently convincing appearance of reform."

Student Loan "Sunshine" is not enough. Reforming the relationships between lenders and college aid officials is a miniscule portion of the real problem.

Spellings Testimony Roundup: "Inadequate"

The Guardian UK printed the AP story--I think the internationalization is noteworthy.

Miller brought up the Nelnet overpayments on the 9.5% loophole. Spellings said she settled to avoid a costly lawsuit. Washington Post: "The Justice Department is reviewing an audit that found hundreds of millions of dollars have been improperly paid to a student loan company, House Education Committee Chairman George Miller said Thursday.Miller, D-Calif., made the review public during a hearing in which he pressed Education Secretary Margaret Spellings on her decision to ignore a recommendation by her department's inspector general, John Higgins, to recover an estimated $278 million. "

NPR has audio. The reporter seemed impressed with Spellings' offense-as-defense. Suddenly everyone's a student loan reformer I guess.

More at Huffington Post.: Lies Under Oath.

Tightest Rental Market in 7 Years

The Times covers a Gen Debt story they've written about many times before-- the unaffordabilty of housing for young arrivals in New York City. This time, it struck me that the examples they used are not particularly well chosen. Ok, so you've got nine students at NYU, a private university, from families who are "fairly comfortable financially," camping out for three months in free office space--donated by one of their fathers. This is a crisis? Sounds more like a lark.
Also, many of the people in the article seemed to have the problem that they weren't looking beyond Manhattan or neighborhoods like Williamsburg. New arrivals have to search beyond the obvious to find bargains.
Much, much more to the point would be to look at the living situations of young people who arrive in the city without family money or connections, just working and trying to make it. The words "Bay Ridge," "Bushwick," and "basement" come to mind.

Student Loan Scandal Frenzy Media Frenzy!

I gave two radio interviews today to talk about the student loan ethical reforms passed in the House, Spellings' testimony tomorrow, Shaw's resignation, and everything else going on. You can hear me here on KCRW in Los Angeles,
and tomorrow on The Bryant Park Project, a new, youthy show launching on NPR this fall (but they already have blogs, and podcasts, and iTunes downloads, and other good stuff.) If you care about student loans, go over to Bryant Park and tell them, because they're trying to figure out what best to cover.

Tearing Down the Gates

Interview on Inside Higher Ed with the author of a new book, Peter Sacks, who argues that we need to focus on class barriers in higher education. Good, forceful argument.

"This uniquely American ideal — the promise of equal educational opportunity — is close to vanishing unless we change course. Education is becoming like health care and so many other aspects of American life where money rules the system. We are creating a system in which ability to pay is the main thing that separates those who go to college from those who don’t go to college.

Instead of a system of equal educational opportunity, we are creating a system of educational haves and have-nots that increasingly is based upon birthright. Yes, a system based upon class origins. For almost every measure of educational achievement and progress, the class divide between educational haves and have nots is getting worse — and getting worse at a time when we can least afford to waste an ounce of human talent as we head into the 21st Century."

Terri's Out!

Chronicle of Higher Ed:

Theresa S. Shaw, the Education Department's chief operating officer in charge of federal student aid, is stepping down, effective June 1, the department announced on Tuesday.

Ms. Shaw has spent five years at the department, after a 20-year career at Sallie Mae, the nation's largest student lender, and a few years at a start-up technology company.
The announcement of Ms. Shaw's resignation comes two days before Education Secretary Margaret Spellings is scheduled to testify before Congress concerning recent entanglements and conflicts of interest in the $70-billion-a-year program that provides federally guaranteed loans to college students and their parents.

Wonder if the private-equity Sallie has a job for her?
update: here's her email to Federal Education Dept. employees.

-----Original Message-----
From: Shaw, Terri
Sent: Tuesday, May 08, 2007 4:47 PM
To: FSA ED Employees
Subject: Announcement of Resignation
Importance: High

Today, Secretary Margaret Spellings will announce my resignation from
Federal Student Aid, effective June 1, 2007. I spoke with both Under
Secretary Sara Martinez Tucker and Secretary Spellings in February to inform
them of my plans to leave Federal Student Aid prior to the September 2007
expiration of my appointment to pursue other career opportunities. During
those discussions, both the Secretary and Under Secretary asked me to remain
at Federal Student Aid until June 1st and I agreed. I will spend the next
several weeks working with the Secretary, Under Secretary and the Executive
Management Team of Federal Student Aid to ensure and support a smooth
transition and the ongoing work of Federal Student Aid.

The Federal Student Aid team is so incredibly passionate about our mission.
Every day I am both amazed and humbled by the dedication, commitment and,
most of all, the hard work of each and every one of you. The recent
attention on our programs and our work only confirms how very important our
programs are to the students and families we serve. It has been my honor
to work with you and be a part of the Federal Student Aid team. We have
accomplished a considerable amount since September 2002 and I am proud to
have been a part of these successes with you. I am confident that together
we established a solid foundation for Federal Student Aid's continued
success.

I deeply appreciate and thank each of you for your efforts over the past
five years.

Terri

Credit Card Debt for Kids

Hasbro is issuing a new version of its beloved LIFE board game with Visa cards instead of fake cash.
from blog Consumerist:

They also changed the goal of the game from accumulating the most money to earning the most "life points." Supposedly this a combination of wealth and life experiences, but it's not hard to see parallels between "life points" and the reward points and airlines miles offered by certain credit cards.

The Times on Private Student Loans

The New York Times profiles chefs laboring under staggering private loan debt. they go to private culinary schools only to enter a field where entry-level wages are $10 an hour. Obviously something's not right with this equation.

ps. There's also a discussion, with over 300 comments.

Jon Oberg in New York Times

The Times profiles Jon Oberg, the Dept. of Ed official (now retired) who blew the whistle on the 9.5 % loophole.

I interviewed Mr. Oberg last month. He has a slew of great reform ideas of how to introduce competition back into the loan program. He is one of the few reformers to address the problem of private student loans. He suggests removing all direct and indirect subsidies from private loans such as bankruptcy protection, tax exemption, and the ability to securitize them together with federal student loans--except for private loans that followed most of the standards of federal student loans: " cost of attendance limitations, forbearances, deferments, discharge standards, non-discrimination, illegal inducements, and the like."
These private loans would be quasi public, administered by states and nonprofits.
In one way, you could look at this idea as eliminating private loans as we know them. The idea adheres to the fundamental principle that Department of Education subsidies should be directed toward students, not lenders.

Margaret Spellings Hearing Next Week

Thursday, May 10, 2007
Full Committee
Hearing on "Accountability for the Department of Education’s Oversight of Student Loans and the Reading First Program," scheduled at 10:30 a.m. in room 2175 Rayburn H.O.B.

Witness:
The Honorable Margaret Spellings
Secretary
U.S. Department of Education
Washington D.C.

Mark your calendars.

Helicopter Parents to the Rescue

A commenter on yesterday's post writes:

"After spending tens of thousands, or hundreds of thousands, of dollars on elementary school, secondary school, college, admissions exams, applications, etc., is it any wonder that parents feel significantly invested in their kids' success?
I understand that some of this behavior is ridiculous, but allow me to play devil's advocate for a second: is behavior necessarily inappropriate just because it is new to this generation?
One more thought: as we all know, wealthy and connected parents often call on their friends and professional networks to help their kids get jobs. So why is it always wrong when less wealthy parents try to vouch for their kids?"

This is a really good point. Some of this will come to be accepted as a cultural change. I actually read a similar story about India--young adults increasingly have American-style professional opportunities with professional companies, but it's still the norm for people to live with their folks till they're married, so recruiters are not hesitating to market to Mom and Dad.
It's not so outlandish to think that America's love affair with extreme individualism will have to alter a bit to accomodate the challenges of the 21st century, and that includes families being more economically dependent on one another, and invested in each other's success.
Still and all, parents have a difficult task to pull back and accept that their offspring must flail and fail on their own in order to become adults.

Guide to Student Borrowing

This newspaper article inadvertently illustrates how little the public knows about the student loan game. The information is mostly correct, yet unless you read carefully, it confuses Direct Loans with Stafford Loans:
"About 20 percent to 25 percent of colleges and universities require that students who get so-called Stafford loans borrow directly from the federal government. Stafford loans are government-backed and have subsidized or deferred interest."

and calls private loans 'unsubsidized' loans:
"Another thing to be aware of is the kind of loan one is taking, he noted. Many of the offers made to students are for unsubsidized loans, which carry no government guarantee or interest rate subsidy."

To clarify: from the student's point of view, there are three kinds of loans, by ascending cost: Subsidized (Stafford) loans, Unsubsidized loans, and Private loans. "Subsidized" from the student's point of view refers to the fact that the interest is subsidized (paid) by the federal government while you are in school, while with unsubsidized loans, it accrues and is added to the balance at the end of school. There are federal limits on both Sub and Unsub loans--lower for Sub loans. That's where private loans come in. You can spot them because they're more expensive than the fixed 6.8% rate.

From the program's point of view, there are five types of loans: FFEL Sub and Unsub, Direct Sub and Unsub, and Private. Direct loans are cheaper for the taxpayer but not for the student. Currently the discrimination between Direct and FFEL is not the students' decision to make. IF you are lucky enough to go to a school that uses Direct Loans, later on you will have better options such as 25-year cancellation, and in some cases, Direct Loans have more borrower-friendly decision making policies. But in most cases it won't matter much. Not nearly as much as if you have private loans.

What Would Lou Do?

A Washington newspaper has a refreshing editorial on the coddled-gen-y-in-the-workplace phenom. What is going through parents' minds when they write a reference letter, show up to an interview, or call a prospective boss to complain?

"The article states, "As Generation Y enters the job force, parents of new hires are calling employers to negotiate salary and benefits, and some are even showing up at job fairs."
These parents are kindly known as "helicopter parents" (hence the hovering) rather than, say, clinging, controlling, overly-involved, infantilizing, freaky weird parents."

The Case for Subsidized Loans

The Washington Post prints a long letter from my favorite student-loan industry mouthpiece, Kevin Bruns of America's Student Loan Providers, in response to the excellent April 23 editorial "Lender's Paradise." He's often found sending me gently scolding emails and I think once or twice in the comments section on this blog. Hi Kevin!

Kevin provides a 3 point argument for maintaining the status quo on FFEL.
In order from most valid to least:
1) "The private sector has been responsible for major technological and service innovations in the federal student loan program. "
This is true. It's hard to get federal bureaucracies to invest in the latest technology. However, this is exactly where competitively bid servicing contracts come in.
2) "Since 1965 Congress has understood that it's unreasonable to expect well-run financial institutions to lend at below-market interest rates to individuals with no credit histories, income, collateral or cosigners...Without the subsidies, we would not have a low-cost, private-sector-based program. "
That was true in 1965. But now major financial institutions will lend money to your dog at a zero percent introductory rate, and private student loans, which require none of the above and have no federal subsidies, are the fastest-growing sector of the student loan business. Clearly, they can and they will.
Also, this whole "involving the private sector is always better regardless of bloat, cronyism, or just plain incompetence" line smacks of W's first term. I thought we were all disgusted with that by now. Remember what a fine job Halliburton did rebuilding Iraq?
Which leads us directly to the worst point,
3) "because loan providers compete with one another, borrowers typically save thousands of dollars. In fact, federally guaranteed loans are the lowest-cost student loans available."
In fact, the vast majority of loan providers do NOT compete on price. (MyRichUncle is a notable exception.) They charge the federal maximum. That's because they didn't have to discount--they just "induced" schools to put them on the preferred lender list, and business followed. Now that there's more noise about the fact that you do have the right to shop around, all of a sudden there are some discounts on offer, as the Austin American-Statesman reports:

"Student lender Nelnet Inc. said borrowers who take out new Stafford loans after July 1 will be able to get a rate cut of 1 percentage point if they sign up to have their payments automatically debited from their bank accounts, up from the current 0.25 percent discount.
Citigroup Inc.'s student lending unit said it will automatically drop its rate 1 percentage point once students start repaying their loans, typically after graduation."

Real competition is great for students, and reducing subsidies will create real competition.

What to do in College to Be Successful in Your Career

A classic post from Penelope Trunk, a career/life writer I've been appreciating more and more lately.

Free Tuition Demands

Today marks the April Mobilization for Higher Education by a group called the Democratizating Education Network. They demand full public funding for higher education; a rollback and eventual phaseout of tuition; the democratization of higher education in the USA.
They've supported the Tent State movement, which I've written about elsewhere and attended in Ann Arbor.
Here's their charter:

DEMOCRATIZING HIGHER EDUCATION CHARTER

1) Full Public Funding for Public Higher Education
2) Free Access to Higher Education and Abolition of Tuition
3) Affirmative Action to End Institutionalized Racism and Sexism
4) Full Recognition of the Right of Students and Workers to Organize
5) Democratic Self-Government of Higher Education
6) Service to the Public Welfare, Not Corporate Profits
7) Free Speech and Academic Freedom
8) Debt Forgiveness of Student Loans
9) Civic Education for a Democratic Society
10) Education, not war; Schools, Not Jails

As recently as the 1970s it was normal for students to call for free education, and it didn't seem that strange when many public colleges charged only nominal tuition. Militancy provides -not a realistic policy option but a clear rallying message and a good starting point for debate.

Student Addresses the Gender Gap

I was really struck by this column in the Cornell Daily Sun, about the gender gap as it applies to paid vs. unpaid internships, particularly this argument:

"Thankfully, I stuck with my gut and took the courses that interested me; the difference wouldn’t have paid out, anyway. Even if I’d switched my major three years back and taken one of those paid internships, I’d probably be making less than the guys to my left and my right."

Ed Dept "Asleep at the Switch," Cuomo sez

NY Atty General Andrew Cuomo testified before the House Education and Labor Committee during an investigative hearing today, saying Secretary of Education Margaret Spellings "has defaulted on her obligation" to oversee the $85 billion student loan industry, and that his investigation should lead to criminal charges.

Spellings herself will testify before the committee May 10, says George Miller's office. It ain't Alberto Gonzalez, yet, but stay tuned.

Good Q&A on NPR, primer on the issue (transcript) with Kelly Field of the Chronicle of Higher Education.

"Idealism and Narcissism Can Coexist"

A thoughtful response to the "Generation Me" (c)rap, in the Boston Globe. The writer is in his early 20s.

In related news, a small group of students at Stanford ended a nine-day hunger strike , succeeding in raising the hourly wages for maintenance, groundskeeping, housing, and food-service workers, even contractors, to at least $11.15 with benefits.

"Lord's Lament"

Pretty awesome takedown of Al Lord in Sunday's Washington Post:

"What do you call someone who earned more than a quarter of a billion dollars over a decade by privatizing a government-chartered monopoly that made its money trafficking in government-guaranteed student loans -- and then turns around and complains how awful government is?

How about ingrate? Or hypocrite?

No doubt Al Lord thinks he deserves every penny that he's earned because of all the value he created for Sallie Mae shareholders since ousting the previous management and taking control of the company in 1997. He'd probably also have us believe that he wouldn't have done it if the prize were only $100 million -- or that there was nobody equally skilled who would have done it for $50 million. These are the standard rationalizations for excessive executive compensation."

Gen-Y Feels Gender Gap

I was surprised to read this. What is wrong with this picture?

"-College women on the brink of graduation this spring may be in for a rude awakening.
While they have enjoyed majority status on campus and graduate with higher grade point averages than their male classmates, young women still conspicuously lag in one crucial area: income earnings immediately after graduation.
The American Association of University Women, the Washington, D.C.-based advocacy group, released a report today that finds that [ONLY!!] one year after college graduation, women [ALREADY] make 80 percent of what their male counterparts earn. As women's age increases they fall further behind men. Ten years out of school, women earn 69 percent of what their male peers do.
"We controlled for everything that could have had an effect on earnings," Catherine Hill, director of research at the American Association of University Women, told Women's eNews. "And we still found a wage gap among a demographic that you'd expect there to be very little difference with, given, for the most part, that they don't have caregiving obligations. But surprisingly, and unfortunately, we find that women already earn less; even when they have the same major and occupation as their male counterparts."

By the same author, Hannah Seligson: Young Women Face Culture Shock in First Jobs

Sallie Mae--Dept of Ed Revolving Door

Stephen Burd of the New America Foundation ; It's kind of like if the EPA was run by former GM and Exxon execs.

"According to a report last week in The Wall Street Journal, at least eight senior Education Department officials during the Bush Administration either came from the loan industry "or have taken lucrative jobs in that arena since leaving the agency."

What effect has this revolving door had on the integrity of the loan programs? The answer to that question can be found in a little-noticed 34-page audit report that the Department's Inspector General released in September. That report blasts the Financial Partners division of FSA for failing to "provide adequate oversight and consistently enforce FFEL program requirements."

"According to the report, the Financial Partners division of FSA:
Emphasized partnership over compliance in dealing with guarantee agencies, lenders, and servicers.
Significantly overstated the number of program reviews it performed on lenders and failed to assess liabilities for regulatory violations.
Lacked adequate policies for conducting program reviews.
Failed to follow the procedures it did have when performing reviews."

"Taxpayers Pay the Bill for the Sallie Mae Buyout"

Bethany McLean of Fortune gets unusually demonstrative over the Sallie Mae buyout:

"Sallie markets itself as friendly to students ("Helping millions of Americans achieve their dream of a higher education," reads its Web site), but critics have long charged that the opposite is true. Until recently, though, no one - save students and their advocates - seemed to care. When the Democrats took over Congress, they spotted an opportunity, and announced that they would chop the interest rates on student loans, and pay for it in part by reducing subsidies paid to lenders. Sallie, along with the rest of the industry, cried poor - and said that their real concern was not their own profit margins, but the well being of those they serve."

"The deal may also mean that despite Sallie's cries that Congress's cuts will send it and the nation's students to the poorhouse, there is still a ton of profit in its business - enough for it to absorb a significant cut in profits, add to its debt pile, and still make its executives and its new owners even richer. Reportedly the buyers believe that Sallie will benefit from any action Congress takes, because its market share will grow as weaker players fall by the wayside. That's great for all of those parties. Just keep in mind who is paying the bills: Taxpayers and students."

Sallie Mae up for Sale!

They don't want to be a public company no more.

"Sallie Mae agreed late last night to be sold to JP Morgan Chase, Bank of America and two private equity firms for $25 billion, said people involved in the negotiations.The deal would move the nation’s largest education lender, officially known as the SLM Corporation, into private control amid increasing turmoil for the company. The deal is expected to be announced today, these people said."

One of its private buyers is known for snapping up companies with serious problems.

Weekend Student Loan Roundup

Whee! The news is coming fast and furious.

Education Finance Partners will pay $2.5 million into the same fund that Citibank and Sallie Mae are anteing up for. (New York Times)

"In a fierce contest to control the student loan market, the nation’s banks and lenders have for years waged a successful campaign to limit a federal program that was intended to make borrowing less costly by having the government provide loans directly to students." (New York Times) (also see my piece from January 2006 on this topic.)

Lenders Misusing Student Database--Improper searches raise privacy fears
(Washington Post) Some lending companies with access to a national database that contains confidential information on tens of millions of student borrowers have repeatedly searched it in ways that violate federal rules, raising alarms about data mining and abuse of privacy, government and university officials said.

Overseeing this database was Matteo Fontana's job.

Village Voice Ed Supp on Student Loans

I have a couple of pieces back in the Village Voice, one a roundup of student loan reforms, one a quickie piece on the Columbia situation.

"'Wow—as if I'm not paying Columbia enough already, now there's a dude profiting off my financial misery.' According to an online poll last week by the university's student newspaper, The Spectator, that's the most common campus reaction to news that Columbia's financial aid director, David Charlow, held $72,000 in stock in Student Loan Xpress from 2002 to 2005, even as his office at Columbia was promoting the student loan company as its top "preferred lender.""

Revolving Door

Wall Street Journal today reports on the "revolving door" between the student loan industry and the department of Education. This is the article I've been waiting for.

Critics Blame Lax Oversight
Resulting From Close Ties
Of Industry, Government
By JOHN HECHINGER and ANNE MARIE CHAKER
April 13, 2007; Page B1

Four years ago, Sally Stroup, then an assistantsecretary at the U.S. Education Department, got a memo from theagency's inspector general urging her to curb any "illegal inducements"lenders might be using to win college loan business.

Ms. Stroup, who had previously worked for aPennsylvania loan company and a for-profit education concern dependenton student loans, didn't take the memo's advice.

At least eight top officials in the EducationDepartment during the Bush administration either came from student-loanor related organizations or have taken lucrative jobs in that arenasince leaving the agency. Former Education Department staffers say arevolving door between the department and industry has led to laxoversight of federal financial aid. Members of Congress -- includingthe Democrats who head committees overseeing education, Sen. EdwardKennedy of Massachusetts and Rep. George Miller of California -- saythey are concerned about the industry ties. Mr. Miller plans to hold ahearing on student loan abuses this month.
...
Later the story gets into the 9.5% loophole.

Also in 2003, Mr. Oberg wrote an internal, widely distributed memo warning that lenders were exploiting a legal provision that guaranteed lenders a minimum 9.5% rate of return no matter how low the prevailing rate might be. The 9.5% guarantee was supposed to apply only to loans funded by tax-exempt bonds. Congress eliminated the guarantee in 1993 but grandfathered in the existing arrangement, thinking the high-rate guarantees would disappear. Mr. Oberg warned that the proliferation of these loans could cost taxpayers billions of dollars in excess subsidies.

A later report by the inspector general confirmed Mr. Oberg's findings. It focused on student loan company Nelnet Inc., which figured out a complicated strategy to collect about $278 million in what the report said were excessive payments from the government from January 2003 through June 30, 2005. The report recommended that the department require Nelnet to "return the ... overpayments received and exclude ineligible loans from future billings." In securities filings addressing the issue, Nelnet said it had received verbal approval from the department to collect the higher rate.

Despite the inspector general's report, the Education Department announced this past January that it would let Nelnet keep the bonanza, though not future payments. In a statement, Nelnet spokesman Ben Kiser said the company's receipt of those payments conformed to department regulations.
---
The obvious point that the article doesn't point out: Nelnet wasn't the only lender exploiting the 9.5% loophole improperly. They were all doing it. What about overpayments to other companies?

UWM-Correction-Hojan-Clark not on leave

From the office of University Relations and Communications:

"UW-Milwaukee Financial Aid Director Jane Hojan-Clark has NOT been put on
leave. She does, in fact, enjoy the strong support of her division's
leader, Provost Rita Cheng.

One somewhat-related development. This morning, it was reported that she
resigned from the Student Loan Xpress advisory panel on which she was
serving.

http://www.jsonline.com/story/index.aspx?id=589837
"

How Corruption Works- A seat at the table

The Wall St Journal (paywall) ran a story today, sent to me by a smart reader, reporting that the National Association of Student Financial Aid Administrators
in 2003 considered and rejected a policy of a $50 cap on gifts from lenders to financial aid officers. This failure of self policing , they suggest, came because NASFAA has lots of lender-members and also enjoys the lavish sponsorship of lenders at its annual conference. NASFAA counters lamely on its website that "student loan lenders have been members of the National Association of Student Financial Aid Administrators (NASFAA) almost since its inception in 1966."

This gets you off the hook how?

A really thoughtful article on Inside Higher Ed last week talked to lots of financial aid administrators about how they deal with lender swag and other conflicts of interest. Craig Munier is a leader of the National Direct Student Loan Coalition , a coalition of public university financial aid administrators which promotes the cheaper of the two federal loan programs as a better option for students. Though for some reason the article doesn't mention this affiliation:

"Craig Munier, director of financial aid at the University of Nebraska at Lincoln, said that he has “deep reservations” about how closely intertwined the financial aid world has become with the lending industry. He has been urging the National Association of Student Financial Aid Administrators to stop letting lending officials join the group and to stop letting the companies sponsor its events. “We should have emancipated ourselves,” Munier said. “Even if those contributions and financial support didn’t sway our decisions, it gives the appearance that it may have.”

Munier is also the member of a small group of public university financial aid officers. That group meets annually — with no real budget and no outside support — and Munier said that the discussions focus on how to help students. Student loans may be part of the equation, but he said he has noticed that when aid officials aren’t worried about making association sponsors feel included, much more of the discussion is about aid programs.

“When I go to NASFAA, it will be nearly impossible for me to find a table at lunch where at least one or more people from the industry are not seated at the table, so the conversation invariably feels obligated to include that private sector, and I would love to discuss lots of things that aren’t about banks and lending,” he said."

Newshour--further thoughts

I appreciate the kind words, y'all.
Someone asked me why there wasn't some "conservative yahoo" up there debating me.
The interesting thing about this scandal as it continues to unfold is that neither the lenders' lobbyists (ie the Consumer Bankers Association) or the financial aid group (NASFAA) seem willing to defend the financial aid officers. They are twistin in the breeze even though the corruption demonstrated by the college-level officials seems petty compared to the corruption on the federal level. How about Spellings letting Nelnet keep $278 million in improper overpayments -- payments her own inspector general said were improper--and refusing to even look to see how much other student loan companies were also overpaid thanks to the 9.5% loophole?

The New York Times says Senate investigators are now calling the stock transfers to Fontana and the financial aid directors from Student Loan Xpress's president possible "securities fraud". Meaning a criminal investigation. Sounds like Al-Capone-for-tax-fraud to me.

TV

I'll be on PBS's NewsHour tonight at 6:28 pm to discuss the student loan scandals.

Student Loan Xpress and the Senators

see my post at the Huffington Post.

Full Disclosure

I'm scheduled to speak about "Generation Debt" at the University of Wisconsin-Milwaukee tomorrow. UWM, it emerges, it emerges, is the single school that handled the largest volume of federal student loans from Student Loan Xpress, the company now under scrutiny by the Attorney General's office. $72.4 million, as their sole preferred lender for a few years. Their financial aid director, Jane Hojan-Clark, is one of several who have been placed on leave CORRECTION: SHE WAS NOT PLACED ON LEAVE AFTER ALL. She didn't get tens of thousands in stock options; she did sit on an advisory board and get free trips to Ohio and New York.

Here's the thing. Obviously, I get paid for these appearances at colleges. And part of the money that pays me comes from tuition. And part of that money comes from student loans. I even got paid last fall to appear at a conference sponsored by a nonprofit student loan servicer who, I think, is one of the good guys. But never has the irony been so obvious. Even as I do my best to remain independent in outlook and bring a message that will help students, I'm part of the system, too.

Job Market Better for Class of '07

Best fields are education, finance and health care, says the Post. And though they need Millennials, recruiters seem to not like them so much.
They are using text msg spam to reach Millennials. And cheesy customized web pages--red for chicks, navy for guys.

"With a personalized Web page, we're giving this generation a couple of things they've grown used to - quick access to information and the feeling that they're very important to us," says Consolidated Graphics' national recruiting manager, Rachel Seff Koenig, who recently gave a seminar to human-resource managers called "Capturing College Talent: Creative Strategies for a Competitive Market."
"You've got to remember," she says, "this generation is kind of pampered. They're a little bit wussy. These are the children of Soccer Mom Nation, and they're used to having every aspect of their life arranged for them."

Gee, that's real respectful. I'll go tell all my friends to work for Consolidated Graphics.

George Miller on Suspension of Lender Execs

Congressman Miller's statement today:

WASHINGTON, D.C. – U.S. Rep. George Miller (D-CA), the chairman of the House Education and Labor Committee, issued the following statement today on the CIT Group’s decision to suspend three top executives of its student loan division, Student Loan Express, after it was revealed that financial aid officers at three universities and an Education Department official involved with administering the federal student loan program once held stock in the company.

“Over the past several weeks, serious and alarming conflicts of interest within the college loan industry have been revealed – conflicts of interest that greatly jeopardize the credibility of our federal student aid system and the services that students and parents depend on to help afford today’s high college costs. The CIT Group’s decision is an important move in helping to uncover all relevant information relating to these practices. The Department of Education should immediately take similar measures to ensure that any individuals involved in this matter are held accountable for their actions.

“For far too long, questionable practices and relationships have been muddying the waters of our federal student loan programs. We have an obligation to ensure that the federal student loan programs are working as intended: to help students and parents pay for college. It is clear that many changes, including requiring full disclosure of the nature of relationships between school financial aid officers and student lenders, must be made within the college lending industry as we work towards this goal.”

USC and Sallie Mae--Business Partners?

USC is one of the schools where a financial aid official, Catherine Thomas, has been put on leave after it came out that she owned lender stock. Student Loan Justice sent around this page from Sallie Mae's annual report, with a picture of the same Catherine Thomas.
She is quoted as saying,
"We depend on Sallie Mae as a business partner, not simply a lender/servicer."
Famous last words...

Net Widens in Student Loan Scandal

On Friday I posted on the Huffington Post that Matteo Fontana, accused of holding 10,000 shares of stock in a student loan company while overseeing student lenders for the federal government, used to work for Sallie Mae.

By the end of the day Friday, Andrew Cuomo's office had subpoenaed Sallie Mae
for "a list of all of its former employees who had worked for the Education Department in the last six years, and for e-mail messages and other communications between those former employees and the company." And Fontana had been placed on leave.

Education Dept. Official Held Lender Stock

check my post at the Huffington Post.

Bravo, New America Foundation.

Breaking News: Columbia Financial Aid Dean Invested in Loan Stock

From the New America Foundation's Higher Ed Watch blog, referred to me by an alert reader--

"...Several financial aid administrators who had significant personal investments in a publicly traded, for-profit student loan company. Following a request for university comment, an implicated Dean [at Columbia] was placed on leave by his parent institution.

According to a September 2003 SEC filing by Education Lending Group (see chart on page 18), the original owner of the lender Student Loan Xpress, financial aid directors at Columbia University, the University of Southern California, and the University of Texas at Austin, were preparing to sell 10,500 shares of stock in the company, which were worth more than $100,000 at the time.

The three college aid officials -- Lawrence Burt of University of Texas at Austin, David Charlow of Columbia University, and Catherine Thomas of University of Southern California -- sit on an advisory board that provides strategic advice for Student Loan Xpress. According to sources familiar with the company, the owners of Student Loan Xpress offered stock options as a way to compensate members of that board. Some aid administrators on the board reportedly turned down the offer, citing ethical concerns."

These 3, apparently, had no such concerns. Cuomo's on the case with fresh subpoenas.

Debt Myths

A sharp piece on Newsweek by James Scurlock, the Morgan Spurlock of the debt industry with his movie Maxed Out.

Two years ago, I set out to tackle one of the most perplexing riddles of our time: After two decades of unprecedented prosperity, why can’t America get out of debt?....
It may be hard to believe that banks make most of their profits on the least responsible customers, but it’s the two thirds of us who can’t pay off our credit-card balances who contribute all of the interest and most of the penalties—money that goes directly to the banks’ bottom lines.

StudentLoanGate

Over at the Huffington Post they asked me to put something up about the student loan scandals.
There's an attack on MyRichUncle in the comments:

"I find it very interesting, and somewhat suspect, that all of these "investigations" have started happening only after one lender that was shut out by most schools started what amounts to a slander campaign. That lender's name is My Rich Uncle--the reason for the shut out was two-fold: 1st, their products just are not that good. 2nd, Who in their right mind would list a company with the name My Rich Uncle on their lender list--the very name screams entitlement and is a turn off to most people."

Actually, this is a good point. Except it wasn't a slander campaign--it was a truth campaign. MyRichUncle believes that it can offer cheaper loans by marketing directly to students ( a debatable longrun business proposition, but their loans right now are indeed cheaper), and so they refused to play the sleazy preferred-lender game, choosing instead to draw attention to it (with a full-page ad in the New York Times, among other publicity plays). It may very well have been that publicity that drew Andrew Cuomo to his current investigation, and MyRichUncle, silly name and all, deserves some credit.

More on the Cuomo Settlements

So as part of Cuomo's still-ongoing probe into lenders' relationships with financial aid offices, 6 schools have agreed to reimburse students $3.27 million, Citibank is donating $2 million to a financial-industry education fund, while 29 New York State schools have simply signed codes of conduct without admitting wrongdoing.
To address some of the questions raised in the comments, I do see the quick payoff as an admission. If not overtly confessing guilt (and I agree that most lenders probably didn't break the law, as now written), it's an acknowledgement that both schools and lenders would rather that students and taxpayers hear as little about lender practices as possible. The money, frankly, is peanuts. This is an $85 billion industry which once sued the Secretary of Education. If the lenders wanted to, they could easily create a legal fund to defend themselves and every single one of the 100 schools involved.
Taking as a given the power of market forces to deliver the best prices to consumers in most circumstances, I think the incentives in the current system are messed up. Currently your financial aid officer is like a financial adviser who works on commission. He's going to try to sell you the financial products that give him the best commission, as well as making you happy.
Or a real estate buyer's broker. She's never going to get you the absolute best price, says economist Steven Levitt, because lowering your price lowers her commission too.

National Association of Financial Aid Administrators Speaks

Official statement on Andrew Cuomo's investigation:

New York Attorney General Andrew Cuomo claims that he is “beginning the process of restoring trust between universities and students.” But he needlessly tore the fabric of trust between schools and students in the first place with his inflammatory press statements and media comments. Financial aid administrators have built trust with students and parents for generations by offering well-informed, accurate, and unbiased information
NASFAA agrees that any preferred lender list abuses and genuine conflicts of interest should end, however such abuses are rare. NASFAA is confident that when the New York Attorney General’s office completes its investigation it will find only a very few problems; nearly every aid administrator and school is extremely ethical. Undoubtedly, some areas need improvement because we can always do better. It would serve the public interest to have greater transparency in how and why a school uses a lender list. Student aid administrators only want to serve their students’ best interests.

"nearly every aid administrator and school is extremely ethical." Quite an endorsement! But I agree that personal ethics are no substitute for transparency & accountability.

Cuomo's Financial Aid Probe Continues

Chronicle says:
"New York State’s attorney general, Andrew M. Cuomo, has sent settlement agreements to dozens of colleges across the country that he has accused of accepting kickbacks from student-loan companies.Colleges in New York State had until noon today to sign the agreements. If they did not, they faced the possibility of being served with subpoenas from Mr. Cuomo’s office. Colleges in other states were reportedly given a later deadline."

The settlement agreements included promises to disclose relationships with preferred lenders, stop taking kickbacks, and tell students they have a right to borrow from anyone, and--get this--a promise to reimburse students who took out private loans.

Young and Uninsured

New York Magazine, better known for its lists of the best plastic surgeons, devotes a cover story this week to the largest and fastest-growing group in the country without health insurance: Young people. Some good anecdotes in here.
"Those coming of age today are entering an economy where many of the old rules no longer apply. The paternalistic corporate culture of the past (full-time staff members supported for the long haul) has been largely replaced by a frenetic “permalance” model, the strivers and thrivers encouraged to jump from one company to the next as needed. There was a time when a health plan symbolized something—you were making it—but now benefits are scarce at many levels."

Generation Debt column from Bob Herbert

TimesSelect: One of the weirder things at work these days is the fact that we’re making it more difficult for American youngsters to afford college at a time when a college education is a virtual prerequisite for establishing and maintaining a middle-class standard of living.
...

This is a wonderful example of extreme stupidity. America will pony up a trillion or two for a president who goes to war on a whim, but can’t find the money to adequately educate its young. History has shown that these kinds of destructive trade-offs are early clues to a society in decline.

PS> Anne Thompson at The Campaign for America's Future at Tompaine.com :

While UCLA is leading the pack as a number two seed in the NCAA tournament, it is not faring nearly as well when it comes to tuition increases. Tuition at UCLA has increased from $3,683 in 2000-2001 to $6,522 this school year, close to doubling in just six years. That’s well above the sizeable 41 percent average increase in tuition at public colleges nationwide since 2001. How do those numbers affect the odds that hardworking students will earn college degrees and succeed in the competitive global economy?

The Philosophy of Debt

An interesting article in the Times today about Americans' love-hate relationship with debt.
Leonhardt argues:
"When somebody comes up with an innovation, be it consumer loans, credit cards or creative mortgages, it inevitably leads to an explosion of borrowing that includes a good amount of excess and downright abuse. After the abuse is cleaned up, though, most families end up better off." The mortgage crisis, he says, will eventually bring more of the same.

As a journalist, I'm obviously part of the century-old media tendency he describes, to "focus on the economic risks" of new forms of debt and higher debt. I see my role as being a necessary corrective to the prevailing mentality, which is no-big-deal, borrow now, pay later.

I agree that the debt liberalization-and-regulation thing is a cycle, but I'm not so sure about Leonhardts' argument that extravagantly easy money has improved Americans' lives. He says it would be much harder to buy a house or pay for college without low-interest loans. But many (including conservatives) argue houses and tuition wouldn't be so expensive without those loans.

Leonhardt also argues that credit cards have become a kind of safety net. "Just a generation ago, a temporary setback, like illness, divorce or job loss, was much more likely to force a family to take drastic measures than it is today. That’s in large measure because of debt, which allows families to smooth out the rough edges of their financial lives."
Progressive analysts also see credit cards as a safety net, but a pretty crappy one. As in the Demos report, The Plastic Safety Net. A generation ago, a family's "drastic measures" may have included actually spending less money, or Mom going to work. Now, those same setbacks--illness, divorce, job loss--are far more likely to lead to credit card debt, followed by bankruptcy. Is this progress?

Consolidation Borrowers Overcharged

Thanks to the commenter who pointed this out. According to a lawsuit filed today, a very stupid error in the regulations has caused 3 million holders of Department of Education consolidation loans to be overcharged by capitalization of interest, to the tune of hundreds of millions. The most frustrating part is the lack of communication and accountability in the system, says the lead plaintiff:

"Pfeiffer said she notified officials about the overbilling mistake at least 15 times over the phone and in writing. "Most of the time I was told that, yes, we realize that this isn't right, but that's the way the system is," she said."

Buying a House With Help from Your Parents

The Times looks at a common-enough Generation Debt experience (if your parents have the dough), and one a good friend of mine is going through right now (snip):

"A decade ago, younger New Yorkers were able to buy their own apartments. That’s because studios and one-bedrooms cost $150,000 or so. Now, first-time buyers are paying nearly four times that for the same apartments, according to data from the Real Estate Board of New York. Brokers say they see more buyers turning to their parents for help...

More buyers are turning to therapists to help them work through how they feel about depending financially on their parents when they have carved out independent careers and lives. Dr. Richard Shadick, a Manhattan psychologist who works mainly with 20- and 30-something New Yorkers, said that “a good portion” of his cases focus on the problems of seeking financial help from parents to pay for housing."

Hm. Maybe a case of psychologizing yourself to fit into a messed-up society?

New York Next State to Ask for Student Loan Sunshine

Attorney General Andrew Cuomo warned schools to immediately disclose their conflicts of interest in choosing preferred lenders:

“There is an unholy alliance between banks and institutions of higher education that may often not be in the students’ best interest. The financial arrangements between lenders and these schools are filled with the potential for conflicts of interest. In some cases they may break the law.”
Among the offenses catalogued are
Kickbacks, free trips to Pebble Beach, lines of credit, outright payments , and call centers so that when you call up the school's financial aid office, you actually get the lender.
Similar to stuff that's been unfolding recently in Pennsylvania.

Debt - The Moral Values issue of 2008

I had a piece on Tom Paine today relating the subprime mortgages crash to credit card and student loan industry practices.

"America is at another Enron moment. Rather than shedding a tear for the traders who pumped up this market, we are now required as a country to reexamine the responsibility that creditors have to borrowers—to make a sane assessment of the ability to repay, not merely to make as much money as they can out of the risk. It is high time to block predatory lending of all kinds by reinstating usury laws, limiting interest rates, penalties and fees that creditors can charge."

It's possible , with the range of reforms now cooking, that student loans might even lead the way. That would be a victory for the members Generation Debt!

Update: today the Times covered the angle I was looking for: the homeowners.

Lenders Seeking New Ways to Access Borrowers

Over the past week InsideHigherEd has detailed the relationship between MyRichUncle and Princeton Review as well as MRU's purchase of a company called Embark. Most of the buzz around the story has to do with Princeton Review's placement of MyRichUncle as the "preferred lender" on individual college pages. This elicited an angry response from some financial aid administrators who dislike the aggressive charges leveled by MRU on financial aid practices.

InsideHigherEd went on in a subsequent article to detail the purchase of Embark and how the companies seem to have gone out of their way to hide the relationship.

Of greater interest than the back and forth between banks and schools is why a private lender is purchasing a company with such a different institutional mission. One suggestion is that it provides them access to potential borrowers. This type of "synergy" is increasingly common in the world of student lending. Nelnet owns Peterson's a test prep company, Sallie Mae owns a company the does similar application and enrollment management work to Embark.

This type of vertical integration is aimed at identifying students earlier in the college process, gaining information and even building relationships to secure their lucrative loan business.

Did you hear the one about the student lender and the playboy playmate?

Well according to the AP it goes something like this. Andrew Yao, who is currently on trial for bankruptcy fraud, used to run Student Finance Corp., a student lender that specialized in making loans to students at trucking schools. They are being sued by Royal Indemnity, the company that financed SFC's loans. The AP writes,

In civil lawsuits, Royal has alleged that Yao operated SFC, which specialized in loans to students at truck driving schools, as a Ponzi-type scheme in which he conspired with schools to generate as many loans as possible, then fraudulently obtained new loans from Wilmington Trust (nyse: WL - news - people ), Wells Fargo (nyse: WFC - news - people ) and other institutions to pay down older loans that had gone into default.

All told Royal was left holding the bag for $380 million in SFC loans. In the process of pursing Mr. Yao, Royal Indemnity uncovered $669,000 in questionable payments by SFC to "A. Karlsen" for "aviation services." Turns out that A. Karlsen is actually Alexandra "Lexie" Karlsen Wolfe, Yao's mistress and former playboy playmate.

Yao's attorney claims that the obfuscation had nothing to do with an attempt to hide questionable SFC payments to Karlsen or two Las Vegas casinos where Yao had run up considerable debt. Rather he offers the heartening explanation that Yao was simply trying to hide his affair from his wife.

Lovely.

Update: Mr. Yao was convicted on Tuesday March 14th.

What do Ted Kennedy and President Bush have in common?

The Cleveland Plain Dealer's Steve Koff did a big piece this week on the changing political landscape for student lenders. Koff wrote another excellent story in 2005 about Sallie Mae and then House Education Committee Chairman John Boehner that's worth a reread.

Koff writes:

What do Ted Kennedy and President Bush have in common?

Both are making the multibillion-dollar student loan industry incredibly nervous.

Both want to slice the taxpayer subsidies the industry enjoys - subsidies that make student loans "the second most profitable business for banks, after credit cards," says Kennedy.

Both say students will benefit.

The President's call for a cut to the subsidies of private student banks in his 2008 Budget may well be the most significant proposal in his entire budget.

"It's a different game today," said Michael Dannenberg, director of education policy at a Washington think tank, the New America Foundation, and a former education adviser to Kennedy, who chairs the Senate education committee. "Not just because there's a Democratically controlled Congress, but because they've been triangulated by the president."

It is no secret that the federal government could more efficiently use its education tax dollars to help students. The lenders are gearing up for a major fight this year, likely retaining new lobby firms, media spokespeople and preparing for a new onslaught of campaign contributions. 2007 could look a lot like 1993 when then President Clinton proposed major reform to the loan programs that created Direct Student Lending.

Credit Card Practices to Make your Blood Boil

Senator Carl Levin (who kinda looks like a senator in a movie) is holding hearings on credit card billing practices :

“The credit card industry thrives on the confusion and powerlessness of consumers to both nickel and dime the average card-holder and to commit highway robbery of anyone who slips up even in the slightest,” said Levin.

The committee heard testimony from the CEOs of the top three credit card issuers in the U.S., as well an Ohio consumer, Wesley Wannemacher, who used a Chase Bank credit card in 2001 and 2002 to pay for approximately $3,200 in expenses for his wedding. These expenses exceeded the credit card limit of $3,000 by about $200. Over the next six years, he made payments toward the debt averaging about $1,000 per year, and as of February 2007, he had paid about $6,300 on his $3,200 debt. However, his statement showed that he still owed $4,400 – a total of $10,900 in charges for $3,200 in purchases.

Maxed Out in theaters now

Finally, a "Super Size Me" for the credit card industry. (The companion book is subtitled " Hard Times, Easy Credit and the Era of Predatory Lenders.") I am planning to catch this this week and I'll come back with a review; check out if it's playing near you.
Salon liked it:

"..."entertaining" in a dark, paranoid, confirming-your-worst-fears sort of way. The subject in question is credit-card debt, and by interviewing scores of experts and ordinary citizens Scurlock builds a damning incremental case that the old-fashioned banking system, in which credit was extended to those who were actually likely to pay the money back, belongs to the era of cave paintings and WordStar. In case the hair-raising interest rates and oh-so-clever hidden fees on your monthly hadn't clued you in, Scurlock argues that the U.S. economy is now based on ever-increasing and unsustainable levels of debt. "

9.5% Loophole Rises Again

Today a bunch of democratic lawmakers sent a strongly worded letter
to the department of Ed asking for more details about "the egregious misuse of a 1980 provision in the HEA by Nelnet, Inc., one of the nation's largest student loan lenders, resulting in hundreds of millions of dollars in overpayments to Nelnet by the federal government."

Apparently Spellings' department settled with Nelnet (and allowed it to keep $278 million in overpayments) without looking into exploitation of the loophole by other lenders, which has been going on for 10 years (!).

Oversight is good, but some actual ass-kicking would be even better.

ps. New York Times weighs in. "Advocates for students hope the letters may be the first step in a broader review of the loan industry, and hailed the pressure on the department."

Unpaid Internships in the Christian Science Monitor

Smart story. Tom Peter opens with a young woman who goes on food stamps to pursue an unpaid internship at a high-end, Harper's or New Yorker-esque magazine; in my very first Generation Debt column, I used a similar example.

Op-Ed on Mitch McConnell, the Pro-Creditor Senator

I was really flattered to be approached by David Donnelly at the Public Campaign Action Fund to co-write this op-ed.
Donnelly's group is all about following the money in politics, an exhausting, disgusting, yet exhilarating pursuit. In this case:

... the bankruptcy bill is one of the most egregious examples of pay-to-play politics in recent memory. According to the Center for Responsive Politics, the credit card and commercial banking industries have given $224 million to federal candidates and political parties since 1989, contributing 62 percent percent to Republicans and 38 percent percent to Democrats. The industry greased the skids for over a decade to be able to write preferential legislation into law.

Senator McConnell managed the floor fight to pass the bill, and he has received more than $535,000 in campaign contributions from the credit card and commercial banking industries. Just a few months before the bill's passage, McConnell raked in $60,000 from executives at two financial giants, UBS and Citigroup, at a New York City fundraiser. He was served well by his chief fundraiser, former banking lobbyist Alison Crombie Kinnahan.

Senator McConnell contends the bill was necessary to stop bankruptcy fraud. Yet bankruptcy lawyers and judges call it a "monumental failure,"adding red tape without limiting fraud.

Beating on Young People

It's rare that I would post anything from Nerve.com, and the whole of this essay, "Coming Home: The Sexual Trials of the Boomerang Kid" is certainly NSFW, but I was struck by this graf:

The journalist-shrinks all seemed to think we boomerang kids favored our parents' homes over the bright and terrifying world of adult responsibility. They made us sound like Dustin Hoffman in The Graduate, whimpering, when anyone asked what we were doing, "I'm just sort of drifting... here ... in the pool." But, like most of my friends who lived at home, and like none of the boomerangers profiled in the blitz of articles, I worked full-time. I didn't pay rent, but I helped out with other bills. It infuriated me that this trend was attributed to some soft-headed psychological bullshit and not to pure economics.

On a related note, the author of last year's anti-youth book, Generation Me, is on the verge of getting some of her research published in an actual scientific journal. She argues based on personality testing that the Millennials are more narcississtic than previous generations. The interesting thing is that she, a PhD psychologist, published a whole popular book based on her pet theory without any previous academic recognition of its validity.

There's one piece of info on this subject that's always puzzled me when it's trotted out there:
Surveys show "current freshmen are much more interested in financial success and less in "a meaningful philosophy of life" than students were in the 1970s."

Current freshmen are under grossly expanded economic pressures compared to 30 years ago, including stagnating income, high student loan debt, and a greater necessity to work while in school. Maybe they're more interested in being well off because they're an entirely different class of people than the overwhelmingly white, male, middle class freshmen of the 1970s.

Debt Blogs

I was on vacation last week when this interesting story ran in the NYT about debt bloggers -- people crawling their way out of bad credit & debt situations and posting about it online to connect with a community. Almost all of them are members of Generation Debt. I have read some of these blogs and I think it's great that the Times will let more people know about them.

BusinessWeek on Generation Debt

Here's an interview I did with Marshall Goldsmith, a bestselling business book writer, executive coach, and a really nice person.

STAR Act Reintroduced

This bill saves billions for student aid by starting the switch to direct loans.

The world (and the House Education & Labor Committee) is just full of good news for students/bad news for the student loan industry today. Check out my Huffington Post on the latter matter.

Sallie Mae's Own Martha Stewart

Apparently Sallie Mae chairman and former CEO Al Lord decided to unload 1/3 of his stock in the company. . . just days before President Bush unveiled a proposed multibillion dollar cut in subsidies to the industry, sending the stock to a 2-yr low.

I'm sure none of Lord's good friends in Congress know anything about this.

Generation Debt Blog Review

A personal finance blog called The Simple Dollar took a detailed look at Generation Debt this week and ended with the recommendation:

Rather than strictly talking about dollars and cents, this book is mostly about the varieties of experience that these two generations (Baby Boomers and GenX/GenY) have in their early adult lives, mostly focusing on the younger set because their situations aren’t documented nearly as well. In that regard, the book succeeds brilliantly.

Thus, the people that really need to read this book are teenagers, twentysomethings, and their parents. In fact, I’ve gone so far as to consider giving a copy of this book to my parents and to my mother- and father-in-law to read because it captures in great detail the differences between our experiences.

Trent is reviewing "52 personal finance books in 52 weeks." He's got a lot of other interesting stuff on there too.

Cry them a River

"Shares of student lending firms fell 6 percent or more Monday after President Bush's budget request included a proposal to cut lender subsidies by 0.5 percentage points..."
"The White House said reducing the subsidy would save an estimated $12.4 billion over five years that would be redirected to Pell Grants, which go to the poorest college students."
Yeah, that's right, the Bush White House. George W. Bush has got religion on student loans.

Also check this exchange: Senator Ted Kennedy says: "The student loan program works brilliantly for the banks, but not for the students. We ought to take the money-changers out of the temple in terms of student loans." A slight directed at the lenders, to which Tim Fitzpatrick, CEO of Sallie Mae responded, "Unfortunately, Sen. Kennedy has attempted to smear the integrity of Sallie Mae, the student loan industry, and the financial aid professionals. I'm certainly personally disappointed in his baseless and insulting attacks."
I'm confused--I don't really see any smear or attack there. Is Sallie Mae saying that they're not moneychangers by profession?

Spellings Announces Bush Administration's Pell Grant Increase for 08 Budget

Secretary Spellings announced today that the President's Fiscal Year 2008 Budget (due out on Monday) will include an increase in the maximum Pell Grant award to $4,600. The increase would be the largest jump in decades if Congress hadn't acted this week to raise the maximum award to $4,310 on what's left of the 2007 budget.

Everyone should remember this moment-we have our leaders fighting over who can make college more affordable for low-income students.

Here's the AP's story on this. What the Secretary did not announce today is whether the budget will cut billions of dollars in other federal program that target the same low-income students to pay for the Pell increase. We'll have to wait until Monday for the potentially dirty details. Here are my thougths from the article:

Luke Swarthout, higher education advocate at the U.S. PIRG, a public interest group, applauded the announcement but also said it's important to see how the increase will be paid for.

"Provided that the administration is not robbing Peter to pay 'Pell,' this could be a very meaningful increase for low-income students all across the country," he said.

Student Loan Justice: The Bus Tour

Student Loan Justice is a group representing thousands of Americans whose loan burdens have reached six figures through delinquency or default. Many of these people, whom I've heard from, are older and truly desperate, their educational dreams long abandoned, trapped in the spiral of unlimited lateness and penalty fees and ruined credit, with no possibility of relief through bankruptcy.
SLJ formed a PAC in December. The founder and other members are now traveling the country in a bus meeting with lawmakers to push their agenda of relief and amnesty. They want student loans treated like other forms of consumer debt, including the ability to refinance and declare bankruptcy. From their latest update:

We are currently leaving Santa Monica enroute to Tucson by way of Phoenix. We have met with the staff of 5 members of the education committees thus far: Wu, Woolsey, Miller, McKeon, and Sanchez.

Also, we have been greeted at our stops by various members...this is important...helps keep the morale up!

The "bus" continues to function well, except for a slight mishap (flat tire) in Cherry Valley.

The meetings have gone well. Some staff have suggested measures even more beneficial than what we are currently proposing, although we did meet some skepticism from Miller's staff with regards to the payoff plan for defaulters (agenda item #1 for the PAC). This is of particular concern, since Miller is Chairman of the house education Subcommittee. It would behoove you all to contact the House Committee, and let them feel your pain!! Their phone number in Washington D.C. is:

202-225-3725