Sallie Mae

A Hazardous Student Loan Bailout Plan

If you haven't heard yet, Treasury Secretary Henry Paulson quietly inserted a provision in his $700-billion bailout plan designed to come to the rescue of struggling student loan providers. While virtually no details of the plan are yet available, it appears that the proposal would not only focus on federal student loans but would potentially allow loan companies to dump hundreds of millions of dollars of bad private loan debt on the backs of taxpayers. This is a terrible idea.

At Higher Ed Watch, we firmly believe that student loan companies, like Sallie Mae, should have to bear responsibility for the consequences of the predatory private student loan practices they engaged in by pushing high-cost private loans on high risk borrowers. For years, they bore the risk while gladly raking in profits.

If Congressional leaders go along with this ill-conceived provision and bail out lenders, then we believe they have a fundamental obligation to also come to the aid of financially distressed private loan borrowers who have been victimized by predatory practices. At the absolute least, Congress needs to reverse a 2005 law that made it extremely difficult for borrowers with unmanageable levels of private student loan debt to discharge these loans in bankruptcy. As we have said many times before, it makes no sense that the government has made it easier for people to discharge credit card debt than private loans they took out to attend college.

Over the last two years, we have written extensively about how loan companies' aggressive marketing practices and cozy relationships with colleges have pushed students to take on unnecessarily high levels of expensive private student-loan debt. In fact, at least one in five private student loan borrowers take out a private loan before they exhaust safer, cheaper federal Stafford loans.

Sallie Mae Seeks Competitive Bidding

By Jason Delisle and Stephen Burd

The Wall Street Journal reported yesterday that Sallie Mae is in a contract dispute with the U.S. Department of Education over the agency's plan to purchase federal loans from private lenders that are struggling with liquidity as a result of the credit crunch.

According to the newspaper, Sallie Mae has filed a formal protest with the Government Accountability Office over the Department's decision to put its current Direct Loan servicer, Affiliated Computer Services Inc., in charge of collecting on these loans for the government without putting the contract out for bid. In other words, Sallie Mae is saying that the Department should have held an auction for the contract to service those loans.

Oh, the irony is rich here. Sallie Mae is making the case that a government program run by private businesses should be subject to competitive bidding, so that the lowest cost and best equipped company for the job is ultimately hired. Surely Sallie Mae is arguing that this competitive approach saves money for taxpayers. Too bad the student loan giant has rejected this same argument when policymakers proposed using a competitive bidding process to determine the rates at which the government subsidizes lenders in the Federal Family Education Loan (FFEL) program.

Higher Ed Roundup: Week of September 8 - September 12

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NASFAA's Clouded View

By Ben Miller and Stephen Burd

As individuals on the "‘front lines" of the financial aid process, financial aid administrators offer an important perspective on the credit crunch's daily effects on student loan availability. As such, the results of a recent survey that the National Association of Student Financial Aid Administrators conducted of its members provide some interesting ground-level impressions of the credit crunch. Unfortunately, this viewpoint is almost entirely clouded by the 30,000-foot spin the organization's leadership has put on it. Needless to say, the association's close ties to the student loan industry remain firmly evident.

On its face, the survey suggests that immediate federal loan availability concerns have been largely satisfied, though worries remain about discriminatory lender practices (i.e. banks refusing to lend to students at community colleges and for-profit trade schools) and the long-term fiscal health of the student-loan market. The vast majority of respondents, for example, said actions that Congress and the Bush administration have taken in recent months have "eased the student loan crunch problem" for now. And only a relatively small proportion of aid administrators (about 25 percent of those surveyed) are worried enough that they have put contingency plans in place to prevent any disruptions in loan availability for their students.

Guaranty Agencies: A Middleman in College Access Clothing

What do an appendix, plica semilunaris, and student-loan guaranty agency all have in common? They're all vestigial structures whose original purpose is no longer necessary. But unlike the first two examples, guaranty agencies are desperate to show -- despite all evidence to the contrary -- that they are still relevant.

As parts of a system known for its complexity and confusion (the Federal Family Education Loan Program, otherwise known as FFEL), guaranty agencies are the ultimate amorphous entity, branching out into numerous roles that are completely unrelated to their original purposes.

Soon after Congress created the FFEL program in 1965, it authorized the involvement of guaranty agencies (many of which were already in existence in the states), to encourage lenders to offer student loans by providing default insurance. Congress also gave the guarantors important oversight responsibilities, such as ensuring that only eligible students obtain federal loans, and that lenders make a concerted effort to keep delinquent borrowers from defaulting.

While it made sense for guaranty agencies to occupy these roles at a time when technological limitations made it difficult for solely the federal government to oversee FFEL, the program's current setup and recent oversight failures make it clear that guaranty agencies should not be the ones to carry out these functions.

Where in the World is Matteo Fontana?

We hope you all enjoyed your Fourth of July vacation. While it’s nice to have the occasional hard-earned day off, we know someone else who has been on a very long paid break.

It has been 459 days since Matteo Fontana, the then-general manager of Financial Partners Division of the U.S. Department of Education’s Federal Student Aid office, was placed on administrative leave. The Department took this action after Higher Ed Watch revealed that he held at least $100,000 worth of insider stock in the student-loan company Student Loan Xpress. At the time, Education Secretary Margaret Spellings promised that she was taking the matter “very seriously.” But as far as we can tell, the Department hasn’t done anything beyond giving Fontana his regular paycheck and telling him to disappear.

It is clear that Fontana’s purchase and subsequent sale of the stock represented a substantial conflict of interest -- he was, after all, responsible for overseeing the lenders and guaranty agencies that participate in the Federal Family Education Loan (FFEL) program. In addition, at the time he received the stock he was in charge of the National Student Loan Data System (NSLDS), a national database that keeps track of the student aid awards of tens of millions of students. Last year, the Department was forced to shut it down temporarily because, as Higher Ed Watch also revealed, student-loan companies had been mining it to collect personal information about borrowers for marketing purposes.

A Well-Deserved Award

Too many times of late, we have seen mainstream journalists fall for the spin of lenders, who in the wake of the credit crunch have had a vested interest in raising panic levels about the availability of student loans.

That's why it's such a pleasure for us to see good, critical, and insightful reporting on the loan industry receive the recognition it deserves. Case in point: Paul Basken, a senior reporter at The Chronicle of Higher Education, has received a National Press Club award for a revealing piece he wrote last May showing how the revolving door between the Bush Administration and the student loan industry brought great rewards to Sallie Mae and put financially needy students in harm's way. [Disclosure: the author of this post used to work for the Chronicle.]

We wrote about Basken's article last year. But at a time when the student loan scandals of yore are fading fast from memory, we felt that it was important to remind our readers of just what he found. The conflict of interest that he uncovered still exists and needs to be dealt with.

A "Key" Development in the Case of Silver State Helicopters

For a long time we have known that KeyBank has played a leading role in aiding and abetting the efforts of sham for-profit trade schools to scam vulnerable students. What we didn't realize, however, was the integral role that KeyBank played in fueling the growth of Silver State Helicopters, an unlicensed and unaccredited Nevada-based flight-school chain that left its 2,500 students in the lurch when it shut its doors without warning on Super Bowl Sunday and filed for bankruptcy liquidation. Most of these students are now stuck having to repay nearly $70,000 in high-cost private loan debt for training they did not receive.

Thanks to a class-action lawsuit filed by several former Silver State students in California, we recently learned that KeyBank was Silver State's exclusive private student loan provider from 2002 to 2005, a time when the flight-school chain grew by "an astounding 2,786 percent." KeyBank appears to have severed its ties to Silver State in 2005, forcing the flight-school chain to find other lenders to provide private loan funds to its students. As we previously reported, Silver State then forged an exclusive arrangement with the infamous Student Loan Xpress and the Pennsylvania Higher Education Assistance Agency (PHEAA), to make and service the loans.

Important News for College Graduates

Attention recent college graduates: starting July 1st, you will have a once-in-a-lifetime opportunity to significantly reduce your federal student loan costs. We at Higher Ed Watch are telling you this, because if some in the student loan industry get their way, you may never hear about it.

For six months beginning July 1st, members of the Class of 2008 who have taken out variable interest rate federal student loans will have the opportunity to refinance those loans and lock in a low, fixed 3.61 percent interest rate. That's about 3 percentage points lower than the variable rate that was set last year. This is the biggest one year drop in student loan interest rates ever, and the 4th lowest interest rate in the 15 year history of the student loan consolidation program.

Higher Ed Roundup: Week of June 2 - June 6

Risky Lending a ‘Mistake', says Sallie Mae's Al Lord

Education Department Report Reveals Differences in Borrowing, Graduation Rates