Fannie Mae and Freddie Mac problems: Implications for Sallie Mae?

[TimeCruncher]

To standrews: Thank you for your post. Like your family, my family lives frugally by necessity and choice. My daughter will begin college this Fall, fortunately with enough transferable AP credits to enter college as a first or second semester sophomore. She could graduate in under four years if--and this is a big "If"--she is able to register for the (quickly closing) pre-requisite-level courses required for her dual-major program. (She could also earn her M.A. with only one additional year in residence.) Right now, my family's contribution to her college expenses will be a minimum of $10,000/year ($3,000/year above my family's $7,000 EFC), and we intend to tighten our belts still further in order to make this contribution out-of-pocket, rather than take out parent loans. Still, if Sallie Mae runs into the same financial trouble as Fannie Mae and Freddie Mac, and my daughter's Stafford and Perkins loans are reduced or cancelled due to Sallie Mae's financial problems, my family needs a back-up plan to help my daughter pay for her education. Right now, I have no idea what that back-up plan might be.

To LongPrime: Thank you for your additional post. I researched Asimov's Foundation trilogy, by the way. I want to read the entire series, so I've got my Fall reading cut out for me (and I think I'll start by reading Gibbon's The History of the Decline and Fall of the Roman Empire, as Asimov did).

To timely: Thank you for your post. I will check to see if our family's employer-sponsored retirement savings is enmeshed with any risky investments.

To BCEagle91: Thank you for your additional post and article link. I read the WSJ article and placed it in my Favorites. I also checked Google news for Paulson's recent comments and re-read them.

To Atana: Thank you for your post. The information you provided is grim, but it is what I expected to hear. I can easily envision the federal student loan safety net disappearing from beneath financially needy college students. My daughter is among the "fearful" college students you mentioned. Yesterday, as she and I were watching and reading the news about Fannie Mae and Freddie Mac, and discussing the possible impact upon Sallie Mae, she remarked, "I'm sure the government is more concerned about mortgages than about student loans." She thinks there is a possibility that the Stafford and Perkins loan programs will be sharply curtailed--perhaps even discontinued--while she is still in school. Could she be right?

[Atana]

She could be correct and for two reasons. First would be the already extant lobby pressure against such as the Perkins programs. That has reached a level wherein there was actually an internal directive within the USDOE to deemphasize such programs.
The second factor would be monetary limitations, in the last decade there has been an increasing emphasis from direct funding into secondary modes of student support. And that combined with the recent bailouts of both the mortgage and SL industry (the recent move to save liquidity was a probable bailout) means that available funds will be limited.
There is some political pressure within academia to increase grant amounts or to transition away from the loan model. But grants have been subject to years of actual reductions. So additions at this point will be more a matter of regaining lost ground that actual increases to students.
There has been some very serious discussions within academia and by parents and students as to how to resolve this situation...but it could be difficult as those groups do not have the lobby power of the corporate people who have the USDOE on a leash.
Could be an interesting year, and the whole situation is problematic enough from economic or academic perspectives that it won't be able to be kept quiet too much longer.

[TimeCruncher]

To Atana: Thank you for your additional post. I will look into the details you provided, and I will share your information with my daughter.

[Atana]

Your welcome...

The whole situation is almost surreal. Before the redirection and attendant emphasis on privatization the federal student loan programs were more or less workable and equitable for colleges, student borrowers and the general economy.
But within so short a time after the effective changes, these companies have somehow made an incredible mess of the whole situation. After all some of these companies had made record profits, including the aforementioned 1000%+ increase in stock values and almost unprecedented benefits for their CEO's. People get after Gates and Microsoft for their business practices, but at least they could keep their systems stable and indirectly have done some social good.

But it certainly whatever the SL barons did with their largely government sponsored bonanza, it was anything except applying it to keep the system stable. But perhaps stability and by implication service to students and colleges was never their intention...

And ironically as I wrote this the BBC was explaining exactly how bad the Fannie Mae, Mac situation actually is...with some clearly stated British worry about runs on US banks and etc. When the SL mess becomes more evident and combines with the mortgage debacle...I wonder when the overseas markets are going to effectively try to quarantine US financial systems.

[TimeCruncher]

To Atana: Thank you for your most recent post and additional information.

I took a look at the interactive stock charts (on <hoovers.com>) for Fannie Mae, Freddie Mac, and Sallie Mae to see how they compare over one, five, and ten years' time. I saw that Fannie and Freddie tend to parallel each other, while Sallie differs; however, I also saw that all three institutions were declining by early to mid-2007, with Sallie's plunge the wickedest of the three. As I mentioned in my initial post, my knowledge of finance is poor, and yet, Sallie's chart compared to Fannie's and Freddie's looks ominous to me.

I'm glad you mentioned the BBC, because you reminded me that foreign news sources might provide a more candid (and accurate) picture of the situation than the news sources here at home. Yesterday, while browsing the Web for information, I found a June 19, 2008 The Independent (UK) news article entitled, "End of the Road with Sallie Mae," which reported that Sallie Mae abruptly pulled out of the British student loan market, "owing to the credit crunch," leaving British postgraduate students "in the lurch." That article is among the news reports which prompted me to start my thread this morning. (If Sallie Mae has abruptly cancelled its loans to foreign students, then is abrupt loan cancellation for U.S. graduate, pre-professional, and undergraduate students far behind?)

I don't understand what you mean by "quarantine US financial systems," but I will find out.

[Atana]

Quarantine in this case could mean as much as possible moving their investments, and subsidiaries as much as is possible away from US financial interests. And it seems to be happening given the Euro has now climbed to about 1.60. And some in the European Union (especially the Germans) are beginning to view American financial speculation (which would include the SL bubble) as being reckless, irresponsible and the product of poor regulation.

And with Sallie Mae getting out of the English market, I'd wonder if more was involved than the credit crunch. Such as the British government making inquiries, or threatening to do so. SMC has a history of doing just those type of strategic redirections, for example the sale and move away from a public holding when investigations were threatening here in the US. Or the temporary removal of A. Lord when the PR was getting too bad.

Plus the Brits would be in a difficult political spot insofar as SMC co-opting their educational funding systems. The Brits have the Irish and Australian higher education systems in their cultural locus, both of which work much better than the American model.

The Canadians are also beginning to resent the presence of subsidiaries and models derived from the US edudebt industry, to the extent they have some very active consumer rights organizations about the matter. Even in India there seems to be some serious tensions about the issue, although I'm not quite sure what is the exact situation. And I don't currently know anyone from India that can be asked about the matter.

And since SMC has so many subsidiaries it tends to make reforms or inquiries into their activities difficult in the US. However overseas resentments are building about world economic troubles and many believe these are directly attributable to US economic problems. It's likely some reactions are brewing. It's could be possible that SMC could be asked (or told) to leave the countries where the resentment is especially marked.

The following is a partial list of their SMC subsidiaries, shadow companies and otherwise... (from website salliemaebeef.com admittedly an activist website, but SMC isn't especially free with this type of information)

2% EdvantageSM
2Futuro®
2Futuro® (logo)
A Higher Degree of Talent®
A True Partner in Asset Recovery®
Absolute Zero ProgramSM
Absolute ZeroSM
Academic Management Services®
Affinity Loan ProgramSM
Aim TrueSM
AllianceSM
Alternative Loan ProgramSM
ALTSource®
AMS®
AMS® (logo)
AMS Easysave PLUSSM
AMS Education Loan Trust®
AMS Webaccess®
App SacksSM
AppTrakSM
Arrow Financial Services & Design® (logo)
Arrow Financial Services®
Arrow Financial ServicesSM (Australia)
Arrow Financial ServicesSM (European Community)
Arrow Financial Services (Turkey)®
Arrow GlobalSM
Arrow GlobalSM (logo)
Arrow Global A Sallie Mae Company (logo)®
Arrow Global® (Japan)SM
Arrow Poland®
Ask a Counselor®
AutoChekSM
Bar Study Loan®
Be Brilliant With Student Loans®
bedebtsavvySM
Building Hope: A Charter School Facilities Fund®
Campus Assist®
Campus Gateway®
Campus GatewaySM (logo)
CampusBusinessSM
Care for MarylandSM
Care for Oregon®
Care for VirginiaSM
Career Training LoanSM
Cash BackSM
Champions for Higher EducationSM
CircuitSM
CIREDITSSM
CLASS®
Collectively Speaking®
College AdvantageSM
College Answer: Knowledge for CollegeSM
College Answer®
College RelianceSM
College Savings Accelerator®
Collegeanswer.com®
Collegeanswer.comSM (logo)
CollegeServ®
Collegiate ConnectionSM
Community College LoanSM
Connect USASM
Connect®
Corporate Partnership ProgramSM
Custom Campus Solutions®
Debt Management EDvisorSM
Debt Management SolutionsSM
Delivering What Matters Most®
Dentist Advantage Loan Program®
DENTSource®
Direct Repay PlanSM
Direct RepaySM
DOCSource®
EAGLE IITM
EAGLETM
EdNotes®
EdNotes® (logo)
EdTech®
Educacion a Tu Alcance®
Education Leads Us®
Education Leads Us® (logo)
Education Lending Training ConferenceSM
Education Resource CenterSM
Educational Advantage®
EduSource®
eFAO®
eFAO® (logo)
EmployeesFirst Source for Education®
Everything You Need To Get Ahead®
EXCEL Custom®
EXCEL Education LoanSM
EXCEL Grad Extension LoanSM
EXCEL Grad LoanSM
EXCEL Preferred®
EXCELSM
Executive MBA LoansSM
ExportSS®
Express OnlineSM
ExpressLoanSM
F.E.E.D.S.SM
Financing Your Lifelong Goals®
FINMAN®
FinPlan Forum®
First Class Teacher Award®
First In My Family®
FLAGSSM
Flex RepaySM
Full Circuit®
FutureCashSM
General Revenue Corporation®
General Revenue Corporation® (logo)
GetLoanStatus.comSM
GetYourLoanStatus.comSM
Giving Back Volunteers® (logo)
Global Health Education LoanSM
Global Health Education Loan ProgramSM
Global Health Private LoanSM
Global Health Residency and Relocation Loan®
Grad Choice Account®
Grad Rewards®
GRADADVANTAGESM
GRADEXCEL®
GradSource®
Graduation Bonus®
GRC® (logo- stylized)
GRC®
Great ReturnsSM
Great Rewards®
GRP Financial Services CorporationSM
GRPSM
GRPSM (logo)
HEAL Relief®
Heal RewardsSM
Helping Make Education Possible®
Hit your MarkSM
Idaho First®
Imagine the Possibilities®
International Health Education LoanSM
iReward®
Job Skills Training Loan®
Jump Start Plus®
Jump Start®
K-12 Family Education LoanSM
K2C®
Keeping Your Focus On Student SystemsSM
Kids to College®
Kids to College® (logo)
Knowledge for CollegeSM
Laureate and Design®
Laureate®
Law Loans Private LoanSM
LAW LOANS®
Law RewardsSM
Law Student LoanSM
LAWLOANS Direct Repay®
LAWLOANS Express®
LAWLOANS Private LoanSM
LAWLOANS Rewards®
LAWLOANS®
Lender Funds ManagementSM
Loan LinkSM
Loan SurvivorSM
LoanSense®
Louisiana Lagniappe®
Love Work. Love Life.®
Manage Your LoansSM
MBA LOANS Direct Repay®
MBA LOANS Express®
MBA LOANS Private LoanSM
MBA LOANS Rewards®
MBA LOANS®
MEDEX RewardsSM
MEDLOANS Consolidation Cash BackSM
MEDLOANS Consolidation LoanSM
MEDLOANS Consolidation RewardsSM
MEDLOANS Direct RepaySM
MEDLOANS Healthier ReturnsSM
MEDLOANS RewardsSM
Nellie Mae®
Nellie Mae A Sallie Mae Student Loan Company Logo®
Nellie Mae Cash Back®
Nellie Mae's Financial Success seriesSM
Nellie Mae GradPLUSSM
Nellie Mae's Parent Resources for Educational Preparation (PREP)SM
Net WizardSM
Net.PaySM
Net.RepaySM
Net.Shop®
Netback AdvanceSM
No Fuss PLUSSM
No Wait RebateSM
Nobody Lends You More Support®
Nursing Advantage Loan Program®
Office WizardSM
Online Loan ConnectionSM
Opening Doors to Higher Education®
Opening the Next Door to Your FutureSM
OpenLineSS®
OpenNet®
OpenNet® (logo)
Oregon First®
Outreach Counseling®
P in Pioneer Credit Recovery® (logo)
PaybackSM
Payment AdvisorSM
Pennsylvania Rewards®
Personalized Solutions That Work For You®
Pharmacist Advantage Loan ProgramSM
Pharmloan®
Pioneer Credit Recovery, Inc.®
Pioneer Credit Recovery, Inc.® (logo)
Pioneers in Client Server SystemsSM
PLUS By PhoneSM
PLUS By WebSM
PLUSback®
PLUSShare®


PortSS®
Powered by Sallie Mae®
Powered by Sallie Mae® (logo)
Priority Loan®
Private Consolidation Loan®
Private LineSM
Relationship Focused, Results Driven®
Repayment AnswerSM
Rewards PLUSSM
Rising Sun® (logo)
Sallie Mae®
SallieMae® (logo)
Sallie Mae (Argentina)®
Sallie Mae (Australia)®
Sallie Mae (Brazil)®
Sallie Mae (Canada)®
Sallie Mae (Chile)®
Sallie Mae (European Community)®
Sallie Mae (India)®
Sallie Mae (Japan)®
Sallie Mae (Mexico)®
Sallie Mae (Republic of Georgia)®
Sallie Mae (Republic of Korea)®
Sallie Mae (Singapore)®
Sallie Mae (Turkey)®
Sallie Mae (WIPO)®
Sallie Mae 10K®
Sallie Mae 10K® (logo)
Sallie Mae AdvantageSM
Sallie Mae Bank®
Sallie Mae Cash Back®
Sallie Mae Community College LoanSM
Sallie Mae Cup®
Sallie Mae DENTALoans®
Sallie Mae Debt Management Operations®
Sallie Mae DMOSM
Sallie Mae Education Trust®
Sallie Mae Education Trust®
Sallie Mae Extra CreditSM
Sallie Mae Financial®
Sallie Mae Financial® (logo)
Sallie Mae Home Equity Line of Credit®
Sallie Mae Home Loans®
Sallie Mae Home Loans® (logo)
Sallie Mae How to Pay for College®
Sallie Mae MallSM
Sallie Mae MallSM (logo)
Sallie Mae Mortgage®
Sallie Mae Mortgage® (logo)
Sallie Mae Newslink®
Sallie Mae Plus SuccessSM
Sallie Mae Private LoanSM
Sallie Mae Rapid Returns®
Sallie Mae Solutions®
Sallie Mae l UK® (logo)
Sallie Mae UK Education Loan®

Sallie Mae UK Education Loan Programme®

Sallie Mae Valley Classic Races®
Sallie Mae Valley Classic Races® (logo)
Sallie Mae's 1-2-3 approach to paying for collegeSM
Sallie Mae's Business Office Suite®
Select PLUSSM OnlineSM
Select PLUSSM ServiceSM
Select Step®
Select Your TermsSM
SEPSM
Service Excellence ProgramSM
Service Makes The DifferenceSM
Signature Associate LoanSM
Signature Education Loan®
Signature Express Online®
Signature Express®
Signature Grad Loan ProgramSM
Signature PharmloanSM
Signature Select®
Signature Student Loan®
Signature Student Rewards®
SLFA®
SLM (stylized)®
SLM Corporation®
SLM Education Credit Finance Corporation (ECFC)SM
SLM Financial Corporation®
SLM Financial Corporation® (logo)
SLM FinancialSM
SLM FinancialSM (logo)
SLM Financial® A Sallie Mae Company (logo)
SLM Holding Corporation®
SMART AdvantageSM
SMART LOAN®
SMART LOAN® (logo)
SMART Options®
SMART Rewards®
SmartDataSM
SmartDataSM
SMSC Honors®
Solutions for students. Solutions for schools.®
Solutions for them. Solutions for you.®
Southwest Student Services Corporation & Design®
Southwest Student Services CorporationSM
Southwest Student ServicesSM
SSSCSM
Student AnswerSM
Student Excel®
Student Loan Boot CampSM
Student Loan Counseling SoftwareSM
Student Loan Funding Cash BackSM
Student Loan FundingSM
Student Loan FundingSM (logo)
Student Loan WorkshopSM
Student SuiteSM (logo)
Student Web SystemsSM
Success By Sallie MaeSM
Swiftpay®
SwiftpayTM (Arizona)
Take the next step into your futureSM
Teach for Maryland®
Teach for Oregon®
Teach for Virginia®
Teacher Advantage Loan Program®
Technology for the Business of EducationSM
The #1 Paying for College Company®
The American Dream: Paying for College TourSM
The Experts in Student SystemsSM
The Fall ForumSM
The Informed SourceSM
the planning for college destinationSM
The Research Assistant®
The Research ToolkitSM
The Sallie Mae Fund®
The Sallie Mae Idea Lab®
The Sallie Mae SourceSM
The Science Behind CollectionsSM
The Science Behind Consumer Debt Purchasing®
There For You®
ToAnyDegreeSM
TransferAnswerSM
TransportSS®
True Fee®
Trust for Education®
Tuition Answer®
Tuition Answer® (logo)
Tuition Answer. A Sallie Mae Education LoanSM
Tuition Answer. A Sallie Mae Education LoanSM (logo)
Tuition Loan Program®
Tuition Payment PlanSM
TuitionPay & Design®
UnderPrimeSM
Unity USASM
Unlocking your FutureSM
Un-Met Need ScholarshipSM
Upromise®
Upromise® (logo)
Upromise Loan LinkSM
USA Education®
USA Group Enterprises®
ViewSASM
Washington First®
We Consider You FamilySM
Web Bonus®
Web BonusSM (logo)
Web Loan DeliverySM
We've Got Money to Learn®
What's Up With My Loan?SM
Where the World is GoingSM
Where's My Money?SM
WhizFund and Design®
WhizFundTM
Whizfund® (logo)
WhizkidSM
WhizKid® (logo)
WhizKid for Windows®
WiredScholar®
WiredScholar® (logo)
WiredScholarship®
Your Electronic AwardSM
Your Informed SourceSM
Your Student Loan Funding.com®

[TimeCruncher]

To Atana: I just saw your most recent post after having been away from my computer since last night. Thank you for your explanation (about quarantining), information, and reference to salliemaebeef.com. (which I will look at after I post this reply).

I don't shock easily, but your partial list of Sallie Mae subsidiaries and shadow companies took my breath away. I was especially shocked to see that Sallie Mae operates in so many foreign countries. (The UK article I cited in my previous post led me to conclude that the UK was the only foreign country in which Sallie Mae was administering student loans.) As stated in my initial post, much of what I've heard about Fannie Mae and Freddie Mac defies logic and common sense. So does your list. I don't understand how any institution can be scattered and splintered, and not risk being vulnerable to mismanagement and related financial problems. (I am going to randomly research some of the listed subsidiaries and shadow companies to see how well--or how poorly--they operate.) I guarantee that my daughter will be equally shocked when she sees your list. This is the sort of information student borrowers need to know.

In your Post #19, you described the current financial situation as "almost surreal." I agree. I watched and listened to CNBC all day yesterday (I have it on right now) to keep up with breaking news, and to continue learning financial terminology. The more I see and hear, the more bizarre this situation seems to be. For example, I learned yesterday that Anheuser-Busch was just bought by a foreign company; I learned this morning that General Motors is being restructured in an attempt to stave off possible bankruptcy. (Again, I'm shocked. A-B and GM are U.S. corporate heavy-hitters!) I've also heard that approximately 150 more banks are expected to fail. I'm bothered by the fact that this sort of financial news is "breaking." Common sense tells me that the financial problems of the sort I'm hearing about now did not happen overnight; they must have been brewing for a long time. Either the companies and institutions in financial trouble have been exceptionally circumspect about their financial problems, or the media have been (perhaps intentionally) dropping the ball.

In your Post #15, you mentioned a "circular toxicity" to this situation as it applies to colleges and college students. Common sense tells me that if an increasing number of high school graduates forego applying to college, and if an increasing number of college applicants and continuing students need federal loans in order to attend college, and if federal student loan programs are curtailed or cancelled, then financially needy college students will be dropping out. The college drop-outs will join the high school grads who never applied to college, and both groups will be looking for jobs. If there aren't enough jobs available to accommodate them, these young adults will be unable to support themselves, and will end up on welfare. Whether these young adults apply to and stay in college (with federal loans), or they lose their federal loans, drop out of college, and become involuntarily unemployed, the government pays. It makes more sense to me for the government to help students stay in college, where students will acquire the knowledge and skills to become more employable, more likely to become financially self-supporting, and be better contributors to the economy.

What a mess.

[annikasorrensen]

Can anyone explain in very basic terms what the near future of Student Loans might be like in a semi-worse case scenario? (Not a complete collapse, but perhaps a partial?)

I'm working on the assumption of sending our kids to college on a combination of parental funds, saved student funds, and modest student loans (not co-signed by parents). Do we need to rethink this combination in a semi-worse case scenario?

Annika

[BCEagle91]

I just read that the SEC has ordered naked short positions closed on Fannie, Freddie, Lehman and primary dealers. Seems like a desperation move to prop up share prices. It frequently works in the short-term. I wish that the SEC would just enforce their own rules when it comes to naked short-selling. They just seem to use it on their own companies.

[Atana]

Timecruncher, Yes it does make more sense for the government to help to keep students in college. In the long term it benefits the economy of the entire nation. That's why other countries do not use the US model for higher education funding.

The problem is that government is no longer distinct from corporate interests in regards to higher education policy and funding. The USDOE is literally a suburb of the larger companies such as SMC and NNC. It's a difficult condition to explain to those who graduated prior to the privatization/corporate consolidation of control over higher education funding. They still have fuzzy memories of the days when such as Sallie Mae were government sponsored enterprise and not corporate monoliths. But these trends have been developing for some time, for example the consumer rights for bankruptcy and student loans (subsidized) were stripped clear back in 1978.

As that long list of subsidiaries makes very clear, what happened is that SMC (and other companies) used their access to government money, and their insider protections to massively expand. As you noted, this type of over expansion does indicate potential lack of financial oversight. Which in some cases could be deliberate, insofar as the various consumer rights groups or politicians who have tried to make inquiries into the student loan swamp usually don't succeed. Either because they can't find the money or they don't want to disturb the financial waters.

Problem is, what made SMC's monolithic presence ultimately possible has been the economic marginalization of an entire generation of students.

Concerning partial collapses of the educational funding systems, to some degree it's already begun. But congress will have a dilemma insofar as another bailout is going to be read as a massive influx of corporate welfare. And that bailout money will ensure that funds for expansion of grant programs and non-corporate loans will not exist. Problem is most in congress have taken substantial donations from the edudebt industry, and so are in their vest pocket. They certainly don't have the students interests as a primary concern.
The following quote is from Stephen Burd's article in the Chronicle of Higher Education about donations and the effect on policy decisions, it was written several years ago (2004) but nothing has really changed.
"A Chronicle investigation reveals that over the last year and a half, officials with the loan industry and proprietary institutions have given, individually and through political-action committees, or PAC's, almost $1-million in campaign contributions to the 49 members of the House Committee on Education and the Workforce, according to Federal Election Commission records through the end of May...One lobbyist for a company that was a big contributor to the committee, who wanted to remain anonymous for fear of offending the congressmen, compared the process to a less savory profession. "It's like in the mob," the lobbyist said. "To get ahead, you have to be a good earner for your team."

Which could account for the mysterious absence of comments about this issue by those currently running for office. In addition to the financial wrecks this industry has caused for thousands of former students the entire situation is now building up to a major economic crises. But somehow our esteemed leadership feel compelled to say nothing...

[Atana]

BCEagle, in regards to the SEC's seeming abrogation of regulatory responsibilities could that also be a factor in the handling of the SL companies?

They have been playing in the murkier waters of the secondary bond market, and in one instance investors have been badly burnt and there was some brief murmurings about investigations.

[BCEagle91]

Naked short selling is more of a matter of share price than it is in operational matters. I don't have the highest opinion of the SEC.

[Atana]

It appears that loss of respect regarding the SEC is well justified. In regards to the continuum of financial influence peddling there no longer seems to be an interest by government regulatory bodies to actually do their stated mission.
Gods know SEC isn't doing their job, and the USDOE is so rife with influence peddlers from the very industry they're supposed to regulate for the good of students....that incest would seem to be a more appropriate word than policy.

The below is from the June 25th Higher Education Watch, from the New America Foundation. And it's incredible, but not entirely surprising that these type of schemes are permitted to propagate especially since the only way that these can happen is with outright collusion by governmental officials.

It's very disappointing however that we have to rely on specialist press such as Higher Education Watch, or Chronicle insofar as fairly few outside the field read these sources. If these scandals and schemes were covered by larger media outlets there'd likely be a hue and cry to reform the situation before it all collapses. It may already be too late for many student borrowers, as their rights have been so compromised as to be irrelevant. But because of the profiteers we're probably looking at the systemic collapse of higher education funding. The moral collapse happened some time ago...


Stephen Burd -
June 25, 2008 - 2:08pm

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.

Going to Bat for Sallie Mae

The Chronicle article revealed that Matteo Fontana, a high-ranking official in the Department of Education's Federal Student Aid office, made "a controversial and high stakes legal ruling" in December 2004 that greatly benefited Sallie Mae, his former employer, the day before the company officially broke its ties with the federal government and became a private corporation. In fact, Fontana's action essentially removed the last obstacle to the company's long-sought transformation. [Yes, this is the same Matteo Fontana who was at the center of a Higher Ed Watch investigation that found that he held 10,500 shares of insider stock from Student Loan Xpress. Nearly 15 months later, Fontana remains on paid administrative leave pending the outcome of a Department investigation.]

In his ruling, Fontana rejected an opinion offered by the Department's Inspector General (IG) two years earlier that a lucrative arrangement that exists between Sallie Mae and USA Funds, the country's largest guarantee agency, violated the law and needed to be severed in order to protect borrowers.

Sallie Mae's relationship with USA Funds dates back to 2000 when the loan giant purchased the guarantor's parent company, USA Group, which had been one of its largest competitors.

On its face, the sale didn't give Sallie Mae control of USA Funds. Under federal law, for-profit lenders, such as Sallie Mae, are not allowed to own nonprofit entities such as guarantee agencies. That prohibition makes sense because the Higher Education Act puts guarantors in charge of overseeing loan providers -- making sure, for instance, that lenders do everything required to keep borrowers who are delinquent on their loans from defaulting.

Sallie Mae, however, found a creative way around the restriction. While the loan company's purchase didn't include USA Funds, it did gain control of USA Group Guarantee Services, a for-profit subsidiary that provided administrative services to help the guarantor carry out its functions. The deal also required USA Funds to contract its loan guarantee services to Sallie Mae.

USA Funds is now a shell of its former self. Sallie Mae employees carry out most of the agency's operations. Meanwhile, the guarantor pays Sallie Mae about $250 million a year for staffing and other purposes, according to the Chronicle.

Raising Red Flags

In 2002, the Department's IG raised a giant red flag. Sallie Mae's relationship with USA Funds, the IG's office wrote, presents "a conflict of interest" that needs to be cured. Because Sallie Mae effectively controls the guarantor, the IG pointed out, there is no independent agency ensuring that the loan giant is doing all it can to ensure borrowers don't fall behind on their payments. By working hand-in-hand, the two entities actually have a perverse incentive to let borrowers fall behind so that the USA Funds can collect the generous subsidies the government provides guarantors for keeping delinquent borrowers out of default.

What makes the story especially outrageous is that the Federal Student Aid office initially agreed with the IG's assessment. In March 2004, Fontana sent a letter to USA Funds saying the "conflict of interest" needed to be eliminated. But on the eve of the day Sallie Mae was finally to become a fully private for-profit company, he had a change of heart.

In the follow-up letter he sent that December, Fontana wrote that the Department "had reconsidered its prior position." He said the conflict of interest did not exist because the Sallie Mae (SLM) subsidiaries that helped manage USA Funds had separate tax identification numbers from other parts of the company. "It is apparent from SLM's website that SLM regards these subsidiaries as separate corporate entities," he wrote. Great detective work there.

Basken's piece showed how Sallie Mae's friends at the Department went to bat for the corporation, despite having concerns that students could be hurt. Hopefully next year, when the Department's leadership changes, the agency will revisit this dubious decision and, as a change of pace, put the interests of students first.

Congratulations on the award, Paul. Keep up the good work."

[TimeCruncher]

To annikasorrensen: Thank you for your post. My family has made a similar college financing plan (although my daughter presently has no savings, but will be working part-time during the school year and full-time during summer breaks). Like your family, my family will now need a back-up plan.

To BCEagle91: Thank you for your most recent posts. As I was looking up the financial terms you mentioned, I heard the term "naked short selling" uttered on television. I've had CNBC on since early this morning, and I watched and listened to the Senate Banking Committee hearing. The participants' comments were often too technical and too complex for me to understand, so I had to rely upon the CNBC anchors' analyses for clarification. At one point, the CNBC anchors excitedly commented that Sen. Jim Bunning had just challenged Treasury Secretary Paulson with the statement, "Can I believe what you're telling me about the GSEs?" The CNBC anchors commented that statements as openly confrontational as Bunning's are out of the ordinary, and therefore, significant.

To Atana: Thank you for your most recent posts. You hit on one reason this situation is such a cause of concern for me. I am fifty-five years old; my "fuzzy memories" pre-date Sallie Mae's privatization. I was an undergrad between 1971-75, and each undergraduate year, I used federal Work-Study, a National Defense Student Loan, and a state-guaranteed student loan (administered by my hometown bank) to supplement my school-awarded merit scholarship. (My parents, who despised college-educated people, were financially able but unwilling to contribute to my education--an ugly story, the details of which are not pertinent to this thread.) I graduated $10,000 in debt, deferred repayment while in grad school, and then--with an unanticipated string of low-wage jobs--managed to both support myself and repay my student loans in full and on time. (I repaid the NDSL in about half the allotted time.) Those repayment-phase years were financially tough, and in retrospect, I would probably be in better financial shape today if I had started working full-time after high school instead of going to college. College and grad school haven't yet paid off for me, and I don't want my daughter to find herself in my financial position when she's fifty-five. Regardless, I'd rather have my daughter attend college/grad school, and then graduate with "reasonable" federal student loan debt (which I intend to help her repay), than have her federal student loans curtailed or cancelled, leaving her unable to afford to complete her education.

The information you provided about the corporate/political wheeling-and-dealing involving Sallie Mae adds to my concern. Clearly, it's a bad time to be a financially needy college student.

[BCEagle91]

"At one point, the CNBC anchors excitedly commented that Sen. Jim Bunning had just challenged Treasury Secretary Paulson with the statement, "Can I believe what you're telling me about the GSEs?" The CNBC anchors commented that statements as openly confrontational as Bunning's are out of the ordinary, and therefore, significant."

Ron Paul and Barney Frank are two that routinely challenged Greenspan over the years.

"Those repayment-phase years were financially tough, and in retrospect, I would probably be in better financial shape today if I had started working full-time after high school instead of going to college. College and grad school haven't yet paid off for me,"

You sound articulate and purposeful in dealing with challenges - perhaps those are benefits of your college degrees?

The amazing thing is the amounts of debt today. $10,000 for four years with no family help would be a great number for today. It was a bit hard for me to really consider the numbers today (the real consideration is when you make your first payment - until then, it's theoretical) based on my experience ($1,000 in loans) way back when. Costs were exponentially lower and grants were more plentiful.

It probably wouldn't hurt to send letters to your elected officials. It's pretty easy to do this with many legislators that have forms that you can fill out on their websites.