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

[mam1959]

Atana - don't mean to quibble - but fannie and freddie are overseen by OFHEO -and not the SEC (although the SEC has many a hand in is SPE investments, of which there are too many) and it has been a difficult relationship - one that in my view OFHEO has been on the right side on - they were particularly strident about Fannie's accounting chicanery - but one must question OFHEO's effectiveness here. They have been quibbling about single digit billion dollar accounting problems when both organizations are now (practically speaking) levered 50 to 1. This massive amount of leverage is the problem - no business, even one government sponsored, can consistently survive in this leveraged state. Sallie Mae is overlevered too, so the concern about Sallie is valid, although I don't think they are in the same extreme situation as fannie and freddie.

[Atana]

Quite true about the confusion of regulatory agencies. My comments about the abrogation of regulatory responsibilities was aimed at the USDOE in regards to SMC and other companies. But keeping track of which governmental entity isn't doing it's job is getting difficult. And the intertwining of these companies does make it difficult to trace out the spiderwebs. And given the long list of SMC subsidiaries its very possible that one of their entities is involved where the OFHEO/SEC would have venue.

USDOE is so co-opted by these companies that any serious investigative activity is unlikely. Usually the ethical regulators at USDOE have to resign or retire before they can comment on the whole situation. And so the information we lowly mortals can get about the situation is often too late or is simply more disinformation brought by those bought by the lobbyists.

For example default rates have been assessed at artificially low percentages, by various tricks including not tracking past 2 years or by considering deferments a form of default conciliation. But there has been some interest in revising the default data to indicate true rates. If this is done there is an expectation that actual default rates will increase considerably.

"An analysis of default rates by the Department of Education found that a longer-term snapshot could show that default rates are as much as 60 percent higher than with the two-year window. Under the proposed change, public schools would see their average default rate go from 4.7 percent to 7.2 percent, while private schools would edge up to 4.7 percent from 3.0 percent.
The biggest increase, however, would be at for-profit institutions, which would see their average default rate increase from 8.6 percent to an estimated 16.7 percent. Even more troubling, though, is the fact that were the cohort window extended to four years, for-profit colleges would have an average default rate of 23.3 percent. In other words, after four years, one out of every four for-profit students would likely have defaulted on their federal student loans. (Miller 2008)


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. (2008 Higher Ed Watch, Basken, Burd) "

The whole situation is morally sick, insofar as the influence peddlers had initially peddled fraudulently high default rates when that wasn't the case in order to get the regulations bent in their favor. Now potential defaults are climbing because of economic strains (including abuses by the edudebt industry) they want that information constrained because it illuminates too many shady business practices on their part.

For those who graduated in the 80's. 90's and those who will graduate in the 00's the whole situation with student loans is economically disasterous. And with the layers and layers of shell games its impossible for the average student borrower to know why they probably will never be able to pay for their education. And if the actual numbers on both the incredible profits and the shear number of people adversely affected were released, methinks there'd be a hue and cry for reform that no lobbyist would be able to quell.

The irony of it all is the profiteers are about the wreck their own party. And as a result of their intrusion into older more equitable systems higher education has become itself a means of lowering status rather than raising ones condition. And the result its a weird dichotomy within academia. Many profs are now little more than educated sharecroppers for the edudebt industry. But part of their jobs persona is to make students believe that education will elevate them? In my case I have a terminal degree, which was a massive economic mistake, but that is what permits me to be an academic. But increasingly I advise students in my field not to obtain terminal degrees...

It seems the 'life of the mind' is going suffocate in corporate cash boxes...

So yeah SMC and other companies are over levered but the amount of damage they've caused by their games could further wreck a shaky economy and other consequences could last for generations.

[TimeCruncher]

To BCEagle: Thank you for your comments, compliment, and suggestion.

Ron Paul and Barney Frank are known to be outspoken. Perhaps the CNBC anchors' amazement was in response to Bunning being the source of the challenging statement. On the other hand, the anchors sounded as though they were reacting to the actual wording of Bunning's statement, and the context in which he made his statement. (I think C-SPAN covered the hearing also, so they might replay it, and I'll have a chance for a second look and listen at the exchange between Bunning and Paulson.)

Yes, I'm purposeful, but fortunately, that's a quality I must have possessed at birth. (If I hadn't had that quality before entering college, I wouldn't have survived long enough to battle my way out of my hometown and into college.) College and grad school were undeniably valuable in helping me develop and improve my writing and research skills. I don't regret the time, effort, and money I spent to earn my college degree. (I have only my bachelor's degree; two major surgery-related financial setbacks required me to leave my graduate degree program in ABT status.) However, I do regret that despite my degree, I have never earned enough money to provide myself and my family with a higher standard of living. (My daughter's undergraduate student loan burden will be considerably larger than mine.)

Letters to legislators might be in order. I'm not the activist type, but I'll think about it. Thank you for the suggestion.

To mam1959: Thank you for your post and for your information. I don't know what you mean by "overleveraged," but I will find out.

To Atana: Thank you for another informative post. I appreciate it.

I agree that many of today's college students have little idea what life will be like for them when their massive student loans come due. Fortunately, my daughter has always been a realistic, eye-on-the-bottom-line sort of person. She had no problem rejecting the schools which admit-denied her. (Two of those schools--both OOS public flagships--offered financial "aid" packages consisting entirely of loans totaling $26,000 to $32,000 a year!) She also had no problem rejecting two somewhat more affordable in-state public universities which espoused a "Change your major as often as you want, and stay here as long as you like (as long as you keep paying through the nose)" philosophy of undergraduate education. My daughter is pleased with the large, urban OOS state-related public university she has chosen to attend. She has made the wisest academic choice and the wisest financial choice. My daughter knows that undergraduate and graduate degrees alone will not "elevate" her, that there is no high-income "dream job" waiting for her, and that borrowing federal student loans is serious business. Within the past few days, however, she has learned how a downturn in the economy can negatively impact individuals like herself. She's taking this news in stride, but still, she's shocked… now. Less realistic college-bound students will be very shocked later.

[BCEagle91]

Looks like Canada is doing something about the student loan problem:

Kitchener-Waterloo — If you have a large student loan debt that is more than seven years old, you can now have it forgiven by a bankruptcy, according to personal insolvency professionals at PricewaterhouseCoopers (PwC).

Under amended Canadian federal bankruptcy laws which came into effect on July 7, 2008, if your student loans are older than seven years, they can now be forgiven or compromised by filing a bankruptcy or consumer proposal with a licensed trustee in bankruptcy. As well, there are changes to the law which may see your student loans forgiven after five years if you are experiencing significant financial hardship.

“The change to the law will help those who have been struggling for years with unmanageable student loan debt to get a fresh start” said Wesley Cowan a Kitchener-Waterloo-based bankruptcy trustee at PwC.

Exchange Morning Post

An article on Massachusetts and grants:

Yet many educators are less optimistic. Two decades ago, a typical state grant covered 80 percent of college costs; now it covers 15 percent. And state and community colleges, which educate a disproportionate number of low-income and minority students, have little money to spend on financial aid.

State lags on student grants - The Boston Globe

And in my frugal Yankee state:

Student debt in N.H. 2nd in nation

CONCORD — New Hampshire student loan borrowers have the second highest debt burden in the country. Eighty-two percent of the 1,500 borrowers surveyed said that without student loans, attending college would not have been possible, according to survey results recently released by the New Hampshire Higher Education Assistance Foundation Network Organizations.

Student debt in N.H. 2nd in nation

The NHHEAF said recent survey results support the need for its program designed to educate student loan borrowers about the serious consequences of defaulting on a loan.

There are some interesting results of a survey that they did on those in the state with student loans. One interesting national statistic was that about 56% of students used loans to fund college. The surprising part of the statistic was that 44% don't use loans which to me is pretty remarkable.

http://www.nhheaf.org/pdfs/Borrowing...hterfuture.pdf

[Atana]

Interesting that Canada acted on the matter. But not surprising given the situation here in the US. Hopefully the Canadians action might indirectly pressure our seemingly deaf, dumb and blind representatives to act to resolve a situation which is close to a public crises.

However Canada has been dealing with the secondary effects of the US student loan mess for some time. For several years Canadian teaching postings had a disproportionate number of US applicants. To the extent that the last time I checked (when I was still in the North), the Canadians were placing citizenship preferences on such positions. And quite a few people along that border were considering immigration to Canada as a solution to the pressures of the loan cabal. Perhaps that's why Montana actually floated a proposal to deny drivers licenses to those who were behind on student loans. Perhaps they figured out an incipient exodus was in the making... but I wonder how many US people might now consider Canada as a option because of their new laws.

And state and CC's have had problems with reductions in grants, and attendant problems in becoming reliant on loan money for funding. To the extent that many of the activities cited as problematic by the NYS SAG are still very much in evidence.

Timecruncher; Good your daughter is keeping a realistic view of the situation. But somehow we lose much of the moral credibility of academia by having had to come to these realizations.

[TimeCruncher]

To BCEagle91 (I read the materials for which you provided links) and Atana: Thank you for your most recent posts. My household is a week away from moving (two thirds of our stuff is already packed, out the door, and in storage), and yesterday was another major packing day. I had time to read your posts yesterday morning, but I haven't had a chance to respond until now.

Canada's bankruptcy law change with regard to federal student loans doesn't sit well with me. I don't see how a federal student loan program can continue functioning for current and future student borrowers unless graduate debtors repay their loans in full. So, I think Canada's new policy is a bad idea. I hold this opinion because many members my generation of state and federal student loan borrowers did not take their repayment obligations seriously; they either voluntarily dropped in and out of the workforce or overspent themselves into financial oblivion, allowed themselves to default on their student loans, and then used bankruptcy as a quick and easy (and dirty) way of discharging their student loan debt. In my initial post, I stated that "there's plenty of blame to go around" for America's current financial mess, and I think my own generation's defaulting state/federal student loan debtors own some of that blame.

I consider government student loan default to be as serious a matter as tax evasion, and I think that just as back taxes must be paid, government student loans must be repaid. I disapprove of automatically letting government student loan debtors off the repayment hook just because a certain period of time has elapsed; however, I also disapprove of imposing inflexible repayment terms and draconian penalties upon debtors who make a good-faith effort to repay, but find it temporarily difficult--or impossible--to do so. I approve of discharging government student loan debt only for those graduates who die (obviously), or who become permanently disabled, and therefore, unemployable. I somewhat approve of partial student loan forgiveness for debtors who enter government service. However, I think that all other government student loan debtors must repay somehow, some way, no matter how long it takes.

While continuing to research Sallie Mae, I ran across an old (September 11, 1988) New York Times article entitled, "Administration Faults Dukakis on College Loans." That article described the Reagan administration's negative response to Michael Dukakis' proposed student loan repayment plan (called STARS--the Student Tuition and Repayment System), under which the federal government would administer a payroll-deduction system which would enable debtors to repay their student loans during the course of their working lifetime, rather than within a fixed number of years during which recent graduates' earnings are most likely to be low. That article caught my eye, because some elements (but not all elements--I would make participation by state/federal student loan debtors mandatory, and I would set the payroll deduction at 5% of gross earnings) of Dukakis' proposed plan make sense to me. It's unfortunate that it was Dukakis who proposed this plan during the thick of the 1988 presidential race; I wonder if the same or a similar plan--either proposed by someone else or proposed at some other time--would have been better received, and perhaps be in place today. I'm trying to find out if a Dukakis-style loan repayment plan has ever been re-proposed by any member of any political party.

I can't assess the "moral" credibility of academia, but I strongly agree that my daughter's generation of college-bound students is being sold down the financial river by high schools which trumpet that all students have a "right" to a college education (and that all students can "afford" an expensive college education), and by colleges which aggressively and slickly market themselves to students. The NHHEAF report (to which BCEagle91 provided a link) is not only factual, but also insightful, and in my opinion, is a disturbingly revealing portrait of how today's college students can easily get in over their financial heads. I think that academia is dropping the ball at the high school level, not the college level. My daughter and I attended a number of college admissions and financial aid seminars conducted by her two high schools over the past four years. Those seminars were always pie-in-the-sky positive; the issue of student loan debt was never mentioned, let alone explained. My daughter's awareness of the risks and responsibilities of student loan debt comes from me, and in this respect, my age and my experience as someone who has borrowed and repaid student loans, works to her advantage. I am old enough to have had many years of personal contact with my grandparents, who survived the Great Depression, and who developed a lifelong fear and loathing of debt. My parents, who enjoyed post-WWII economic prosperity, didn't listen to their parents' warnings to avoid debt, but I listened and learned. I passed my grandparents' wisdom on to my daughter, who--like the strong and wise great-grandparents she was never privileged to meet--has adopted their (and my) "Use it up, wear it out, make it do, or do without" approach to living within one's financial means. No matter what happens with the economy (either now or in the future) I'm certain that my daughter will make her best effort to survive financially. My concern (and hers, as well--she's aware enough to be concerned) is that the country's economic problems will get so bad that even her best effort to survive won't be good enough, and that she will fall through the financial cracks along with those who are either less aware of or less concerned about various forms of debt.

I didn't start this thread with the intention of yakking about myself and about my daughter, or with the intention of spouting my own opinions and viewpoints. I started this thread to obtain information and clarification about the current financial situation. However, it's hard for me to make sense of what's going on unless I can acquire an understanding how current financial events relate to me and mine.

I thank everyone who has contributed to this thread so far, and I hope to see additional replies.

[BCEagle91]

"Canada's bankruptcy law change with regard to federal student loans
doesn't sit well with me. I don't see how a federal student loan
program can continue functioning for current and future student
borrowers unless graduate debtors repay their loans in full. So, I
think Canada's new policy is a bad idea. I hold this opinion because
many members my generation of state and federal student loan borrowers
did not take their repayment obligations seriously; they either
voluntarily dropped in and out of the workforce or overspent
themselves into financial oblivion, allowed themselves to default on
their student loans, and then used bankruptcy as a quick and easy (and
dirty) way of discharging their student loan debt. In my initial post,
I stated that "there's plenty of blame to go around" for America's
current financial mess, and I think my own generation's defaulting
state/federal student loan debtors own some of that blame."

New American Standard Bible (©1995)
"At the end of every seven years you shall grant a remission of debts."

Bankruptcy is not something to be taken lightly, especially if you
have any assets. It basically puts you in credit jail for a while.
But if a debtor has the ability to claim bankruptcy on debts, then it
naturally encourages the lender to be more cautious about the loans
that they make IF THE LOANS AREN'T SECURITIZED with the responsibility
dumped on bondholders or the government. We used to make mortgages
with the local bank in a face-to-face transaction with the bank
holding the paper. Hopefully the loan officer knows the borrower and
sees her from time to time.

Universities take a chance on students all the time. Their loan is far
more generous. In some cases the required repayment is $0 provided the
student maintains the requirements of the scholarship. If the student
doesn't maintain requirements then he would be considered a "bad
investment" (to coin a term from another thread) with scholarships
rescinded. Here too the university is taking a gamble on a student as
would a lender.

"I consider government student loan default to be as serious a matter
as tax evasion, and I think that just as back taxes must be paid,
government student loans must be repaid. I disapprove of automatically
letting government student loan debtors off the repayment hook just
because a certain period of time has elapsed; however, I also
disapprove of imposing inflexible repayment terms and draconian
penalties upon debtors who make a good-faith effort to repay, but find
it temporarily difficult--or impossible--to do so. I approve of
discharging government student loan debt only for those graduates who
die (obviously), or who become permanently disabled, and therefore,
unemployable. I somewhat approve of partial student loan forgiveness
for debtors who enter government service. However, I think that all
other government student loan debtors must repay somehow, some way, no
matter how long it takes."

You can't get blood from a stone. If you provide serious disincentives
to work, you wind up with a bunch of former students in unemployment.
If you forgive their debts, they can hopefully get meaningful
employment, grow in their jobs and pay more in taxes than the amounts
of their student loans over the rest of their earning career.

In essence, we loan students $120,000 for their K-12 educations and
hope to get it back in the taxes that they will pay over their
lifetimes. There are some that don't appreciate the expense and some
that make the most of it. There are some that throw it away right in
the public's face. Yet we continue to provide these moneie to every
child, gratis.

On taxes, I would guess that IRS officials have the ability to reduce
and negotiate tax liabilities. For the same reason. If you take
everything away from someone, they have no incentive to work. You get
more in the long run if they can go back to being productive members
of society.

"While continuing to research Sallie Mae, I ran across an old
(September 11, 1988) New York Times article entitled, "Administration
Faults Dukakis on College Loans." That article described the Reagan
administration's negative response to Michael Dukakis' proposed
student loan repayment plan (called STARS--the Student Tuition and
Repayment System), under which the federal government would administer
a payroll-deduction system which would enable debtors to repay their
student loans during the course of their working lifetime, rather than
within a fixed number of years during which recent graduates' earnings
are most likely to be low. That article caught my eye, because some
elements (but not all elements--I would make participation by
state/federal student loan debtors mandatory, and I would set the
payroll deduction at 5% of gross earnings) of Dukakis' proposed plan
make sense to me. It's unfortunate that it was Dukakis who proposed
this plan during the thick of the 1988 presidential race; I wonder if
the same or a similar plan--either proposed by someone else or
proposed at some other time--would have been better received, and
perhaps be in place today. I'm trying to find out if a Dukakis-style
loan repayment plan has ever been re-proposed by any member of any
political party."

The term is wage garnishment I believe.

How well does this work for welfare mothers and their supposedly
missing fathers? Their fathers may actually be living with them but
it's more efficient for the father to be "missing". It seems that it
is very hard to try to modify ingrained human behaviour and it may be
more efficient to appeal to some rather base behavours like simple
greed for the betterment of society.

"The NHHEAF report (to which BCEagle91 provided a link) is not only
factual, but also insightful, and in my opinion, is a disturbingly
revealing portrait of how today's college students can easily get in
over their financial heads. I think that academia is dropping the ball
at the high school level, not the college level. My daughter and I
attended a number of college admissions and financial aid seminars
conducted by her two high schools over the past four years. Those
seminars were always pie-in-the-sky positive; the issue of student
loan debt was never mentioned, let alone explained. My daughter's
awareness of the risks and responsibilities of student loan debt comes
from me, and in this respect, my age and my experience as someone who
has borrowed and repaid student loans, works to her advantage. I am
old enough to have had many years of personal contact with my
grandparents, who survived the Great Depression, and who developed a
lifelong fear and loathing of debt. My parents, who enjoyed post-WWII
economic prosperity, didn't listen to their parents' warnings to avoid
debt, but I listened and learned. I passed my grandparents' wisdom on
to my daughter, who--like the strong and wise great-grandparents she
was never privileged to meet--has adopted their (any my) "Use it up,
wear it out, make it do or do without" approach to living within one's
financial means. No matter what happens with the economy (either now
or in the future) I'm certain that my daughter will make her best
effort to survive financially. My concern (and hers, as well--she's
aware enough to be concerned) is that economic problems will get so
bad that even her best effort to survive won't be good enough, and
that she will fall through the financial cracks along with those who
are either less aware of or less concerned about various forms of
debt."

What you've discussed is similar to one explanation of k-waves or
long-term waves. The first generation hates debt because they lived
through the terrible deflationary times. They pass their hatred of
debt on to their children who understand it somewhat but don't
personally experience managing their finances through the period.
The next generation knows little or nothing about the downside of
credit bubbles and goes hog-wild precipitating a credit crash and
then it starts all over again.

"I didn't start this thread with the intention of yakking about myself
and about my daughter, or with the intention of spouting my own
opinions and viewpoints. I started this thread to obtain information
and clarification about the current financial situation. However, it's
hard for me to make sense of what's going on unless I can acquire an
understanding how current financial events relate to me and mine."

There are lots of chatty people here.

[Atana]

"I hold this opinion because many members my generation of state and federal student loan borrowers did not take their repayment obligations seriously; they either voluntarily dropped in and out of the workforce or overspent themselves into financial oblivion, allowed themselves to default on their student loans, and then used bankruptcy as a quick and easy (and dirty) way of discharging their student loan debt."

Timecruncher it's difficult to comment about specific members of your generation in regards to loan issues. However in the late 70's/early 80's when the financial industry lobbied to have consumer protections removed from student loans, the actual default rate was actually quite low. What they did was promote a red herring about the default problems, such as the image of herds of lawyers and doctors not paying their student loans. But it had about as much real veracity as the welfare mom and Cadillac stories of the same era.

Ironically, and perhaps intentionally as a result of the edudebt industries successful and long term lobby campaign; actual default rates are much higher now. This is largely because the outrageous supplemental fees that our co-opted congress has allowed the edudebt corporations to levy which make it virtually impossible to pay troubled notes. In some cases these fees can approach 25%. If you check up on what SMC and USA Funds have been doing it's abundantly evident the corporate barons want defaults because of the incredible compensatory fees and government surety money that they can collect. So it's very different from the 70's insofar as student borrowers have been exposed to a system which often is little more than corporate loan sharking.

"...article entitled, "Administration Faults Dukakis on College Loans." That article described the Reagan administration's negative response to Michael Dukakis' proposed student loan repayment plan (called STARS--the Student Tuition and Repayment System), under which the federal government would administer a payroll-deduction system which would enable debtors to repay their student loans during the course of their working lifetime, rather than within a fixed number of years during which recent graduates' earnings are most likely to be low. That article caught my eye, because some elements (but not all elements--I would make participation by state/federal student loan debtors mandatory, and I would set the payroll deduction at 5% of gross earnings) of Dukakis' proposed plan make sense to me"

Dukakis's plan is actually very close to the Australian system, wherein a certain percentage of income is sent to the government for a set number of years. At the end of that term, remaining amounts are forgiven.
The Australian system has worked fairly well, but the Aussie's have also maintained control over their loan system. In part because they seem to have more direct loans than those administered by private and for profit corporations. And in their system the money which is owed goes back directly to the Australian government rather than being filtered through and skimmed off (or scammed off) by a corporate system.

"My daughter and I attended a number of college admissions and financial aid seminars conducted by her two high schools over the past four years. Those seminars were always pie-in-the-sky positive; the issue of student loan debt was never mentioned, let alone explained. My daughter's awareness of the risks and responsibilities of student loan debt comes from me, and in this respect, my age and my experience as someone who has borrowed and repaid student loans, works to her advantage."

Well, the amount of misinformation and very, very slick marketing about the blisses of student loans which infiltrates academia is appalling. And despite the NYS AG's exposes about the matter, its still very prevalent. It's one of the aspects of the industry which has greatly compromised academes moral standing.
Supposedly we exist to serve students and to propagate the truth. But when our halls are lined with posters and ads, and supposed seminars, which exist solely to promote the agenda of these companies...and often do so with disregard for the actual truth or consideration of the students better interests...its very difficult to keep that systemic independence and so morality. And speaking up against these unethical tricks is very difficult. It's not unknown for faculty who do comment to be pilloried, fired, or marginalized. Obviously enterprise has the right to advertise, but the essential difference between the edudebt industry and any other entity...is that they get to lie and do so with government complicity.