Sallie Mae and the College Loan Meltdown
April 18, 2008 – 10:34 am by Nick
On December 19, 2007, Al Lord, the chairman of Sallie Mae (SLM.N: Quote, Profile, Research), quipped “You know that a company is doing poorly when metal detectors are used at investor meetings”. Sallie Mae, the nation’s largest student lender, was familiar to bad quarters but the economic crisis might soon be wreaking havoc on the student loans market. Top executives have been mauling over the possibility of suspending the issuing of new federally guaranteed student loans, whose interest rates are capped at 6.8%.
Sallie Mae has been swamped by a tsunami of misfortune: loss of 70% of the stocks value, $104 million losses in the first quarter, high borrowing costs, reduction of government subsidies and a credit crunch. The recent economic climate has chased away institutional investors from securities bundled with student loans. Incapable of raising money, the company will only be able to collect loan payments.
While college-bound students rush to send their early loan applications, the House lawmakers passed a bill boosting liquidity for Sallie Mae and other lenders. The Treasury Department might soon be forced to buy securities backed by student loans. Wall Street analysts agree that government intervention is inevitable. But should the government also take steps to restructure the market and replace Sallie Mae with a governmental agency?
Originally, Sallie Mae was a quasi-governmental agency, whose goal was to encourage private banks to loan to students. Eleven years ago, Sallie Mae severed all ties with the government and became a lender. In the following years, the company saw its stock price soar 2000 percent. Many critics protested that Sallie Mae was taking advantage of students and taxpayers.
Sallie Mae as a private institution has never assumed any risk for its actions. Every time a student defaults on a loan, the government is required to pay Sallie Mae the principle and the compounded interest. The company makes the lion’s share of its revenue from ballooning loans of students who do not default. During the past decade, the taxpayers have spent $40 billion on guaranteed student loans.
The default rate is 5% due to several provisions in bankruptcy laws, clamping down graduates with the burden of paying back the student lenders (even Social Security can be garnished). Several students are stuck between paying credit card bills or their student loan. The lower interest student loan goes unpaid, in favor of the credit card companies ridiculous rates. Government has also passed bills, making it harder for individuals to escape their credit card debt via bankruptcy. The system is broken.
An agency, created to encourage students to achieve a higher education, has burdened students with astronomical debts. The CEO of Sallie Mae, Al Lord, has accumulated a fortune estimated at a quarter of a billion dollars. Sallie Mae was once Wall Street’s darling. Is there any alternative to Sallie Mae’s greed?
The Department of Education oversees a direct loan program, costing taxpayers five times less per student loan. The program is not allowed to compete with big lenders because universities receive kickbacks for directing students to private lenders. Many students now face insurmountable debt.
