[Congressional Record Volume 153, Number 68 (Thursday, April 26, 2007)]
[Senate]
[Pages S5171-S5173]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                             STUDENT LOANS

  Mr. DURBIN. Madam President, in April, students all across the Nation 
will make final decisions about where they want to go to college, and 
with college costs higher than ever, they are figuring out how they are 
going to pay for school. For most, the financial aid office at their 
chosen school is their only guide through the complex world of higher 
education funding.
  Students are making financial decisions and choosing their colleges. 
They are making decisions, though, that will affect them for 20 or 30 
years after they graduate. They are making these decisions based on 
what they believe to be impartial advice from their future school's 
financial aid officers. Unfortunately, we have learned over the last 
few weeks, the advice given to many may not have always been passed on 
with the student's best interest in mind.
  Where is the student loan industry today? Here is where we are: 
Student loans are an $85 billion industry. Lenders have been clamoring 
to be placed on schools' preferred lenders' list. Financial aid 
officers of prominent schools have been placed on leave over 
allegations of holding significant financial interest in the parent 
company of a lender they have been recommending to students.
  A top official at the Department of Education's Federal student aid 
office has been placed on leave after it was disclosed that he held a 
significant amount of stock in a parent company of a lender.
  Let's go back in history for a moment to 1965, the year that Congress 
began guaranteeing loans to needy students and paying the interest 
while the student was in school. To entice the financial industry to 
loan money to students without a credit history, lenders were given a 
helping hand from the Government. Congress created the Federal family 
education loan program, the FFEL program, which subsidizes lenders and 
guarantees them against default. Congress also chartered the 
Government-sponsored entity then known as the Student Loan Marketing 
Association, euphemistically called Sallie Mae, to create a secondary 
market for lenders participating in the loan program. Sallie Mae would 
purchase loans from the lenders, thereby providing liquidity so that 
the FFEL lenders could continue loaning money to each new class of 
students.
  Now fast-forward to 1994 when the Direct Loan Program went into 
effect and the Federal Government began loaning money directly to 
students. The General Accounting Office, the Congressional Budget 
Office, even President Bush found that the Direct Loan Program cost the 
Federal Government a lot less than the FFEL program. Using the 
President's numbers, for every $100 private lenders loaned to students 
in 2006, it cost the Federal Government $13.81 for the FFEL Government 
loans, while the same amount borrowed through the Direct Loan Program 
cost the Federal Government only $3.85--$13.81 for the private lenders, 
$3.85 per $100 for the direct loans.
  For a few years, the Direct Loan Program grew quickly, capturing one-
third of the student loan market. My predecessor in office, Senator 
Paul Simon of Illinois, was one of its strongest advocates. However, 
the private lenders weren't going to go down without a fight. They were 
making too much money on these students. They didn't want to lose this 
opportunity. They wanted this market to be there for years to come. 
College costs were on the rise, students needed to borrow more and more 
money, and private lenders saw potential profits in student debt. So 
they began to offer money to schools to pull out of the Direct Loan 
Program.
  Even though the program cost the Federal Government less money, these 
private lenders went to the universities and said, well, why don't you 
just use our private lending operation. Don't go the direct loan route. 
Of course, they had a profit motive in doing that. They sued to prevent 
the Direct Loan Program from becoming more competitive. Their efforts 
paid off. The direct loan market is now down to less than a quarter of 
the student loan market. It is shrinking.
  It is about this time that Sallie Mae, led by a man named Albert 
Lord, decided to become independent of the Federal Government so it 
could offer student loans, not just purchase loans on the secondary 
market. It successfully shed its GSE status in 1997 and

[[Page S5172]]

now is one of the most dominant players in the student loan market in 
America. Its shareholders and executives have benefitted handsomely.
  Let me show what has happened to the stock price of Sallie Mae, SLM 
if you are looking for a way to look it up on the Internet. Stock 
prices from 2001 to the present have appreciated 281 percent. This is 
the industry loaning money to our students around America. Doing quite 
well. Company revenues went from $3.5 billion in 2001 to $8.75 billion 
in 2006.
  One would like to think these Federal subsidies would at least make 
college more affordable if we are putting this much money into this 
private corporation that is loaning money to students. Let's see what 
happened to college costs. Tuition, fees, and room and board at 4-year 
public schools have followed a similar trajectory, increasing by 42 
percent since the year 2001.
  The remarks I am going to make today have a lot to do with the people 
who are loaning money to students across America, how profitable it has 
become, how well they have done, and how poorly the students are doing. 
The debt is being heaped on them. They end up graduating from college, 
if they are lucky, with a debt as big as the mortgages most of us faced 
when we bought our first home. Now we say to these students: 
Congratulations, here is your diploma and your book to pay back your 
loan. Good luck in America.
  I don't want to absolve the colleges and universities from this 
conversation. The fact is, they have been a party to the dramatic 
increase in the cost of higher education during this same period of 
time. We will save that topic, as important as it is, largely for 
another day.
  Speaking to the student loan industry, with higher government 
subsidies and higher college costs, something is wrong with this 
picture. Remember Mr. Albert Lord I mentioned earlier, the former CEO 
and now chairman of the company called Sallie Mae? Mr. Lord has done 
pretty well loaning money to students across America, so well that he 
recently got into a little controversy in the Washington area. He 
proposed the construction of a golf course, and people in Anne Arundel 
County didn't like the idea much. They didn't want the traffic that 
might be associated with the golf course, so they started complaining. 
Mr. Lord, however, disabused them of the notion that this would cause 
traffic congestion when he told them that the 244 acres he was setting 
aside for the golf course was for his own personal and private golf 
course.
  Doing quite well, isn't he, at the expense of students across 
America? He had enough personal wealth to lead a serious but 
unsuccessful bid to purchase the Washington Nationals baseball team. In 
2002, Mr. Lord, appropriately named, was ranked first in the Washington 
Post's executive compensation survey of local companies, and Sallie 
Mae's current CEO, Thomas Fitzpatrick, was ranked second. What a 
terrific business it is loaning money to students struggling to get 
their education.
  In 2004, Mr. Lord was ranked second on the list, with $41.8 million 
in total compensation. Not a bad year. Yes, Sallie Mae's executives 
have come quite far from the days when they worked as a quasi-
governmental operation. Sallie Mae's dramatic financial growth didn't 
happen without some financial help. Since the start of the Bush 
administration, Federal officials have turned a blind eye to problems 
surrounding private lenders. And why wouldn't they? The Bush 
administration rewarded loan industry officials with key positions in 
the Department of Education.
  There isn't anything inherently wrong having people with experience 
in the loan industry working in the Department of Education. What I am 
asking, though, is whether the cozy relationship that developed between 
the Bush administration, the Republican-led Congress, and the lenders 
have left the loan industry essentially unregulated.

  If I was a lender who heard Representative Boehner, former chairman 
of the House Education Committee, say to the loan industry, ``know that 
I have all of you in my two trusted hands,'' what do you think I would 
do? Exactly what the lending industry has done--do whatever it takes to 
push the student loan industry in my favor--especially at a time when I 
knew no one would be there to stop me.
  This is when revenue-sharing arrangements between colleges and 
lenders began. Sallie Mae led the way with one of the most offensive 
schemes called ``opportunity pools.'' Here is how it works. A lender 
provides a school with a fixed amount of private loan money the school 
can lend a student who otherwise wouldn't qualify for loans. These 
loans come at higher interest rates. In return, the college agrees to 
make the lender its exclusive provider of federally backed loans.
  Some of Sallie Mae's competitors complained to the inspector general; 
however, Department officials chose not to take any action, insisting 
that the loan industry could regulate itself. What do you think Sallie 
Mae's competitors did with this tacit approval of opportunity pools? 
They did what any business would do to compete--they began offering 
similar deals to schools.
  But they didn't stop at opportunity pools. Lenders have loaned 
financial aid offices staff and have operated call centers on behalf of 
schools. Students and their families seeking information and advice on 
tuition financing options are talking to individuals they believe to be 
school officials but are actually employees of the lenders. Lenders 
have long provided schools with little office trinkets, such as post-it 
pads and pens. No harm done. However, in recent years the little 
trinkets have turned into gifts, such as iPods and trips to exotic 
locations for so-called educational conferences.
  Let me give you one example. Last year, EduCap, a nonprofit lender 
who offers loans under the name, Loan to Learn, invited financial aid 
officers and their spouses or guests from all across the Nation to an 
educational, all-expense paid ``summit'' held at the luxurious, 
beachfront Four Seasons Resort in Nevis in the West Indies.
  This resort, by the way, has been rated as one of the top luxury 
resorts by Travel and Leisure magazine.
  Between symposiums, forums, and roundtable discussions on the 
importance of addressing the cost of higher education, guests could 
enjoy snorkeling, water and beach sports, sailing, kayaking, 
volleyball, sailboarding, access to an 18-hole championship golf 
course, a 10-court tennis complex, beachfront pools, and a luxury spa. 
Not a bad deal for college officials being entertained by the student 
loan industry. News of the trip generated such negative response from 
the public that EduCap had to cancel it, unfortunately, before it 
occurred.
  After reading about the West Indies trip, I asked the inspector 
general of the Department of Education to investigate whether lenders 
are offering kickbacks or inducements to school officials in return for 
loan business. My staff passed along information provided to us by 
constituents regarding these inducements. You can imagine my 
disappointment when a member of my staff received an e-mail response 
from the inspector general's office. The e-mail merely described the 
results of the inspector general's conversations with my constituents. 
My staff didn't think the e-mail could possibly be the inspector 
general's official response and followed up to confirm. Even with all 
the recent news stories, I am still waiting to hear from the inspector 
general of the Department of Education as to whether they are going to 
initiate an investigation into these lender inducements.
  Sallie Mae recently agreed to be bought out and turned into a private 
company. Is this a good deal? Is it good for taxpayers that subsidize 
student loans? Is it good for students? It certainly is a good deal for 
Sallie Mae's executives and shareholders.
  The buyers, two private investment funds, J.P. Morgan Chase and Bank 
of America, have agreed to pay $25 billion for this company at $60 a 
share for its stock. In case you are wondering how much that is over 
the stock price that is published, it is 50 percent, a 50-percent 
premium over Sallie Mae's share prices before news of the buyout was 
reported. Let's see how much Mr. Lord and Mr. Fitzpatrick are going to 
do if this deal goes through.
  Well, it looks like Mr. Lord is going to end up with $47.2 million, 
and Mr. Fitzpatrick, a little better, with $58.6 million. They are 
riding high. They are riding high at the expense of students all across 
this country.

[[Page S5173]]

  There was a time when this Congress cared enough about students in 
this country to create a program called the National Defense Education 
Act. It was a time when Sputnik had been launched. We were afraid of 
the Soviet Union and what it might do with its satellite capacity, and 
Congress, for the first time, said let's create a student loan program, 
the first time ever.
  I know a little about this program because I happened to be one of 
the recipients, one of the borrowers. I borrowed money to go to college 
and law school from the National Defense Education Act and paid it back 
after graduation at 3 percent interest. I couldn't have asked for 
better treatment and better consideration from those who were lending 
money.
  Those were the early days when we were just thinking about students 
and education and the future of America. Now we are talking about big 
business, fat profits, basically indefensible compensation for the CEOs 
who run these companies. I hope someone is able to uncover what other 
fees and payments Sallie Mae's executives may be receiving to help take 
the company private.
  Will this deal be good for students? Sure, Sallie Mae and many other 
lenders have long touted that they have been able to offer better deals 
for students through loan fee and interest rate discounts. Of course, 
they can offer a discount. They are obviously still making enough money 
off student loans. Look at their profitability. Look at what has 
happened to their stock price. Look at how much they are being paid. 
Yet they made sure the Direct Loan Program, cheaper for the Federal 
Government, better for the students, could not compete.
  Now we know why they have been able to make money off students. The 
Washington Post recently reported that some lending companies with 
access to the National Student Loan Data System, which includes 
confidential information on 60 million student loan borrowers, have 
repeatedly searched the database in ways that violate the Federal rules 
on privacy. It appears the lenders were giving unauthorized users, such 
as marketing firms, collection agencies, and loan brokerage firms, 
access to this database.

  Lenders are allowed to access information contained in the database 
only if they have the permission of the student or have a financial 
relationship with the student, but the Department of Education recently 
decided to cut off outside access to the database. Were lenders using 
this information gathered from the database to sell other nonrelated 
loan products to students? We don't know for sure, but I intend to find 
out. I have sent letters to the largest student loan companies asking 
them to reveal how many times they have accessed the database in the 
last 4 years and explain what they subsequently did with the 
information.
  I am concerned about the proposed sale of Sallie Mae. A private 
Sallie Mae could lead to even less information being disclosed to the 
public. Sure, lenders are required to provide certain information in 
order to participate in the Federal loan program, but we should make 
sure all lenders are held to the same standard of disclosure, 
regardless of whether the lender is a school or a nonprofit, a private 
or a publicly traded company.
  Let me conclude by saying that tuition at 4-year public institutions 
has risen by 42 percent in the last 5 years. Students and their 
families are struggling to pay off college debt. Students are leaving 
college, on average, with nearly $20,000 in debt, and many much more. 
We must take serious steps to help these students achieve the American 
Dream.
  On the Democratic side of the aisle we are proposing a $1,090 
increase in the maximum Pell grant over 5 years, a cap on loan 
repayments at 15 percent of an individual's income, and reducing the 
student loan interest rate. How will we pay for it? By cutting $22.3 
billion from the lenders' subsidies, which we give to those like Sallie 
Mae. Sure, it is more than President Bush's proposed cut, but only a 
little bit, $2.3 billion. Of course, lenders are claiming that the 
proposed cut goes beyond what they think is sustainable and that 
lenders will decide to leave the student loan business. It is difficult 
to be moved by these claims when a company like Sallie Mae is worth $25 
billion and its buyers are willing to pay a 50-percent premium, knowing 
that the lenders' subsidies will likely be cut.
  It is time we return to the day where the Federal Government makes a 
serious investment in one of its most valuable assets, its children. 
The future of our country depends on it. We need to be asking those who 
are involved in this business of student loans to keep in mind first 
these students and their families.

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