[Congressional Record (Bound Edition), Volume 153 (2007), Part 7]
[Senate]
[Pages 10230-10231]
[From the U.S. Government Publishing Office, www.gpo.gov]




                  REFORMING THE STUDENT LOAN INDUSTRY

  Mr. KENNEDY. Mr. President, a column by Joe Nocera from last 
Saturday's New York Times contains an excellent analysis of the student 
loan industry and the recent sale of Sallie Mae. We often hear about 
the rising cost of college and the debt that so many students shoulder 
to attend college. As this article emphasizes, the industry reaps 
enormous profits by forcing students to burden themselves with 
excessive debt.
  The recent sale of Sallie Mae illustrates the problem. The company, 
the largest player in the industry, was purchased earlier this month by 
private equity firms and banks for an incredible $25 billion, 50 
percent premium over Sallie Mae's stock price.
  Financial specialists know how profitable lenders such as Sallie Mae 
are because of the large Government subsidies these companies receive 
subsidies of more than a billion dollars last year. As Congress moves 
forward with reauthorizing the Higher Education Act, we must look 
closely at this industry and its practices to ensure that America's 
students are the ones being served, not just the bottom lines of 
America's lenders.
  Mr. Nocera, a Times' business columnist and former editorial director 
of Fortune magazine, is widely respected and has won numerous awards 
for excellence in business journalism. I believe his column will be of 
interest to all of us in Congress, as we consider the reauthorization 
of the Higher Education Act, and I ask unanimous consent that his 
article, ``Sallie Mae Offers a Lesson in Cashing In,'' be printed in 
the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                [From the New York Times, Apr. 21, 2007]

                Sallie Mae Offers a Lesson on Cashing In

                            (By Joe Nocera)

       Aren't you just fuming about that Sallie Mae deal?
       The company, formally known as the SLM Corporation, which 
     has been the subject of recent exposes and investigations, 
     announced this week that it had agreed to be taken private in 
     a deal worth $25 billion. The stock, which has been in a slow 
     decline over the last year, leapt. The market was pleased.
       But I'm here to tell you that the deal stinks, though not 
     in the usual ``management and private equity are stealing 
     your company'' kind of way. You're free to disagree, of 
     course, though if you do, you're probably not struggling to 
     put your children through college.
       Sallie Mae is the nation's largest student lender; indeed, 
     it dominates the business. It has the biggest share of 
     government-guaranteed loans, originating $16 billion of such 
     loans last year alone. In 2006, it also generated $7.4 
     billion in ``private'' loans: that is, loans that aren't 
     guaranteed, but which students need because their tuition, 
     room and board so far exceeds the pathetic $23,000 the 
     government guarantees over the course of an undergraduate 
     degree.
       The most popular government-guaranteed loans come with 
     interest rate caps (currently 6.8 percent) but they also have 
     certain undeniable advantages for Sallie Mae and its 
     competitors. They are subsidized by the Department of 
     Education. The government makes the lenders nearly whole, 
     even if the student defaults. And the companies are 
     guaranteed by law a decent rate of return.
       In other words, the lender takes no risk. The private loans 
     are even more lucrative because companies can charge whatever 
     interest rate they want--not to mention all kinds of fees. In 
     all, Sallie Mae originated more than 25 percent of the 
     student loans made last year.
       But wait. There's more. Sallie Mae buys loans from other 
     education lenders and then securitizes them. It has a loan 
     consolidation business, so students can wrap all their 
     education loans into one big fat Sallie Mae loan. It even has 
     its own collection agency so it can hound delinquent broke 
     graduates into repaying. (Government-guaranteed college 
     loans, by the way, aren't easily discharged if the borrower 
     files for bankruptcy.) Sallie's market power--and its close 
     ties to university financial aid administrators, as we've 
     been learning lately from Jonathan D. Glater, a reporter for 
     The New York Times, and others--have made it immensely 
     profitable. In 2006, the company made over $1 billion.
       Thus, you can't blame the private equity guys for drooling 
     over Sallie Mae. They look at the company, and the arena in 
     which it plays, and they see never-ending tuition increases. 
     The need for a college education will only increase in 
     importance. Most cash-short students and middle-class parents 
     will continue to borrow lots of money to pay the $100,000 to 
     $150,000 required to attend a good college. Although the 
     Democrats want to cut the subsidies for government-backed 
     loans, and lower the interest rate caps, the more lucrative 
     private market is going to continue to explode. No wonder the 
     private equity firms of J. C. Flowers & Company and Friedman 
     Fleischer & Lowe were willing to offer a 50 percent premium 
     over Sallie's stock price--and load on $16 billion in new 
     debt. This thing is a gold mine, I tell you.
       But there's another, less market-oriented way to look at 
     this. The entire educational-lending racket is built around 
     the business of piling thousands of dollars worth of debt 
     onto a class of Americans who will probably have to struggle 
     to pay it back. ``We ask people who are trying to make 
     something of

[[Page 10231]]

     themselves to mortgage their future, and Sallie Mae profits 
     from that,'' said Elizabeth Warren, a professor at Harvard 
     Law School.
       And when those former students have to start paying back 
     the loans, and they don't have a good-paying job, and they 
     start to fall behind, the industry takes full advantage. 
     Meanwhile, many of the practices now under investigation by 
     the New York attorney general, Andrew M. Cuomo, are intended 
     primarily to keep out competition that might bring down the 
     cost of those loans. Last week, Sallie Mae paid $2 million to 
     settle an investigation that Mr. Cuomo's office was 
     undertaking. In other words, Sallie Mae and its competitors 
     are maximizing profits on the backs of college students. Can 
     that really be the right priority for our society?
       It wasn't always like this. Sallie Mae was started in 1972, 
     and for most of its existence it was a ``government-sponsored 
     entity'' like Fannie Mae or Freddie Mac. Its primary role was 
     to buy up and securitize government-backed student loans 
     originated by banks and others so that they, in turn, would 
     have the cash to make yet more student loans. The government 
     subsidized such loans to give lenders the incentive to make 
     them, since the interest rates were fairly low, and the 
     margins were thin. The private loan business largely didn't 
     exist.
       During the Clinton administration, the government created a 
     new direct-loan program, thus potentially cutting out the 
     industry, and leaving Sallie Mae with the prospect of 
     becoming irrelevant. At the time, Sallie Mae was prevented by 
     law from originating its own loans.
       In 1997, Albert L. Lord became the chief executive of 
     Sallie Mae. (He remains the company's chairman.) Despite 
     presiding over a government-sponsored entity, Mr. Lord was an 
     unapologetic capitalist, who decided that Sallie's best bet 
     was to untether itself from the feds and go directly into the 
     loan business.
       Under his leadership, Sallie shed its status as a 
     government-sponsored entity and began the process of 
     dominating the industry. It built those controversial ties to 
     financial aid officials. It helped push back the direct loan 
     business, which many people believe offers taxpayers a much 
     better deal. It got into the private loan business. It became 
     the 800-pound gorilla. From 1999 to 2004, Mr. Lord 
     accumulated $235 million, most of it from stock options. He 
     got so rich making student loans that he even led one of the 
     groups trying to buy the Washington Nationals baseball team.
       The abuses and problems that have recently come to light 
     have actually been around for years. But it wasn't until a 
     new entrant into the field, MyRichUncle, began running a 
     series of advertisements asking pointed questions about the 
     cozy relationships between financial aid officials and 
     executives at the big educational lenders, that the world 
     took notice. The small company's two founders, Raza Khan and 
     Vishal Garg, both 29, had the radical idea that if they 
     offered lower interest rates and a better deal, students and 
     parents would flock to them. Instead, they discovered that 
     most people simply did whatever the university federal aid 
     officer suggested, and they couldn't get on the list of 
     ``preferred lenders.''
       Shut out by what they saw as a cartel, they decided to 
     fight back with a public campaign. That campaign helped set 
     in motion the current investigation by Mr. Cuomo--and earned 
     the MyRichUncle founders the eternal enmity of Sallie Mae and 
     the rest of the industry.
       Not that they appear to care. ``We love talking about 
     Sallie Mae,'' Mr. Khan told me with a devious chuckle. Mr. 
     Khan believes that students will be better served if the 
     lending companies start competing on the basis of interest 
     rates and price--and not just on who can cozy up to the 
     universities. It is hard to disagree with him.
       What does Sallie Mae say about all of this? You will not be 
     surprised to hear that the company views itself not as the 
     college student's tormentor but as her best friend. I spoke 
     to two Sallie Mae representatives, a senior vice president 
     named Barry Goulding, and Tom Joyce, its vice president for 
     corporate communications, both of whom insisted that Sallie 
     Mae was the dominant player because it offered students and 
     administrators the best level of service, and the best array 
     of products. They insisted that borrowers who exhibited 
     exemplary behavior often got interest rate reductions. (Those 
     who missed a payment weren't so lucky, however.) They said 
     that the so-called preferred-lender list was actually a good 
     thing, and not a way to keep out competition.
       ``The vast majority of schools go through a competitive 
     bidding process and get the best deals for students,'' Mr. 
     Joyce said.
       According to them--and they are right about this--a big 
     part of the problem is that Congress hasn't raised the limit 
     on government-guaranteed loans since the early 1990s, and 
     that fact, rather than the lenders' greed, is what has driven 
     the explosive rise in private loans. Although they complained 
     that any move by Democrats to lower subsidies and interest 
     rates would hurt its business, they denied that this would 
     cause Sallie Mae to promote its private business at the 
     expense of its government-guaranteed business.
       And maybe it won't. But even so, the current for-profit 
     student lending industry is still more about shareholders and 
     profits than about the genuine needs of students, who very 
     often don't have enough money in the first 2, or 5, or even 
     10 years out of college to pay the high interest rates and 
     onerous fees that make the industry so profitable.
       There are some things in life that really ought to be about 
     more than making money. Surely, student loans should be on 
     that list. Sallie Mae was once an institution where profits 
     took a back seat to performing a public good. That, alas, is 
     no longer the case.
       Lest you doubt me, listen to Mr. Lord himself. On Thursday, 
     The Washington Post published an interview in which he 
     bluntly declared that his decision to take the company 
     private stemmed from his frustration with ``the politicians'' 
     whose decisions were hurting Sallie's share price. These are 
     the same politicians, of course, who passed the laws that 
     made Sallie's business possible. But never mind.
       ``I didn't see our share price rebounding anytime soon and 
     I said, `This is silly,''' Mr. Lord told the paper. Mr. Lord 
     added that when the buyout is complete and he leaves the 
     company, he'll walk away with a $135 million payout.
       Are you mad yet?

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