Tuesday, April 24, 2007


Two stories on the student loan front.

First, the Wall Street Journal reports another Education Department official owned stock in student loan lending company:

WASHINGTON -- A U.S. Education Department official reported holding more than $50,000 in stock in student-loan company Sallie Mae after being hired by the federal agency that regulates the company, according to documents released yesterday.

At a time when state and federal officials are investigating what they say are widespread conflicts of interest in the student-loan industry, the disclosure is likely to renew questions from lawmakers about whether the close ties between Education Department officials and the industry they regulate may have compromised the agency's oversight.

The Education Department student-aid official, Michael Sutphin, reported shortly after he joined the agency in November 2002 that he held between $51,002 and $115,000 of stock in SLM Corp., or Sallie Mae, the nation's biggest student-loan lender. According to disclosure forms, he held the shares until spring 2004, when he said he sold them because of the oversight responsibilities of his post as state-agency liaison officer.


Mr. Sutphin worked in the same office as financial-aid official Matteo Fontana, who was placed on leave after it was disclosed that in 2003 he held $100,000 of stock in the parent company of Student Loan Xpress Inc. That firm, a unit of financial-services company CIT Group Inc., has been at the center of an investigation by New York Attorney General Andrew Cuomo.

Before joining the department, Mr. Sutphin and Mr. Fontana both worked at Sallie Mae, where they specialized in information technology. Mr. Sutphin couldn't be reached for comment yesterday. Tom Joyce, a Sallie Mae spokesman, said Mr. Sutphin worked at Sallie Mae from January 1983 until 1999, and then again from 2000 until November 2002.

Next, the NY Times reports that attorneys general in the states are taking the lead in oversight of student loan lenders because the Bush administration has abdicated it's role and allowed an "anything goes" environment:

State attorneys general around the country are stepping up their scrutiny of college lending practices in the absence of federal enforcement action, following a pattern that experts say has prevailed in some other major consumer investigations in recent years.

Yesterday the attorneys general of Illinois and Missouri announced that as a result of investigations into lending practices at three major universities in those states, the universities had agreed to adopt a code of conduct to guide their relations with student lenders.

The code will be modeled on one developed by Attorney General Andrew M. Cuomo of New York, who has been looking into student loan practices for months and who said in an interview that similar investigative efforts were snowballing around the country.

“I think we’ve reached a tipping point,” Mr. Cuomo said.

The state-by-state regulatory action, so far limited largely to efforts by Democrats, comes at a time of little progress in the development of federal rules on lenders’ dealings with colleges. A bid by the Education Department to negotiate such rules collapsed on Friday in disagreement among representatives of colleges, banks and other groups.


In addition to the attorneys general in New York, Missouri and Illinois, those in California, Connecticut, Minnesota and Ohio have announced in recent days that they are investigating student lending practices. Last week 40 attorneys general, or their aides, participated in a conference call with Mr. Cuomo, arranged by the National Association of Attorneys General to discuss the student lending issue, said Angelita Plemmer, a spokeswoman for the association.

Gee, do you think there's any connection between stockholders of student loan companies/Dept. of Education employees overseeing student loan lending regulations and a lack of oversight and enforcement on student loan lenders by the Department of Education?

Yet another non-story.

There might have been something to squawk about if the wrong people had received student-loans they never repaid. But that's not the case here.

And who cares if someone owned a few shares of Sallie Mae stock. If the clowns in question owned a million shares, they'd have too little to affect anything at SLM.

Then there's Cuomo, who thinks the sums paid by Citibank and another lender were kickbacks.

That's interesting. If true, what does Andy call frequent-flier miles?

People who travel on business, that is, people who travel on behalf of their employers, are given free plane trips to any place in the world. The whole family can go -- free. Talk about a kickback. Whew.

Does anyone give their frequent-flier miles to the company, the organization that paid for the ticket that resulted in the frequent flier kickback, err. award? No.

Does anyone pay income taxes on this valuable freebie? No. In fact, not only are there no taxes paid on these free trips, the company that purchased the original business travel ticket included the cost of the ticket as an ordinary expense. That means the ticket price is a tax-deductible item.

Nice. Airlines can buy loyalty without laying out a dime by bribing those who fill the seats with free tickets.

Teachers don't fly much. It's not part of the job. Thus, when a teacher flies away on a vacation, the ticket isn't a free valuable gift. Worse, the teacher can't deduct the price of the ticket from income. Thus, there's no tax advantage for flying.

Meanwhile, is the student loan program working? Is it enabling students to finance college? I think it is. The real problem is public education. Not SLM.
When you call Pace University and ask for the student loan officer, they transfer the call to Sallie Mae where a Sallie Mae employee responds to your call as a Pace University employee and answers your questions about student loans.

Do you see a problem with that?

Pace says they will no longer do this, but since they have been engaging in this practice for the past few years, how do you know if you can believe them?And they are not the only school to be doing this. Many schools are.

The same goes for the federally mandated exit interviews for seniors. At many schools, they are given by employees of student loan companies, but the people are identified as school employees. They then try and sell students on their student loan products.

Do you see a problem with that?

As the investigations continue into the universities and the student loan companies, we will learn much more about what transpires behind the scenes and out of sight.
reality, you wrote:

"When you call Pace University and ask for the student loan officer, they transfer the call to Sallie Mae where a Sallie Mae employee responds to your call as a Pace University employee and answers your questions about student loans."...

..."Do you see a problem with that?"

No. I don't. SLM has the Pace account. Big deal. Companies give exclusive rights and marketing deals all the time.

Read the following from Tuesday's Wall Street Journal.

Sallie Mae Report 23% Profit Drop
Ahead of Sale to Private-Equity Funds
April 24, 2007 9:34 a.m.

Educational lender SLM Corp., commonly known as Sallie Mae, reported a 23% drop in first-quarter profit a week after agreeing to be sold to two private-investment funds and two banks for $25 billion.

The Reston, Va., company said net income fell to $116.2 million, or 26 cents a share, from $151.6 million, or 34 cents a share, a year earlier. Results from the latest quarter include pretax losses on derivatives and hedging accounting of $357 million, compared with $87 million a year earlier.

Sallie Mae's core earnings, a figure emphasized by the company and analysts, fell 13% to $251 million, or 57 cents a share, compared with $287 million, or 65 cents a share, a year earlier. On average, analysts polled by Thomson Financial expected earnings of 75 cents a share.

Private education loan originations, a segment of preferred-channel originations, were $2.4 billion, and included more than $241 million of direct-to-consumer loans, a 64% increase from a year earlier. The company originated $4.8 billion loans, up 35% from a year earlier.

Sallie Mae said the company's managed student loan portfolio rose to $150 billion from $127 billion a year earlier. The student loan spread, a measure of profitability, was 1.82% in the first quarter.

Last Monday, JC Flowers & Co. and private equity firm Friedman Fleischer & Lowe LLC agreed to take a 50.2% ownership in the newly private Sallie Mae. Banks J.P. Morgan Chase & Co. and Bank of America Corp. will each invest $2.2 billion and take 24.9% stakes in Sallie Mae. The deal has a termination fee of $900 million.

Sallie Mae was a government-sponsored entity until 1997. The change to private ownership enables the company to be more than a secondary market for government loans and move into a host of profitable new lines of work.

Most notable is the market for so-called private student loans, which have no government guarantees and can carry higher interest rates and fees. The sector has been booming because government aid and scholarships haven't kept pace with skyrocketing college tuition.
You don't see a problem with a student loan lender having its employees falsely identify themselves as "impartial" university employees after the university transfers students to them to talk about student loan options?
reality, you wrote:

"When you call Pace University and ask for the student loan officer, they transfer the call to Sallie Mae where a Sallie Mae employee responds to your call as a Pace University employee and answers your questions about student loans."


"You don't see a problem with a student loan lender having its employees falsely identify themselves as "impartial" university employees after the university transfers students to them to talk about student loan options?"

reality, the content of your two preceding paragraphs conflict.

First you say Pace connects student borrowers to Sallie Mae. Then you claim Pace connects student borrowers to people who identify themselves as "impartial" university employees.

First, if Pace wants to designate SLM as its lender of choice, it has that right. Second, if you really think Company A would give exclusive marketing rights to its customers to Company B without expectations, you are out of touch.

Anyone who has financed a car bought from GM or Ford was sent straight to General Motors Acceptance Corp or Ford Motor Credit. Chrysler once handled things the same way. But now that Chrysler is a German company, I don't know how they handle auto financing, though I assume Daimler-Chrysler operates a captive finance company to which car-buyers go.

Meanwhile, buyers of IBM computers are familiar with IBM Credit Corp, the in-house lender.

By the way, are you familiar with the Municipal Credit Union? Credit Unions are bank alternatives that offer most of the services found at banks, but often at more favorable rates. You might ask how small credit unions manage to offer better rates than banks. It's easy. Credit Unions don't pay corporate income taxes AND they pay employees with the same generosity as WalMart. Politicians passed some crafty legislation that exempts credit unions from the burden of paying income taxes.

You would think voters and politicians would learn something from this exercise. What would they learn? That low corporate taxes lead to better deals for consumers. That only people pay taxes.

That aside, captive finance companies are standard stuff. However, that doesn't mean a buyer has no choice about lenders. If a bank were willing to give a car-buyer better terms, or the buyer needed financing that fell outside the range of options from GMAC or FMC, the buyer is free to take it.

Part of this amuses me because you are aghast at the idea that one company might handle ALL the education financing for Pace. In other words, the idea that one organization has near total control of a situation gets under your skin. The lack of competition gets to you. You want to see competition among the lenders rather than one big lender getting most of the business.

How does that attitude square with your support of public education? I believe you oppose vouchers -- the vehicle by which parents would decide which school would receive the education dollars provided for their kids by taxpayers -- yet you want to reduce SLM's power in the education lending market. I'm sure you oppose charter schools too. You don't approve of any competition in public education, but you want other businesses to duke it out to win the favor of consumers.

With respect to SLM, I think you know little about the company. It's a complex operation. Many moving parts. An analyst would spend a lot of hours getting to know it. But that would be a waste of time now. It is going private. SLM accepted a buyout offer a few weeks ago. Thus, when the deal is complete -- soon -- SLM stock will disappear and the company will become the property of the consortium of private-equity firms that bought it.

Several years from now, after the private-equity companies remodel it, you will probably read about an offer of new SLM stock. SLM will reappear in an IPO that puts big dough in the pockets of the private-equity firms that backed the buyout.

Or, we might learn that the private-equity guys weren't as smart as they thought, that their big plans for SLM failed and now they've got a loser on their hands.
I'm not aghast that one company would be the preferred lender for a school - I am aghast that the university would allow that lender's employees to falsely identify themselves as university employees and then offer "financial aid advice" to students.

I am also aghast that the university employees would allow themselves to be bought off by prospective lenders with money and stock in order to steer students their way.
reality, you wrote:

"I am aghast that the university would allow that lender's employees to falsely identify themselves as university employees and then offer "financial aid advice" to students."

I haven't confirmed this claim. But if a seeker of financial aid calls Pace and the school routes the call to SLM, well, as long as SLM hasn't rigged the phone system, there's no problem.

You wrote:

"I am also aghast that the university employees would allow themselves to be bought off by prospective lenders with money and stock in order to steer students their way."

Bought off? Companies enter into alliances all the time. Go to a supermarket. Food companies pay supermarkets to position food in favorable ways. It costs the food companies plenty to have their goods placed on eye-level shelves. Or to have their stuff placed by the cash registers. Shelving fees.

Do you use Google? Do you know why Google is so profitable? It charges big fees to anyone who wants top billing in a cyber search.

Would it shock you to learn that if you type "student loan" into the Google search window, the system returns Sallie Mae and Citibank in the top positions?

You're all worked up over companies developing their competitive advantages.

Meanwhile, you're opposed to people receiving incentives for their efforts. But there isn't a sales organization in this country that doesn't offer various bonuses to salespeople who produce.

Moreover, what makes the sales of student-loan products different from mortgages and mortgage refinancing? My home phone rings 10 times a day with clowns calling from banks and finance companies seeking a chance to refinance my mortgage. Banks hire outside mortgage companies to beat the bushes for customers. What of it? That's no different than Pace letting SLM handle financing for its students.

Furthermore, you haven't provided any information suggesting there are better lenders than SLM out there.
n_s, you have touched on two hot buttons of mine in a single post -- credit unions and school vouchers. First, credit unions pay virtually no federal income tax because all operating profit is passed back to depositors as dividends. Thus the income the depositor receives is taxed only once, as personel income, rather than twice, as both corporate profit and as dividends. You can get roughly the same tax treatment by investing in BDCs and REITs (but you'll make a pot-load more money in the latter two).

School vouchers are nothing other than a public subsidy for wealthy families with children. If you don't believe it, try to enroll your kids in the best of the private schools in your area. You had best have enough in the bank that that school voucher would qualify as pocket change. You need a maid or a non-working spouse to guarantee reliable transportation as well. I happened to be driving by St. Mark's a couple of weeks ago, and noticed a bunch of boys out playing lacrosse. Lacrosse?! In Dallas (home of the Cowboys) freakin' Texas (home of Friday Night Lights)?! Of course lacrosse -- because these boys are going to be playing it in those ivy-draped schools back East in a year or two, at 25 grand or more per year. Do you really think their parents need my tax dollars?

As for the student loan scandal, why do you think the companies providing the loans are willing to kick back a portion of the profits to the schools and/or school financial aid counselors? Out of the goodness of their hearts? Piffle! They can afford the kickback because the loans are very profitable, particularly when they don't have to price them competitively. It's one more instance of robbing the middle class students and parents to give to the wealthy SLM investors.

While I'm on a tear, I'll point out that if I book a flight on American to get the frequent flier miles, when I could book on Southwest or Jet Blue at half the price, I'm stealing from somebody -- the taxman if I own the business, the investor AND the taxman if I don't.
I don't care whether you have confirmed that Pace is allowing Sallie Mae employees to act as financial aid officers without telling students because Pace has admitted to doing it.

As for the kickback scam, if you think it's fine, than that's good for you. Thankfully you don't make the call on the rules. Cuomo is getting both states and lenders to agree to his code of conduct which prevents these kinds of kickback schemes in the future. I wonder why the colleges and the lenders are so readily agreeing to his code of conduct if what they were doing was perfectly on the up and up?
kicksiron, you have characterized the voucher issue perfectly.
Lacrosse players...in Texas???

Must be a prep school!
rbe, St. Marks and Hockaday aren't JUST prep schools -- they're prep for Ivy League and up. From what I've seen, each has an annex in Heaven where really good educators go when they die.
Oh, yeah, a voucher program will open up those schools to working and middle class kids.

Sallie mae is run by a bunch of thieves. There is a problem when it is more profitable for sallie mae to have it's borrowers default on loans than if loans were paid back as schedualed. Does "no slappz" connected to sallie mae? Follow the trail and you'll find out why "he" is kissing sallie mae's ass. Check out studentloanjustice.org for some eye-opening truths.
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