Wall Street on Sallie Mae
Justin King over at New America has found a Wall Street analysis of the investment outlook on Sallie Mae.
Apparently the possibility of legislation cutting subsidies hasn't spooked investors: Sallie Mae remains in "five star shape," according to Morningstar Rating Services. Student loans remain an "extremely attractive asset" and "Sallie's wide moat should protect its profits over the long haul."
Morningstar also addressed the "controversy" over whether the government could save money making the loans itself. (Really, only the industry itself disputes the possible savings.) Morningstar notes that direct loans might be expanded since "it costs the government less" to originate the loans itself "than if lenders like Sallie originate loans."
"Really, only the industry itself disputes the possible savings" is nonsense and you know it.
What about CBO? In 2005, CBO wrote, “The subsidy calculations under the credit reform act ARE NOT DESIGNED TO FULLY CAPTURE THE ECONOMIC COSTS TO THE GOVERNMENT of the assistance that the student loan programs provide."
Mr. Kvall, how could the "savings" from direct loans be real if the government's own cost estimates are incomplete?
What about what the Clinton Administration's IG for the Dept of Ed wrote?
"Since costs may be higher or lower at any one point in time, a TOTAL COST FIGURE FOR ANY ONE YEAR DOES NOT DEFINITIVELY ANSWER THE QUESTION OF WHETHER THE FFELP or FDLP IS MORE EXPENISVE.”
January 7, 2007 11:38 AM | Reply | Permalink
I believe that Wall Street should consider what the incoming chairmen of both House and Senate subcommittees have gone on record as saying regarding Sallie Mae.
Further, Wall Street should consider the growing grassroots movements against Sallie Mae- a phenomenon completely of Sallie Mae's own making through the companies refusal to provide even adequate customer service, and their shameless profiteering on the backs of students, particularly those who face financial difficulty.
Further, Wall Street should consider the possibility- even probability- that congress will be breaking open the FFELP market soon by allowing the refinancing of FFELP debt, and restricting or outlawing "preferred channel" originations. This will be breath of much needed air for the consumer, who currently cannot leave their current lender, no matter how badly they are treated.
Alan Collinge, Founder
StudentLoanJustice.Org
January 7, 2007 1:23 PM | Reply | Permalink
Heynorm, thanks for reading and commenting.
As you say, in 2005 CBO published an analysis of student loan costs. Here is the text you quote and the surrounding paragraphs:
I wouldn't say that CBO is "disputing" its own estimates here. Qualifying maybe. But the phrase you quote seems like a thin reed for concluding that any excluded "economic costs" that are so large and fall so disproportionately on direct loans that they make up the 17-cent difference.
Sure, the budget numbers aren't perfect, but I'm not sure why this is supposed to be so damning. As previously discussed on this blog, the budget figures for Head Start don't include the economic costs of taxes and debt to finance the program, the taxes paid by Head Start teachers, the future economic gains from Head Start students, etc. Somehow no one claims that we don't know the "true" cost of Head Start.
Finally, the Inspector General is also correct: a certain relationship between interest rates could make guaranteed loans cheaper. We haven't seen it yet, but might someday. However, I don't read that quote to indicate that the OIG "disputes" the official budget numbers that -- year after year -- find direct loans to be cheaper. Do you?
January 7, 2007 5:26 PM | Reply | Permalink
HeyNorm,
Why don't you include a bit of biographical information about yourself in your bio, as everyone else here does?
Alan Collinge, Founder
StudentLoanJustice.Org
January 7, 2007 8:58 PM | Reply | Permalink
Perhaps CBO is not "disputing" its own estimates, but, as Mr. Kvall said, it is "qualifying" them. That's an important point, since many critics of the FFEL program cite the government's cost estimates without any qualification. They're routinely offered at face value.
So it appears that the cost difference between the two programs is some amount less than 17 percent.
The question then is how much less. CBO and GAO have identified costs that if they were counted "would have a greater impact on the subsidy cost estimates of FDLP relative to FFELP."
So the cost difference could be a lot less or a little. We don't really know, do we? It's time critics dropped the pretense that they know, frequently to the dollar.
You raise an interesting point about Head Start. The difference is that Head Start does not act as a bank. It does not have $110 billion in outstanding loans. Taxpayers have a right to know just how much direct loans are going to cost them. Truly accurate cost estimates are in the public's interest.
January 7, 2007 10:20 PM | Reply | Permalink
In my opinion, Sallile Mae should change its name to Bullie Mae.
Can you imagine the uproar if homeowners were suddenly told that if they want to re-finance their home, they can't?
Sallie Mae pretends to have the best interests of their customers at heart, while they covertly work behind the scenes to pass anti-competitive legislation that will end up costing students and parents billions of dollars.
For years participants in the federal student loan program have converted their variable-rate federally guaranteed college loans into fixed-rate federal consolidation loans, to lock in favorable interest rates, in much the same way that homeowners do with their mortgages. And for the same reasons.
But under the laws effective on July 1,2006, the vast majority who have consolidated will be legally barred from ever re-financing again, no matter what other lender later offers them a lower rate.
Legally barred from ever refinancing? Hard to believe, but true. And here's how it happened.
Sallie Mae and most of the other big lenders don't want the lure of lower rates tempting their customers to switch to competitors. So, they called upon the Republican leaders, many of whom had accepted large donations and trips aboard lender jets to luxury golf resorts and other desirable destinations, and got them to attempt to hide this ugly anti-competitive legislation in the Budget Deficit Act of 2006.
When consumer groups such as the American Student Association began complaining about the proposed no-more-refinancing law, Sallie Mae lobbyists countered by spreading misinformation that’s designed to lead people to believe that a borrower moving their loan from one lender to another would cost the taxpayers money needed in other places. Not so. The fact is, the borrower savings would all come from the smaller lenders' willingness to accept less profit.
In the end, Sallie Mae, which, according to Fortune Magazine, is one of America's most profitable companies, won the battle. The losers were America’s millions of students and parents who have been denied the opportunity to negotiate lower interest rates for themselves in an open market.
And adding insult to injury, Sallie Mae, not unlike a football player spiking a ball after a game-winning touchdown, began celebrating. Tom Joyce, a Sallie Mae VP, was quoted by USA TODAY as saying, "The consolidation loan program was never meant to be a re-financing bonanza for students." But later, his crowing grew even louder when he told the Orlando Sentinel, "Smaller corporations will now think twice about getting into the student loan business."
The Democrats say they are going to do something about these issues. They have proposed a 50% cut in student loan interest rates (Reverse the Raid on Student Aid Act; H.R. 5150 and the Senate's RSSA Act), and Hillary Clinton’s Student Borrower Bill of Rights (S. 3255) proposes to repeal the laws banning the refinancing of Federal Consolidation loans and other predatory lending practices. But there is no guarantee that either of these proposals will actually become law.
You may voice your opinion on these issues by calling the following numbers:
U.S. Senate: (202) 224-4543
U.S. House of Representatives: (202) 226-2068.
It's up to you, now.
C. Victoria Patrick
Educator, College Administrator, Financial Adviser (retired)
January 9, 2007 1:27 PM | Reply | Permalink