A dangerous "pool" to swim in
This article discusses Sallie Mae's recent erratic stock-market performance, which brings to light a central question: does Sallie Mae's profit motive as a publicly traded company irreparably undermine its ability to help create the most affordable and safe market possible for student loans?
Specifically, the article is alarming in its overview of "opportunity loans," through which Sallie Mae hands over a chunk of money to schools, which they can use to provide loans to students who would not otherwise qualify, in exchange for becoming that school's preferred lender. With a 70 percent default rate at least one school, Sallie Mae has acknowledged these loans are loss leaders but argues they can still grow business.
However, one has to wonder how Sallie Mae will recover such losses if such extraordinary default rates are prevalent. Like with the sub-prime crisis generally, we should be concerned that Sallie Mae's goal of achieving loan volume at any cost will ultimately result in making private loans less affordable in the long-term.
Remember, loans in default become hidden profit centers with accumulating interest and fees unless they become completely uncollectible and the insurance pays them off. That is how they can still grow their business at a 70% default rate.
On the other hand, the accounting procedures used make it look unprofitable (accrual accounting uses income and expense matching, which allows them to allocate resources they already have as collection expenses, thereby decreasing other overhead in the books by reallocating it.), and stockholders don't like to see loan defaults. They have to walk a thin line. They have to meet standards for getting the government subsidies.
Jim Anderson
The Truth About Credit
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Ministry WebsiteJanuary 12, 2008 11:30 AM | Reply | Permalink