Lobbying Showdown Over the Future of Student Loans

Published on
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Huffington Post Investigative Fund

Lobbying Showdown Over the Future of Student Loans

by
Danielle Knight

When
Sallie Mae, the nation's largest provider of student loans, saw the
possibility of its own extinction in a plan advanced by the Obama
administration, it did what just about any big corporation would do: It
hired the best lobbyists money can buy.

That was standard procedure for Sallie Mae, which for two decades
has almost single-handedly stymied attempts to reduce or eliminate
federal subsidies to the multibillion-dollar private student loan
industry.

This time, however, Sallie Mae has elected not to fight to preserve
the current system. Rather, it is trying to leverage its lobbying
muscle and years of showering money on lawmakers to push an alternative
plan that would position itself not only as a survivor, but a clear
winner - with an even larger share of the market.

Even so, despite ramping up its spending on lobbying -- nearly $2
million in the first half of the year according to disclosure reports
released this month -- Sallie Mae faces an uphill struggle in Congress.
Legislation that would radically reshape the financial aid landscape
along the lines proposed by President Obama cleared a key House panel
last week. Credit rater Standard & Poor's immediately warned
investors that it might downgrade the company's debt to junk level
because "we believe the likelihood has increased" that within a year
Sallie Mae will no longer be able to originate loans.

Rep. George Miller (D-Calif.), chair of the House Education and
Labor Committee, said at a committee meeting that the bill would stop
"wasteful taxpayer subsidies that are keeping a broken system afloat."

The plan would end lending by private firms by giving the Department
of Education a monopoly over federally backed student loans. That could
save the government $87 billion in subsidies over ten years, according
to the Congressional Budget Office - money that would be redirected to
Pell Grants for low-income students. Sallie Mae and other lenders would
be confined largely to servicing loans held by the government and
collecting on defaulted loans.

Presently there are two types of government-backed loans: At schools
that have signed up for direct federal lending, students can borrow
directly from the government. Or they can borrow from a lender such as
Sallie Mae as part of the Federal Family Education Loan Program. Either
way, the taxpayers take on the risk that a borrower might default.

Sallie Mae surprised the rest of the industry earlier this year when
it announced it supported Obama's plan - but with certain caveats. The
company argues that if lenders are still allowed to originate and
service the loans that the government holds, they could produce similar
savings that could also go toward Pell Grants. Under its proposal,
companies that don't already service loans wouldn't be able to
participate in the new system and thus could be pushed out of the
business, leaving Sallie Mae with a bigger share.

Based in Reston, Va., Sallie Mae, formally known as SML Corp., was
created four decades ago as a government-sponsored enterprise. It went
private in the late 1990s. As the number of college students and
tuition costs skyrocketed, so did Sallie Mae's profits - at least until
the credit crisis hit. Last year, chief executive Albert Lord earned
$4.6 million in cash and stock and Jack Remondi, its vice chairman and
chief financial officer, more than $13.2 million in cash and stock,
including the use of a company airplane.

Sallie Mae derives about a third of its earnings from federally
backed loans, and the rest comes from private loans and other lines of
business. Its financial future looks weaker not only because of the
political threat but because of growing delinquencies in its
non-subsidized student loans. The company reported a loss of $122
million for the most recent quarter, compared with a profit of $265
million a year earlier.

Calling on the Lobbyists

Most Republicans support a continuing role for private student
lenders. Thus the battle over Sallie Mae's future is taking place among
Democrats, which is why the company turned largely to that side of K
Street.

"The banks and lenders who have reaped a windfall from these
subsidies have mobilized an army of lobbyists," Obama said in a weekly
radio address earlier this year. "I know they're gearing up for a fight
as we speak. My message to them is this: So am I."

Sallie Mae's key hire was Jamie Gorelick, a former deputy attorney
general in the Clinton administration, who signed on in February to
lobby White House and Education Department officials on student-loan
issues. Gorelick is a partner in the Washington law firm of Wilmer,
Cutler, Pickering, Hale and Dorr, which billed Sallie Mae $270,000 for
its work in the first half of 2009.

Gorelick said in an interview that while she was initially hesitant
to work for Sallie Mae because it had fought the Clinton
administration's efforts to boost direct lending by the government, she
decided to do so because Sallie Mae's plan, like Obama's, provides
funding for Pell Grants. She argues that Sallie Mae's proposal is
better than Obama's because "many schools need the help that [private]
lenders provide in managing the flow of information, processing and
reconciling changes, and educating students about their choices and how
to manage debt."

In March, less than a month after hiring Gorelick, Sallie Mae
retained the Podesta Group, founded by Tony Podesta, a legendary
Democratic fundraiser whose brother headed the Obama transition team.
In addition to Podesta himself, the firm, which was paid $110,000 for
its work in the first half of the year, assigned at least four of its
lobbyists to push Sallie Mae's case on Capitol Hill: Paul Brathwaite,
the former executive director of the Congressional Black Caucus and a
former Clinton Labor Department official; Israel "Izzy" Klein, a former
aide to Sen. Charles E. Schumer of New York and Rep. Edward J. Markey
of Massachusetts, both Democrats; Lauren Maddox, a former assistant
secretary for communications and outreach at the Education Department
in the Bush administration; and Donni Turner, a former aide to Sen.
Richard Durbin of Illinois, Rep. David Scott of Georgia, and former
Sen. Max Cleland of Georgia, all of them Democrats.

Sallie Mae also has tapped several other Washington lobbying firms
for help, including Clark & Weinstock, Global USA, ML Strategies,
and Von Scoyoc Associates, which together were paid $302,500 in the
first half of 2009.

Clark & Weinstock detailed more than a third of its lobbyists to
the Sallie Mae account, including Vin Weber, the firm's managing
partner, a former Republican congressman from Minnesota, and a
half-dozen veteran Capitol Hill staffers: James Dyer, a former staff
director of the House Committee on Appropriations; Niles Godes, who
most recently was chief of staff to Sen. Byron Dorgan (D-N.D.); Ed
Kutler, a former senior adviser to the Speaker of the House; Peg
McGlinch, who most recently was chief of staff to Rep. Tim Walz
(D-Minn.); Jonathan Schwantes, a former general counsel to the Senate
Judiciary Committee; Deirdre Stach, a former legislative director to
Rep. Robert Walker (R-Pa.); and Sandra Stuart, a former chief of staff
to Rep. Vic Fazio (D-Calif.).

Sallie Mae also has a sizable in-house lobbying staff, including six
individuals who are registered on Capitol Hill. They include Carmen
Guzman Lowrey, a former legislative assistant to Sen. Barbara Boxer
(D-Calif.), and Brent Hartzell, a former chief of staff to the
Education Department's chief financial officer.

Many of Sallie Mae's rivals in the private loan business, including
Citigroup's Student Loan Corp., based in Stamford, Ct., and ,Nelnet,
based in Lincoln, Neb., felt blindsided by the company's survival
strategy and have been lobbying on their own to preserve much of the
current system. All three companies are members of a trade association,
America's Student Loan Providers, that represents originators,
guarantors (including dozens of state agencies with that role), and
servicers of federally guaranteed student loans.

Nelnet spent $300,000 on lobbying in the first half of this year,
according to its disclosure reports. One of the company's registered
lobbyists is Amy Tejral, a former legislative director for Sen. Ben
Nelson (D-Neb.), who is one of the most vocal opponents of the
administration's proposal.

Nelson's state is home to Nelnet, which employees about 1,000
people. The lender was the third largest contributor to Nelson's
campaign committee in the 2008 election cycle, with its PAC and
employees donating $49,100, according to the Center for Responsive
Politics.

Spreading Campaign Cash

Sallie Mae also has forged close ties to lawmakers in both parties
by using its political action committee to shower them with campaign
contributions -- more than $2.5 million in the past decade, according
to the Center for Responsive Politics.

Since the Democrats took control of Congress in 2006, Sallie Mae has
wooed key Democrats. In the 2008 election cycle, Sallie Mae's PAC gave
$10,000 to the Blue Dog PAC, and an additional $145,500 to the
individual campaign committees of Blue Dogs and Democrats on the House
Committee on Financial Services, according to a Huffington Fund review
of campaign finance data compiled by the Center for Responsive Politics.

Rep. Paul Kanjorski (D-Pa.), chair of a House Financial Services
subcommittee, is one of Sallie Mae's most loyal friends. Sallie Mae is
one of the largest employers in Kanjorski's district, and it was the
second largest contributor in 2008 to Kanjorski's campaign committee
and leadership PAC. The company and its executives donated $26,150.

Kanjorski has boasted of how he has used his leverage on the
committee to keep Sallie Mae happy. "I got Sallie Mae here and I kept
Sallie Mae here because of my activities with them at a federal level,"
he once told the Wilkes-Barre Times Leader, "making sure that we have a
very favorable climate for them to remain."

An internal strategy document obtained by Miller, the House
education chairman, and published by Higher Ed Watch, a blog of the New
America Foundation, shows that top executives of Sallie Mae saw
"Democratic control of Congress" as the No. 1 challenge facing the
company. They then laid out, as their top "high-level political
strategy," a plan to channel PAC contributions to fiscally conservative
"Blue Dog" Democrats and Democrats on the House Financial Services
Committee. The objective, as Sallie Mae's strategy document put it, was
simple: "grow pro-FFELP [Federal Family Education Loan Program]
coalition within the Democratic Party."

Miller soon announced that he was siding with Obama's plan and on
July 21 his committee approved legislation along those lines by a vote
of 30 to 17.

Sallie's Lifeline

But even if Sallie Mae's lobbyists fall short and the company's
alternative fades, it isn't likely to face massive layoffs or cutbacks.
Instead, Sallie Mae has a pretty good backup plan in place -- thanks,
ironically, to the government-run Direct Lending Program that it has
fought for so long.

When the credit crisis disrupted the availability of education loans
last summer, Congress authorized the government to buy tens of billions
of dollars in existing loans to keep the money flowing to students.
Then, just last month, the Education Department picked Sallie Mae to be
one of four companies that will, under a renewable five-year contract,
service those loans in exchange for fees.

Tucked in the Education Department's press release about the deal
was this highly important sentence: "The selected contractors will also
service loans originated by and sold to the Department in the future."

Sallie Mae already services more than 35 percent of all student
loans. A new huge stream of servicing business under its contract with
the Education Department could offset losses under the Obama plan.

"We're very confident that even in a servicing mode, that we have
the earnings power to generate a substantially higher stock price,"
Lord told Wall Street analysts this spring.

Danielle Knight is a former investigative reporter for U.S. News
& World Report. The Huffington Post Investigative Fund is an
independent nonprofit journalism venture based in Washington, D.C.

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