Sallie Mae's Menage À Trois

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Sallie Mae's Menage À Trois

Isaiah J. Poole

The sale of Sallie Mae to a group of investors that includes JP Morgan Chase and Bank of America should confirm to members of Congress that it is time to pull the plug on what has been a huge ripoff of taxpayers and college students.Sallie Mae became a valuable enough business to warrant a $25 billion purchase price in part because its lucrative loan portfolio, estimated as high as $142 billion, is guaranteed by the federal government. That guarantee, in turn, ensures what has turned out to be in the past two decades a relatively low-risk investment, as graduating college students get jobs that enable them to repay the loans with few defaults.

But the icing on the cake was the success Sallie Mae had, after directing more than $877,000 to the election campaigns of President Bush and congressional candidates in 2004 and 2006, in getting the Republican-dominated Congress to allow it to charge interest rates on loans that ensured it a fat profit. That profit was fat enough, in fact, for its former board chairman, Albert L. Lord, to collect $228 million worth of salary and stock options in 2005 and for its current chairman, Thomas J. Fitzpatrick, to have received $180 million in total compensation, according to The New York Times .

This is, in other words, Reaganesque obsequiousness to private interests writ large: A public-interest goal—low-cost and widespread access to college tuition financing—turned into a license to print money for high-priced executives and investors, leaving students and taxpayers stuck with the bill.

Sallie Mae was once the quasipublic Student Loan Marketing Association and its job was to manage subsidized, low-interest student loans made by banks and guaranteed by the federal government. It was President Bill Clinton who questioned the need for this arrangement and set in motion the privatization of Sallie Mae, with the goal of ending the subsidies. At the same time, the Department of Education under his watch created a program in which students could borrow directly from the federal treasury at a low rate. That proved to be a far more cost-efficient way to get money to students at below-market rates: It cost 3.7 cents per dollar to administer a direct student loan compared to 11 cents per dollar on the same loan made through Sallie Mae.

Nonetheless, when the Bush administration took over the White House it sought to eviscerate the popular direct student loan program, even initially putting an opponent of the program—William Hansen, the ex-CEO of the Education Finance Council, an organization of private lenders—in charge of it. Then the 109th Congress passed legislation that allowed Sallie Mae, beginning in 2006, to convert its variable-rate loans, which had been hovering around 6 percent or less, to fixed-rate loans with interest rates of from 6.8 percent to 8.5 percent, substantially increasing the burden on college students and their families—and sharply increasing the profit for the participating banks.

That legislation was the fruit of Sallie Mae's assiduous courtship of top Republican leadership, especially Rep. John A. Boehner, R-Ohio, who had been the chairman of the House Education and Labor Committee before becoming House majority leader. Boehner, the biggest beneficiary of Sallie Mae campaign cash in the House, got several opportunities to fly on Sallie Mae's corporate jet with Lord, and Boehner's daughter got a cushy job at a Sallie Mae subsidiary. Boehner, returning the favors, famously told a meeting of the Consumer Bankers Association in 2005, during the heat of the student loan interest debate, to "relax and stay calm ... Know that I have all of you in my two trusted hands."

Today, Boehner's hands no longer rule in the House, and even the Bush administration is hard-pressed to sustain the goodies for banks in the face of continuing budget deficits. The new chairman of the House education committee, Rep. George Miller of California, and his Senate counterpart, Sen. Edward Kennedy of Massachusetts, are spearheading legislation that would cut the unnecessary subsidies to banks while directing that aid to where it is needed most, to students, by resuscitating the federal direct loan program.

Meanwhile, the Wall Street verdict is that Sallie Mae can do just fine if the legislative initiatives by Miller and Kennedy succeed. "Some of the savviest minds on Wall Street believe that even in the face of a Congressional debate over subsidies, there is room for a 50 percent premium" over its pre-sale stock price, Charles A. Gabriel Jr., an analyst with the Prudential Equity Group, told The New York Times.

The cleanest way to make college affordable to more students is to follow the spirit of the GI Bill and the Pell Grant and simply make more grant money directly available to students. But if the consensus is for the feds to also stay in the student loan business, then the direct loan program is the most efficient way and should be expanded. Making all federal loans direct, rather than filtering them through Salle Mae, would actually save the government about $5.6 billion, according to a Center for American Progresss analysis—enough to generate 1.5 million more grants under the Pell Grant program.

Any of these alternatives would be better than the Frankenstein's monster of private sector manipulation of government that exists today, in which the government guarantees that the private sector receives hefty profits through above-average interest rates—and guarantees that students graduate with a burdensome debt.

Isaiah J. Poole is the executive editor of This was written with the research assistance of Eric Lotke.

© 2007

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