Monday, December 26, 2005


For millions of Americans, the first big financial decision in life is whether to take on a student loan. Student loans are debt, of course, but they represent something different than credit card debt or a car loan: They are part of a quest for a better future. And they can have lifelong consequences, both good and bad, because for the unwise or the plain unlucky, a student loan can become an inescapable burden. It can almost never be expunged in bankruptcy, and the Supreme Court just ruled that even Social Security income can be garnisheed to pay for defaulted student debt.

The giant of the student loan industry is the Student Loan Marketing Association, better known by its friendly-sounding nickname, Sallie Mae. Many people think that Sallie Mae, like Fannie Mae and Freddie Mac, is sponsored by the U.S. government. And until recently it was. But at the end of 2004, Sallie became an independent, publicly traded company, completing a process begun in 1996. It is now radically different than it was even five years ago-an aggressive, highly profitable lender and a stock market superstar. Since 1995 its stock has returned over 1,900%, trouncing the S&P 500's 228% gain. Today Sallie's stock sells for 22 times earnings and almost ten times tangible book value, "an almost unheard-of valuation for a financial institution," as a Criterion Research report noted.

One reason for Sallie's growth is that during the past decade student loans have been among the fastest-growing areas of financial services because of the rapidly escalating cost of a college education. In addition, Sallie has expanded its business to encompass the whole spectrum of student lending, buying companies that make loans, running guaranty agencies, and purchasing debt-collection firms. (Fee-based revenue now accounts for roughly 30% of Sallie's business.) And while Sallie was always a large owner of student loans, today it is gargantuan-it owns about four times the amount of FFELP loans as its nearest competitor. Sallie has $81.6 billion of student loans on its balance sheet and another $39 billion in trusts off its balance sheet. (Sallie has sold the off-balance-sheet loans to third-party investors via securitizations, but it still manages and services the loans.) "We do not view the company as having a serious competitive threat," wrote Wachovia analyst Joel Houck in a recent report.

Perhaps the biggest benefit of privatization for Sallie Mae has been the freedom to make its own loans. It has eclipsed many of the nation's banks to become one of the top originators of new student loans-both FFELP loans and something known as "private credit" loans. Those are loans not backed by government guarantees that students use as supplements to or substitutes for FFELP loans-if, for example, they are maxed out on government-backed loans or if they attend a school that isn't eligible for the loans. Such loans have "skyrocketed" in the past few years, according to the College Board, as the cost of college has soared and the availability of FFELP loans hasn't kept pace. And because the government is not involved, they have no interest rate cap....

In meeting the competitive threat of direct lending, Sallie has been no less adept at wielding its clout on Capitol Hill. This year Sallie has had to face a major legislative challenge that could have altered the structure of student lending: the pending reauthorization of the Higher Education Act, which comes at a time when there is a congressional mandate to trim billions from student-loan budgets. A bipartisan effort would have reinvigorated direct lending by awarding extra grant money to schools that choose the program that is cheapest for taxpayers. It failed. In late November the House passed an HEA reauthorization bill that does cut the subsidies to lenders but gets much of its savings by raising the costs of loans to students. That bill still needs to be reconciled with a Senate version, but John Boehner (R-Ohio), chairman of the House Education Committee, told lenders in December that he thought they would be happy with the final results. "Know that I have all of you in my two trusted hands," he said.

Sallie, a creature of Washington, is of course no stranger to its ways. At a 2004 dinner that a company lobbyist threw for Boehner, 34 Sallie executives wrote checks for his political action committee, most for $1,000, the Cleveland Plain Dealer reported. "There is no question that members of Congress and their staffs listen carefully to Sallie Mae, probably too carefully," says Michael Dannenberg, director of education policy at the nonpartisan New America Foundation.

Alan Collinge took out $38,000 in loans, which he later consolidated with Sallie Mae, for his undergraduate and graduate degrees in aerospace engineering. He got a job as an associate scientist in aeronautics at Caltech and paid off $7,000 of his loans. But after leaving that job he was unable to find another one, and eventually he stopped making payments. He says he asked Sallie for a grace period, but the company refused. With compound interest, he now owes more than $100,000 and is unable to find work in his field because of his bad credit record. Instead he works in tech support for a nonprofit group in Tacoma. Collinge says he has offered to repay the $38,000 he borrowed, but he says the collection agency will not accept a compromise and is attempting to garnishee his wages.

So Collinge has become an activist. He has started a website called, where former students share their stories of how their loans have wrecked their lives, and he has put together a presentation called "The Bully in the Schoolyard: Why Sallie Mae Must Be Stopped," which he is trying to get heard in Washington.

Collinge's loan, like others, has tripled not only because of compounding interest but also because of the fees-as much as 18.5% of the outstanding value-that get tacked on as a student loan passes from a lender to a guaranty agency to a collection agency. You can see how a defaulted loan could actually be quite profitable for a lender that also runs the guarantor and owns the collection agency. Collinge points to Lord's 2003 letter to shareholders, in which the CEO attributes Sallie's record earnings per share in part to the fees it made by collecting on defaulted student loans. Debt collecting, which can be an ugly business, now accounts for 18% of Sallie's revenues. (The company says that a loan that is being repaid is far more profitable than one that has gone into default.)

That is hardly the only way Sallie plays rough with students who have signed up for its loans. Right now there is a storm of controversy surrounding its business with for-profit schools, which are accused in multiple lawsuits in several states of using hard-sell tactics to recruit students, promising them high-paying jobs that don't materialize and leaving them with mountains of debt that they can't pay off.

Consider a complaint that was filed with the Pennsylvania Department of Education in 2004 against a school called Katharine Gibbs, owned by a for-profit chain called Career Education. Documents examined by FORTUNE, obtained by a source through a Freedom of Information request, indicate that a student took out a $6,500 loan from Sallie Mae. The student, who isn't identified, alleges that he was never told that the interest rate would be 14% annually. In fact, a copy of the loan document reveals that after Sallie tacked on a "supplemental fee" of 9% of the loan balance, the annual cost of the credit while the student was in school was actually over 28%. Today the student owes $18,000. (Sallie says its average private loan rate nationally is about 8%.)

The most recent furor of bad publicity for Sallie involves another Pennsylvania school, Lehigh Valley College, which is also owned by Career Education. LVC charges around $30,000 for degrees in subjects like massage therapy; in recent years Sallie has provided many of the loans. (A small bank in Oklahoma called Stillwater makes the initial loans, which Sallie then purchases.) Last spring a local newspaper, the Morning Call, published a string of stories recounting the experiences of students who found themselves paying double-digit interest rates and discovering that they owed as much as $100,000-roughly 22 times what they'd borrowed-because of compounding interest. At an informational meeting called by the Pennsylvania House Consumer Affairs Committee, Sallie admitted that it charges LVC students an average annual interest rate of 13% on their private loans, and that it sends the loans through Stillwater because the legal interest rate limit is 21% in Oklahoma, compared with 18% in Pennsylvania. House members were outraged. "Are you really doing a real service here by getting people into astronomical interest rate situations?" asked representative Reichley.

A lawsuit filed by former LVC students against the school alleges that LVC "led plaintiffs to believe that the loans ... were low-interest, government-guaranteed, or student loans, when in reality the loans were not government-backed loans and included interest rates in excess of 15%," and that LVC "intentionally hurried Plaintiffs through the financial aid process using aggressive sales tactics." Sallie, which isn't named in the suit, says it needs to charge high interest because students can be bad credit risks.

Career Education says its "intent is to address any issues that arise thoroughly, thoughtfully, and promptly." Sallie says that the controversy in Pennsylvania is the result of its attempt last year to acquire a not-for-profit state agency called the Pennsylvania Higher Education Assistance Authority, or PHEEA, which is a major lender in the state. PHEEA flatly refused Sallie's bid; spokesperson Keith New claims that selling to Sallie "would have been a very bad outcome for students." But Sallie says that the politically connected PHEEA is protecting its own lucrative business and that the uproar over LVC is simply a "political exercise" ginned up by PHEEA.

In coming years Sallie will be facing a headwind, regardless of how the HEA legislation plays out. That's because of the breakup between Sallie and one of its major business partners, J.P. Morgan Chase. In early 2005, J.P. Morgan Chase sued Sallie to escape from a joint venture under which J.P. Morgan Chase sold Sallie all the student loans that were originated under its brands. J.P. Morgan Chase alleged that Sallie was pushing its own brands at the expense of the joint venture, and the two dissolved their partnership in March. This was big business-these brands accounted for some 60% of FFELP originations over the past few years-and the breakup is part of the reason that analyst Ken Posner at Morgan Stanley rates Sallie's stock underweight. In fact, Posner predicts in a report that the dissolution of the deal will cost Sallie $26 billion in cumulative lost volume by 2010. Many investors are sanguine because Sallie's growth has remained strong this year, thanks partly to its private credits. But in the future there may be more and more pressure on those loans to deliver profits.

And that leads to the larger question: Sallie's reputational risk. Student loans aren't just another business like software or laundry detergent. If the ugly headlines escalate, causing colleges, students, and politicians to think twice about Sallie Mae loans, its business will suffer. In the end, Sallie may find that if it doesn't do well by students, it won't do well by investors either.

More here

Campus Conscience Police?

"Over one's inner mind, and self, no one has coercive power." So write attorneys Jordan Lorence and Harvey A. Silverglate, authors of the just-published Guide to First-Year Orientation and Thought Reform on Campus from the Foundation for Individual Rights in Education (FIRE). The Guide is yet another indication that political correctness is faltering on campuses across North America. To those who value the right of individuals to a conscience -- that is, to judge right and wrong for themselves -- this is welcome news.

Political correctness is the belief that certain ideas and attitudes are improper and, so, should be discouraged or prohibited by punishing those who advance them. Conversely, ideas and attitudes that are proper should be encouraged by being enforced. An example of a politically incorrect idea: inherent biological differences between the two sexes explain why there are more male than female scientists. The correct version: discrimination against women explains the 'gender imbalance' in science, and the discrimination must be remedied. Both preceding explanations may have merit but PC is not interested in weighing evidence. It acts to quash the ideologically incorrect idea and to champion the correct one.

Last January, when Harvard University President Lawrence Summers raised the mere possibility of biological differences as an explanation for the 'gender imbalance' in science, a vicious PC backlash forced him to apologize publicly no less than three times. After what some called his "Soviet-show-trial-style apologies," Summers made an act of contrition by pledging "to spend $50 million over the next decade to improve the climate for women on campus."

The most important aspect of the sad episode is not whether the explanation of biological differences is correct. It is that the idea cannot be so much as suggested without the 'offender' paying a terrible price in public humiliation and in his career. The cost to society is high; creativity and intellectual progress wither. The cost to individuals is higher; without competing ideas, people cannot adequately judge for themselves what is true and false, right or wrong, moral and immoral. For me, that private judgment is what constitutes a conscience, to which every human being has an indispensable and inalienable right.

The Summers debacle was a high-profile example of a PC process that has proceeded more quietly across North American campuses for decades. The ability of students to judge for themselves is restricted by limiting the ideas upon which those judgments would be passed. In turn, this impoverishes the quality of conscience.

FIRE's new Guide -- the fifth in a series of ideological survival manuals for college students -- describes both the manner in which the right of conscience is being attacked on campus and how the tide is turning toward individual rights. Three common ways in which universities limit a student's access to ideas are speech codes, mandatory 'diversity' tests or training, and 'non-discrimination' policies.

Speech codes prohibit expression that could give offense on the basis of gender, sexual orientation, race or other 'historical disadvantage.' The codes are used primarily to protect women, minorities and gays from words or ideas that they might experience as insulting. The guidelines are often so vague as to prohibit the open discussion of issues like affirmative action or religious objections to homosexuality. Shippensburg University in Pennsylvania offers an example. In April 2003, the university defined harassment as any "unwanted conduct which annoys, threatens, or alarms a person or group." "[E]very member of the community" was required to adopt the administration's guidelines not only in his or her behaviors but also "in their attitudes." In 2004, the U.S. District Court for the Middle District of Pennsylvania issued a preliminary injunction against the university's codes as unconstitutional and they were repealed.

Mandatory diversity tests and training attempt to correct the unacceptable political views of students. The experience of Ed Swan, a self-described conservative Christian at Washington State's College of Education, offers an example. Swan expressed the belief that white privilege and male privilege do not currently exist in our society. In 2004 he was given low scores on a "dispositions criteria" by which some universities rank the "social commitment" of students. The university threatened to disenroll Swan if he did not sign a contract that committed him to further political screening and re-orientation. Due to a letter from FIRE and a high-profile protest, the contract requirement was dropped.

Non-discrimination policies, which are ostensibly inclusive, have been used to ban "dissenting" groups from campus and from receiving the student funds to which their members are required to contribute. Christian groups seem particularly vulnerable. For example, in April 2005, the group Princeton Faith and Action sought official student status. Its application was denied because FPA is connected to an outside organization (the Christian Union) that was not yet established at Princeton University. Other groups were not required to meet a similar standard. On May 13, the student newspaper the Daily Princetonian reported, "Nassau Hall has reversed its policy on the recognition of religious student groups after being contacted by an outside civil liberties organization that protested the treatment of one such group as an 'ongoing injustice'."

The right to judge for yourself what is true and false, what is right and wrong is a prerequisite for both freedom of speech and freedom of religion. The right of conscience is the bottom line of personal liberty itself. And it is being reasserted.



For greatest efficiency, lowest cost and maximum choice, ALL schools should be privately owned and run -- with government-paid vouchers for the poor and minimal regulation.

The NEA and similar unions worldwide believe that children should be thoroughly indoctrinated with Green/Left, feminist/homosexual ideology but the "3 R's" are something that kids should just be allowed to "discover"

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