Sallie Mae

The Student Loan Industry’s Messaging Machine at Work

As we reported on Tuesday, Qorvis Communications, a top public relations firm in Washington, has taken the lead in the student loan industry's efforts to manufacture grassroots student opposition to legislation that would eliminate the Federal Family Education Loan (FFEL) program. But getting students to rally behind an unpopular industry that profits from their indebtedness has not proven to be an easy task. The firm's desperation has become all too evident in recent weeks.

Take, for instance, the case of Patrick McBride. In a press release announcing the launch of its "Protect Student Choice" public relations effort, Qorvis officials listed McBride, a student at Vanderbilt University, as one of four "local campaign members" -- with the others being leaders of non-profit student loan agencies.

But who is McBride? A former colleague of ours, the enterprising Ben Miller of Education Sector, sought to find out. In an interview he conducted with McBride, Miller learned that he was a first-semester freshman who got interested in the issue while doing research on the Internet. McBride, who would not say whether or not he had taken out student loans (although he added that he "did not have a stake" in the issue), was initially "ambivalent" about the student loan reform legislation. But after talking to David Mohning, the university's financial aid director and a longtime supporter of the FFEL program, he was convinced that the bill was a bad idea.

Exclusive: A Peek into the Student Loan Industry’s Messaging Machine

It's no wonder Americans are deeply suspicious of special interest lobbyists in Washington. Take the student loan industry's latest efforts to kill legislation pending in Congress that would end the Federal Family Education Loan program. It's a prime example of special interest lobbying at its worst.

In 2007, shortly after President Bush signed into law a bill cutting government subsidies to lenders and guaranty agencies, the student loan industry bought into a new strategy to thwart any future Congressional action that might reduce its subsidies further: manufactured grass roots opposition (otherwise known as astroturfing). With Democrats firmly in control of Congress and in a good position to take back the White House in the upcoming presidential election, industry officials knew that the FFEL program was in jeopardy.

Enter Qorvis Communications, a prominent Washington-based public relations firm that had gained notoriety earlier in the decade for its work on behalf of the Saudi Arabian government. Eager for the loan industry's business, one of the firm's partners made a pitch for the company at the 2007 legislative conference of the National Council of Higher Education Loan Programs, a trade group that represents guaranty agencies and non-profit lenders. In a power-point presentation entitled "What Just Hit Us?", this Qorvis executive said that the loan industry had lost the loan subsidy battle because it "had no organized constituency" to "counter" its critics.

How Americans (Actually) Save for College

This week, Sallie Mae and Gallup released "How America Saves for College", an annual report on higher education savings behaviors. The whole survey deserves a read, but here are a few highlights:

  • Only 32% of low-income families (those making under $35,000 a year) have saved for college. By contrast, 62% of all families have saved for higher education.
  • The current economy is impacting college savings behaviors.  For example, 36% of low-income families are saving less for college than before. Only 5% are saving more.
  • Families making under $50,000 who are currently saving for college put away, on average, larger amounts than those making between $50,000 and $150,000.
  • Families making under $50,000 annually save 7.5% of their income for college, on average. By comparison, the average college savings rate among all income levels is 3.6%.
  • In order to reach estimated "savings goals," low-income families need to save nearly 10% of annual income until a child reaches college. On the other hand, families of all income levels only need to save 5.7% of annual income to reach their savings goals.
  • 529 college savings plans are the third most popular savings vehicle for college - with one-third of all families using them.
  • Only 4% of low-income families consider themselves "very familiar" with 529 college savings plans. A whopping 75% were "not at all familiar."

What are the key takeaways from this survey? And how can we apply these findings towards enlightened federal policy?

A New Chapter in the 9.5 Scandal

On Monday, a federal court in Virginia unsealed a whistleblower lawsuit filed by Jon Oberg, the U.S. Department of Education researcher who uncovered the 9.5 student loan scandal, against 10 student loan companies that participated in the scheme. The lawsuit, which Oberg filed in 2007 under the federal False Claims Act, seeks the return to the federal government of $1 billion in excess student loan subsidies these lenders improperly obtained. 

The roots of the 9.5 student loan case go back to the 1980s when Congress guaranteed non-profit lenders, which use tax-exempt bonds to finance their loans, a minimum rate of return of 9.5 percent on federal student loans made with these bonds. As interest rates on all other student loans fell in the 1990s, policymakers became concerned that these nonprofit student loan providers were making a killing. So in 1993, Congress rescinded that policy, but grandfathered in loans made from the old bonds, believing that the volume of 9.5 loans would decline as they were paid off and the bonds retired.

Instead, beginning in 2002, a small group of lenders devised a strategy to aggressively grow the volume of loans that they claimed were eligible for the 9.5 guarantee. This was a goldmine for lenders in the existing low interest rate environment (at the time, the borrower interest rate on regular loans hovered around 3.5 percent.) They accomplished this scheme by transferring loans that qualified for the 9.5 subsidy payment to other financing vehicles and recycling the proceeds into new loans that they claimed were then eligible for the subsidy. The lenders repeated this process over and over again.

Sallie Mae's Influence Peddling

Anyone who thinks that getting legislation through Congress this fall that would eliminate the Federal Family Education Loan (FFEL) program is going to be a cakewalk needs to read this informative article from the Huffington Post. The piece provides the most comprehensive picture to date of how Sallie Mae has used the fortune it has amassed from making federally backed student loans to try to persuade Congressional Democrats to oppose President Obama's call for a full-scale conversion to the federal Direct Lending program.

For years, Sallie Mae had tilted its political contributions and lobbying efforts toward Republicans. According to a recent report published by the Center for Responsive Politics, "Since 1989, political action committees and employees affiliated with Sallie Mae have poured $6.3 million into the war chests of federal candidates and party committees." More than 60 percent of these contributions have gone to Republicans, with the largest recipients by far being Reps. John Boehner of Ohio and Howard P. (Buck) McKeon, both of whom led a key House committee in charge of student loan policy. Meanwhile, Sallie Mae also contributed $250,000 to President Bush's 2005 inaugural committee, the report states.

But as soon as Democrats won control of Congress in 2006, the company realized that it had to reverse course. As we've previously reported, Sallie Mae outlined its plans to "grow" a "pro-FFELP coalition within the Democratic party" in an internal strategy document it produced soon after the election. In the document, which was obtained by Rep. George Miller (D-CA) and published on Higher Ed Watch, the student loan giant said that it would target its campaign contributions to "Blue Dog and Financial Services Democrats," as well as members of the Congressional Black and Hispanic Caucuses.

Not So Innocent After All

[This is the eighth in the Higher Ed Watch series "Revisiting the 9.5 Student Loan Scandal." The series takes a closer look at the origins of the scandal with the purpose of trying to resolve unanswered questions and dispel lingering myths surrounding it. Links to earlier parts of the series are available here, here, here, here, here, here, and here]

Sallie Mae has long boasted that it did not take part in the 9.5 percent student loan scheme. But a new report from the U.S. Department of Education's Inspector General (IG) refutes that claim.

According to the report, which was released on Monday, Sallie Mae improperly obtained $22.3 million in excess student loan subsidies from the federal government between Oct. 1, 2003 and Sept. 30, 2006. The actual amount that the company over-billed the government is probably substantially higher -- as the IG looked only at how the student loan giant handled the 9.5 loans it obtained through its purchase of Nellie Mae [NLMA], the Massachusetts non-profit student loan agency. Between 2000 and the end of 2004, Sallie Mae bought three other non-profit lenders, including the Arizona-based Southwest Student Services Corporation, which had increased the volume of federal loans that it claimed eligible for the 9.5 percent guarantee by 135 percent in the years immediately preceding the sale.

To be clear, Sallie Mae does not appear to have engaged in the type of loan and bond manipulations that other companies, like Nelnet and the Kentucky Higher Education Student Loan Corporation, did to massively grow their 9.5 loan holdings. Instead, the loan company violated the law by submitting 9.5 claims on loans financed by tax-exempt bonds that had matured and been retired, the IG report states.

Trade School Lobbyists' New Cause?

For-profit college lobbyists have suddenly become concerned about overborrowing by their institutions' students.

On Monday, a procession of career college lobbyists urged the U.S. Department of Education officials to give their schools more discretion to limit the amount of federal loans students can take out to cover their living expenses. The industry representatives made their remarks at a public hearing the Education Department held at the Community College of Philadelphia to gather ideas for strengthening federal student aid rules to improve the integrity of the programs.

"Schools are trying to limit borrowing," said Richard Dumaresq of the Pennsylvania Association of Private School Administrators, which advocates for proprietary institutions in the state. "But it's not enough to stem the tide of overborrowing, especially in a down economy." His comments were echoed by Harris Miller, the president of the Career College Association, and lobbyists for some of the largest publically traded chains of for-profit colleges, such as ITT Educational Services Inc.

At Higher Ed Watch, we would obviously be happy if students didn't have to take on such a heavy load of debt to attend for profit colleges and trade schools, many of which have had trouble graduating students. But it is hard to take the lobbyists' concerns too seriously, considering the recent conduct of many of these institutions.

A Failure of Leadership

By now it's hardly news that the U.S Department of Education has failed, over the last eight years, to provide adequate oversight over the lenders and guaranty agencies that participate in the Federal Family Education Loan (FFEL) program. Perhaps that explains why a new report on this subject from the Department's Inspector General (IG) received little attention, getting only the briefest of mentions in the trade publications that follow the agency's every move.

But that's unfortunate because the report provides the most vivid picture to date of how little the previous leaders of the agency's Federal Student Aid (FSA) office cared about oversight, and how they put their allegiances to the student loan industry over their responsibility to safeguard the integrity of the federal student loan programs.

The report provides numerous examples of how the Financial Partners division of FSA, which is in charge of monitoring lenders and guarantors, fell down on the job. Take, for example, the fact that the division's leaders:

  • Assigned only one person to review the hundreds of compliance audit reports that lenders and guarantors submit to the Department each year.
  • Regularly allowed program participants that were subject to review "to determine the liability" they owed the Department, and had "no formal procedure" to verify the results of the loan companies' calculations.
  • Did not consult with the Department's Office of Postsecondary Education or Office of General Counsel before issuing program review reports that dealt with "sensitive" and "political" issues to ensure that the findings in these reports were consistent with the Higher Education Act and the Department's regulations.

Sallie Mae’s Self-Serving Proposal

At Higher Ed Watch, we would be remiss if we didn't salute Sallie Mae for acknowledging in its student loan proposal that there is significant waste in the Federal Family Education Loan (FFEL) program and that the time has come for fundamental reform. We couldn't agree more.

Sallie Mae's plan, however, seems to be primarily designed -- surprise, surprise -- to maintain and even significantly expand the loan giant's predominance over the federal student loan program. Because of its size and economy of scale, Sallie Mae is a clear favorite to be one of a handful of student loan companies to win a highly coveted servicing contract from the U.S. Department of Education. As a result, the proposal would allow the company to make loans; sell them to the Department for a fee; and earn another payment  from the government for servicing these loans. In addition, Sallie Mae would be paid to service Direct Loans and other loans made by lenders that don't wish to or cannot comply with servicing standards put out by the Department.

While the plan might make some sense politically (the more lenders buy in to change, the less resistance), it makes little sense from a public policy point of view. Why should the government pay lenders to originate loans when it can make the loans itself at a lower cost? Isn't part of the point of student loan reform to stop subsidizing unnecessary middlemen?

Higher Ed Watch Exclusive: Sallie Mae’s Alternative Student Lending Plan

Sallie Mae has been busy in Washington, D.C., circulating a plan that would preserve a modified version of the Federal Family Education Loan Program (FFEL) rather than eliminate it in favor of the more taxpayer efficient Direct Loan program as President Obama has proposed. Obama dedicates his proposed savings to turning the Pell Grant program into a true entitlement for low-income students. Higher Ed Watch has obtained a copy of Sallie Mae's alternative plan (both the legislative language the company has proposed, a discussion memo about it, and a letter sent out today to schools). Sallie Mae, the leading FFEL lender, has hired two high-powered, well-connected Democratic lobbyists to pitch the plan.

According to Sallie Mae's reported estimates, the lender's plan would sacrifice approximately $17 billion in funding the Congressional Budget Office has identified as potential savings from eliminating FFEL. Under the President's proposal, that money would go to expanding Pell Grants. Under Sallie Mae's proposal it would be used, in effect, to continue the two competing loan programs.

Ultimately, the company wants to modify the bank-subsidized FFEL program that it currently dominates. It would allow lenders to use their own capital to issue federal student loans and guarantee that those loans would be sold to the Education Department within 120 days of full disbursement. The servicing rights (what regular people call billing and collections) associated with these loans would be retained by the lender or handled by one of the Department's contractors, with the added twist that the servicers would be penalized for defaulted student loans. Colleges would continue to choose which origination platform they would use to disburse the loans -- the one the government uses for Direct Lending or those of individual lenders.

Here is a breakdown of Sallie Mae's plan, with some initial explanation of why this is a good deal for the loan giant, but not worth sacrificing the $17 billion in savings. More analysis will come tomorrow.