Tuesday, January 03, 2006

The Student Loan Sharks

This Fortune article tells parents and prospective college loan seekers just how expensive college will be:

Sallie Mae: A hot stock, a tough lender
To drive growth, the education-lending giant is socking students with rates of up to 28%.
December 14, 2005: 3:03 PM EST
By Bethany McLean, FORTUNE senior writer

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 percent, trouncing the S&P 500's 228 percent 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.

Sallie's dividend has risen at an average annual clip of 18 percent over the past ten years. And thanks to hefty helpings of stock options, Sallie's top executives have earned fortunes. From 1999 to 2004, just-retired CEO Al Lord -- now the lead investor in a group trying to purchase the Washington Nationals -- received total compensation of $225 million. New CEO Thomas "Tim" Fitzpatrick made $145 million over the same period.

To produce those sorts of numbers, a company usually has to be obsessed with the bottom line, and Sallie is certainly that (a big chunk of its executives' bonuses is based on Sallie's profits). As good as that may be for shareholders, a growing number of critics contend that those profits are coming at the expense of Sallie's other constituents: students and taxpayers.

"Sallie advocates policies we believe are frequently contrary to the interest of students," says Luke Swarthout, a higher-education advisor to the U.S. Public Interest Research Groups. He charges that Sallie used its political clout to shape new legislation that will increase the cost of student loans.

Ira Rheingold, executive director of the National Association of Consumer Advocates, decries Sallie's growing presence in the ugly business of collecting on defaulted debt. Pennsylvania state representative Doug Reichley alleges that Sallie is engaging in "predatory lending."

Indeed, Sallie uses high interest rates and fees to charge students as much as 28 percent annual interest on loans. As a result, some have seen their school-loan debt balloon into six-figure delinquencies that they can't hope to pay when the collection agency (which nowadays may be owned by Sallie) comes calling.

I've quoted the important part for tax-payers and borrowers. The article includes the usual 'buts and therefores'. Make no mistake that soaking students and parents has become a huge, unregulated, and unconscionable business. Please thank the Bush administration cronies this November.

No comments: