Sallie Mae CEO: "Frivolous" Legislation Will Cut Into "Razor-Thin" Profits

Democrats' and President Bush's proposed student loan reforms have put Sallie Mae on the defensive. And the loan giant is certainly not going to take a beating without a fight. Here comes the public relations blitz, starting with this letter to college and university presidents praising the work of financial aid officers.

Tim Fitzpatrick, the Chief Executive Officer of Sallie Mae, is testing several tacks in his assault on recent legislative proposals. Unfortunately for him (and fortunately for those in the higher education world cheering on these reforms), each of his arguments can be discredited or chalked up to Sallie Mae's intense commitment to profit-making at the cost of student interests and taxpayer money.

"Frivolous"

Lets start with Fitzpatrick's claim in a Washington Times article that Congress' plan to cut interest rates in half is a "frivolous" idea that only creates a "headline sensation." Frivolous? Maybe to a guy who made almost $40 million in 2005. A student who begins school in 2007 and takes out a subsidized Stafford loan would save about $2,280 over the lifetime of the loannot a small chunk of change for most of us.

Fitzpatrick also derided the legislation by claiming it would affect only 27 percent of all borrowers. Well, only an estimated 5.5 million students would see their student loans reduced, or almost 60% of Stafford loan recipients, according to data from the Project on Student Debt. And lets not forget that represents the neediest of student loan borrowers. The student loan rate cut is specifically for students who hold need-based, federally-subsidized student loansthose from lower income and middle class homes.

"Razor-Thin"

Fitzpatrick also has been alleging that student lenders profits are "razor-thin and declining." According to Fitzpatrick, if Congress acts on President Bushs proposal to cut subsidies, "many" student lenders in the Federal Family Education Loan (FFEL) Program would be "eliminated." Quite an extreme prediction. Is there cause for concern? Would, as Fitzpatrick stated, "no one mak[e] enough money to even service these loans"?

That would be a resounding "no." Student lender profits have gone, and continue to go, through the roof. Fitzpatricks claim that Sallie Mae earns less than half a penny for every dollar lent is pretty tough to believe. The government subsidy for student lenders provides a 2.34 percentage point boost on top of the market interest rate for commercial borrowing. For Sallie Mae, whose core cost of commercial borrowing has been reported to be 5.4 percentage points, this represents a 43 percent rate of profit on capital. Since 1995, Sallie Mae's stock has posted returns of over 1,900 percent. They call it a "19 bagger" on Wall Street. In 2005, Fortune 500 ranked Sallie Mae as the magazine's 2nd most profitable company. Microsoft ranked 18th.

And Sallie Maes profits arent going anywhere anytime soonas Higher Ed Watch previously reported, after the House of Representatives announced their legislation to cut student loan bank subsidies, Morningstar Rating Service said that Sallie Mae was still in "five star shape."

Scare Tactics and Competition

Fitzpatrick also has employed the scare tactic of "disappearing borrower benefits." If Congress cuts lender subsidies, according to Fitzpatrick, "important [lender-sponsored] savings programs" will be "threatened." Well, lender-sponsored borrower benefits, like reduced interest rates for three years worth of consecutive, on-time payments, are currently so restrictive by design that only a minimal number of students ever obtain them. Fitzpatrick admits it himself: "It is important to remember that a small percentage of borrowers may ever realize these savings." And these borrower benefits cost next to nothing for lenders. The combined cost of all lender discounts is estimated at less than 10 basis points (i.e. one-tenth of one percent) over the past decade. Yet Fitzpatrick continues to harp on about how expensive they are for lenders and how invaluable they are to students. We wish.

Its also hard to believe Sallie Mae's Tim Fitzpatrick when he says hes looking out for the small guys in the student loan industry. He keeps bringing them up in the context of competition: "Students and schools benefit from the efficiencies created by competition in the FFEL industry. Students have received lower rates and fees as a result of competition." Thats true. But the competition for borrowers mainly has occured in the consolidation loan market. There isn't much competition in the overall FFEL market. Out of 3200 lenders, 32 hold over 90% of all federal student loans. One, Sallie Mae, owns over half. And it's five times as large as its closest competitor.

Competition for school partners has occured, but in a limited manner. FFEL players have entered into a variety of controversial agreements with colleges. But the Direct Loan program has been prohibited from offering any competing benefit. In fact, Fitzpatrick and friends have vigorously fought against more competition between the Direct Loan and FFEL program with attached benefits dedicated to increased need-based aid.

Why is Sallie Mae really against allowing the Direct Loan program to compete? Fitzpatrick doesnt want to compete with the Direct Loan program because the federal government might be the one entity that can match Sallie Maes size and strength and truly compete. And hes worried that true competition would force Sallie Mae to divert some of its profits to increased, need-based student aid as opposed to promised, but rarely realized, borrower benefits.

We get that Fitzpatrick and the lenders are against competing with the Direct Loan program. But at least they embrace the idea of competition within the FFEL program. In fact, with all of this talk about competition, maybe Fitzpatrick should take a look at our student loan auction proposal. Taxpayers and students would fair pretty well. Privately, we've heard from a host of Republicans and Democrats who like the auction idea. Publicly, Senator Edward M. Kennedy (D-MA) has spoken favorably of student loan auctions. Higher Ed Commission member Richard Vedder has endorsed the idea (see Monday, Feb. 6th). And former Senator Dave Durenberger (R-MN) has called it a modest, positive step. In fact, Missouri's Republican Governor is embracing the general idea. So is Illinois' Democratic Governor. Sallie Mae and other lenders would be wise to engage the idea constructively. Otherwise, President Bush and a Congressional majority are going roll them and their weak arguments.