Sallie Mae Puts the Lie to Career College Spin on Default Rates

Do colleges with high student loan default rates have any responsibility for their former students’ loan repayment problems?

While for-profit college lobbyists and leaders would like us to believe that the answer is “no,” Sallie Mae, the student loan company with the most experience lending to students at these schools in recent years, has a much different story to tell.

As we’ve previously reported, a little less than a decade ago, the student loan giant began forging sweetheart deals with some of the country’s largest chains of for-profit colleges, such as Career Education Corporation, Corinthian Colleges, and ITT Educational Services, among others. Under these arrangements, Sallie Mae agreed to provide high-interest private loans to low-income and working class students at these institutions. The company apparently viewed these loans as “loss leaders,” meaning that it was willing to make these risky loans in exchange for becoming the exclusive provider of federal loans to the hundreds of thousands of students these huge chains collectively serve.

It didn’t take long for these loans to start going bad. For a while, the company, which had put itself up for sale, appears to have tried to hide the rapid deterioration of its “non-traditional” private loan portfolio from investors and potential buyers by pushing as many delinquent borrowers from these schools into forbearance as they could. But after an investor group led by the private equity firm J.C Flowers & Co. dropped its bid to buythe company, Sallie Mae came clean.

In a conference call with investors on January 23, 2008, executives at Sallie Mae announced that the company had sustained more than $1 billion in losses on these loans, and, as a result, would no longer make private loans to financially needy students attending these institutions. Al Lord, the company’s chief executive officer, laid the blame for the losses squarely on the shoulders of the schools with which they had been working:

Sallie Mae has lent too much money to students who have gone to schools without very good graduation records. Such students at such schools are virtually singly responsible for 60% of the ’07 credit losses…The company has stopped making loans that were predictably not collectible.”

Jack Remondi, Sallie Mae’s chief financial officer, was even more explicit in explaining why the company had decided to terminate its exclusive lending agreements with these institutions:

This is really a segment of the schools that for one reason or another are bringing in students but not producing graduates. Or if they are producing graduates, their graduates haven’t gained a sufficient economic benefit to generate the earnings to pay off and meet the debt obligations associated with their loan. And that’s the business we will be exiting.

In the years since, much of this portfolio has proven to be highly toxic. Of the approximately $6 billion of sub-prime private loans the company made to students at these schools, about 40 percent have gone into default, Sallie Mae officials revealed at an investor conference in March. In comparison, only about 4 percent of the $33 billion in private loans Sallie Mae has made to students at traditional colleges have defaulted. The strength of the traditional college portfolio is especially notable, these officials said, because 35 percent of these loans went to students with credit scores below 700. “What it really shows is the value of education,”  a Sallie Mae executive said, according to a report in Student Lending Analytics. “Keys are not FICO scores or cosigners but graduation rates and the quality of education that student receives.”

But just how much of an impact does a student’s choice of schools have over that person’s likelihood of defaulting? Officials at Sallie Mae set out to answer that question by comparing the default rates of a group of borrowers with credit scores of 700. They found that the chances of such a student defaulting can vary by as much as 30 percent “depending on what school that student attends.”

Despite Sallie Mae’s findings, for-profit college lobbyists continue to insist that the only factors that matter when it comes to their institutions’ high default rates and low student loan repayment rates are the demographic and socioeconomic status of their students.

So who should we believe? High-paid lobbyists who are fighting tooth-and-nail to protect their institutions from further government oversight? Or the student loan company that knows these schools best?

On this point, we’d have to go with Sallie Mae.

12/22 Update: The U.S. Department released data this week showing that it expects that more than 46 percent of all federal student loan dollars borrowed by for-profit college students in 2008 to end up in default. In contrast, the Department expects the overall rate for all college students who borrowed loans that year to be 16 percent.