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Sallie Mae Shows Learning is Lucrative for Lenders

NEW YORK (MainStreet)—When SLM Corp., the largest education financing entity in the country more commonly known as Sallie Mae, announced in January that profits for the fourth quarter of 2012 decreased to $343 million, from $506 million earned in the same quarter in 2011, it was a conspicuous reminder of how lucrative the student loan business is.

The company rebounded in the first quarter of 2013 with net income of $346 million, compared to $112 million for the same quarter of the previous year. Revenue for the first-quarter 2013 included a $55 million gain from the sale of the residual interest in a loan securitization trust of the now ended Federal Family Education Loan (FFEL).

According to a Sallie Mae press release, the first-quarter 2013 private education loan portfolio results vs. first-quarter 2012 included loan originations of $1.4 billion, up 22% from 2012.

The company still holds, as of March 31, 2013, $119 billion of FFELP loans compared with $136 billion at March 31, 2012, stated the communiqué. Indeed, during first-quarter 2013, the company issued $1.2 billion in FFELP asset-backed securities (ABS), $1.4 billion in private education loan ABS and $1.5 billion of unsecured bonds.

Sallie Mae said that it still continues to issue FFELP ABS primarily as a means to finance the redemption of FFELP loans financed in the U.S. Department of Education's conduit program. The company expects to redeem all of these loans prior to the conduit program's Jan. 19, 2014 maturity date.

Until 2004 Sallie Mae was a Government Sponsored Entity (GSE). It was the largest lender of government subsidized student loans. But Sallie Mae went private. It obviously still does well even though privatized and prohibited from making student loans since 2010.

The Obama administration ended the FFEL program in 2010. It was the second largest of the U.S. higher education loan programs – the Direct Loan program being the largest. Other presidents attempted to end the program. President George H.W. Bush came the closest to doing so during the early 1990s.

The theory behind ending FFEL was that the government can save money by eliminating the middle man – the banks and lending the money directly to the students. Estimates of savings were in the billions.

Meanwhile banks, which had long stated they were not making much from the loans lobbied against attempts to end FFEL.

Barmak Nassirian, an independent consultant who was formerly at the American Association of Collegiate Registrars and Admissions Officers (AACRAO), said that banks made a tremendous amount of money from student loans. He indicated that when the subsidies were to be cut, they still wanted to participate in the loan program.

"Some even counted their participation as part of the Community Reinvestment Act," Nassirian emphasized. "They were saying that this was a charitable purpose."

He explained that initially banks were very skittish about loaning money to people who were not creditworthy. So during the late '70s, early '80s, Congress would sweeten the deal to ensure participation.

"Banks and congress played a game of chicken during that time," Nassirian elaborated. "The loans were increasingly subsidized by Congress. Eventually, they became risk free."

He remarked that as the federal loans became very popular Congress capped the amounts. Meanwhile, tuition inflation was twice the rate of inflation. A huge gap then was created became how much the student could borrow and the cost of attendance. The banks continued to lobby the politicians to make the loan program contain even more incentives.

"One of the things that the banks managed to slip into the 2005 Bankruptcy Reform Act," Nassirian pointed out, "was that the private label student loans – those that are not subsidized or guaranteed by the government - are not dischargeable in bankruptcy. This is a huge incentive. It makes students loans more collectable than taxes."

As far as Nassirian is concerned the paradigm of higher education has shifted. He thinks that the whole concept of educational borrowing is that one will be worth more after graduation and therefore is worth the investment. But something happened along the way. Colleges and universities spend more for amenities than they do instruction. They want to make their institutions more entertaining to attract more students.

So the concept of investing in education is distorted. If money is spent on leisurely activities, then one will not be worth more after graduation, he asserted. One reason is that the inflation adjusted median income has stagnated over the past three decades. But tuition has increased exponentially.

"We need to focus on cost containment and better educational outcomes instead of amenities wars and further debt financing," declared Nassirian. "We need to answer the question, how much is a baccalaureate degree worth?"

He urged students to give some consideration as to where they want to go to college, why they want to go there and how the tuition will be paid. He added that students are making very consequential six figure determinations without considering the pertinent factors.

"We should have a financing system that does not impose an unreasonable amount of debt," Nassirian proffered. "Instead we have one that exploits the ignorance of people."

--Written by Michael P. Tremoglie for MainStreet

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