College Guide

Blog

May 10, 2013 1:58 PM Who’s Getting Rich off Student Loans? College Endowments

By Daniel Luzer

Guess who’s making money off your students loans? Turns out it might be your college that’s responsible for the loans. That’s because many colleges invest heavily in student loan servicing and collection companies like Sallie Mae.

According to an article in the Huffington Post:

University endowments… are among big investors in Sallie Mae, the private lender that has been generating enormous profits thanks to soaring student debt and the climbing cost of education….
The previously unreported investments mean that education professionals are able to profit twice off the same student: first by hiking the cost of tuition, then through dividends and higher valuations on their holdings in Sallie Mae, the largest student lender and loan servicer in the country, which profits by charging relatively high interest rates on its loans and not refinancing high-rate loans after students graduate and get well-paying jobs.

Sallie Mae earned $939 million and has generated a cumulative profit of $7.3 billion over the last decade. How? Is that because Sallie Mae is a super-efficient corporation that everyone respects and loves? Do they offer a high-quality product?

Well no, mostly it’s because there’s just no competition. Sallie Mae president and chief operating officer John Remondi explained to investors earlier in the year that “the margins here are really a function of alternative financing opportunities. And if you think about our products, we’re making loans to the parents and students, family education loans. Their alternatives are fairly limited.”

Awesome. A near monopoly!

Monopoly

And college endowments are getting all tied up in this lucrative financial game:

The endowments of Furman University, Harvard University, Mount Holyoke College, and University of Michigan all hold stakes in Sallie Mae through their investments in Highfields Capital Management, a hedge fund that manages more than $11 billion and is the second-biggest Sallie Mae shareholder. As of the end of last year, Highfields owned nearly 40 million shares of Sallie Mae, or 8.6 percent of the company’s common stock.

This is a little complicated, but basically what it means is you took out some loans because your college costs too much. And now the money you pay in interest is making many colleges even richer.

An unlike normal companies (say, real banks), Sallie Mae is essentially assured of financial success, because the federal government guarantees its loans, and borrowers can’t default on their debts.

A normal loan works like this: you want to buy something, you take out a loan to buy it, but first you have to prove that you have assets equivalent to the value of the loan. So if you can’t make payments on the loan the bank can take your stuff. This prevents people from taking out loans they can’t afford.

Student loans, however, often go to people with no assets. The federal government encourages this and guarantees the loans so that people can go to college even if their incomes are low. This means students don’t have a direct incentives to take out only loans they can afford (and colleges don’t have an much incentive to charge tuition that students and families can comfortably pay).

The federal government can guarantee student loans because debtors have to pay, no matter what happens financially in their lives. If you don’t make payments on your loans the federal government can garnish wages, retirement benefits, social security, even life insurance upon death.

This isn’t a huge scandal. Colleges have endowments. They invest these endowments in things that make money. It makes sense to invest in student loan companies, since they’re profitable.

But in a greater sense what’s going on here is this:

  • Many colleges are investing their money in companies that profit from interest on student loans.
  • Student loan levels are based on the cost of college.
  • The cost of college is determined by institutions that invest in companies that profit from interest on student loans

No wonder they have no incentive to cut costs.

As long as students are protesting endowment investments in controversial institutions (Israeli companies and fossil fuel corporations are particular targets now), it’s worth taking this one on.

A college investing in Sallie Mae isn’t the illegal or immoral stuff that leads to jail time or financial restitution, but it sure looks like a conflict of interest.

The HuffPo article indicates that Sallie Mae shelled out “more than $1.4 million lobbying members of Congress last quarter,” presumably to ensure the gravy train keeps rolling in.

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer

Comments

  • Kenneth O'Connor on May 10, 2013 3:16 PM:

    Good article Daniel.

    Just for clarification, federal student loans carry no underwriting (or limited underwriting in Plus loans), and are essentially "guaranteed" to students without considering the ability to repay, debt-to-income ratio, future income potential and viability of the major. SInce the repeal of the FELP program, lenders like Sallie Mae no longer participate in issuing new federal student loans, but they have servicing contracts for outstanding federal loans, and continue to issue new private loans.

    Private loans do not have the same subsidies in place, and follow actual underwriting standards that allow applications to be denied if applicant credit is unsatisfactory.

    A lot has changed in the industry, but basically the federal loan program as a whole needs to be reevaluated to more accurately consider risk when lending to college students today, especially since student loans are not dischargeable in bankruptcy. Private loans already do this, and have half the default rates of federal loans.

  • clarence swinney on May 11, 2013 11:16 AM:

    SUFFOCATION POLICIES
    The Job Growth is fine but more than 11 million work seekers cannot find a job.
    There is no growth in manufacturing. Misguided tax and spending policies As the sequester cuts are just beginning. The only good news is Housing is up, measures to control inflation by the Fed and stock market rise.
    Some Republicans believe reducing government spending is the key to economic stimulation.
    The CBO projects Sequester will lose 700,000 jobs. The Republicans have lost the popular vote in five
    of six presidential elections. The GOP is represented in Congress by conservative,, whites meaning a minority constituent. The Koch 50 in the House have been a disaster with their cut government cut taxes and policy of fight everything offered by the President.
    The House is a divided mess out of control by Republican leadership.