Originally Published on forbes.com on April 30th, 2012
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Alan Collinge, founder of StudentLoanJustice.org , and Sallie Mae on the same page? Can such a thing be? Well maybe not exactly, but it may be that they are not as far apart as you think. A couple of weeks ago I heard from Martha Holler, Senior Vice President, Corporate Marketing & Communications for Sallie Mae. Being a mere $193 billion (assets) company, they don’t have the kind of media access a famous activist like Alan Collinge has, so they wanted to talk to me about how to get their story across on the forbes.com platform. Here is the email from Ms. Holler that got us going:
I read Alan Collinge’s blog and your comments about it with interest and would welcome the opportunity to discuss student loan debt and recently proposed legislation. I will be in New York on April 24 with Sallie Mae President & COO Jack Remondi and SVP of Public Policy Sarah Ducich and would love to meet. Would you have 45 minutes to meet with us?
As we discussed the arrangements for the meeting, my conscience was stricken with the notion that I was becoming guilty of impersonating a journalist. I was afraid that this email might cause them to cancel, but I sent it anyway in the interest of full disclosure:
Actually I am located in Westborough Massachusetts but I like to get down to the city every once in a while and there is somebody else I need to meet with around then anyway. I should be clear that I am just a contributor to forbes.com. I work full time as a CPA.
That didn’t cause them to back out. I thought I could use some help from a real journalist so I asked my friend Jonathan Schwartz, who runs Interlock Media, a not-for-profit corporation based in Cambridge that makes films on environmental and human rights issues to help. Among their films is Turned Out, a powerful documentary about sexual assault in prison:
We supplemented the team with John Whalen, an Interlock intern, who was immensely helpful, not least in handling much of the driving including especially the city part.
Sallie Mae On Increasing College Costs
So there I was in Connolly’s on 45th Street sitting across from John F. “Jack” Remondi, President and Chief Operating Officer of Sallie Mae. I started off by asking him if he really is worried that college costs might go down, which would hurt their business. I got that from the Sallie Mae 10-K. He kind of smiled and said that was the type of risk that they had to disclose to shareholders but he did not think it was very likely. Then I asked him about the assertion made by Allan Collinge and others that the industry profits from student defaults.
Sallie Mae On Defaults
The argument has a certain logic to it. The interest and principal on most of Sallie Mae’s portfolio is federally guaranteed. If somebody goes delinquent, but then starts making some payments, many of those payments will be late fees, which is extra income to Sallie Mae beyond the interest and principal that is guaranteed. Mr. Remondi indicated that this argument ignores costs. Before turning a loan over to the federal government for delinquency, a process that takes about a year, Sallie Mae, on average, will contact the borrower seventeen times (They are required to contact them twice). Given the limited time and the amount of material we were covering, there was some necessary vagueness in our discussion, but Mr. Remondi was very clear on this:
When someone is delinquent, it takes work to pursue service. Sallie Mae faces five times the servicing costs as compared to servicing a current loan. If we had all current accounts, we would trade late fees for delinquent costs. Absolutely.
Given what else I’ve learned about Sallie Mae, I’m inclined to believe him.
What About Refinancing ?
Sallie Mae is at an interesting crossroads right now. The program that generated most of its portfolio, FFELP, is not guaranteeing any new loans. Sallie Mae expects to be making money off that portfolio for the next twenty years, though, and is buying portfolios of other institutions that hold FFELP loans. Given its infrastructure, Sallie Mae can presumably service them more profitably. Since it is a federal guarantee that gives the portfolios their gilt edge, it strikes me that this might not be the optimal deal for the taxpayers. We will get the ones that stink while Sallie Mae makes money off the ones that perform.
Mr. Remondi set me straight on something that I had not understood from the 10-K. Although many of the borrowers are paying fixed rates, the lenders are getting variable rates (roughly LIBOR +2). (There is a true-up done with payments either coming from or going to the federal government. Currently they are going to the federal government.) Sallie Mae when it buys the loans up, secutitizes them giving institutional investors something like LIBOR+1. That seems like a pretty sweet deal, if you already have the servicing infrastructure in place. My question was and still is why the taxpayers don’t do this. Why don’t we, the taxpayers, refinance the whole FFELP portfolio ? We are already stuck with the down side of it. This is another thing that Sallie Mae tells its shareholders it is worried about:
For instance, during the fourth-quarter 2011, the Administration announced a Special Direct Consolidation Loan Initiative that provides a temporary incentive to borrowers who have at least one student loan owned by ED and at least one held by a FFELP lender to consolidate the FFELP lender’s loans into the DSLP program by providing a 0.25 percentage point interest rate reduction on the FFELP loans that are eligible for consolidation. We currently do not foresee the initiative having a significant impact on our FFELP Loans segment. However, the initiative is an example of how the Administration and Congress could detrimentally affect future estimated cash flows and profitability from our FFELP Loan portfolios through their actions.
Mr. Remondi did not seem all that worried, but I don’t think he was smiling when I asked him about this.
The Big Question – What About Bankrurptcy ?
This was the most exciting thing about the interview to me, but the Sallie Mae people did not think it was that big a deal. Ms. Ducich explained how the bankruptcy exemption for student loans evolved over time, with the last most draconian piece being added by a floor amendment. They indicated that Sallie Mae is not opposed to bankruptcy protection for student loans, provided that it applies to all student loans and there is some sort of good faith attempt at payment for five or six years. You should not be able to graduate and immediately declare bankruptcy. (Calm down, Alan, I know you think those stories are apocryphal).
Alan Collinge and John Remondi Around The Campfire?
I have this strong desire for everybody to get along. Somebody once told me it is because I am an Aquarian. So the image of the President of Sallie Mae and the student loan activist singing Kumbaya about bankruptcy protection is irresistible to me. Sadly, the Sallie Mae people tell me much of what Alan says is “factually inaccurate”. There is a lot to sort out there, which I will leave for future posts. I hope some of those will come from Sallie Mae, who will further aid me in my ambition to become the Tom Sawyer of blogging.
You can follow me on twitter @peterreillycpa.