1jesusandjohnwayne
Brendan Beehan 360x1000
14albion
2jesusandjohnwayne
storyparadox3
4confidencegames
7confidencegames
1defense
3theleastofus
3defense
Mark V Holmes 360x1000
2lafayette
Stormy Daniels 360x1000
Edmund Burke 360x1000
1confidencegames
12albion
1transcendentalist
1empireofpain
Anthony McCann1 360x1000
2albion
Samuel Johnson 360x1000
Susie King Taylor2 360x1000
Betty Friedan 360x1000
Margaret Fuller5 360x1000
1gucci
James Gould Cozzens 360x1000
199
Thomas Piketty1 360x1000
6confidencegames
Learned Hand 360x1000
Margaret Fuller1 360x1000
Margaret Fuller 360x1000
Thomas Piketty3 360x1000
Thomas Piketty2 360x1000
1trap
2paradise
1lauber
399
10abion
4albion
lifeinmiddlemarch1
Storyparadox1
1falsewitness
3paradise
6albion
1lafayette
5confidencegames
2transadentilist
Gilgamesh 360x1000
3albion
499
2trap
9albion
1madoff
1albion
1paradide
Susie King Taylor 360x1000
LillianFaderman
George F Wil...360x1000
Mary Ann Evans 360x1000
George M Cohan and Lerarned Hand 360x1000
Lafayette and Jefferson 360x1000
2lookingforthegoodwar
Margaret Fuller2 360x1000
Anthony McCann2 360x1000
Margaret Fuller 2 360x1000
Ruth Bader Ginsburg 360x1000
Office of Chief Counsel 360x1000
Margaret Fuller4 360x1000
2gucci
2falsewitness
13albion
3confidencegames
lifeinmiddlemarch2
2defense
11632
Adam Gopnik 360x1000
5albion
1theleasofus
7albion
Maria Popova 360x1000
2confidencegames
AlexRosenberg
Margaret Fuller3 360x1000
299
Spottswood William Robinson 360x1000
2theleastofus
8albion'
11albion
storyparadox2
Tad Friend 360x1000
Maurice B Foley 360x1000
Richard Posner 360x1000
1lookingforthegoodwar

Originally published on Forbes.com on June 6th, 2012

After accepting a few guest posts from Alan Collinge, I heard from Sallie Mae. At the risk of being confused with a journalist, I had an interview with John Remondi, Chief Operating Officer. The Sallie Mae people indicated that Alan is not always factually accurate, although they indicated they are not opposed to bankruptcy protection for student loans. Probably the biggest difference they have with Alan is on his assertion that they profit from defaults. Mr. Remondi made a pretty convincing case to me that they would rather that the loans performed. They convinced me, but not Alan, who is back with another guest post on the subject.
 
Two weeks ago, Peter Reilly (noted accountant, and courageous Forbes contributor) was invited by the top brass at Sallie Mae to meet to discuss my contributions to this column, and comments I made regarding the company in particular.  While it was a bit difficult to extract any specific criticism they had about my claims, they did make it clear that they felt I was wrong about my assertions that the company makes more money from defaulted student loans than loans that remain in good stead.  In response, I would like to lay out the facts about defaulted student loans.  They are well proven, not controversial, and unambiguous.
Lenders are paid full book value on defaulted loans (principal plus interest).  For defaulted loan collections, collectors get to keep 18 cents out of every dollar before anything is applied to principal or interest.  If the loan is rehabilitated, the new, much larger, loan is sold, and the guarantors get paid (in addition to 10 months of payments that go straight into their pockets) something like 18%  of the inflated balance.
For lenders who only lend to students (and don’t guaranty, or collect on defaulted loans), they lose no money on a default. The money they are reimbursed can (and is) immediately used to fund another loan.  Therefore, these lenders, fiscally, have a neutral outlook about defaults (i.e. they don’t care one way or another if a loan defaults).
If a company both loans, and also owns collection subsidiaries, then as long as collection of defaulted student loans is profitable (and it is extremely profitable), then this company clearly and unambiguously has a financial interest that loans default rather than remain in good stead.
If a company not only lends, and collects, but also owns a guarantor company (guarantor’s lifeblood is penalties and fees attached to defaulted loans), then this incentive is increased significantly.
Sallie Mae went on an acquisitions tear in the late 1990’s, acquiring some of the largest collection companies, and also multiple guaranty agencies, including the largest, USA Funds .  Therefore it is impossible for Sallie Mae to claim that they would rather loans remain in good stead than default.
I think I’m going to remain agnostic on this issue.  I am waiting to hear back from Sallie Mae.  I also might take another crack at Sallie’s 10-K, but if you want to beat me to it, jump right in and comment.
 
You can follow me on twitter @peterreillycpa.