April 30, 2007
Here is a very interesting opinion piece from the Washington Times. In particular, the author argues some very good points about default rates. As student loans are guaranteed by the government, any loan that is not paid back is shouldered by tax payers. What’s astonishing is that while around 11% of FFELP borrowers default on their loans, more than 16% of Direct loan borrowers go into default!! That’s 150% of FFELP loan borrowers – all of it being shouldered by tax payers.
Defaulters vs. taxpayers
By Leslie Carbone
April 29, 2007
New York State Attorney General Andrew Cuomo on March 22 announced a civil lawsuit against Education Finance Partners, a student loan company based in San Francisco, for offering colleges incentives to steer student borrowers toward the company’s loans.
American colleges accept a variety of financial incentives from some large student loan companies to steer students to borrow from them, according to Mr. Cuomo. Such goodies include substantial cash payments, free trips to resort destinations for campus financial aid officers, and company-manned call centers to answer students’ financial aid questions. Institutions that have accepted such incentives include Long Island, Boston, Clemson, Baylor and Drexel Universities.
“We believe these revenue-sharing agreements are really no different than kickbacks,” Mr. Cuomo charged at a news conference.
Senate Health, Education, Labor and Pensions Committee Chairman Edward Kennedy, Massachusetts Democrat, sent a letter to several other large student loan companies, including Sallie Mae, Citibank, Bank One and Bank of America, demanding information about their financial relationships with colleges.
These actions will no doubt energize politicians eager to take credit for clipping the wings of private lenders who earn profits from federally guaranteed student loans.
The Bush administration has proposed reducing the amount the government insures private companies against defaulted loans and increasing the fees companies must pay. But for an industry that operates on slim margins such measures would likely reduce competition and hurt students when companies simply pass these increased costs on to their customers.
Others propose more direct lending by the government. But such a shift could increase the taxpayers’ burden and drive up the overall costs of college.
As many taxpayers may not be aware, the U.S. Department of Education operates two competing loan programs, and the taxpayers bear the risks of both. Under the William D. Ford Direct Loan Program, the department makes and administers loans directly to borrowers. Under the Federal Family Education Loan (FFEL) program, private companies provide the capital and administer the loans, but the loans are largely federally subsidized and insured.
Some believe one way to rein in costs would be to scale back the FFEL program and expand the Ford Direct Loan program, thereby cutting out the middleman and potentially reducing costs.
But the devil is in the details — or, in this case, the defaults. The default rates under the Ford Direct Loan Program are higher than under the FFEL program, and the gap is widening. When a college grad defaults on a federally insured student loan, the taxpayer is on the hook for most of the balance.
The Office of Management and Budget says the 2007 projected weighted average default rate under the FFEL program is 11.7 percent; under the Ford program, it is a whopping 16.65 percent. Already 3.1 million Direct Loans are expected, and the increased burden to taxpayers would be significant if the program were expanded.
What accounts for the different default rates? Private companies have both the incentive and the ability to be innovative in keeping track of borrowers, enabling them to prevent and recover bad debts.
Students are a poor credit risk. They typically have limited credit histories, no secure jobs, and an immature sense of responsibility. That’s a main reason the federal government insures student loans.
But private companies are often better equipped than government agencies for keeping track of their customers. Government bureaucracy is inherently less efficient. Even the most diligent civil servants are hamstrung by the fact their public bureaucracy moves slowly and less able to take advantage of the best practices of the most successful private companies. Giving a federal agency more direct responsibility, in student lending or anything else, is likely to make its inherent inefficiencies costlier to taxpayers.
Federally insured student loans now provide 30 percent of all payments for college tuition costs. That loan market has more than doubled in the last 10 years, and economists have argued the result actually put upward pressure on college costs.
Four decades of experience have shown expanding the taxpayers’ burden while reducing students’ responsibility doesn’t make college more affordable.
The College Board says the cost of attending a public college or university has risen 86 percent, adjusted for inflation, since the 1991-92 academic year; private college costs have soared 52 percent in the same time. Tuition and fees for the current academic year at private, four-year institutions reached $22,218, up 5.9 percent from last year. Prices at public, four-year institutions rose 6.3 percent, to $5,836.
It’s time to take a hard look at the reasons college costs escalate, including rapidly rising federal student aid, and to pass policies that pressure colleges to decrease tuition — and not simply shift the taxpayers’ burden from one shoulder to another.
- U.S. Citizen
- U.S. National (Includes Natives of American Samoa or Swain’s Island
- U.S. Permanent Resident who has an I-151, I-551, or I-551C (Permanent Resident Card)
If you are not in one of the above mentioned categories, you must have an Arrival-Departure Record (I-94) from the U.S. Citizenship and Immigration Services (USCIS) showing one of the following designations:
- Asylum Granted
- Cuban-Haitian Entrant, Status Pending
- Conditional Entrant (valid only if issued prior to April 1, 1980)
- Parolee (Must be paroled in the U.S. for at least one year and must be able to provide evidance from the USCIS that you in the U.S. for other than a temporary purpose and that you intend to become a U.S. Citizen or Permanent Resident)
You are not eligible for Federal Aid if you only have a Notice of Approval to Apply for Permanent Resident (I-171 or I-464).
If you are in the U.S. on F1 or F2 Student Visa, or J1 or a J2 exchange visitor visa then you are not eligible for Federal Financial Aid. Also, students with G Series Visa’s are not eligible.
April 27, 2007
The largest student loan company in America is now under fire for potentially illegal and aggressive tactics. You can read the entire article at the Washington Post.
Probe Launched on Sallie Mae Collection Tactics
By Amit R. Paley
Sallie Mae, the nation’s largest student loan company, may have violated federal laws by repeatedly using aggressive tactics to collect loans from student borrowers, Senate investigators said yesterday.
Aides to Sen. Edward M. Kennedy (D-Mass.), chairman of the Senate education committee, said they believed the Reston lending giant tried to collect debts that were not owed, fired employees who attempted to help borrowers and intentionally sent payment notices to an incorrect address to force a borrower into default.
“I am concerned that several student loan lenders may be engaging in harsh and inappropriate tactics” that “are prohibited by federal law and regulations,” Kennedy wrote in letters sent yesterday to Sallie Mae and Nelnet, a Nebraska student lender, that requested documents about their collection practices.
Both companies defended their policies and said they would cooperate with the inquiry. “We are proud of our record of helping more than 20 million Americans pay for college,” Tom Joyce, a Sallie Mae spokesman, wrote in an e-mail.
Kennedy’s probe of improper loan collection practices comes in the midst of a nationwide investigation into the $85 billion-dollar-a-year student loan industry. The unfolding scandal has revealed kickbacks and conflicts of interest among lenders, universities and government officials, prompting pledges from lawmakers of both parties to reform the system.
One of the stories highlighted by Kennedy centered on Britt Napoli, 48, a former special education teacher whom Sallie Mae put into default after he lost his home in a 1994 California earthquake. Investigators said the company violated Education Department policy.
Napoli said in an interview that he did not receive letters from Sallie Mae telling him he was going into default because he was living in a tent city without access to mail and surviving on help from the Red Cross. He said the company refused to negotiate with him and insisted that he immediately pay the $26,000 balance of his loan. Napoli said that over the past decade Sallie Mae has improperly taken $32,000 by garnishing his wages and seizing his tax refunds. The company has added interest and fees and says he still owes $72,000, Napoli said. His payments do not reduce the principal of the loan, he said.
“This is a nightmare,” said Napoli, now a college professor in Sacramento. “The people at Sallie Mae won’t compromise or listen. And at this rate, I’ll be paying them the rest of my life.”
Asked to respond, Sallie Mae provided a letter from the Education Department’s Office of Federal Student Aid, which indicated that the company had the right to put Napoli in default.
Napoli and Kennedy aides disagreed with the letter’s conclusions.
In its investigation of loan collection practices, Kennedy’s office interviewed about a dozen borrowers and former Sallie Mae employees, an aide said. Investigators said that Sallie Mae threatened a borrower would be sent to jail if he did not pay his loan. It also harassed the neighbors, family and co-workers of borrowers, the investigators said.
Joyce, the Sallie Mae spokesman, said the company followed the law and had “an excellent compliance record in performing post default collection activity.” He also attacked Kennedy’s office for publicizing the inquiry. “It raises the question as to whether the facts are important in this inquiry, and whether the matter has been pre-judged,” Joyce said in the e-mail.
In his letter to Nelnet, Kennedy said the company may have refused to provide loan and payment history information to defaulted borrowers and inappropriately consolidated loans with the borrower’s consent.
Ben Kiser, a Nelnet spokesman, said the company has “extensive systems, policies and procedures in place to stay in compliance with the law.”
So many students have borrowed loans over the years and have not kept records of who their lenders are or even how much they have borrowed in loans. Due to the recent suspension of access to NSLDS (National Student Loan Database System), it has been very difficult for students to locate this information. Most students are getting ready to graduate and are looking to repay or consolidate the loans that they have. Consolidation Lenders have been unable to provide detailed information or details on the consolidation process due to the lack of information available.
Students should always know who their lenders are and should be aware of the resources available to them to responsibly handle student loans. If you are unsure who your lenders are, you can locate this information a few different ways.
1. Visit www.StudentLoanConsolidator.com and click on loan locator. This site will link you directly to the the Department of Educations Loan Database.
2. Contact your Schools Financial Aid Office
3. Visit www.StudentLoanForm.com. This site will link you directly to the Department of Educations Loan Database.
Now, you have all your loan details including who your lenders, what your rates are, and when these loans need to be repayed. Now you are ready to consolidate!
April 26, 2007
See below for a detailed Stafford and Plus Loan Discharge and Cancellation Summary Chart….
Borrowers total and permanent disability or death*
Plus Loans may be discharged in the event of a death but not the disability of a student for whom the parents borrowed.
Full time teacher for 5 consecutive years in a designated elementary or secondary school serving students from low-income families.
Up to $5,000(up to $17,500 for teachers in certain specialties) of the total loan amount outstanding after the completion of the fifth year of teaching.
Under the Direct and FFEL Consolidation Loan Programs, only the portion of the consolidation loans used to repay eligible Direct Loans or FFEL Loans qualifies for Loan Forgiveness.
Plus Loans are not eligible for teacher loan forgiveness. At least one of your five consecutive years of teaching must occur after the 1997-1998 school year.
Bankruptcy (Rare Cases)
Cancellation is possible only if the bankruptcy court rules that the repayment would cause undue hardship.
Closed School (before the student could complete course of study) or False Loan Certification
For Loans received on or after January 1, 1986.
Effective July 1, 2006
School does not make requires return of loan funds to lender.
Up to the amount that the school was required to return.
For Loans received on or after Jan. 1, 1986.
Questions….Contact the Department of Education at 800-433-3243. You may also find additional information on http://www.StaffordLoan.com.
April 25, 2007
Here’s an interesting article – ther’s a new website that helps decode and demystify financial aid award letters! There’s a glossary of what terms actually mean, and analysis of 5 actual award letters. Check out the article below and the site itself at FinancialAidLetter.com.
An A for Your Aid Award Letter (or an F?)
As if financial aid directors don’t have enough to worry about these days, now they need fear a failing grade on a new Web site, FinancialAidLetter.com, that dissects aid award letters for clarity and transparency.
“Over the years, people have been giving me letters and saying, ‘I don’t understand these,’” says Kim Clark, a senior writer at U.S. News & World Report who launched the Web site last week while on a six-month Kiplinger Program in Public Affairs Journalism fellowship at Ohio State University. “And I would look at them and say, ‘Wow, I don’t really understand them either.’”
“There’s so much jargon; there are so many buzzwords. The letters that students receive from colleges are often unintelligible to 17-year-olds or especially a parent who hasn’t been to college,” Clark says. “It makes it very difficult for families who are trying to compare offers.”
FinancialAidLetter.com offers a glossary defining the jargon and answers to frequently asked questions on student aid issues for high school students and parents. But on top of all that, it “decodes” aid letters from five institutions – Hendrix College, American and Monmouth Universities, and the Universities of Arizona and Pittsburgh – indicating in red any potentially misleading or unclear information. (Clark says that she asked high school counselors to recruit students to share their letters, and so the universities were chosen based on which students were willing).
A group of experts assigns each letter a grade based on clarity and completeness of information. Among the common transgressions cited by the evaluators: Unexplained acronyms and abbreviations, unsubsidized loans packaged as aid without any explanation (running the risk, evaluators say, of students, particularly first-generation students, thinking they’re “free money”), and incomplete information about cost of attendance.
For instance, the University of Pittsburgh, which receives a B-, is faulted for failing to include any explanation of what’s listed on the letter simply as the PHEEA (a grant from the Pennsylvania Higher Education Assistance Agency). The University of Arizona gets a B but also gets demerits for listing federal PLUS parent loans toward the total award (and since parents eligible for PLUS can borrow up to the balance of tuition after grant aid, institutions that do this can end up sending the message that the total aid award equals the total cost, Clark says).
Meanwhile, Monmouth University gets a D, in part for imposing tight deadlines on students and also for including “alternative financing” — described by graders as “a fancy name for a loan, which shouldn’t be counted as ‘aid’” — in its award letter.
“I was looking for something simple so that families can sit down and say, ‘Aha, this is how much it will cost to send Junior to college.’ None of these letters do so,” says David Hawkins, director of public policy at the National Association for College Admission Counseling and one of the site’s six volunteer graders.
“It wasn’t clear what the students and families were in for when it came to total cost, when it comes to how much aid they were getting versus loans.”
Yet, some of the financial aid directors whose letters were dissected describe a different philosophy about whether loans should be packaged as aid, and point out that while they were docked for including few details about various aid options in their letters, the explanatory information accompanying the letters was not considered or evaluated on the Web site.
“Needless to say, I’m not happy about the site,” says Claire Alasio, associate vice president for enrollment management at Monmouth. “The rating, I think, was very arbitrary, very unfair.”
“For example, one of the things that we were critiqued on was not offering the complete cost of attendance. When we publish our award letter, we very carefully specify that the costs we provide are for tuition and fees, in the case of a commuting student, or tuition, fees, room and board in the case of a resident student,” Alasio says. Additionally, administrators make the conscious decision to address the balance between gift aid and cost by including the “alternative financing” line in the award letter – and providing students in accompanying paperwork with various options for paying that balance via “alternative financing,” be it through taking out a PLUS or private loans, or enrolling in the university monthly payment plan. “From our point of view, by putting that on the award letter, we’re showing students and parents that there is a way to pay that gap,” says Alasio.
“There’s a difference in philosophy between our philosophy at the University of Arizona and the people who run that site,” adds John Nametz, the financial aid director there. “We believe in absolute full disclosure of all options on the award letter,” he says – adding that the university’s letter has a “back page” that wasn’t evaluated on the Web site.
The question of how to clarify award letters isn’t a new one within the financial aid world. In 2000, a National Association of Student Financial Aid Administrators committee on college access developed the Award Letter Evaluation Tool to offer colleges “a framework in which to provide ‘what families want to know’ in a language understood by all.”
Yet, the field has generally resisted standardization, Clark says.
“Simplicity and ease of comparability are really important,” she says, criticizing colleges that bury important information in “six inches” of material and underestimate the true costs students will face in their award letters by only including tuition, room and board, and fees (minus books, travel and other expenses).
“At a cost now of sometimes over $50,000, it’s not clear to me why consumers should not be given the same basic consumer rights that they receive in other, less important financial transactions. My God, when they buy a box of Jell-O for 69 cents, they’re given more consumer information than when they spend $50,000,” says Clark (who says that she’s unsure at this point how the site, which belongs to US News & World Report, will grow, and whether more critiques of letters will be added).
Don Hossler, a professor of educational leadership and policy studies at Indiana University and one of the evaluators for the site, says that as a former vice chancellor for enrollment services, he can understand the issue from both the student and administrative perspective.
“The first time I saw our letters [as vice chancellor], I thought, ‘Oh, my God,” he says, laughing (and quickly adding that the letters have since been updated). But, at the time, he and other administrators were unable to alter the award letters, he remembers, because the software they were using didn’t enable them to make the changes they desired.
“It can be complex on the back-end sometimes to write good letters,” Hossler says. “But I don’t think that absolves us of our responsibility.”
What a lot of students dont realize is that they may still be eligible for Stafford Loans even though they are attending a school overseas. The process for the loan is somewhat different than the process for schools in the U.S.. Your first step is always to complete your Fafsa. This must be done in order to receive any Federal Financial Aid. Once your Fafsa is completed, typically, you would receive an award letter from your schools financial aid office. In the case of a Foreign School this most likely won’t happen. You will need to contact the school and let them know that you are applying for the loan. They will need a copy of a signed Promissory Note and your SAR. The SAR will come from the Department of Education and the Promissory Note will come from your lender. To obtain a Promissory Note, visit www.StaffordLoan.com and click apply online. Make sure to sign and mail your Promissory Note to the address mentioned on the application. Mail a copy of the MPN and the SAR to your school. Your school will then certify the loan and the funds will be disbursed.
April 23, 2007
Wow, I can’t believe it’s been a week since I posted last. Ironically, I haven’t posted because of the happenings in the student loan industry. Late last Tuesday night, and without warning, the Department of Education locked out all Lenders, Guarantors and Servicers out of NSLDS which is the nationals student loan database. For once, I’m going to write my own thoughts. Later I’ll post a more comprehensive view.
This database is where colleges report that you are a student, it’s where lenders report that you pay your loans on time or are in default. And it’s where lenders turn to verify that students are/are not in school or to collect loan balances for loan consolidation. It’s where Universities turn to get incorrect data on their students updated and corrected, so that loans can finally get disbursed.
So why did the Dept. of Ed. do this? Well, it’s a great PR move – they can be seen to be doing something. Right now student loan lenders are being vilified left and right – even the innocent ones – and so temporarily locking them all out probably seemed like the best PR move to try and keep their own reputation clean. (The Dept. of Ed is getting a lot of flack at the moment too).
However, this isn’t a solution. In fact, the only people who lose out are students!
Like all student loan companies, my company scrambled last week to work around the lock-out, and we’re back to functioning semi-normally. However, students are feeling the pinch now because loan companies are taking so much longer to process their requests. What about the students waiting for their loans to come out of default? Or students trying to put their loans in deferment or forbearance to avoid going into default?
In the end, it’s the students who will pay the price for this, not the lenders. And it’s not fair to the students.
April 16, 2007
Take a look at this article from thew New York Times:
[Edit - This deal eventually fell through, and Sallie Mae remains independent 9/30/2008]
Sallie Mae Agrees to Be Sold for $25 Billion: Report
NEW YORK/PHILADELPHIA (Reuters) – Sallie Mae said on Monday it had accepted a $25 billion takeover bid from two private-investment funds along with JPMorgan Chase & Co. (JPM.N) and Bank of America Corp. (BAC.N) in one of the largest ever buyouts of a financial company.
The deal comes at a difficult time for the largest U.S. student loan company, which last week settled a regulatory investigation into some of its lending practices. It also could suffer if proposed legislation successfully reduces demand for privately underwritten student loans.
The deal values Sallie Mae at $60 a share, a 28 percent premium to the company’s closing stock price on Friday. The shares were up $8.49, or 18.2 percent, at $55.25 in early New York Stock Exchange trade.
Sallie Mae, whose formal name is SLM Corp. (SLM.N, said the two funds, J.C. Flowers & Co. and Friedman Fleischer & Lowe, would invest $4.4 billion and own 50.2 percent. Bank of America and JPMorgan will each invest $2.2 billion and own 24.9 percent.
The deal is unusual because leveraged buyouts usually entail boosting debt at a company to increase the return on equity, but financial companies usually have high debt levels to begin with.
But Sallie Mae could raise its corporate debt levels and just rely on other forms of debt, particularly asset-backed securities, according to asset-backed bankers and CreditSights analysts.
Last week, Sallie Mae settled with New York Attorney General Andrew Cuomo for $2 million. The company did not admit wrongdoing, but did promise to change such lending practices as paying university financial aid officers for appearing on advisory boards.
STUDENT LENDING UNDER FIRE
Attorneys general from New York, California, Connecticut and other states are looking into the extent to which student loan companies offer kickbacks to universities and their financial aid employees for steering business to the lenders. Student lenders made about $85 billion of loans last year.
U.S. Sen. Edward Kennedy, a Democrat, has introduced legislation that would threaten lenders, including Sallie Mae, by rewarding colleges for steering students into loans made directly by the government.
Sallie Mae was created in 1972 as a quasi-governmental company known as a “government-sponsored entity.” It began cutting its direct government ties in 1997, a process completed in 2004.
After the takeover, Sallie Mae’s current management will continue to lead the company, which will continue to originate student loans under its internal brands. It will remain headquartered in Reston, Virginia.
Bank of America and Chase will continue to operate their independent student lending businesses.
The transaction, which requires the approval of regulators and Sallie Mae’s stockholders, is scheduled to close in late 2007. Sallie Mae will not pay any dividends before completing the deal.
The company will still have publicly traded debt. Bank of America and JPMorgan have committed to provide debt financing for the transaction and to provide additional liquidity to Sallie Mae before the deal closes.
UBS Investment Bank was the lead financial adviser to Sallie Mae and its transaction committee, which was also advised by Sandler O’Neill + Partners L.P. and Greenhill & Co. JPMorgan and Banc of America advised the investor group.
April 13, 2007
Here’s a surprise! Sallie Mae is in talks to be bought out! Read the whole article online here.
Student loan firm reported in sale talks
NEW YORK –Sallie Mae, the nation’s largest lender to college students, is in talks to be bought out by private equity in what could be a deal for more than $20 billion, people briefed on the discussions said yesterday.
A buyout, if completed, would be an impressive show of muscle-flexing by private equity firms, which have grown emboldened over the last two years by acquiring ever larger targets.
Yet the talks are taking place as the firm has come under scrutiny by state and federal officials over the financial relationships between college officials and student loan companies. This week, Sallie Mae agreed to pay $2 million and to change its business practices to settle an investigation by the New York attorney general’s office.
One potential bidder is the Blackstone Group, the people briefed on the discussions said. Blackstone declined to comment. It could not be learned who the other potential bidders were, but one buyout group was thought to include a financial services firm.
The negotiations appear to be at a late stage, but these people warned that numerous hurdles remain, and it was unclear that a deal would be reached.
Sallie Mae, officially the SLM Corp., was created by Congress in 1972 to support a secondary market for student loans issued by private lenders, much the way Fannie Mae and Freddie Mac support the housing market. It was privatized in the 1990s, becoming fully independent as a publicly traded company by 2004. Now institutional investors like the Vanguard Group, not the government, own the company.