Sallie Mae Defends its Student Loan Practices

Published 2007

A recent column about student loans, Options for victims of predatory student loans, generated a lot of feedback from other people in similar situations and from Sallie Mae. The catalyst was a single mom seeking help with what appeared to be student-loan irregularities. The column resulted in fervent comments.

Sallie Mae, www.salliemae.com, took exception to several of the column’s salient points. But Martha Holler, Sallie Mae’s managing director of corporate communications, offered to resolve the issues with our reader.

Also, I heard from former students as well as a nationwide organization, Student Loan Justice, www.studentloanjustice.org, which is based in Tacoma. Founder Alan Collinge said my column mirrored the problems of countless others. He forwarded their voluminous criticisms of lenders. Many have defaulted on their loans.

Two Congressional bills threaten to reform lending practices and would boost students’ chances of getting a higher education. However, the bills would not put brakes on the exploding private loan market nor would they retroactively help students who have valid complaints.

Also at issue is the proposed sale of Sallie Mae to a group of investors for $25 billion. Many fear Sallie Mae financials would not be transparent under private equity owners.

Congressional plans would cut the student loan interest rate in half and would slash government subsidies by $19 billion. As a result, the Sallie Mae buyer group might back out if Congress cuts the subsidies. Meantime, the Bush Administration threatens to veto the bills.

As a public company, Sallie Mae attracts stockholders and raises funds by issuing bonds to investors. Sallie Mae uses those funds to loan money to students and it profits from the loan interest and by servicing the loans. Sallie Mae is anxious to tell its story. Spokesperson Holler responded to my questions in a lengthy e-mail of more than 1,100 words.

Here are her excerpted answers:

Q: What is the default rate of your loans?

A:  While most student lenders, including Sallie Mae, do not disclose their federal student loan default rates, the national federal student loan cohort default rate, as published by the U.S. Department of Education, is currently 5.1 percent. What I can tell you is that Sallie Mae’s federal student loan default rate is well below the national rate.

Q: If the $25 billion acquisition of Sallie Mae is consummated, what disclosures will Sallie Mae provide?

A: On May 20, 2007, the buyer’s group led by J.C. Flowers issued a news release outlining initiatives to enhance responsible student lending. 

“As a private company, Sallie Mae will institute a series of voluntary transparency standards and practices to ensure customer accountability, including annual disclosure of the company’s top five earners; an annual student town-hall – or “stakeholder” meeting on campus and on-line; continued compliance with the Student Lending Code of Conduct; and continued compliance with all applicable Sarbanes-Oxley requirements.”

Sallie Mae will also continue ongoing reporting under federal securities laws and fully comply with ongoing oversight by the FDIC and the U.S. Department of Education as well as other state and federal regulators.

Q: My column indicated that Sallie Mae still has an image of being a government sponsored entity. Indeed, the reaction was that students picked Sallie Mae for that reason because they trusted the government. Instead, some intended up with “private loans,” which they feel have been somewhat predatory toward them. But you disagree that Sallie Mae has been able to take advantage of such a GSE image. Why?

A: Sallie Mae has not been a government sponsored entity since 2004, nor have we represented ourselves as such since the change.

Q: You’ve stated Sallie Mae has razor-thin margins. Why?

A: Student loan providers make roughly $.0056 on every $1 they lend. This is a remarkably low margin compared to any other consumer debt. 

Q: A published report states: “From 1999 through 2004, former CEO and current chair Albert Lord took home over $200 million. In 2006, current CEO Tim Fitzpatrick was paid $16.6 million in salary, bonuses and stock.” Is this true? If not, why not? 

A: The vast majority of Mr. Lord’s compensation, more than 90 percent, was paid in equity compensation, specifically in stock option grants. Mr. Lord’s compensation figure that you provided reflects the value of unexercised stock options earned over his 10 years of service as Sallie Mae CEO and Chairman.

Sallie Mae is a very complex business with many risks in its operations. Their equity compensation packages reflected the size and complexity of operating the business.

Q: What is the 2007 compensation for Sallie Mae’s CEO?

A: Information about executives’ 2007 compensation will be disclosed in the next annual proxy statement, which is tentatively scheduled for March 2008. 

Q: Your company’s Web site states: “Sallie Mae also provides eligible employees with the opportunity to share in the company’s financial success through performance-based stock option grants.” What is the total value of stock options given to employees in the last 10 years?

A: Sallie Mae does not disclose the value of options given to our employees.

Q: How much did Sallie Mae contribute to federal political candidates and parties in the 2006 elections?

A: Sallie Mae made contributions totaling $661,000 in 2006 and $224,000 in 2005 to federal candidates and parties. Opensecrets.org, which tracks political spending, shows our partisan breakdown to candidate committees as 48 percent Republican and 52 percent Democrat.

Q: What else would you like to add?

A: Sallie Mae does not make the rules regarding the terms and servicing requirements for federal student loans, but we, just like the 3,500 other lenders who are authorized by the U.S. Department of Education to administer the program, must follow them. Customers’ federal student loans would be administered (with regard to loan collections, default and forgiveness) the same way whether their loans were with Sallie Mae, another lender or even the U.S. Department of Education.

Numerous published reports have raised questions about Sallie Mae:

A report in May indicated former CEO Fitzpatrick was to be paid $25.86 million. That’s the 58th highest CEO pay out of the top 400 ranked companies.

Sallie Mae has been paying its executives more than their counterparts at other companies. But they aren’t facing adverse Congressional action nor have they been forced into a scandal settlement of $2 million with New York Attorney General Andrew Cuomo.

Sallie Mae Chair Albert Lord sold $18.3 million worth of company stock just before President Bush suggested a major cut in lender subsidies that led to a slide in Sallie Mae shares. The Securities and Exchange Commission launched an investigation.

Sallie Mae has set aside $3.6 billion in stock options for employees since 1997.

The Federal Direct Lending Program at the U.S. Department of Education, launched during the Clinton Administration, is known for being affordable. Sallie Mae was accused of offering special loan funds worth millions to colleges, if they left the federal program.

Regarding Sallie Mae’s justification about high executive pay because their business involves huge risks, Student Loan Justice founder Collinge disagrees:

“There is no risk on the federally backed loans that Sallie Mae provides,” said Collinge. “When a loan defaults, Sallie can make even more money through their collection companies. For private loans, since bankruptcy dischargeability was taken away for the vast majority of the loans, there is very little risk involved.”

Finally, it would appear that Sallie Mae makes plenty of money. Just released Q2 earnings are up 33 percent for a total of $966 million. Sallie Mae’s net loan interest was $635 million. And its student loan portfolio jumped 18 percent – now totaling $153 billion. So, billions in government subsidies haven’t hurt, either.

Yes, it’s important to make money, but let’s hope Sallie Mae uses these profits to correct its problems with our reader and other students. The nation needs an educated workforce, and students deserve transparency and fairness. We’ll keep you updated.

From the Coach’s Corner, if you want to avoid the expense of student loans, there are three free options that are often easily overlooked: 1. Federal government Pell Grants. 2. Scholarships. 3. Work study programs at college.