Studying Student Loans

My mother, Ruth Vincent, is a 40-year veteran of the student loan industry working at the college, state, federal, and corporate levels. She has consulted for the Gates Foundation. For years I have encouraged her to write about the industry and start a blog of her own educating students and parents about loans, how to get them, and how to prepare to pay them back. One of the best talks I have ever heard was the talk she gave in November 2001 for the Georgia Consortium for Financial Literacy. Subprime was just a word, but it was a word that had meaning for my mother. So did the word default. She made clear that students were graduating with levels of undergraduate debt that they were not likely to ever repay. At the time of her talk, grants for college were few and far between and the Pell grant amount had not changed in over 20 years. That and many other things changed with the passage of the health care bill. Yes, student loans were part of that bill. I knew something was up when my mother disclosed to my sister and brother-in-law that colleges tend to steer students toward lenders who offer the colleges the biggest kickbacks, not students the better interest rates.

First the dirty laundry of the student loan industry from my mom.
STUDENT LOAN REFORM – DID THE CHICKENS COME HOME TO ROOST?
by Ruth Vincent

Part 1: The Bad, The Ugly

Having started collecting National Defense Student Loans (now called Perkins Loans) in 1963, that no one thought they would have to pay back, left the ‘industry’ in 2004, and watched it from a far since, I am sorry to have to say it was about time for this reform. And yes, 1963 was before the Higher Education Act of 1965 (HEA) when the large Federal Family Student Loan Programs (FFELP) today were originally created, so believe me in my 41 active years, I witnessed and experienced the good, bad and ugly.

You note that I emphasize ‘industry’ which Wikipedia defines as the “production of an economic good (either material or service) within an economy”. I recall it was the mid to late 1980s following the 1978 enactment of the Middle Income Assistance Act (an amendment to the HEA) which made all students, not just low income students, eligible for student loans that we in student loans: lenders (profit and non-profit), guarantors, loan servicers (profit and non-profit), secondary markets, investment bankers, debt collection agencies, credit bureaus, etc. started referring to the business of making student loans as the Student Loan Industry. Suddenly, we became highly compensated CEO’s, Presidents, CFOs, Executive Vice-Presidents, etc. moving from student centered to bottom line operations because FFELP loans provided an opportunity to make a lot of money. We started getting larger by expanding operations, building expensive buildings often with lavish furnishing, identifying operational functions that could be split from non-profit to profit and state based loan operations began a competitive assault on other state based operations in an effort to book more loan volume on the balance sheet to increase income potential. Every time the Government talked about cuts to subsidities, we cried foul, predicted the demise of student loans and set loose your Washington based lobbyist with millions of dollars to stop the reform.

Before you knew it, students had multiple FFELP loans from multiple lenders, guaranteed by multiple guarantors and sold to multiple secondary markets and serviced by multiple servicers. And somehow we are mystified about the student loan default rate! Student borrowers no longer were primary, but just an output of production. Relationships between lenders and guarantors who also have a responsibility for lender oversight became tense when guarantors tried to intervene in this morass. Schools were being inundated with visits from lender and guarantor representatives some of whom were compensated by their success to obtain the school’s loan volume. School administrators in some cases made business decisions to settle scores with local agencies without regard for the best interest of students, but rather based on what lenders wined and dined them, provided the best entertainment at meetings, supported professional organizations, appointed them to advisory boards with paid travel and in some cases provided supplemental consultant opportunities. Though these things had gone on for years, the indiscretions became public in 2007. Might I add, in my opinion all fueled by “greed”.

End of Part I.  Thanks, Mom!

Commentary:  Okay by now we know the alphabet soup of the housing crisis:  MBS (Mortgage Backed Securities), CDO (Collateralized Debt Obligations), CDS (Credit Default Swaps).  Fannie Mae and Freddie Mac which create a secondary market for mortgages.  Now we read about a secondary market for student loans and multiple secondary markets for student loans.  Just like with mortgages, because the lender doesn’t retain the student loan on their books, but sell it into the secondary markets students may not understand who they need to deal with when issues arise with their loans.  It was all pretty gnarly.

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