CollegeLoanSearch

So...what's happened?

2008-12-30T09:15:00.004-05:00

As the bomb blast shock begins to wear off, and we look around through the haze, how are things shaking out? Well, last fall our elected delegates removed profitability from the FFELP program. Most participants have left that market. It's simple: no profit, won't play. It seems that mostly banks are continuing to make FFELP loans. Albeit, they're not marketing the product like the old days, but if you ask, you can get a FFELP loan from a bank -- mostly the larger, diversified banks. They have a low cost of capital (deposits and TARP money), and can justify the low margins as a loss leader to cross sell other banking products. Of course, the number of banks continue to shrink, but that's a story for another blog. Also, FFELP consolidation loans are a thing of the past. Let us know if you find anyone making those loans.

But if that weren't enough, the credit crunch wrenched the marketplace even further. This affected primarily the private ed lenders. Anyone with a line of credit either had it revoked or it was priced unprofitably. The result? Most non-bank private ed lenders shuttered their doors. What's left is an environment where only pristine credit worthy customers can now secure one of these loans.

So, you need a loan to go to college? Pretty much all you can get now is a Stafford or PLUS loan. And the Dept of Ed's Direct Loan program is making loans, so the FFELP products are out there and you can indeed secure them. There's just no choice. You can't choose your lender/servicer, you can't shop around for discounts anymore. We're not so sure this is what Congress intended, but it's the result.

We're not really recovered...

2008-12-29T09:16:00.002-05:00

....from our depressed state of the student lending industry. But we'll resume posting here.

Been getting lots of gossip from many industry participants. So, we'll continue to highlight here say, gossip, and unverified "facts". A lot of stuff that y'all send us we can't really distribute (loan volume data for a specific entity, etc), but we'll certainly discuss anecdotal information.

We'll start posting more regularly in a day or so, but to sum up the past 6 months: Yecccch! The industry for the most part is being facilitated by the Dept of Ed's "direct loan" program. That's pretty much the only place where you'll get a Stafford/Plus loan (or any other guvm't guaranteed loan). There's a few others out there, but Direct seems to have picked up the volume....and we eat some crow here: our predictions of a Direct Loan meltdown didn't materialize. We have no information/data/feedback about application servicing issues, but that's probably because the Dept of Ed is handling the volume. We're pretty sure that ACS is the sole outsourced partner to do the actual work....Sallie Mae tried to get some of the business, but we never heard where that went.

As for private loans: the only folks getting approved for a private ed loan are those that can demonstrate that they don't really need the loan in the first place. If your FICO score is less than 720, don't even bother to apply. Nobody is lending to an applicant that even smells like a credit risk. We're sure this disruption will be causing problems.

Anywhoo, we'll get to all this over time. Stay tuned.

FFELP runs like a top!

2008-06-10T16:15:00.002-05:00

This isn't' the first time we've seen this story before. It crops up several times a year. It's a scam to defraud FFELP out of proceeds. But you have to ask yourself: Does this happen very often with other types of unsecured lending (i.e. credit cards, personal loans, etc)?

Our bet is that yep, it does happen...but not to the tune of $2.2 million per instance. See, a private lender loves their money. It's how they make money. So if a private lender flushes money down the toilet, they cannot allocate that money to make more money. The government, on the other hand, merely asks the Dept of Treasury for more money when they screw up. There's no accountability or consequences for this sort of thing.

Yet another reason why FFELP needs to be privatized with the help of a well placed US government guarantee.

Sallie Mae to the Rescue!!!! well...so it seems

2008-06-10T16:10:00.004-05:00

Sallie Mae is out there advocating their commitment to the FFELP program! Whew! Because we thought FFELP was dead. Sacrificed. Non-existent.

So we called Sallie Mae to get hooked up with a Stafford loan. We went to their website, got the phone number for "Apply Now", and after 15 minutes on hold, we gave up. That must have been an anomaly. So we tried again. This time we gave up after 20 minutes. Then we directed 3 staff members to do the same. One fell asleep. One had to go to the clinic for a hurt wrist after playing solitaire for 25 minutes. And the third had to get "something to eat" after 20 minutes (staff are insubordinate sometimes).

Our observation: Sallie Mae is indeed open for business.....good luck in getting them to answer the phone!

So, How is the Credit Crunch effecting student lending?

2008-06-02T14:10:00.002-05:00

This article is pretty typical of how student lending firms are getting squeezed by the credit crunch. Keep in mind, and this is important, this is only half of the problem. And this situation only effects the state agencies, the monolines, and "non-profit" lenders. The banks aren't so much effected by the credit crunch in the same manner.

But, this article describes how the auction rate securities market, a typical borrowing vehicle for student loan companies, has reacted to the liquidity situation and the impact on making student loans. A few things worth further consideration: 1) Brazos, whom this article details, is a "non-profit", monoline lender. Meaning they have a not for profit status with the IRS. We wonder how they can be "non-profit" and not really a state agency or anything like that. It's our opinion that there were huge profits generated from the Brazos organization. Where did all that money go? Brazo's is tightly controlled by the Murray Watson and his family. We're sure the Watson's know where the profits went. It's just not public knowledge. 2) An additional consideration, how come these auction rate securities financing student loan issues are in a pickle? 98% of the underlying loans backing these student loan securities are backed by the full faith and credit of the United States government. It just seems illogical to us. And, 3) Although not an issue in this article, but something that crossed our minds: how on earth can the Department of Education buy and price student loans in a secondary market environment? The DoE doesn't do this for a living. They have NO expertise in pricing student loan issues. They have NO experience in managing secondary market operations. This is a complicated deal the DoE is proposing, yet they have no experience, expertise, or vision of how their loan buying program will work. We predict failure. The markets cannot figure it out....do we really want to rely on the DoE?

Interesting twist on the First Marblehead consideration

2008-05-27T13:06:00.003-05:00

A recent post at Seeking Alpha points out a FMD consideration we completely forgot about. [And we might also point out, wasn't in the sights of FBR either.]

FMD bought a bank in Rhode Island last year; albeit, a modest community bank: Union Federal Savings Bank. It seems that FMD has quickly adapted the bank to become a cost effective liquidity source for First Marblehead's student loan business. Thus, engineering a non-ABS funding ability.

Seeking Alpha has drudged through Union Federal's balance sheet and garnered some insight into the how the new owners are leveraging this institution. Essentially, brokered deposits are financing First Marblehead's direct to consumer business. For the time being, it seems that the bank is on a sound capital base and indeed making money.

Our worry is the same as FMD in general: how will these loans hold up in uncertain economic times? How will these loans hold up during a period when the private student loan market dynamics changed in a very short period of time? It will become a matter of credit underwriting and credit operations. We personally do not think that underwriting and credit ops is a strong point for FMD, but time will tell. Watch FMD's portfolio reporting and losses at Union Federal for indications of how things will likely shake out.

To be sure, the banking regulators will probably be watching the situation with a close eye as well. Using a banking charter to serve First Marblehead in this manner probably isn't making many friends with the bank examiners.

Check it out for yourself, but certainly an interesting angle that no one else in the business is working.

Friedman, Billings & Ramsey think First Marblehead looks like a deal

2008-05-22T09:51:00.002-05:00

An analyst from FBR today indicated that First Marblehead looks like an attractive takeover target.

Um, we don't think so. FBR sites their origination platform, brands, and database have value. Let's take each one of these.

The origination platform isn't rocket science. There are a number of off the shelf platforms that can be implemented so that perfunctory work can be accomplished in low wage regions of the world or USA. We mentioned before that student loan monolines aren't really that good at lending. FMD is a little different in that the founders are seasoned bond traders. They understand the importance of a good platform, but it was never their primary focus. FMD was really good at executing securitizations and leveraging their network. We give the origination platform a B-.

FMD brands were created out of thin air. Consumer products and services do this all the time so the same product may appeal to different segments of the population. In terms of the brand awareness and respect, First Marblehead didn't come up with anything earth shattering. They just threw out brands like their affiliate marketers and competitors. There was no innovation in their branding or marketing. Our grade for FMD brands: C-.

FMD's database? We don't see any value here at all. Every marketer/lender has a database. FMD's isn't especially large or doesn't carry any information that cannot be found from existing consumer databases or credit bureau's. FMD is hardly known for their data prowess. Our grade for FMD's database: C-.

In fact, we speculate (solely our opinion here), that FMD may be a liability. Why? Because their secondary market deals squeezed ALL future value from the loans at deal time. They were extracting 11%-13% premiums out of their deals; that's really spectacular. But now their guarantor is bankrupt, and there's no fat to subsidize losses. Speaking of losses, FMD underwrote loans based on a booming economy. Whoops....the economy has turned south...way south. How will their loans perform in an uncertain economic environment? We don't know. Neither does FMD. Nor Friedman, Billings & Ramsey. The trust income from FMD's securitizations may very well not support the bond p&i obligations for reasons we mentioned above. Just our opinion, but we're certainly entitled to it.

Sallie Mae to remain in the market

2008-05-22T05:36:00.002-05:00

We're a little confused on Sallie Mae's decision to continue marketing and funding FFELP products. It's a little unclear how they will make money at this.

We did point out yesterday that student loan monolines aren't really the sharpest tools in the shed when it comes to financial services. Has Sallie Mae stumbled on a marketing and processing epiphany that will allow them to drastically reduce costs in order to make a profit in this world of the DoE as investment banker? Is Sallie Mae merely playing lip service to appease the administration and congress while they lobby like starved wolved to get the Student Loan Sunshine Act repealed? Or, is this just a really bad business decision based on the promises the Department of Education has made? We just don't know.

What we do know is this: it is unprofitable to make FFELP loans. It not a function of "where's the money coming from?" Using a Wall Street investment bank, and certainly using the Department of Education as an investment bank, will NOT amend the lending landscape for FFELP loans. Structurally, the congress has torched the business model.

Still Upside Down!

2008-05-21T14:35:00.002-05:00

So the Department of Education thought and thought about it, the industry waited with baited breath, and here's what they came up with: Lenders can sell their loans to the Department of Ed for 100 basis points + $75.

Nope, that's not gonna get people back in the game.

Let's take a little example: a Stafford loan...the vanilla sort....say $3,500 in principle. A lender would be able to sell that loan to the DoE for (3,500 * 0.01) + 75 = $110. That's right....a lender would be able to pocket $110 for funding this loan. It seems like a lot until we compare that with the associated costs.

Let's say, on average, marketing expenses, and we're being conservative here, per loan are $50. That assumes the lender has a kick-ass marketing department -- which by the way, student lenders have very sloppy and unsophisticated marketing efforts, so this number is probably 2 or 3 times higher than our efficient $50 per loan figure. Now that the marketing department has secured the application, the lender must now process the loan, this isn't a free process: we'll presume this costs about $30 per loan. Again, we're assuming a highly efficient loan operations group -- and you guessed it, very few efficient loan operations exist in student lending. And there will be funding costs. In order for the loan to be funded, even though the DoE will ultimately be replacing the capital, those funding structures must be organized. This effort primarily utilizes investment bankers, lawyers, and commercial bankers. The costs aren't cheap; a funding structure of a modest size can cost up to half a million dollars plus ongoing maintenance fees. For simplicity sake, let's assume there's a funding cost of $20 per loan.

In our greatly simplified, and unrealistic assumed world, that comes to a per loan revenue of $110 and expenses of $100. For a total profit of $10! Or, in terms of ROI, that's a 9.1% return. Not bad? No, not too bad. But considering this is a temporary program, and you'd be doing business with the government (the Department of Education no less!), there are unquantifiable risks here that in reality shrink that 9.1% return down to a loss! The government has yo-yo'ed the FFELP program so many times, that bank transfer costs have a significant legislation/regulation risk premium built in.

It's still not worth it. And here's the main problem: the Department of Education decided on an arbitrary profit amount. The Department of Education is good for doing things like shuffling paper, issuing memo's, promoting bureaucrats. The Department of Education is not good at, in fact horrible, at modeling the market forces in a loan origination industry.

Not to mention, it's not the lack of capital that hindering the FFELP business....it's the, you guessed it, the profit incentive. It will all be quite interesting. This fix will blow up before the elections take place. At some point our elected delegates will have to admit failure.

Rep Miller will have some explainin' to do

2008-05-06T18:38:00.004-05:00

Yesterday's WSJ (Monday, May 5, 2008) didn't back down one bit from their parry-thrust with Rep. George Miller.

Rep. Miller volleyed back last week reiterating the soundness and logic of his plan to save the federal student loan program. We didn't buy what Miller was selling. And apparently neither did the WSJ.

Their recent Op-Ed piece more or less states what we regularly rant about here, but with better journalistic style. We'll provide a few snippets here:

"....the lenders whose business models Congress recently torched....."

"So Representative George Miller, another architect of last fall's
disaster....."

"Mr. Miller,...,has suddenly found an inordinate faith in the ability of the
Administration to play the credit markets."

"But in 1997 the direct lending system crashed as a large federal
bureaucracy was - here's a surprise - unable to process paperwork quickly
enough to serve borrowers."

"From start to finish, it is hard to imagine a more thorough example of
Congressional blundering while covering its tracks by blaming everyone else and
getting the Fed and taxpayers to clean up the mess."

Oh, this is good stuff. The Wall Street Journal is gonna ride this one all the way. Their criticism has only just begun. Make sure you read their whole piece. It was truly inspiring.

Useless Legislation Clears Congres, Heads to WhiteHouse

2008-05-01T23:10:00.003-05:00

As expected HR5715 has cleared Congress and is headed down Pennsylvania Ave to the White House. In this contentious election year, our elected delegates sure are looking busy; passing all this useless legislation and all.

This is an attempt to demonstrate to the voting and taxpaying public that Congress "did all they could" to avert the looming student loan crisis. When it all hits, they'll say: "Well, our hands were tied, we did absolutely everything we could." Except, that is, for fixing the problem that they created.

Today, Ben Bernake, the esteemed Chairman of the Federal Reserve System, said in a response letter to Chris Dodd: "Congress may well wish to revisit the question" of whether setting hard subsidy levels for loan providers is the best approach, Bernanke said in the letter.
"You may decide that a more market-sensitive approach -- flexible enough to provide a wider spread during times of market stress and a narrower one during normal times -- could provide a more robust structure," he wrote (from a Reuters story out today).

What?!?!?!?! Congress could have acted hastily to put into place some inappropriate legislation and thus contributed to the student loan mess that they're desperately trying to fix? Can't be. We anxiously await Chris Dodd's response to the response. But seriously, we breathed a great sigh of relief at the sanity and logic that Mr. Bernake points out. When the criticism comes from the Wall Street Journal, Congress gets all testy. But Mr. Bernake....they'll take that a little more seriously. CollegeLoanSearch gets plenty of anonymous hate mail from what we suspect to be Dept of Education servants as well; we're apparently way off the mark in our assessment of the situation. But the issue will now be brought to light. It gets more interesting each day.

It's gonna be allllll OK now.

2008-04-30T16:40:00.002-05:00

Whew! Today the Senate passed HR 5715. This is the bill introduced by Rep. Miller that will give the Department of Education the authority to purchase FFELP loans from private lenders at par. The expected demand of $68 billion in government guaranteed loans will now flow like the Mississippi.

A Bloomberg piece on the legislation completely forgot to mention that lenders don't participate in FFELP program because it's not profitable. Thus rendering HR 5715 about as valuable as the paper it's written on.

But that's besides the point! Legislation for the sake of legislation is absolutely necessary in an election year.

Rep George Miller Fires Back

2008-04-29T14:06:00.002-05:00

Last week the WSJ ran an editorial questioning Rep. Miller's student loan problem. See below for out take on the editorial and the link to the piece.

Today he responded in the WSJ. We're shocked. Well, not really shocked, Rep. Miller does spend most of his time inside the Beltway, so of course his perception is warped. But we certainly got a glimpse of Rep. Miller's view of the looming student loan crisis.

You see, Rep. Miller maintains his ignorance regarding the damage he did to the student loan industry with his Student Loan Sunshine Act legislation last fall. He flat out denies contributing to the lack of participation in the FFELP program: "...as for the recent turmoil in the student loan industry, it is not due to any act of Congress but is clearly part of the failure of the auction markets and the larger tightening of the nation's credit markets." Wow, inside the Beltway indeed.

The thing is: liquidity is there. Especially for the banks. Banks have been stepping out of the market more slowly than the monoline lenders because they do have liquidity. However, the banks are just as reactive to the profit incentive for participating in FFELP. We've said it before: no profits, no product.

Those "outsized taxpayer subsidies for the student loan industry" can either be spent for private enterprise to facilitate the student loans, or for the US Treasury to pick up the entire tab. By the way, if we're reduced to relying on the Direct Loan program to make all the FFELP loans, it will cost a lot more than those "outsized taxpayer subsidies".

And Rep. Miller finishes with: "Last year, by reducing excessive subsidies to lenders, we were able to help millions of students receive cheaper federal loans , increased grant aid, and other college benefits -- all at no new cost to taxpayers." At least that's his inside-the-Beltway perspective any way. But.....there will be no new loans.....no one is making these loans.....it is no longer profitable to make FFELP loans. Except of course the Direct Loan Program, but that will be at a cost to the taxpayer.

We're at a loss as how this is rationalized in Rep. Miller's mind or any other elected delegate who voted for the Student Loan Sunshine Act. But it looks as though no member of Congress will admit they hammered the last nail in the FFELP coffin. And without acknowledging their mistake, it will not be rectified.

Bravo Wall Street Journal

2008-04-24T08:46:00.002-05:00

We used to think we were crazy and way off base. Judging from all of our hate mail we thought our viewpoint was confined to our tiny headquarters.

But no! Look at this: an editorial running in the WSJ. It's so refreshing to see this. The funniest thing is how the WSJ characterizes Rep. Miller's efforts as a letter writing campaign searching for a bureaucrat to fix the blowup that Rep. Miller himself caused.

Failing to find a bureaucrat to solve Rep. Miller's mess. Our elected delegates will be forced to eat crow in a few months.

But this is good stuff. Make sure you catch this editorial.

"The Plan" is doomed

2008-04-24T08:00:00.002-05:00

We're so relieved that the ridiculousness continues, because now it reaches a level of pure entertainment. We were getting bored with "American Idol", so we're happy we have the "The Student Loan Show".

The Department of Education is drafting their "Plan" to save the federally guaranteed loans. "The Plan" is wonderfully summarized in today's WSJ:

"In a conference call Wednesday, Lawrence Warder, the Education Department's
acting chief operating officer for federal student aid, said his agency expected
to buy student loans from lenders at "no cost" to taxpayers, meaning lenders
would receive no premium for selling the loans."

We fell off our chairs when we read this. Why on earth would anyone make a loan to be sold at par value with no prospect for any associated revenue of any sort? A lender entering into such an arrangement would provide free marketing expense, processing expense, and financing services expenses to fund a loan that they make $0.00. We're by no means finance experts, but when expenses are greater than revenue, that amounts to a loss. And that's not good business for a business who exists to create a profit.

Sure, "The Plan" makes sense to Larry Warder: he works for the government. He has no profit incentive in his current role. He's a career accountant spending the bulk of his career with Deloitte & Touche, so we're thinking he understands expenses, profits, you know, all that high level finance stuff. Ultimately, we're perplexed at this proposed "Plan" coming from him.

It's just quite obvious that the policy makers and law makers are absolutely ignorant to the possibility that the softness in student lending could be the result of the removed subsidy's and increased fees the lawmakers instituted in the Student Loan Sunshine Act. Like we've said before: provide all the liquidity you want, without a profit no one will participate.

Here's how it can all be fixed.

2008-04-20T09:37:00.003-05:00

Here's our plan to fix the student loan fiasco. We'll assume that the audience understands FFELP, FASFA, Stafford/PLUS/Perkins, where we are, and how we got here.

Our plan is quite simple. The Department of Education will be given the authority to issue a guarantee of 98% of defaulted loan dollars (or some industry-government mutually agreed upon target) for FFELP loan products. The guarantee can come with stipulations. These stipulations can encompass the loan attributes (term, payment options, and minimum collections efforts), and to ensure that the FASFA award translates into the appropriate loan amount. The stipulations cannot encompass marketing, financing, or loan processing. The Department of Education will then review defaulted loan claims to ensure that the stipulations are met, and if met, the Department of Education will pay out the claim. That's it. The Department of Education's role is to provide the default guarantee. Nothing more...nothing less.

So how will the consumer be protected? We'll turn to the FTC/FDIC/FRB/OTS for consumer protection and oversight of the intermediation process. These agencies already to a really good job at making sure that money is intermediated if a fair and balanced manner. From marketing, disclosures, and disputes to processing, funding, and accounting....you can bet that our current financial oversight agencies will straighten up a lot of the shenanigans that previously existed.

We've heard plenty of belly aching that many FFELP firms were sleazy marketers. Could have very well been the case. It's because the Department of Education does not have the personnel, resources, or experience in dealing with "sleazy marketers". Turn the FDIC or FRB loose on those "sleazy marketers" and any questionable behavior will stop in about 2 seconds. You get the idea: let's use the existing agencies for what they already do very well.

Also, the interest rate subsidies would go away under our plan. The marketplace would determine the rate of interest on a loan that is virtually 100% guaranteed will priced. Competition will indeed do a better job of determining the rate than the government could ever do. Our plan will also allow the lenders to implement their own collections strategies. Right now FFELP has pre-1970's collections strategies mandated (The Department of Education is woefully ignorant of how to structure a collections effort). If the Department of Ed is impressed with the loss rates today, wait until they see what an institution, under a highly competitive environment would do with the loss rates. In this scenario, every dollar collected contributes to the profit of the lent principal.

Of course, our idea would never fly. It's because someone at the Department of Education would loose precious budget dollars and people. Once the money and people are present, a bureaucracy perpetuates itself. Also, it would require our Congressmen to admit they initiated a foolish law before they suggested a radically different solution.

So, our students will continue suffer. Taxpayers will suffer. And the world goes on.

House bill passes today!

2008-04-18T11:00:00.002-05:00

So, like we've mentioned in the past, the band-aid legislation is getting closer to becoming law.

The Department of Education will be buying FFELP student loans that private lenders make? But, there's no profit in making student loans. That's why all the participants are exiting the marketplace.

HELLO? Are you frickin' listening?

Go ahead - authorize the Dept of Ed to buy $40 frickin' billion dollars worth of loans. They won't finance a single dollar! You know why? No one will originate the loans to begin with. It's not PROFITABLE.

You see, to make this work, you've got to model the legislation after the ever so effective farm subsidy programs: have the government buy the loans at a point, where the lenders actually make money. Then you can turn the loans into cheese and give it to welfare recipients. Wait, we're mixing up our effective government programs. But you get the picture. Even better, pay the lenders NOT to make student loans. No, that doesn't solve anything either. But our ideas seem to be working along the same lines of logic that our elected Congressmen employ.

Please, someone, one of our elected Washington delegation, someone, please acknowledge that you screwed up here! Then you can fix the problem.

And another one gone.

2008-04-18T10:46:00.002-05:00

The situation reminds us of that literary classic "Five Little Monkeys Sitting in a Tree". You know the story. One by one, the monkeys misbehave and receive fatal concussions. It's a kids book, that demonstrates the dire consequences of misbehavior.

But continuing on with the monkey allegory, the next monkey to receive a fatal concussion: BankOfAmerica. Yup. BofA is done with private loans. This is a double whammy because FirstMarblehead used to buy all the funded private loans from BofA. So FMD lost a really big customer as well. We predict that within the next 3 weeks BofA will also step out of FFELP lending too. For the same reason that Chase did, and Nat City did, and Brazos did, and Nelnet did, and CLC did, and so on, and so on.

Indeed, we can learn so much from the children's classics. You mess around with a system, and you cause irreversible damage, just ask one of the monkeys. Should our Congressmen learn their lesson is yet to be determined. As it sits right now, it doesn't appear that they have connected the dots: remove profitability...and....all the lenders go away! It's not that difficult, but they will soon figure this out.

The band-aid legislation swirling around doesn't fix the underlying problem, and therefore will have little, if any, impact on improving the situation. If we all sent our Congressmen a copy of
"Five Little Monkeys Sitting in a Tree", and a note explaining the mess they made in student lending, perhaps a light bulb might go off.

Sounds like Sallie Mae is on the verge of throwing in the towell

2008-04-17T11:26:00.002-05:00

In a conference call with analysts today Al Lord, Chairman of Sallie Mae said:

If we didn't convey the urgency of the issue, then we haven't been particularly successful. We are literally in daily deliberations about how much further we can
go.

Sallie Mae posted a significant loss today after brutal 9 months. SLM's stock has tumbled from a height of about $60 last spring to $18 as of this writing.

Sallie Mae has been a prolific lobbying machine. We're pretty sure they communicated the effect of the Student Loan Sunshine Act to Congressmen. Yet no one listened. Instead of Sen. Kennedy sitting at his desk with a large smirk since he's driven private lenders out of the FFELP program, he has to deal with the embarrassment that he contributed to the demise of the federal student loan program. We presume that Sen. Kennedy and his colleagues will continue to blame the credit/liquidity crisis as the culprit. But let's be honest: even if liquidity were available, no lender would make money loosing loans.

Good job guys!

Finally, a reaction from the Dept of Ed.

2008-04-16T16:36:00.002-05:00

That's right! The Department of Education is planning to solve the looming student loan crisis.

Oh, never mind. We just read the source a little more closely. Actually, the Dept of Ed is planning an "emergency survey". We have no earthly idea what that means, but based on previous statements and actions from the Dept of Ed, we're pretty sure it amounts to NOTHING.

So, back to DEFCON 4. We'll let you know when something really happens.

Yikes....another biggie falls

2008-04-16T08:54:00.001-05:00

Student Loan Corp, the student lending subsidiary of Citibank just stopped making FFELP loans.

We certainly hope that the Department of Education is still "monitoring the situation".

Oh jeez -- Chase scaling back now

2008-04-15T18:46:00.002-05:00

JP Morgan Chase has often been heralded as the savior of the FFELP program. With Dept of Ed officials and Congressman trumpeting their sticking ability in the marketplace.

Hmmm. Chase apparently crunched some numbers and discovered why they're one of the few left: cuz it doesn't make sense to make FFELP loans.

We hate to tell every "we told you so", but we're too busy preparing for our big "We Told You So" party.

So let's recap once more: 2 more FFELP participants folded their tents, a third is scaling back (and we think will close up shop all together very shortly....get ready for another "we told you so).

Yep, we've got some answers. That's right, if our ideas were implemented, we would save the whole student loan program. It's been a while since we've ranted about our ideas. Might be a good time to bring out our brilliance. We'll do that tomorrow.

Oh look, here's another one.

2008-04-15T18:43:00.003-05:00

MEFA, the Massachusetts Education Finance Authority, throws in the towel today as well.

Isn't Senator Kennedy from Massachusetts? How could he let this happen? In his home state? Oh yeah, he claimed that private lenders operating in the FFELP space are greedy and made too much money.

It's silly.

Sen. Dodd fails to understand free market economics

2008-04-15T18:25:00.004-05:00

Wow! Did you see the Senate hearing today? We didn’t, but sure did get a lot of feedback about it. It seems that Sen. Dodd accused the student lending industry of turning their backs on the students!?!?

We’re gonna take this opportunity to get all Ayn Rand over Sen. Dodd. Private lenders ultimately serve to make profits; not to provide a money loosing product to the marketplace. If Sen. Dodd is so concerned about the plight of the students, perhaps he should work on getting legislation in place that allows private lenders to participate in the process while meeting their ultimate objective. Oh wait: HE DID THE EXACT OPPOSITE LAST FALL!!!!! In reading a summary of the hearing Sen. Dodd seems to be totally fixated on blaming the liquidity/credit crisis on the problems. This is just downright irresponsible if you ask us. The lawmakers need to admit responsibility to the problem; otherwise, they won't begin to undo what they did. Sure it's not 100% the fault of last Fall's legislation, but even if liquidity were restored, no one is going to make loans that loose money! Our fav quote of the day is from John Remondi, Sallie Mae's CFO: "Every loan we make today we're making at a loss."

So, let's recap: The Department of Education is now "monitoring the situation closely", our elected lawmakers refuse to admit they've contributed to the student lending mess, and no FFELP lenders are actively looking for business (if they are in fact still in business). It's fun to watch, that's for sure.

...and another one shutters the doors

2008-04-15T18:22:00.000-05:00

Today the largest FFELP lender, Sallie Mae, pulled out of the FFELP consolidation market. Consolidation loans are a tool to provide relief to borrowers by extending the term of their underlying Stafford loans up to 30 years from the out of the box 10 years. By doing so, the monthly payment is decreased. This of course increases the amount of interest to be paid over the life of the loan. But there are no prepayment penalties on FFELP loans, so a borrower is certainly free to make principle payments of any amount at any time. But the lowered payments as a result of the lengthened payment term provides some cash flow relief for recent graduates.

But why did Sallie Mae pull out of the market? We’re quite sure the decision was simple: FFELP loans are no longer profitable. There’s no reason that a for profit company would pursue an aggressive money-loosing product line..

The Department of Education still hasn’t done anything to fix the issue, but then again, they don’t make the laws to incent private lenders into the marketplace, they merely regulate the marketplace.

Congress admits failure, but puts blame on Dept of Ed

2008-04-11T15:34:00.002-05:00

So Sen Hinojosa and Sen Kennedy are publicly politicking for something to be done about the lack of student loan providers. Yet we find it sort of funny that they blame 100% of the issue on the financial credit/liquidity crisis. They are also quick to point out any lack of movement by the Dept of Education to solve the problem.

A proactive approach, wouldn't you agree? It's this sort of passive/aggressive behavior that typically sinks any ship. Let's be honest here: Congress needs to own up to the people who pay their salaries and admit that Congress is indeed the root cause for the student loan mess.

The fact of the matter is liquidity is certainly available for financing FFELP loans and private ed loans. The lack of profit left in the FFELP program now renders the participation from private and semi-private (non-profits and state run authorities) to a very simple decision: FFELP isn't profitable any more. It's that simple.

Please Congress, admit you made a mistake, fix the mistake, and let's move on. As long as ego's are running the Education committee's and sub-committee's the taxpayers and students will loose money and opportunities. What's the worse that could happen? A 15 term congressman won't get re-elected? You're not getting any sympathy from us.

First Marblehead takes a big stinky dump today.

2008-04-08T19:36:00.002-05:00

Why?

Because their loan guarantor, TERI, filed chapter 11. What's that mean? How does all this work?

Well, TERI has been around for a while. They're a non-profit that operates kinda like an insurance company. They insure losses on private student loans. This sort of operations takes two pieces: the ability to underwrite loans or provide an underwriting evaluation, and cash to make good on the loans that go bad.

TERI is pretty good at the first requirement. They have a lengthy dataset that they can model loan losses from. But oh no. Their dataset is based on people borrowing modestly to finance modest tuition rates. We surmise that their models don't take into account any macroeconomic considerations though (i.e. How will all these loans perform in a recession?).

And the second requirement to be a good guarantor requires you to have hordes of cash layin' around. No, TERI is no good at this part. We seem to recall TERI being BBB rated by one of the agency's. They seem to have been a little undercapitalized.

And First Marblehead has TERI locked up in an exclusive agreement. No one else can use TERI. Only First Marblehead. Personally, we're a little suspicious of this arrangement, but it's not our call. Anyway, First Marblehead stock did indeed take a big stinky dump, dropping 36% to close under $5 a share (a far cry from their $55+ days in Jan 2007).

Beyond the internal issues facing First Marblehead, will the private education loan market now survive? We'll have to wait and see. There are a number of First Marblehead-like companies out there, but it is now going to be a function of their marketing prowess. And if First Marblehead introduces a contagion effect like the FFELP market saw, then it looks like Timmy is going to community college this fall, living at home, and working at Taco Bell. Wonderful. Thank you, out hats off to our elected Congressional leaders.

The Department of Education isn't giving up hope....

2008-04-08T19:32:00.002-05:00

.....but they are making plans to "fix" the problems they claim aren't there. Which we find sort of strange. No problem...but we'll fix the lack of problem. Congress even chimed in. Rep. Miller submitted some legislation that will give the Department of Education the power to provide liquidity to the lending marketplace.

It's too little, too late though. The industry has imploded. There are no operations centers to make the loans. The liquidity is of no use if there is no infrastucture to process the applications.

But, it's a nice gesture. It looks like they're doing something, at least.

Senator Clinton Complains about high cost of student loans; Proposes elimination of FFELP

2008-03-25T12:53:00.002-05:00

It makes perfect sense if you think about it. Senator Clinton was complaing about student loans at Penn State today. Clearly, it's the involvement of private lenders that drives up the cost of student loans. Clearly, the free-market enterprise system is incapable of providing a reasonable priced and reasonable service to the marketplace. Competition is baaaaaad. Government is gooooood.

Ummm....not buying it! Nope. We just can't get our arms around the logic that Clinton is dishing out here. Perhaps she got a little shell-shocked when she was last in Bosnia....after all, Clinton claims she was in the shit.. An errant mortar could have gone off nearby causing her loss of common sense.

How in Gods Green Earth can Senator Clinton maintain that the Government of the United States of America will deliver a financial intermediated product to the public cheaper, better, or faster than a competitive, for-profit environment? Jeez. If there's one thing money can do better than the government: find the highest and best use. Money doesn't discriminate. People who discriminate with money, tend to loose it all. You invest it where it makes you more. It's that simple. The government on the other hand, you create bureaucracy, inefficiency, sloth, and angry constituents with government investment. Government just wasn't built to compete with the free-market.

We'd feel more compfortable is Sen. Clinton would stick to addressing her "mischaracterizations" of trips to hostile, war zones.

Lenders shut down FFEL program; Secy Spellings still living on Planet La-La-Land

2008-03-24T23:25:00.002-05:00

We're not too sure what goes on inside Secy Spellings mind. Or what her people tell her. Or how a government official can objectively perceive reality. This past week Secy Spellings provided testimony to Congress basically saying that all is well with student lending. We're quite sure this is exactly what Secy Spellings believes. She's been saying this for a while.

The problem is: this isn't the reality of FFELP lending. Not by a long shot. It seems very few lenders have stopped lending in the program. Nay, it seems all lenders have left the FFEL program: for-profit lenders, state student loan authority's, non-profits -- they're all done with FFELP. A combination of the Student Loan Sunshine Act and the liquidity crisis has brought the program to an abrupt halt. We've heard from or contacted the top 20 FFELP lenders -- most are beyond the decision to halt FFELP lending, they're considering completely shutting down student lending operations.

But wait, Secy Spellings just told Congress not to worry, it will be all OK? Maybe it's the water in the Department of Education. Maybe something in the air in the building. We're not sure. But Secy Spellings said there's only a very small number of the 2,000+ FFELP lenders have dropped out of the program. Does Secy Spellings know something we don't? Not likely.

Grab your popcorn and watch what happens this spring and summer. Cuz Secy Spellings is gonna get BOUNCED out of the Dept of Ed over this fiasco. Fact of the matter is: She's dead wrong here. And her inability to face what's really going on is gonna make for a truly embarrassing moment for her. It's gonna be a career ender. We've got a good seat.

Student Loan Official Draws on Experience From Working At the Phone Company

2008-02-29T00:01:00.002-05:00

It's all OK. We did a little web-based research on Sara Martinez Tucker. It seems that she's more than qualified to make statements about state of the student loan program. You see, she worked at the phone company for a while. She also has experience in running a scholarship/grant outfit.

So yeah, working at the phone company and giving money away....we're quite sure she understands the intricacies of all the factors contributing to the looming student loan mess.

Which brings us back to another peeve of ours: why on earth is the Department of Education even remotely involved in the intermediation of money? This question is fodder for a very long post in the near future.

EBay Enters Student Loan Market

2008-02-28T23:44:00.002-05:00

Yes, Sara from the Department of Education is absolutely right! You see, EBay is now a valid source of money for obtaining low cost student loans. Just look at this! We're not sure how the logistics of the transaction would take place, but it seems that the winning bidder on this EBay auction will have the proceeds directed toward paying down this woman's student loans.

Yes, Liza has lots of student loan debt. And she's probably having a hard time making the payments right now. But this is a perfect example of what we've been saying: it's not the LOANS that are causing her problem, it's what Liza was forced to due as a result of the cost that was dictated to her. The tuition, room, board, books, lab fees, student fees, travel, etc are the root cause of Liza's situation. The loans only facilitated Liza to obtain the degree.

However, we encourage you to bid on Liza's loans. If nothing else, she's using the ingenuity and creativity of a well educated participant of our society.

Department of Education Executive Puts Head in Sand, Averts Trainwreck

2008-02-28T23:23:00.002-05:00

Oh....our doom and gloom predictions from the past few days.....nevermind.....the Department of Education says everything is going to be ok. From a story in todays New York Times:

The under secretary for higher education, Sara Martinez Tucker, said in a
telephone interview Wednesday, “We have today 2,253 lenders that are active
in originating loans, so to the extent that some lenders pull away form some
markets or some schools, other lenders have been able to” step up.

We don't know who Sara is, but we'll do a little web-based research and see what we come up with. But we think she's not only drinking the Kool-Aid, but dishing it out as well. There probably are 2,253 Department of Education issued Lender ID's out there. We'll go to Vegas on the over/under that there's less than 100 active in FFELP today. We think it's far less than 100, actually, but the odds maker looked at us funny when we offered our original number.

We're hearing quite the opposite of what these "experts" are reporting. Schools are screaming that they can't get loans funded. Lenders have layed off thousands of processors, account execs, and managers. Warehouse lines of credit are non-existent for student loans. The credit markets cannot sell the paper for securitized transactions.

We're gonna keep our eye on Sara. There will likely be some really good quotes coming from her once the administration lets her go later on this summer.

Editors & Contributors Needed

2008-02-28T11:48:00.002-05:00

CollegeLoanSearch is looking for editors and/or contributors. As you can see, we're hardly a hard news site. You can get that from Google news. What we do is purely editorial and opinion.

If you are passionate about student lending (you don't have to have the same viewpoints as our present staff), we'd welcome the opportunity to solicit your contributions to CollegeLoanSearch.

If you're interested, please drop us a note at CollegeLoanSearch@gmail.com and we'll see if we can get something put in place.

Let's review the stock performance of the student lending community

2008-02-28T09:26:00.002-05:00

We started this last year, but haven't really followed up with it. Who's getting rich? Not stock holders of student loan companies, that's for sure. Last May, student loan companies were commanding a one month return of about 10%....not bad stuff. But that was last May. Since April 2, 2007 (we purposely avoided tracking the student loan portfolio on April 1), through today...ouch...those same companies are posting a 47% decline in market value. We think a series of "hard eight" bets at the craps table would fare better than a student loan investment.

If our HTML skills were better, we'd post the results in this spot, but we're somewhat handicapped in that department (our student loan portfolio consists of: UNCL, STU, NNI, SLM, and FMD).

We're not addressing the investment performance to twist the knife or anything like that. This is merely how the market has reacted to the series of events that has affected the student lending industry. Granted, we normally just vent our spleens here, but what we talk about is real. The equity markets call it like is. That's the cool thing about money. It's not going to be prejudiced by anything but the ability to make more money. And the decline in the equity values of these student lending organizations merely confirms the outlook of the ability of students to acquire loans which will facilitate the attainment of a higher education. It's not a rosy picture. And there is no solution on the horizon.

I told you so

2008-02-27T09:53:00.004-05:00

....read below about the October legislation changes and their effects. Then read what our benevolent Congressman are saying. Rep Paul Kanjorski sent over a letter to Secy Paulson basically saying, and we paraphrase here, "hey hank, the student loan industry is in the crapper, and students will be looking for FFELP loans here in a bit, and we may have problem on our hands....can you fix the problem?"

Ok, so lets recap once more: the House and Senate rush legislation through that contributes to the present situation where private lenders are absolutely not interested in providing FFELP loans. Granted, the liquidity crunch is effecting the situation as well, but let's not be naive: the very legislation that these Congressman crafted certainly takes a great deal of the blame here.

We just don't see what the Dept of Treasury can do to fix the situation. Lenders don't want to participate in the FFELP industry because it's not profitable anymore -- it's a law now. It's funny that for-profit companies are driven by their ability to make profits. And funnier when the legislative landscape is such that when private lenders can't make money, they withdraw from that industry. Actually, it's not really that funny, but it is a fact. And to be sure, this is a fact that was plainly repeated to our benevolent legislators. Apparently everybody thought the private lenders were merely crying wolf when they said: "if you pass this law.....we'll take our marbles and go home!"

Well, participants in the FFELP industry did go home with their marbles, just like they said they would do. And now the legislators are employing an amazing act of foresight and trying to fix the problem before they look silly this summer when their constituents go looking for guaranteed student loans and will be told: "Sorry, your Congressman fixed it so we can't and won't give you any money."

But wait, the Henry D. Ford Direct Loan program is there. The Direct Loan program will save the day! Nope, that won't happen. The federal government just isn't a financial intermediary. There is no incentive for the Direct Loan program to perform optimally. Not to mention the burden the Direct Loan program puts on a university's financial aid office. Suddenly, the financial aid office must begin processing and tracking loan applications and loan disbursements. We're hearing an earful from a number of very large university's that they don't want anything to do with Direct Lending because, well, they're a university, and not a loan processing outfit.

Sadly, the victim in all this will be the student. The ability of students to obtain low cost loans to attend college will be denied to thousands of applicants. The private lenders have been forced out of the business. All because an ill-conceived, knee-jerk reaction to a problem that wasn't the lenders fault.

The perfect student loan storm

2008-02-26T07:34:00.002-05:00

Ok, the legislators walked student loans up to the gallows. But it was the credit crunch that slid the noose over the neck. [We worked really hard to come up with that imagery!]

As we see it, the credit crunch unfolded like so: mortgages started going bad, which affected the performance of the securitized pools they were sold into, which in turn soured investors on the bonds that supported the securitized structures. As the scope of the mortgage backed securities market came into light, the sale of bonds that were sold for all sorts of securitized assets began suffer.

Student loans are quite often packaged up and securitized just like mortgages. Most monoline lenders rely on this capability to free up their warehouse lines of credit so more loans can be funded. Alas, investors stopped buying bonds (usually commercial paper or auction rate securities) that financed the securitization structures. Warehouse lines could not be refinanced.....and all lending comes to a screeching halt.

What we don't understand is the irrational behavior of the investors. The bond quality is a direct function of the underlying loans in that securitized structure. FFELP student loans are still guaranteed by the full faith of the US Government. FFELP student loans are still in great demand as a tool for students to invest in their futures. FFELP student loans, basically are not to be compared with the sub-prime mortgage mess. But for whatever reason, the investors are gun shy of any investment vehicle that resembles a mortgage backed security.

The problem with the student loan secondary market is purely a liquidity issue, not a credit issue as with mortgages. We firmly believe the liquidity market will return to some resemblance of normalcy at some point....don't know when, but will do so eventually.

Student loans relied heavily on a special securitization structure in which the underlying bonds were auctioned off every month....sort of like commercial paper, but with different terms...the vehicle is called "auction rate securities". Typically a student lenders investment bank would buy issues with their own capital when the auction did not clear all the refinanced bonds. The IB would then sell those auction rate bonds later on during the month. Well, most IB's stopped supporting their auctions. In other words, the bond holder of a maturing note would not get their money back. They were stuck with the position for another month. It should be noted that the failed auction rate markets were a decision by the investment banks due to their inability or aversion to employing their own capital to support their customers -- the underlying quality of the student loan pools did not change one bit during this period. Regardless, student loans are now labeled as an EPA Superfund site.

So, the loans aren't nearly as profitable as they used to be (note: loans funded prior to Oct 1, 2007 are just fine, it's the few loans made since Oct 1, 2007 that will have trouble making money).....student lenders have been frozen out of the credit markets.....and the lending season is just starting to gear up. Yes, folks, there's a real mess brewing down at the Dept of Education, and no one really seems to be too interested in taking control of the situation.

What the October legislation did

2008-02-25T10:01:00.003-05:00

Our benevolent Senators and Congressmen were at it last fall. You see, Andrew Cuomo, an angry constituent base, and an looming election year were all influences in a mis-guided proposal.

The problem was simple: students are graduating with a lot of student debt. In a quest to gain a higher education and acquire the necessary skills to survive in the 21st century, our ranks have been seeking post high-school education at record levels. This is good. However, the university and college systems, responding to true supply & demand interactions, have been able to increase tuition rates while still attracting above average quality and quantity students. This also is good. Our environment is such that society is requiring a more skilled workforce and colleges & university's can charge more money to satisfy this demand. Yep, we've mentioned this before, but it's the free market at work. Don't fight it.

This is the part where the problem is highlighted: students attending college in greater numbers in a time when tuition and associated fees are increasing faster than inflation turned to student loans (both private and government based loans) to finance the demand. We tend to look at this as an investment....a social good.....the economy satisfying a market based demand. Nevertheless, our society is becoming better educated and luckily there is a government sponsored solution (FFELP) in place to facilitate the education expense. Heck, the marketplace even stepped in and created an additional solution (private loans) for individuals who required assistance beyond what the government could provide. We love free market enterprise. It seems to take care of a lot of society's issues.

Oh but wait, our benevolent lawmakers decided it was bad that students had to incur so much debt to become better equipped to participate in society. Clearly, it's the loans that caused these problems. Never mind that the tuition and fees charged by the colleges and university's had outpaced typical price increases. Must be the loans that the students took out that caused such social disruptions. Yes, we are mocking the legislation that took effect in October 2007. The loans were merely a pre-existing facility that allowed students to respond to a greater need to attain better education/training and to manage increasing tuition/fees. The loan process, of course, did not cause the problem of students incurring so much debt.

So, our benevolent legislators took matters into their own hands: they decided to eliminate profitability from the FFEL program. That way, it will be cheaper for students to attend college and the reduced cost of the FFEL program will be channeled into grants for lower income students. But something interesting happened: the reduced profitability of the FFEL program partially caused almost all of the private lenders to shut down their FFELP lending. So now, FFELP loans will be quite scarce this spring and summer....nay....non-existent. Students will have to rely on the Direct Loan program for their Stafford/PLUS allocations. We're gonna go out on a limb here and make two predictions about Direct Loans: 1) the Direct Loan program will come to a crashing halt this spring/summer. There is no way that a government based loan processing and disbursement program can keep up with the $60 billion demand for government sponsored education loans. The Henry D. Ford Direct Loan program will be crushed by June/July of 2008. 2) All the savings that our benevolent lawmakers predicted would be extracted from the changes they made in FFELP will be absolutely overwhelmed by requests for capital from the US Treasury to fund the Direct Loan program.

There you have it.....our legislators have made a huge mess. Granted, this big mess wasn't intentional, but this is the result of uninformed lawmakers going to work to solve problems when they only listen to the likes of Andrew Cuomo.

The problem here has been exasperated by the credit crunch. Tune in tomorrow and we'll vent about that in greater detail.

We're baaaack

2008-02-24T11:29:00.002-05:00

It's been really busy and depressing the last few months. But we're gonna be back with more regular and objective critical reviews of the student lending space.

We'll expand on a number of topics in later posts. But first, let's recap:

August 2007: Liquidity crisis begins. Most monoline student lending outfits aren't banks. They garner their money to make loans by borrowing on Wall Street. Once the borrowing on Wall Street tightens up, it starts getting difficult to acquire funds to make the loans. Even though the FFEL program is a government sponsored loan, the capital is acquired privately by the lender. The liquidity crisis has crescendo'ed into a colossal mess. The student loan industry has come to a crashing halt, especially in the past few weeks.

October 2007: Crippling legislation is enacted. Our benevolent legislators are convinced that it's the loans that have caused all the problems for students seeking a higher education. Never mind that these loans are merely a response to the ever increasing tuition rates dictated by the colleges & university's. Clearly, the best solution is to remove ALL profitability in the government sponsored loan program. Therefore, in the legislators warped sense of reality, if the profitability for making these student loans is removed....voila, problem solved. What everyone failed to understand is that abnormal profits weren't being realized by the private lenders. Much of the "abnormal profits" were returned to the borrowers in the form of benefits (reduced interest rates, cash back, etc). Competition is a wonderful thing...the involvement of for-profit entities in the FFEL program led to innovative and attractive adaptations of FFELP loans that ultimately benefited the borrower. All this is gone now.

The above confluence of events has resulted in most lenders exiting the FFELP business. Even the state run student loan authorities aren't making FFELP loans. So, perfect, our estimation is that the legislators have made a huge mess. But we predict more wackiness. It's an election year after all. Desperation will abound by the end of April. We don't dare predict exactly what will happen the next 90 days, but we assure you that the legislators, the Dept of Education, perhaps the Dept of Treasury, and possibly a few other far flung executive branch outfits will put together a really stupid solution in place that will turn the FFEL program into a Simpsons-esque made for TV cartoon fodder.

Keep checking back, because we haven't even begun to vent our spleens on the issue. We'll be naming names, highlighting absurd details, and allaying blame to all silliness that student lending has become.

What's been the damage?

2007-05-21T09:52:00.000-05:00

We're all aware of the recent "indictment by press release" activity that the student loan industry has been put through recently. Be we got to thinking: what's the quantifiable damage done to the student borrowers?

We think this is an important question. If we could quantify the dollar damages, our benevolent elected officials can better assess the proper response, instead of lunging headlong to fix a problem that may never have really existed. We may find that that there are no damages!?! Perhaps the student borrowers actually benefitted from the recent highlight on preferred lender lists. But surely everyone would agree that by putting the problem in the proper context is the first order of business.

Now, we're sure Andrew Cuomo has calculated the damages, or some proxy thereof ! We would love to see what Cuomo has

NSLDS tidbit

2007-05-17T20:55:00.000-05:00

We're sure this is leaked out to more than just us. But it seems that the Department of Ed is getting ready to unveil their NSLDS access guidelines. The primary point we understand is that NSLDS can only be accessed by lenders/marketers IF they have a signed promissory note from a borrower. It also seems that the Department is planning on instituting some accountability for NSLDS access and guideline adherence to the point that an organization's CEO must assume responsibility. For heaven's sake....it's NSLDS not Sarbanes-Oxley!

We don't know how much of this will become part of the regs, but it appears to be weak to us. We were dissapointed to see that there is no effort to run NSLDS as a credit bureau and have the credit bureau regulatory agencies oversee NSLDS. If you ask us, the Department has really done nothing substantial. The privacy issues still exist, the usage risks still exist....it's just not enough. We're hoping that our intel does not pan out and the Department ends up handling this properly.

Daily Musings

2007-05-16T22:24:00.000-05:00

Over at The New America Foundation, where they sometimes seem to think fairly clearly and oftentimes seem to miss the mark, they're blasting the default rate issue of FFELP vs Direct Loans. Their analysis draws the conclusion that free-market enterprise is to blame here. Alas, it's poor government policy. You see, the free-market will constantly seek to test the best use of capital and entrepeneurship. The answer is to tighten up sloppy policy....just the the market do what it does best, you can't fight it.

We were deeply saddened today to see that Drexel University acquised to Cuomo's strong arm tactics. Cuz Drexel had a sure thing. But when you have an unlimited budget to misapply prosecuting and badgering companies, sadly the defendants will spend more money to clear their name than settling.

Student Loan Portfolio Project

2007-05-15T10:48:00.000-05:00

We forgot to mention the Student Loan Portfolio Project.

Basically....we'll follow a portfolio of publically traded student lending companies and comment on the returns from time to time. We'll start off with: UNCL, NNI, STU, SLM, FMD, CIT. If we forgot any, or need to include any, drop us a note...don't want to ruffle any feathers.

But, 45 days into the Student Loan Portfolio Project, the industry is returning about 9.2%. We have a few anomolies however. Of course Sallie Mae have a purchase offer in front of them, so they're featuring a 33% return. And the private education monolines UNCL & FMD are flat to declining...interesting to not. Otherwise, the "traditional" student lenders are up 10-ish% with the exception of NNI, they're lagging at a 4% return.

Are there any natural hedges to a student loan basket of stocks? Unnatural hedges? Leading indicators? We don't know...but interesting to watch.

How's this possible?

2007-05-15T09:03:00.000-05:00

This one is going to be difficult to explain: Terri Shaw, the former head of Federal Student Aid within the Dept of Education, has taken home over $250,000 in "bonus'" the past 4 years! That's right, a government employee granted a bonus. And we're just not talking about a nominal "atta boy" bonus....these are significant bonus structures. Terri has averaged over $60k per year in bonus the past four years (all this in addition to her $144k per year salary....which was bumped up to $165k per year last year).

We understand the nature of a bonus: to reward an employee for work that was done. And we understand that the government needs to be creative in attracting and retaining talented people to accomplish tasks that they otherwise would be paid significantly more in the private sector. But to hand out over $250k in bonus for the last four years? It just seems a little excessive to us. Leaders within the government do not assume the roles they do for salary and bonus packages. They do so for their passion of a public policy issue/topic. They do so to fulfill a need to serve the public. Government leaders are compensated to operated in a low risk environment. A bonus is a return for risks taken in a decisioning environment. Terri Shaw did not operate in a high risk environment.

Consolidation loan shenanigans

2007-05-10T20:10:00.000-05:00

We've been getting quite a few emails from borrowers in the middle of consolidating their loans and why it takes so long. Since the annual "season" for consolidation is coming up, we thought this would be a timely post.

We've done some research, made some calls, snooped around, and mystery shopped some lenders. Here's what we found out. Once you submit a FFELP consolidation loan application to the lender of your choice, the lender promptly begins processing the loan. The first thing they do is make sure the required information is submitted. Although the application asks for a lot of information, all they're looking for is: name, address, city, state, zip, social security number, date of birth, reference information, and the underlying loan information. Let's look at a few of these application requirements. First reference information. The Department of Education requires two references and their address info. The references must be at a different address than yours, and the two references must not be at the same address. Why? We surmise this is left over from collections practices from the 70's. Our guess is that the Department of Education is completely ignorant about the advancements and innovations that have occured in the collections industry which would make the reference requirement completely obsolete. The second piece of info we'd like to address is the underlying loans. According to our mystery shopping experience, most lenders will look this info up right on the phone. If a lender has your permission, they can pull your NSLDS record to verify this information. Whoops, the Department has taken NSLDS away from all lenders. So, you as a consolidation applicant must get this information to your lenders yourself. What a pain in the ass. We found a few lenders that are pulling credit bureau reports to get the underlying loan info. Frankly, we're lazy, we'd rather have the lender go through the exercise of gathering all that information.

Another aspect to why it takes so long to get a consolidation loan consummated is the process of obtaining the payoff verifications of all the underlying loans. You see, the Department has some very beurocratic rules that govern this process. Unfortunately, it seems that they do absolutely nothing to enforce those rules (according to a few calls lobbed into some lenders). Here's what happens. Say you have 4 underlying loans. The lender sends a LVC (Loan Verification Certificate) to the holder(s) of those 4 loans. The holder(s) have 10 days to provide the payoff details back to the consolidating lender. Given the technology base of servicers and lenders, they can get these requests out in about 24 hours. But what do they do in reality? Nothing. Those loan holder(s) want to keep their asset. So what happens when they ignore these LVC's ? Nothing. The Department of Education is lame. Who loses in this whole process? You, the borrower. How come mortgate refinancing doesn't have this LVC nonsense? Because it's pointless and the borrower would file a complaint with their states AG regarding the underlying loan holder if they witheld payoff information.

Aaarrgghh.....we're gonna do a little more research on this topic, it sounds fishy.

Spellings Testimony

2007-05-10T20:01:00.000-05:00

We didn't get through all of the testimony, but our impression was that it was a pummelling for Ms. Spellings. In fact, some of her admissions may have testified her right out of a job! We heard Spellings say over and over again that the Department is as vigilant as ever, and their hands are tied by the legislation that guides the powers of the Department of Ed. Um....if that's truly the case, it's a little too late to be bringing all this up now. Instead of devising carefully crafted excuses, we should have heard about how accountability for managing the system has been shirked and the proposed changes that the Department is putting forth to restore oversight.

We could go on and on about what REALLY needs to get done to fix the federal student loan program...you've read it all here before....so we'll spare you for the time being.

Misc things

2007-05-10T09:51:00.000-05:00

Yesterday, the House, nearly unanimously, voted to enact Sen. Kennedy's "Student Loan Sunshine Act". This act, as best we can tell, is a guide in ethics and common sense. Read up on it, but basically, the preferred lender lists, iducements, and such. We didnt' find anything too earth shattering here. Like we said, it's legislating good business practices. Since the Department of Education failed to regulate these issues, the lawmakers passed a law to address the issue. If signed in to law, there will now be criminal consequences for the industry if the preferred lender list shenanigans continues.

Hurry up....you can catch Margaret Spellings testifying before the House education committee. You can watch it live here (it will probably also be archived for some time too). It's fairly contencious. Really good stuff.

Terri Shaw stepping down

2007-05-08T21:33:00.000-05:00

Smack dab in the middle of intense scrutiny, and the day before her boss testifies at a much awaited Congressional hearing, Terri Shaw, the head of the federal student loan office at the Department of Ed is leaving to "pursue other career opportunities". [see Washington Post article detailing all this.]

Her departure is unlikely to remove her from investigation, however. Terri came to the Dept of Ed direct from Sallie Mae. We surmise her transition from Sallie Mae will be queried. As would any potential financial stakes in Sallie Mae. Where is Terri going? What "other career opportunities" are available to Terri? Will she jump ship to a student lending firm?

Rumors appreciated here.

NSLDS Math

2007-05-07T17:21:00.000-05:00

We've gotten several comments questioning our assuredness that no one was using NSLDS as a marketing prospecting tool. Well, we don't know for sure. But we'll lay out our NSLDS math and let you decide.

First of all....assumputions:

1. All entities were only given access to NSLDS via the web query form and results were displayed in a web query form. Otherwise, if you had raw access to the data, then sure, the database could be used for prospecting.
2. An auotmated "bot" is used to harvest the information. This is done by "screen scraping" the submission of an SSN and to harvest any underlying data.
3. There are 60,000,000 names in the NSLDS database.
4. Given the simple 9 digit Social Security Number, there are a billion possible SSN combinations. But applying a convention to how the number is constructed, that nets down to about 670 million.
5. A bot would, on average, take 15 seconds to evaluate whether or not a particular SSN exists i the database.
6. A bot would, on average, take 60 seconds to harvest, evaluate, and store an existing SSN.

Now for our NSLDS math. We're going to assume one pass thru the database only.

To merely evaluate if an SSN exists one would have to submit all 670 million SSN's. At 15 seconds per, thats 319 years of computing power.

Once those valid SSN's are identified, another 60 seconds are required for those 60 million records, that's 114 years of computing power.

There, according to our NSLDS math, it would take 433 YEARS of computing power to effectively comb thru the NSLDS data source. Sure there's probably a few shortcuts we could implement to get that down to 200 years, to be conservative. But that's still ludicrous to suggest that NSLDS is a prospecting source.

And we haven't even addressed the fact that NSLDS, in the form that's made available to lenders, does not display ANY indicative information: no address, no phone number, or no email. So some smarty pants goes thru and devises a clever, and very expensive, method to access NSLDS, but there's no frickin' way to contact those people.

It just doesn't make any sense what's been proposed by Sen. Kennedy and Amit Paley from the Washington Post. We're gonna stick to the math, you can't argue the math.

Results of the big NSLDS shakedown?

2007-05-06T14:53:00.000-05:00

Now that the student loan industry has NSLDS back up and running, we're kinda curious to learn what the Department of Education has found out from it's investigation.

We can't wait to hear all the evidence that the Department gathered to support the initial claim that the student lending industry uses NSLDS as a prospecting tool. But we don't think we'll hear any of this. You know why? Because they didn't find anything.

Nonetheless, the student borrowers, the lenders, the loan servicers, and the guarantee agencies all deserve to hear what the outcome was. This was an inconviencence of monumental proportions, and all the customers of the Department of Education and NSLDS deserve an explaination.

Generic branding

2007-05-04T14:13:00.000-05:00

We didn't check this outfit out, but got some info on eStudentLoan.com.

This is interesting....it appears to be a brand of Goal Financial, a large FFELP consolidation outfit. In the same vein as Student Loan Network, Goal Financial, has apparently created a new brand that tries to distance itself from the existing Goal brand. But they're set up to look like a referral site that finds the best loan for you. As we understand it, you get directed primarily to Goal Financial for a loan, because, they can. We've been told that you can also get directed to Great Lakes depending on your situation. They also seem to offer private ed loans too. Didn't hear how those loans are directed though. Nonetheless, the marketing efforts of Goal Financial are testing a new channel, a new message, a new look/feel. The point is, they're testing, innovating, being creative, being different, responding to change.

But it brings up an interesting observation. It's been our opinion that there's been very little innovation in the student lending industry. Not the fault of the private companies that make it all happen -- the fault of the Department of Education....Dept of Ed doesn't know how to regulate a financial intermediary system. But the front end marketing has been very adaptive. The internet has proven to be low-cost acquisition channel. It's been the back end stuff that's stifled innoviation due to the Dept of Education: how the loans are processed, how they're serviced, how the guarnator interacts with the assets, etc.

The Department has relatively few rules/regs regarding the marketing acquistion of FFELP applications. Let's consider this: let's have the FFEL program be regulated as other credit products. Marketers have to answer to the FTC, Truth In Lending, the Fair Credit Reporting Act, and all the others. Let's take it all away from the Department of Ed. Let's let the servicing of loans be governed by the Fair Debt Reporting Act. Let's run NSLDS as a credit bureau. We'll see 30 years of pent up innovation unleashed in the marketplace. We'll have better products offered, better service, lower loss rates: that's just competition at work.

But oh my, what will the office of Federal Student Aid do? Well, they'd manage a loan level guarantee program. And that loan level guarantee would still be the market making ingredient for the FFEL program, but all the other nonsense would be regulated by real financial services regulators.

Alumni Associations?

2007-05-03T19:25:00.001-05:00

OK, this has gone just a tad too far. CNN is reporting that Cuomo is now investigating the ties between alumni associations and lenders to promote student loans.

As we understand it university alumni associations come in two distinct flavors. One camp is a university sponsored office. The budget is provided and approved by the University proper. The other camp is an affiliated organization, that although related to the university, isn't directly funded by such. It's our belief that the non-university sponsored alumni office should be allowed to engage with any organization it feels promotes its mission. Phooey on Cuomo.

But Cuomo shouldn't stop here. We think he should investigate the relationsip between shoe manufacturers and the atheletic departments of unversity's. What about the Rose Bowl Parade? We saw lots of colleges/university's with floats entered in the parade. That's an unfair promotion for the school. Cuomo needs to get on that. We noticed one time in a college book store that they only sold BIC pens, there were no other brands -- sounds fishy to us! At what point will the citizens of New York announce that Cuomo is clearly grandstanding and not really providing value to the State?

We're getting so boooored of Andrew Cuomo now. We're going to go back to focusing on the work of providing student loans and the participants involved.

Alumni Associations?

2007-05-03T19:25:00.000-05:00

NSLDS news for May 3

2007-05-03T06:06:00.000-05:00

As we heard yesterday, guarantee agencies in federal student loan program were restored NSLDS access, reported by the Washington Post today.

It looks like lenders and others will regain access today or tomorrow. It's hard to tell from the article. We're somewhat dissapointed by the communication from the Department of Education regarding the NSLDS shutdown.

CNN is reporting today that some lawmakers want the FTC to investigate marketing tactics used by lenders in the industry. We kinda like this suggestion. It at least acknowledges that the Department of Education does not own oversight of the entire program, and the Department of Ed is not qualified to regulate/police all aspects of the program.

Even Wall Street gets it....

2007-05-02T12:37:00.000-05:00

.....Tom Brown over at Bankstocks.com has an interesting perspective in his on-line newsletter.

In our experience, we find it unusual that an equity analyst would comment on a public policy issue as pigeon-holed as studend lending. Sure there's big Wall Street money at work here, but unusual nonetheless.

Tom basically says that Andrew Cuomo is correct in pointing out problems with the relationship between lenders and the school's preferred lender list. But Cuomo's solutions are hasty and likely to ulitmately perform a dis-service to the student borrower.

We find it curious that a highly trained equity analyst gets it, but dozens of journalists and elected Senators and Congressmen are focused on the political equity this issue garners.

NSLDS update

2007-05-02T10:16:00.000-05:00

We're getting rumors that some lenders/servicers/guarantors are gettting NSLDS access back.

Nothing confirmed....nor do we know how much of the industry is back up.

If you know anything or hear anything, let us know.

Hearings galore about student lending.

2007-05-02T09:31:00.000-05:00

We find it funny (not funny in the "ha-ha" sense) that for years the legislators ignored the damage that the "Single Holder Rule" imposed on student borrowers, yet the poor judgement of a handful of financial aid staffers and student lenders causes a firestorm of attention by the legislators. Of course our elected delagates have to respond to Andrew Cuomo's investigations and they have to respond with a purpose, because, well, they won't be re-elected.

But Inside Higher Ed details yesterday's hearings. Nothing earth shattering. But at least the House Committee is listening members of the financial aid community. Dallas Martin, who heads up NASFAA, has been a defender of the industry, got to say a piece. He's been one of the few individuals not cowering admist all the criticsm.

Hopefully, the Committee and our delagates will focus on the policy of student lending and refrain from engaging in the politics of student lending.

Sallie Mae moving abroad.

2007-05-02T07:02:00.000-05:00

Not content with all the distractions and flak from the US student lending community, Sallie Mae has decided to invade the UK market.

It appears that they are offering a credit based private education loan for UK residents to attend UK schools. The Sallie Mae UK website details the offering and eligibility. Although, we don't think the marketing photo's look like British citizens.

How are preferred lender list membership determined?

2007-05-01T09:04:00.000-05:00

Well, according to an article today in University of Texas - Austin's campus paper, it appears that "treats", randomness, and $1 per share stock offerings seem to be a big determinant.

This article is a must see. Make sure you look for the PDF links off to the side. It appears to be emails and docs produced for the Cuomo/Kennedy supeana's. So, we get some very interesting insight into how a financial aid office determines the lenders, their position, and other ridiculousness. The "Preferred Lender Reviews" PDF link is a document that summarizes their internal ranking process. It's good that they have what appears to be an objective rubric for determining list inclusion and list selection. But there are some bizzar characteristics that they consider. We especially like the "Where or What" dimension that factors into the lender list decisions. You'll see that taking the financial office staff out to happy hour at the Hula Hut is quite important. Also, ice cream, birthday cakes, and BBQ lunches are quite significant.

So, we're still reading through the produced information and shaking our heads. But it's no wonder why this issue is getting so much attention.

Look....This Guy Gets It.....

2007-05-01T07:54:00.000-05:00

...in today's Washington Post, Kevin Bruns has an Op-Ed that very succinctly summarizes why private lending institutions are involved in the government sponsored student lending mission.Kevin points out 3 primary reasons why the private-public relationship exists in government student loan programs. I'll go over them here, but Kevin does it with less words than I can.

1. The "subsidies" are neccessary to entice lenders into the program to offer below market interest rates for otherwise non-creditworthy applicants. See, the government needs to foster the market in order to attract the capital that funds $83 billion of student loans each year.

2. Technology, finance, and service innovations provide an environment that improves the product design beyond the original government designation, ultimately benefitting the student borrower. The Deptarment of Education isn't a consumer finance organization; we find it inconceivable that a government agency can be sufficiently motivated to perform the function that the private lenders currently serve.

3. Increased competition ensures that the student borrowers are getting better deals than the government loans specifications due to #2. Here at CollegeLoanSearch, we're firm believers in free market enterprise as a solution to most social demands; and we hope lawmakers also have such beliefs.

See, we took Kevin's sucinct outline, and with twice as many words we managed to recap his op-ed. You're better off reviewing the original piece though.

Field Trip

2007-04-28T12:13:00.000-05:00

We decided to take a field trip to Las Vegas to see if we could uncover any student lending gossip. So far, the only thing we've unearthed is a great bar that serves the best margarita we've ever had.

Will keep you posted if we find any student lending dirt.

More on the breakdown of the Negotiated Rulemaking sessions

2007-04-26T16:21:00.000-05:00

We just got some tips that provided a little more insight into the dissentegration of the student lending negotiated rulemaking.

Yes, it was apparently fairly contentious, but we're being told that progress was being made. And it appeared that consensus was close to being achieved. It was the Department of Education that canceled the last 3 1/2 hours of the session and declared a draw!

No insight into why the Department took this action. But we can surmise that the Department wasn't looking for consensus and thus forced to take direction that they didn't necessarily agree with. Just a stab there.

Interesting stuff.

We got the exclusive unconfirmed NSLDS update right here.

2007-04-26T10:52:00.000-05:00

First off....the Department of Education axed access to NSLDS to everybody in the industry EXCEPT for institutions of higher education and student borrowers. We did get a tip that 15 schools lost their access during this NSLDS hiatus....don't know which schools those are.

This Tuesday, April 24, we heard that the servicer than exclusively handles the Direct Loan program got their access back. So perfect, the Direct Loan program is up and running.

But this is interesting: we hear that the Department is really focusing on the fully vertically integrated institutions. That's organizations that have an internal marketing front end, an internal financing vehicle, an internal guarantee agency, and an internal servicing function. There's not too many of these...examples include: Sallie Mae, AES/PHEAA, and Great Lakes....probably a few others, but those come to mind initially. But here's what we didn't know. The guarantee agency's get a full dump of NSLDS. The certification of the loan level guarantee requires a 360 view of the database. So, if an organization has a marketing front end in-house and a guarantee agency in-house, there's the opportunity for shennanigans theres. Not many shops are strucutred like this though.

Our snooping and nosing around also yielded that access will be fully up and running in 2-3 weeks. The Department is not notifying people when access is available.....just need to keep checking.

This is all unconfirmed rumor...this is the good stuff we eat up.

We keep forgetting to post about this: Prosper.com

2007-04-25T22:48:00.000-05:00

Have you ever checked them out? Prosper.com is sort of a cross between Myspace and eBay.

It works like a miniature private equity fund. If you're a borrower, you set up an account, describe why you're looking to borrow money, and post your offer to the Prosper.com community. If you're a lender, you look thru all the borrowers profiles (both personal and credit), and make pledges for an amount to the borrower request. It seems that a $10,000 loan could have dozens of lenders supplying the capital. Once the loan request amount is met in terms of pledges, the Prosper.com goes out and executes a "capital call" (like private equity companies sometimes do) and the loan funds. The borrower makes one payment to Prosper.com, who in turn divvies up the P&I payments to the various lenders. Prosper.com probably does a better job of explaining how it works, so check them out.

But it seems that some folks use Prosper.com as a viable source of capital to finance a college education. Again, we've just sort of Googled around, but check it out. Let us know if you've had an experience with Prosper as an education finance source.

Just as we thought....

2007-04-25T21:58:00.000-05:00

....the coverage of Andrew Cuomo's grand appearance on Capital Hill delivered no earth shattering suggestions regarding a fix to the Dept of Education's oversight of the FFEL program.

He did employ some flowery language to describe the situation as he sees it. You can read some summaries at the esteemed publications of the Washington Post and the New York Times. Note that the Post piece is written by Amit Paley, he's the guy who wrote the original "Sunday article" that started the whole NSLDS shutdown fiasco (which by the way, is still underway at this writing). Amit seems to have no shame in reporting on an issue and not allowing the opposite side having an opportunity to describe their perspective. We're shocked to see this quality of journalism representing the Washington Post! [Note: here at CollegeLoanSearch, we're not fair and balanced either, but we don't profess to be journalists ...we just vent our spleens everyday.]

But we'll put forth our predictions here. We're not shy. We kinda like all this attention the preferred lender list is getting. Of all the reforms proposed out there, this one is fairly benign. Some lenders will be affected more than others. Some financial aid offices will have some significant changes to adapt to. But in the end, yeah, student borrowers will be better served. So, if any legislation is gonna get proposed, straightening up the preferred lender list is most preferred. See, the esteemed delagates in Washington will probably only have one chance at getting education finance stuff through this year. And they sort of have to address preferred lender lists given all the attention that the Education Committee's have thrown on the issue. With all the other distractions going on this year, we think there's only one chance to focus on ed finance. Time will tell...but that's our take on the matter today.

The Cuomo Show just finishished up.

2007-04-25T13:21:00.000-05:00

You can read Rep George Miller's prepared remarks here or go here to link to the video of the hearing.

Um.....yes....the hearing was Andrew Cuomo only, which means that Rep. George Miller is looking to get a particular point of view out there. We find this sort of show to be a little irresponsible. There needs to be a balanced point of view. And neither George Miller or Andrew Cuomo are objective commentators on the issues.

We're not policy experts, so we'll wait for some analysis to be posted on the hearing and get that out to you later on today.

First Marblehead to be investigated?

2007-04-25T09:20:00.000-05:00

Sometimes when we get bored, we browse through the "Asset Backed Alert", http://www.ABAlert.com, it's a financing industry weekly newsletter. Sometimes there's stuff in there about student lending financing deals.

A strange bit in the April 20 episode this week though. Asset-Backed Alert is reporting gossip/rumors that First Marblehead is next on Cuomo's list. They don't cite any sources or quotes to substantiate the rumour. But we're going to perpetuate the gossip too.

First Marblehead is the mack daddy of private ed loans. They don't write loans or fund them directly, but rather they put together a network of marketers and banks to issue loans, and First Marblehead creates the secondary market by securitizing the products. They make a ton of cash doing this. They're sort of a mini-Sallie Mae during the startup days of Sallie.

Naturally, if someone is making money by lending to students, they have a big ol' target painted on them right now.

Negotiated Rulemaking falls apart.

2007-04-25T09:07:00.000-05:00

We do bash the ineptness of the Department of Education quite a bit. But lets give them some credit for putting together Negotiated Rulemaking sessions. The Dept created four groups drawing from government, policy advisors, industry, and the education community. One of the groups was to focus on student finance issues. The point was that this group, representing all facets of the issue, would develop reccomendations that would suggest legislation and shape regulations. Indeed, a good idea. Everyone would walk away feeling that the government is making a sound, objective decision.

In theory a good idea anyway. Personally, we feel that Israel and Palestine have a better chance of working out their differences. You see, if you put representatives from all facets of student lending in a room together you typically get a lethal combustible combination of matter. With no clear and defined leadership in these sorts of gatherings, it should be no surprise that the sessions fell apart. What's pretty interesting is to contrast what the participants have to say vs what Secy. Spellings has to say about why the sessions disintegrated.

So what's going to happen? Well the obvious, Secy. Spellings is putting together a Task Force to come to the rescue. We haven't heard who's gonna be on said Task Force, but we're pretty sure it will be hand-picked "friends" that will see eye-to-eye with Sen. Kennedy's agenda. Let us know if you hear anything about this.

Get the popcorn....

2007-04-24T20:19:00.000-05:00

....it's gonna be an action packed Wednesday! That's right.....on C-SPAN Wednesday, April 25, we've got Andrew Cuomo, Live In Congress.

We just checked over at C-SPAN and didn't see exactly when the excitement begins, so we're starting watching first thing in the morning. This will be good. We've been at the Capital for these hearings before. This one is to get headlines. Nothing will be decided, no good information will be disseminated, and the reporters will get all the good seats. But you don't have to be in Washington to catch the show....thanks to C-SPAN.org we can get streaming gobley-gook from the Comittee hearing room live all day right from our desk.

CNN has some good quotes from Cuomo today: 'Cuomo said Spellings' move was "too little, too late."' He's talking about Margaret Spellings' creation of a Federal Task Force To Investigate the Relationship Between Lenders and Financial Aid Offices. We surmise that Spellings' is just wrapping up the Federal Task Force to Investigate the Bribes Taken by Federal Employees Who Oversee Those Industry Participants. And the Federal Task Force To Investigate Why The Department of Education Cannot Police Any Of It's Regulations should be delivering it's reccomendations shortly as well.

But our prediction for tomorrow is: 1) Lots of headlines/soundbites/bylines on the topic; 2) No actionable suggestions that will fix all the problems; 3) a variety of pithy responses to the circus that's due in DC tomorrow.

Finally.....

2007-04-23T14:49:00.000-05:00

...someone willing to stand up the bullying by Andrew Cuomo -- Drexel University. You see, Drexel had an exclusive arrangement with Education Finance Partners out in the San Fran area. EFP would provide private student loans to Drexel's financial aid office in return, EFP would provide revenue sharing with Drexel University.

Drexel refused to cave into Cuomo's demand for restitution. To avoid too much egg on Cuomo's face, he was forced to file suit against Drexel. To which Drexel responded with the perverbial: "Bring it on!" And there we have it. Drexel will see Cuomo in court over the matter. And we think Drexel has a better than 50-50 shot at winning.

Out in the real world we call this an "affinity marketing" arrangement. There's nothing wrong with this. Open your wallet, take a look at all your credit cards. You probably have 5 or 6. They were probably solicted to you via a group you belong to: your alumni association, NASCAR, your favorite airline, etc. You think those groups just hand over their member list to the credit card company for free? Heck no! They make a bloody fortune off of renting their member list. You can also rest assured that your alumni association, NASCAR, or your favorite airline didn't go out and establish their own credit card program. The cards are probably issued by one of three banks in, you guessed it, an affinity marketing arrangement.

So long as Drexel University officials weren't flown to exotic locations for "conferences", given stock grants, or any other payment otherwise, this exclusive arrangement is just fine. We don't know for sure, but we surmise that Drexel used the money that EFP paid to them to fund scholarship funds, the Unversity general fund, or some other fashion whereupon the University as a whole benefited.

We also cannot confirm this, but if a Drexel student decided not to get their private loan through EFP, then they were free to shop around and do business with whomever they pleased. This is America after all.

So to you, Drexel University, our hat goes off to you and CollegeLoanSearch stands in solidarity with you!

We think this is a great idea: a do-it-yourself consolidation site

2007-04-22T13:13:00.000-05:00

This is really cool....consolidateyourself.com; they offer a complete do it yourself facility to consolidate your loans. You only need your FASFA id/pin so you can look up your loans and loan detail to include on the consolidation application.

What's really interesting is their borrower benefit. 4% cash back. It's graduated in the sense that you get 1% back if you make consistent on time payments. This is an unsually generous benefit, we presume, because it's offered in a low touch environment.

consolidateyourself.com is a brand of Erie Processing Corporation in Florida. We've never heard of Erie Processing before, so do a little checking around before you engage in business with them. This is a great concept though.

Here's how to fix the whole mess.

2007-04-20T20:47:00.000-05:00

The Department of Education and the federal student loan program needs to be fixed. We've got THE solution right here.

We operate from several premises here. First we'll assume that the government is not in the business of running a business, but to regulate, police, and guide us as a society. Kind of a stretch there, but it's our beginning premise. Our second premise, and we may loose some of you here, is that the free market forces will allocate technology, resources, innovation, and entrepreneurship to the most productive uses demanded by our economy. Not everyone agrees with Premise #2, but we do. We’ll debate this premise to the grave though.

With those premises in hand, let’s explore the student lending industry. In fact, let’s compare a student lending operation to a bank. Student loan companies lend money – banks lend money. Student loan companies borrow money that they lend – banks borrow the money they lend. Student loans are regulated by the Department of Education – banks are regulated by bank regulators. Whoops, things fell apart with that last one.

But we think you get the picture. An education policy administration is regulating the financial intermediation process? Yes that’s right. The Department of Education.

Here how it should work: The Department of Education provides a loan level guarantee to student loans that meet certain criteria. We’ll let the Department of Education devise the criteria, but it must be regulated and policed consistently. Now, all marketing, financing, underwriting (the usual banking stuff) should be regulated by the bank regulators. So as long as lenders fund loans that meet the Department of Education’s criteria, the lender can apply for the government sponsored insurance policy for each loan that funds (an individual loan-level guarantee). The insurance policy or guarantee will protect the lender in the event of a loan default event. The Department is therefore limited to tinkering with the guarantee criteria – which we hope would be focused on accessibility and affordability and not the process of funding loans, processing loans, or marketing loans.

See, the financial intermediation process is beautiful. There is no discrimination in financial intermediation; capital will flow to the best uses of that capital naturally (see Premise #2). The more restrictions, covenants, and friction introduced in the intermediation process, the less efficient it becomes. Sure there’s some involvement of the government here, they need to provide the guarantee to create the market. But there’s no reason for the government to absolutely smother the process – unless you insist on ending up with our present student loan mess.

Borrower Benefits....what's up with that?

2007-04-19T20:51:00.000-05:00

This can be a confusing topic, or it's really clear. We see "borrower benefits" as a feature of FFELP consolidation loans mostly. It's basically a way to differentiate a commodotized loan. They're a good thing.

First, the basics. The attributes of a FFELP consolidation loan are dictated by the Deptartment of Education guidelines. The term is a function of aggregate balance of outstanding student loans. The greater your loan balance, the longer the term. The term ranges from 10 years to 30 years. The interest rate is the dollar weighted average of all loans being consolidated rounded up to the nearest eighth of a percentage point. Your amortization schedule ranges from income sensitive, interest only, and a straight amortization - again the Dept dictates the amortization schedule specifics and choices.

So, with all these attributes pre-determined, how can lenders offer "borrower benefits"? Well, it's an after funding treatment to the cashflows dictated by the Department of Ed. The lender is willing to give up a potential portion of the interest income stream in return for the loan to be booked with them. The most common benefit is "1 at 36". This means that you can receive an effective 1% interest rate reduction after 36 on time payments. If you're late that first 36 months, you are not eligible for the benefit. Read the small print, becuase some lenders will grant you the benefit, but if you're late subsequently, they'll take the benefit away! Anyway, how does the interest rate reduction effect you if the interest rate on the loan is predetermined by the Dept of Ed and the promissory note you already signed? Your monthly payment does not change, this is often a misconception. Once the benefit is achieved, you continue to make the same monthly payment, except more of your payment is allocated to principal than before. You effectively pay the loan off faster. It is indeed a good deal.

The dirty secret of "borrower benefits" is that very few people actually achieve the benefit. We hear that probably about 15% of a lenders customers would ever achieve the "1 at 36" benefit. It's a good deal....if you can indeed make 36 on time payments.

There's a bunch of borrower benefits too: "1 at 24", "1% of loan balance cash back after 9 on time payments", "2% of loan balance cash back up to $2,500 after 9 on time payments". They all work under the same principal: it's and after funding manipulation of the agreed upon cash flow designed to reward good repayment behavior. We expect competition to increase the creativity of the borrower benefits beyond what we presently see.

Here's how to fix NSLDS

2007-04-19T08:57:00.000-05:00

NSLDS is a credit bureau. The Department of Education may have another view, but in terms of it's function and structure, that's exactly what it is. So let's take the credit bureau model and port it over to NSLDS. It will solve a tremendous amount of problems. Credit bureaus are regulated by the FTC, FCRA, FDCA, and whole host of other acronyms.

Let's start with how access IDs are handled for lenders/servicers/guarantors/etc. Right now each entity has a site administrator. They submit a form to request an individual employee's ID/password. that ID/password is associated with the site making the request. Then when that ID/password makes an inquiry, the inquiry is posted to the borrowers NSLDS record. In otherwords, there is a record of who made an inquiry, when then inquiry was made, and where the inquiry was made from. Furthermore, restrict access from the work site. Right now employees can use their ID/password off work premises to look up any individual.

Now, let's upgrade the web-only interface. Business's in the business of facilitating student loans want the loan data, not a graphical rendering of the data that must be manually reviewed. This will reduce costs for all involved (i.e. lower costs for borrowers as a result of a more efficient workflow).

Costs? Start requiring users to pay for access. That's how credit bureaus make money. Why can't the Dept of Education charge for access? This event alone will put a stop to any (if it exists) prospecting in NSLDS.

Dept of Education? Well, their mission is to see to it that the citizenery is educated. Why are they running a credit bureau? They shouldn't be. Turn this thing over to the experts: the bank regulators, the FTC, and let it be regulated by the Fair Credit Reporting Act, the Fair Debt Collections Act, and all the others. Sure it's a specialized beast dealing with student loan debt, and there's probably some involvement for the Department of Education, but they certainly shouldn't be running the NSLDS operation, regulating the NSLDS operation, or policing the NSLDS operation.

Tomorrow, we'll rant about a much bigger issue: The fact that the Department of Education is regulating a financial intermediary process. We've ranted about this before, but this time instead of just complaining, we'll provide some soluations as well.

...still no NSLDS for lenders....

2007-04-18T21:32:00.000-05:00

....this is just a plain old bad decision.

This whole mess is apparently prompted by this Washington Post article from Sunday, April 15, 2007.

So, we've got this financial aid officer quoted as saying: "Our students are being inundated with marketing from consolidation companies," said O'Leary, of Stonehill College. "How else are the consolidation companies getting our students' information?" And Senator Kennedy gets his panties all in a bunch.

Alrighty. . We feel a rant coming on.

First Ms. O'Leary is probably a really good financial aid officer. We're thinking not so good at marketing though. Which probably explains why she's a financial aid officer, and not running a marketing department.

Here's how it works. Yes, NSLDS contains detailed, loan level information on each loan that a borrower from the Direct Loan or FFEL programs has ever had. And this is good. Servicers, lenders, financial aid officers, guarantors, and students all access NSLDS to verify student lending activity for various reasons. However, and this is very important so sit up while reading this, the 3 main credit bureaus in the United States ALSO carry the information. Not generally to the same level of detail, but the fact that you have, or have had a student loan is recorded at Equifax, Experian, and Trans Union. This is a fact.

Now, financial services marketers have permissible purpose to access the credit bureaus to determine loan eligibility when making a pre-screened firm offer of credit. When dealing with the credit bureaus, if an approved and paying client, a financial services company can obtain a list of names, addresses, phone numbers, and sometimes email addresses of people that meet specific criteria to market a specific product, as long as a firm offer of credit is made. It's not as easy as calling up the credit bureau and requesting a list, there's apparently a whole science behind this pre-screening process.

Contrasting this process to NSLDS, you'll see that using NSLDS as a marketing prospect tool is simply ridiculous. NSLDS offers users two views of the data: one for lenders/servicers and one for student borrowers. Both views are allowed only thru web-based screens/views. There is no raw database access -- one MUST use the web browser provided rendering mechanisms. Now couple this with the fact that a borrowers address, phone number, and email address is not made available thru these views. Not only is it a logistical nightmare to access the information on a mass basis, there's no indicative information to be used for marketing purposes. The industry uses NSLDS to verify loan applications, create payoff requests, and facilitate the financing function.

It's just plain old silly to imply that the industry is using NSLDS on a wholesale basis as a prospecting tool. Financial services companies use the credit bureaus to prospect for customers. That being said, there are probably some fairly unsophisticated marketers attempting to use NSLDS as a prospecting source using screen-scraping techniques, and they should be punished for doing so.

Tomorrow, we'll provide a solution to the NSLDS access problems. You'll be amazed at how easy this is to fix.

We're just at a loss about the silliness today.

2007-04-18T12:35:00.000-05:00

We just don't know what say about this. Sen Kennedy, in today's Huffington Post is making some leaps of logic that would make Sherlock Holmes roll over in his grave (if he weren't a fictional character).

Apparently the loan level guarantees that the government provides on FFELP loans "could and should be used to make college more affordable and debt more manageable." Well, OK. but the affordability of college is not a function of borrowing money. Affordability of college is a direct function of the tuition levels. Nevertheless, we should spank the financial intermediary function because tuition is so high.

In his rambling post, Kennedy, seems to imply that private education lenders charge too much money. OK....this is like telling a bank that they are charging too much money for an auto loan. Well, you know what? If the interest rate is too high, then don't take out the loan. You have a choice! Banks charge interest based on the ability to pay a loan back. If the credit underwriting is such that the borrower has a poor likelihood of repaying the loan, then that risk will be built into the cost to borrow the money. These decisions are all made systematically based on automated credit decisioning platforms.

To imply that banks are making too much money in FFELP and Private Ed lending is to imply that the free-market does not work. Sure, there are instances where the free-market hiccups and a benevolent government must step in to right the cart. But what we have here is hardly a tipped cart. We just have skyrocketing tuition.

We're curious to see how Sen. Kennedy proposes to fix the system. He can't possibly suggest that the Direct Loan program be the savior to all these problems! Using Holmesian logic, twisted a la Kennday, would lead to the conclusion that the government is better at building and operating a business than the open market ever could.

National Student Loan Database

2007-04-18T07:49:00.000-05:00

Well, we spoke too soon.

Today the Department of Education, in their infinite wisdom, shut down access to the National Student Loan Database System (NSLDS) to loan holders, guarantors, and lenders, basically anyone other than a student or financial aid office.

Umm....this is exactly what Heller's article in Inside Higher Ed said NOT to do! This action will hold up millions of dollars of loan transactions. The student borrowing function will completely cease to function as a result of this action.

Apparently, the Dept of Ed, is doing this temporarily as a review is conducted to ascertain any shenanigans in NSLDS by lenders/marketers. We have but two questions: 1) why shut down the entire system to conduct the review?; and 2) Are they really just now looking at the problem?

More on this as the situation unfolds.

Bankruptcy discharge & Student Loans

2007-04-18T07:26:00.000-05:00

No good unraveling scandals today, so we'll post some stuff about student loans and bankruptcy -- we get questions about this a lot.

Short answer is: nope....not gonna happen. If you file bankruptcy your Title IV student loans will NOT be discharged. Got a bunch of loans outside the Direct or FFEL program? Well, private ed loans are also NOT dischargable as a result of the October 2005 bankruptcy reform legislation.

So there we have it: if you file bankruptcy, your student loans will tag along and be there to haunt you for quite some time. This is why it's so important to review the terms of the loans you are signing up for. Sure the loan documents signed today don't seem to have any commitment, after all, you generally don't have to make any payments for one to four years. But you are obligating yourself to a serious commitment. Each year, add up how much you will be paying monthly based on the debt you are accumulating. You can quite easily put yourself way behind the 8 ball even before graduating from college.

Our point is, don't use loans as a bank withdrawal, there's a consequence to borrowing. Exhaust all other options. And we mean scholorship searches, grants, work-study, and off-campus jobs. Sure all that's a lot of hard work, but the less debt you leave with after graduation, the more rewarding your life will be.

Student loans are a fantastic vehicle that enable the underwriting of tuition, but should be employed responsibly and with foresight.

This just in.....

2007-04-17T10:03:00.000-05:00

....yes folks in the industry and in defense of the industry are taking stock of the situation. Donald Heller has a piece out in Inside Higher Ed that we find pretty good. Basically, Donald is saying there are some folks excercising poor judgement (lenders, financial aid officers, and government officials), but let's not let Andrew Cuomo's investigation be the impetus for stifling regulation to the FFEL program.

An over-recation in the House/Senate will ultimately have an impact on the student borrower. So, let's be rational and reasonable when we consider the consequences. Let's consider the ultimate impact as legislation and regulations are formulated.

Oh look....here he is...

2007-04-17T08:54:00.000-05:00

....Christopher Penn....the guy who runs FinancialAidPodcast.com . This is the anti-Collinge.

But first a little background. Penn works for the Student Loan Network. They're a Boston area based student lending organization. They have an iteresting spin. The Student Loan Network focuses all of their advertising/marketing/promotion on educating potential customers on the product, the process, on why....all that good stuff. Of course they always steer you to their services, but hey, it's a great idea. They immediately establish trust by positioning themselves as an advocate of the potential customer.

But they do a pretty good job of keeping their self-promotion to a minimum and the information they disseminate is excellent.

In fact, there has already been a Christopher Penn vs Alan Collinge encounter. Collinge appeared as a guest on Penn's podcast. We haven't listened yet, but will do so once this is posted. But check out today's podcast: it's Penn appealing to lawmakers to be reasonable. Go Chris!

Have you ever checked out this guy:

2007-04-17T07:59:00.000-05:00

Alan Collinge? He runs an organization called Student Loan Justice. The short story is that Collinge had an unpleasant encounter with Sallie Mae and now appears to have dedicated his life to being a pain in the ass to Sallie Mae. Check out his web site and you'll get the full flavor of his story and his over the top efforts. It's sort of like a messy version of Michael Moore's "Roger & Me", except with more vengence.

We've never met Collinge, but take all this with a grain of salt, we think there's another version to the injustice.

The point is: Wow. He does have some influence. All the kookyness aside, Collinge doesn't get dissed or stood up by senators and congressmen. People are forced to listen to him as a result of his self-promotion.

We're wondering if the student lending industry has an anti-Collinge that will stand up and take on the issues. I'm sure the industry is taking applications for the anti-Collinge. And look what Student Loan Justice has done: they've created a PAC. That means that Collinge doesn't have to work anymore. He pays himself a salary to drive his bus around the country to crusade for student loan justice. Doesn't sound like a bad gig if you ask us.

And the winner is.....

2007-04-16T08:48:00.000-05:00

......JC Flowers - JP Morgan Chase - BankofAmerica! Yup, when the dust settled, that was the winning lineup....offering $25 billion for Sallie Mae. JC Flowers will take a slightly better than 50% share while JP Morgan and BofA will take about 25% apiece.

The one thing that will be interesting here, is what these private equity firms are going to do with Sallie Mae. These companies typically are looking for an exit point to monetize any gain on investment. These gains are usually created by selling off non-core parts of companies. Heaven knows Sallie Mae has a number of non-core business lines: their IRS collections company, their student loan guarantee line, their account servicing line, their financing function, their marketing arm. Whoops, that's pretty much all Sallie Mae does. The point is, it won't be hard to break the company up into functional parts and package them up into attractive investments.

SimpleTuition.com

2007-04-15T16:46:00.000-05:00

We think this really interesting. It's likely a function of marketing, but SimpleTuition.com sorts out FFELP Consolidation, and Stafford/PLUS offers from various lenders based on a few criteria. All you have to do is identify which features are most important. And Voila! You've searched thru 20 or so lenders just like that.

But be aware, we think the only reason that a lender shows up here is because they paid for the spot....but still, you get to see a comparison of a bunch of loan offers.

Weekend Update

2007-04-15T10:59:00.000-05:00

We were out of town for a few days but now back. What have you missed? Here's a summary:

1. Rumors of Sallie Mae being purchased by the Blackstone Group, JP Morgan, and/or possibly others. Our assesement is that such a transaction will not materially impact the industry, Sallie Mae's arrogance, or the earth's rotation. Sallie Mae will merely have a new owner. Blackstone is a private equity firm whose net income is larger than most countries GDP in the world. And Chase bought Collegiate Funding Services not too long ago to compliment their growing student loan business.

2. According to the Dept of Education, student loan companies have been mining the National Student Loan Database. We find this curious, as NSLDS has two interfaces: one for students, and one for student finance participants. In either case, the loan info can only be displayed one record at a time. And even with this severe restriction, no one screen or view details a borrowers entire perspective. It's not easy to mine NSLDS given the interfaces that the Dept of Ed offers. Which leads us to the conclusion that some lenders have been granted access to the raw data. Moreover, the Department of Education is again failing to police their own regulations. So yes, with absolutely no enforcement, there will indeed be rogue lenders that blatantly challenge the system. It certainly doesn't justify the actions of these lenders.

3. Article in Friday April 13, 2007 Wall Street Journal that details the revolving door between student loan industry employment and Department of Education employment. There's a whole slew of folks that have been going back and forth for a number of years. We're very concerned about all this. The damage has most likely already been done, but we don't think we'll see a whole bunch of this continuing.

The Policy experts are jumping in now.

2007-04-10T14:29:00.000-05:00

We're hardly policy experts, but this is a pretty interesting read. We'll stick to peddling gossip and rumors here. But we kinda like these Ivy League educated big-time policy experts over at New America Foundation.

Basically what they're saying here is that it was up to the Department of Education to police the student loan companies. But in the spirit of Bush imposed free-market enterprise, nothing got done. So, naturally, greed took over and look at the fine mess we have today with all these financial aid officers and one particular student loan company.

Like we said before, there's more mess to uncover, but where was the Dept of Education while all this was going on? It's a valid point. If the Dept of Ed is going to develop regulations but not police them, then the regulatory arm is useless. It quickly devolves into a wild-west environment.

Well, there appears to be several new sheriffs in town to clean things up. We've said this before: do a little research on the student loan company you're interested in doing business with. You have a choice, so vote with your dollars.

We're looking for a positive post to put up. Negativity seems to be festering in the student loan industry at present. But we're going to look really hard for a nice warm fuzzy positive topic.

Tsk, Tsk, Tsk.

2007-04-10T09:11:00.000-05:00

In an earlier post, we hypothesized that there were a few bad apples in the financial aid office barrel. It turns out that there are probably a quite a few more than a few. But to redeem CollegeLoanSearch, we also predicted that Andrew Cuomo's investigation would find more ugliness.

So far, Coumo seems to be consumed with CIT's Student Loan Xpress unit. In their defense, it seems that CIT cleaned up the act when they bought Education Lending Group (the previous owner of Student Loan Express) in 2005. All the allegations unearthed so far were the result of pre-CIT ownership.

What we find suspicious is that no other student loan company has been identified yet. We think there's a doozy out there that will be unvieled any day now. Time will tell here.

But the industry isn't full of sleezy, back-room hucksters. There are scores of well-managed, highly-ethical student loan firms that continue to operate. The same goes for the university financial aid community. Sure there's some ill-behaved parties out there....but for the most part, everyone is operating in an honest, open manner.

We'd like to see the industry make a statement to such. Most lenders are doing good -- they are enabling people to attain a higher education. The ill-behaved actors need to face consequences, but the industry needs to take responsbility and promote themselves as providing a valuable service. Because Andrew Cuomo surely isn't going to serve as the industry spokes person. And he's far from finished here.

More ugliness

2007-04-06T22:02:00.000-05:00

Well....more ugliness from Andrew Cuomo's investigation. In a recent New York Times article, it appears that a Department of Education official was also on the take from Student Loan Express. Student Loan Express is a trade name of Education Lending Group, a formerly publically traded company before being purchased by CIT Group in 2005.

So this government official, Matteo Fontana, who worked in the Office of Federal Student Aid, specifically in the area that oversees the National Student Loan Database System, had sold about $100,000 of Education Lending Group stock in 2003. It's still being investigated how the stock was procured by Mr. Fontana, but given all the other instances that Cuomo has uncovered, I'm sure we won't be surprised. What's interesting about this case is that the National Student Loan Database System (NSLDS) houses all records of any individual who has ever received any form of government sponsored loan or grant. This is a valuable database for a private lender, as access to this data can pinpoint candidates for future PLUS or Stafford loans, as well as Consolidation loans.

We hope that Matteo enjoyed some of the money for a nice car or vacation, because we think he's going to be made an example of here. This just wasn't a smart move. The industry really needs to rally and begin distancing itself from the handful of improprieties that have been discovered here.

Knuckleheads!

2007-04-05T14:00:00.000-05:00

We've always said the preferred lender list notion was a bad one. But apparently at some schools it breeds a conflict of interest. But then again....anyone stupid enough to accept a bribe, well, now you have Andrew Cuomo to answer to. Some of these university officials were shortsighted enough to blatantly accept board member seats on student loan company's.

And as Andrew's investigation continues, there will likely be more ugliness. So, what's the likely fallout here? We expect there will be more legislation surrounding the student finance industry. Which is bad, but here's why the problems will be legislated away: Because the Department of Education has a mission to support education, not finance solutions. And because the Dept of Education is notoriously bad at enforcing regulations and laws (which is why the Attorney General of New York is driving the preferred lender list issue).

Our position is that student loans are that: loans. Lending is a function that financial intermediaries excel at. Education policy makers don't neccessarily make good financial service regulators. We would like to see the Dept of Education be solely responsible for the guarantee that the loans carry and let the existing financial service regulators be responsbile for the lending function. Just our two cents though.

The Cuomo-nator

2007-04-03T20:10:00.000-05:00

We understand that Andrew Cuomo has big shoes to fill and is looking to make an impact on day one. But this is really stretching it. So Andy launches this extensive investigation into the preferred lender list shennanigans. Starts collecting details on hundeds of lenders and schools and the relationships between the two groups.

And he comes up with the bullet-proof logic that schools have lenders on their "preferred lender lists" and the schools get "kickbacks" in return for placing lenders on the lists. This article sort of describes what happened and the resulting settlements.

We sort of at odds here. The notion of "preferred lender list" is undoubtedly the issue. If schools actually competed the slots each year it would be one thing, but they don't. So, they should do away with the "preferred lender list". And replaced is a list of all eligible FFELP and private ed lenders. So when the wet-behind-the-ears freshman shows up and asks the all-knowing financial aid officer how he/she goes about securing the loans, the financial aid officer merely tosses the entire list across the table and says, "Pick one....do a little comparing....but pick one." But there's no reason for the revenue sharing deal to be done away with. Those "kickbacks" went right to the school's scholarship funds, the school's general fund, etc. There's nothing wrong with that. It's just how things work.

We can't believe that all these schools and lenders are merely accepting the "settlements" offered by the Cuomo-nator. Won't someone stand up and give this bully a tune up?

Huh?

2007-03-30T22:56:00.000-05:00

We're not sure how to interpt Davidson College's recent proclomation: Davidson will no longer include student loans as part of their aid package. Only grants, scholarships, and workstudy will be identified. Yes, it's a noble gesture on their part: "In an effort to make a Davidson education affordable for all students, the Board of Trustees has approved a new policy that will eliminate loans from financial aid packages."

But why do people need financial aid packages to begin with? Yeah, that's right, to pay the tuition, fees, room, and board. So00, let's break this down. Davidson sets the tuiton rates, the fee rates, the room rates, and the board rates. And it's no secret that those rates are increasing at more than twice the US inflation rate. And Davidson holds the keys to determining the financial ability for applicants to attend their institution of higher learning? We suppose this is a policy that works when most university's are accepting only 17% of all applicants.
But what's gonna happen when the baby boom's kids are done going to college.

Simply put, a college/university cannot treat their consumers like this and expect to build a loyal, reliable source of prospects. At some point the tuition vs ability problem is going to result in revolution.

For lenders it's shaping up to be a bad next 5 years. No matter what innovation, service, or pricing solutions are put in place: 1) the schools will blame the lenders; 2) the government will blame the lenders; 3) the students will blame the lenders; 4) the fall of capitalism will be blamed on the student loan lenders.

Our point is: the free market will vote on how all this works. Please do not focus on the rhetoric, the legalese, or the gossip. The winner will be decided by who can provide student loans for the best price, in the most efficient manner, and with the best price. A school cannot accomplish this. The government cannot accomplish this. Who can do this? A well trained financial intermediary institution -- the private lender.

State run student loan agencies -- what's up with that?

2007-03-29T22:29:00.000-05:00

We wonder about the state run student loan agencies sometimes. Are they a good thing? Bad thing? Why do they exist? What do they do with the money they make? Do they even make money? We just don't really know. But we're curious.

On the one hand you've got PHEAA. PHEAA is a student loan powerhouse. They're everywhere. It seems they might spend a little recklessly. But for the most part, a state-run, non-profit, highly competitive player.

Then you've got some small, quiet guys like RIHEAA and NMEAF. It's not their bag to be a big player, they provide services to their respective state university's. Probably do it very well. We just don't hear much about them.

If you have any insight into these groups, we're interested to hear what you think. Especially MOHELA....we hear a lot about MOHELA.

UPDATE: look, how timely....here's an article that talks about ISAC, the Illinois state run student loan agency (they trade under "CollegeZone"). They apparently have the ability to craft their own non-FFELP loan products. So look at that! Make sure you are proactive and check in with your state run student loan agency. We don't think they're so good at advertising/marketing, so it's on you to check these things out.

But the sky isn't really falling......

2007-03-27T08:55:00.000-05:00

Ok, yeah, the college/university sponsored preferred lender list probably isn't such a wonderful tool: it limits competition, seriously interrupts the flow of information and consumer decision making, and gets under the skin of Andrew Cuomo. [See this article about Education Finance Partners.] But what seems to be really eating at Cuomo are these "kickbacks" that schools get for putting a lender on the list.

They aren't really "kickbacks" as much as they are revenue sharing models; "if I do well, you do well." We call that capitalism. And to make matters worse, the financial aid officers aren't personally profiting from these revenue sharing arrangements. It seems that any revenue from the lending partners are plowed right back into the university's scholarship fund, building fund, endowment, etc. Nothing wrong with that.

Now, there are some isolated instances where EduCap is renting out the Four Season's at Nevis for an all expense paid "conference", but it's just that....and isolated instance. And sure, all those involved should face consequences.

But we have a solution to the problem: do away with the preferred lender list. There, problem solved. But continue to allow the college/university to collect the revenue sharing fees. And the student lending industry should stand up and fight Andrew Cuomo and Sen. Kennedy with the 6 ounce gloves on this one.

WOW

2007-03-24T09:12:00.000-05:00

We've been keeping an eye on all the hoopla surrounding the "preferred lender" lists that financial aid offices keep. It was kind of interesting at first. But now. Wow. This is getting wierd.

This all starts on March 16, 2007. CBS runs a story on the student loan industry and the practices surrounding preferred lender list designations from the school. CBS has it in for Sallie Mae. They've run several stories on Sallie Mae. The story highlighted Sallie Mae as well as other lenders in the student lending industry.

Never taking a whipping laying down, Sallie Mae, issues a March 20 response to the CBS piece. A noteable idea. But Sallie Mae tasked Tom Joyce to produce the response. Google around for Tom Joyce, but there's some gems out there from Mr. Joyce. According to Joyce-logic, when beat up by CBS, respond by administering a deflective beating to a competitor: MyRichUncle. Joyce doesn't stop at blasting a non-personal corporate entity. He goes a step further by blasing the CEO of MyRichUncle and stretching a link between MyRichUncle and disgraced lobbyist Jack Abramoff. Up to this point, it's been quite comical, even surreal. And even amazing that Tom Joyce is still employed by Sallie Mae.

But then on March 22, MyRichUncle issued an open response to Sallie Mae's response to the CBS piece. MyRichUncle had their work cut out for them. Their response addressed Sallie Mae's silliness, made fun of them, and questions why someone like Tom Joyce would be employed in his role.

WOW.

Let's get to the root of the issue here:

2007-03-17T15:21:00.000-05:00

We're interested in the outcome of this investigation. Andrew Cuomo, the New York AG, contends that private lenders engage in unscrupulous arrangements to gain those coveted positions within the financial aid office. If you haven't already figured out, the financial aid office is key in determining your school aid package. The schools typically don't like to manage lots of lenders, it's easier for them "reccomend" only two or three lenders. You can see as a private lender, that having a spot on that list can drive in significant loan volume. And if you're on lots of schools preferred lender lists, you get lots more volume.

Now, we can blame the private lenders all we want. But the fact of the matter is, it's the schools financial aid offices that are committing a travesty. So, back to Suze Ormon's wacky statements: “We always lose when others are competing over our business,” she said. It's not the lenders, they're going about their profit incented business of providing capital to students to attend college. All the advice comes from the financial aid office.

We're anxiously awaiting the results of Cuomo's investigation, but we're putting money on the fact that the financial aid office will the be group with egg on their face.

Consolidation Loan Marketers

2007-03-08T10:58:00.000-05:00

For us, going through the mail is like a dissapointing Christmas. Everyday, the mail has the possibility to bring us new and exciting presents. Except it's usually filled with junk mail instead. If you're a recent graduate, don't throw away solicitations touting various consolidation loan offers.

Yes, consolidation is a good thing -- see previous posts: alternative amortization plans, deferrment/forbearance, no prepayment, you have freed up cashflow, the end to world hunger, etc, etc. But how do you know you're getting a good deal? You don't unless you shop around for a little bit.

See, the student loan lenders are getting saavy, they know exactly who you are, how much you owe, what you ate for dinner last night. It's not really an invasion of privacy, as much as it is them being able to present the most appropriate offer to the most appropriate person. So, instead of throwing away the mass mailed offers, stack them up in the corner for a few weeks, then go through them during a commrecial break of "Grey's Anatomy". You'll quickly be able to discern the best 2 or 3 offers.

After you've done this, compare/contrast the multitude of phone calls you get on the subject as well. Then, confidently choose the best deal. You'll sleep better at night, you'll probably get a raise at work, and your clothes will fit better.

But be prepared this year -- we're hearing from our well placed sources that the marketing for consolidation loans will increase significantly this year. That means more mail, more phone calls, more TV ads, and more radio ads. But take all the advertising to task in order for you to make the best decision possible!

Old Fashioned!

2007-03-04T11:48:00.000-05:00

The relevance of this post may not seem obvious initially, but let us explain. As you navigate around to sort out college finance solutions, you will become overwhelmed, frustrated, confused, and exasperated. Which brings us to today’s topic: the Old-Fashioned.

Looking for an outlet for the week’s pressures of examining student financing solutions, we decided to imbibe on a Friday night. Conducting some web-based research we settled on the concoction of the evening: the Old-Fashioned. It’s an old school libation, but we found it to be worthy of a mention here. Here’s what you need to do to whip up a good dose of stress relieving:

In a high-ball glass, drop in a sugar cube (we just put in a teaspoon of sugar). Put in a dash of Angostora Bitters so it’s all soaked up in the sugar. A splash of club soda or Seven-up to get everything liquidly, and fill the glass with ice. Next, pour in bourbon. The amount will be a direct function of how your week went; we put in about 3 shots. We used Southern Comfort, as it has a distinct flavor. Let it stand for a few minutes so everything gets really cold and the sugar completely dissolves.

Ahhhhh. Your student loan angst should slowly disappear. We noticed that we still had a little angst after the first Old-Fashioned, so we made a second one. Everything was just fine after that. Remember, not to relieve your angst and drive at the same time.

Repayment plans

2007-03-01T11:10:00.000-05:00

When you consolidate your FFEL loans, pay particular attention to the repayment options. We've noticed that when you apply on-line, many of the marketers or lenders don't provide an option for you. In those cases, you'll be assigned to the Standard Repayment Plan. But know what the various repayment options are when applying.

The Standard Repayment Plan is when the borrower pays the same amount each month for the life of the loan. This is your best option for paying the least amount of interest back. Your loans are initially set up for a Level Repayment Plan. It is recommended that you continue with the Level Repayment Plan if you’re able to make your monthly payments. Again, this is because it is the lease expensive plan in the long run.

Another Repayment Plan is a Graduated Plan. The Graduate Plan offers a lower, more affordable monthly payment in the early months of repayment and higher payments later in the repayment term. Your loan is repaid in the same time frame as the Standard Plan. It is the total interest costs that are slightly higher than the Standard Repayment plan.

The Income Sensitive Plan is when the monthly payment amount is adjusted annually, based on the borrowers expected total monthly gross income from employment and other sources during the course of repayment. This is the most flexible plan, but it can be the most expensive in the long run, and you must reapply annually.

How to save money on your student loans!!!!!

2007-02-27T15:17:00.000-05:00

Shhhhhh......don't let the big student loan lenders know you found out about this: you can make principal payments on your FFEL loans at any time for any amount without incurring a prepayment fee!

Yep, that's right. FFEL loans have no prepayment provision...Stafford, Plus, Consolidation, it doesn't matter which flavor. So why is this feature so important? Well, as they say "Time is Money!" We're not so sure who said that, but "they" did say that at one point. And they're right. There is a time value to money. The longer you keep the money, the more it costs in absolute terms. If you shorten the time you borrow money, it costs you less. How can this be? Consider the following.

Let's say you consolidated your FFEL loans. You now have a $30,000 outstanding balance, 25 year term, 5.25% interest rate, and your payments are roughly $180/month. That's your MINIMUM monthly payment. You can (and should) pay more. But first, let's say you only pay the minimum amount each month...that works out to nearly $24,000 of interest (in addition to the $30,000 in principal) that you'll pay back over the 25 years.

Now, let's say you pay an additional $25 each month. If you do this faithfully each month, you'll only pay about $18,000 in interest...or a savings of $6,000...and the loan is paid back in 19.5 years instead of 25 years. But wait. What if you paid an additional $50 per month? Well, you'd end up paying about $14,500 in interest (a savings of about $10,000) and have the student loan monkey off your back in 16 years. Now what if you not only made that faithful $50 principal payment per month, but each April you paid back an additional $250 as you got your tax money back? Easy, your total interest expended on that original $30k is now about $12,500 (a savings of $11,500) and you'd have the stinkin' loan paid off in a little more than 14 years.

We could go on and on with money saving examples. The point is, it doesn't take too much extra each month to get the loan paid off quicker and you saving some cash sooner. Just be consistent about it, and the more generous you are about it, the more you save. See, student loans aren't all that bad.....they're a convienent vehicle to facilitate a college education.

Student Finance Congressional Panel

2007-02-22T15:36:00.000-05:00

Ok, we're reading the transcripts from the Febrary 16, 2007 hearing before the Senate Health, Education, Labor and Pensions Committee. Ah, yes Suze Orman....she's such a cute bundle of contradictions:

“When there are choices, there is confusion,” Orman said, suggesting that student and families get so overwhelmed by information about competing loan options that they just “do nothing.” Consumers would be better off with fewer loan options, she said, a seemingly unusual stance for a consumer advocate. “We always lose when others are competing over our business,” she said.

What?

Just in case you glanced over the previous paragraph: “We always lose when others are competing over our business,” Orman said. Umm....we're sort of at a loss of anything witty or sarcastic to say here....we're quite sure this statement will take on a cult following.

There was more ridiculousness from the hearing.....but we still reeling from Suze Ormon's statements.

Substantiating an earlier claim

2007-02-22T14:06:00.000-05:00

We're still not journalists, but want to be thorough about quoting statistics and facts. In fact, we're now even more passionate about the claims made in the Worchester Telegraph.

Where the editorial staff allowed a statistics to be rambled off that Direct Loans costs $6 less per $100 of funded loans then FFEL loans. Ha! That's a splash in the bucket compared to the comparison of default rates from the two programs. According to the 2008 Federal Budget Appendix (page 337 of the appendix) the Direct Loan program will experience 16.65% of defaulted loans in 2007....while the FFEL program will experience 11.70% of defaulted loans.

That's beyond a significant difference. It tells us that the private bank/lender is far more appreciative of the student loan asset than the government. To us, processing and disbursing a loan is just a small cost. Where the lender makes money is by borrowing money to fund the loan cheaper than the rate earned on the loan....all this is contingent on managing the asset and ensuring that defaults are kept to a minimum. There just isn't an incentive for our benevolent government to assume that responsibility. Trust us, a private bank/lender watches the default rates on their loan portfolios like the Geraldo is watching the Anna Nichole Smith trial.

In fact, we're sufficiently motivated to make a really bold statement: With default rates projected to be 42% higher in the Direct Loan program, the government should consider shutting the Direct Loan program down. It just doesn't work with those loss figures. We welcome a healthy dialog on the argument, but just don't think there's any ammunition you can serve our way to change our minds.