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.
Thursday, May 1, 2008
Wednesday, April 30, 2008
It's gonna be allllll OK now.
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.
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.
Tuesday, April 29, 2008
Rep George Miller Fires Back
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.
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.
Thursday, April 24, 2008
Bravo Wall Street Journal
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.
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
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:
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.
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.
Sunday, April 20, 2008
Here's how it can all be fixed.
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.
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.
Friday, April 18, 2008
House bill passes today!
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.
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.
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.
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.
Thursday, April 17, 2008
Sounds like Sallie Mae is on the verge of throwing in the towell
In a conference call with analysts today Al Lord, Chairman of Sallie Mae said:
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!
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!
Wednesday, April 16, 2008
Finally, a reaction from the Dept of Ed.
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.
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.
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