Why would Sallie Mae support private loan reform: A Contrarian View ♦

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I must say when I read the headline “Sallie Mae, CFPB to Back Student-Loan Changes at Senate Hearing” I was a little surprised to hear both Sallie Mae and Consumer Finance Protection Bureau (CFPB) in the same sentence. Without a doubt reform is needed, but having Sallie Mae and the CFPB on the same page?

My interest continued to be piqued:

Jack Remondi, president and chief operating officer of Newark, Delaware-based SLM Corp. (SLM) (SLM), the education lender known as Sallie Mae, will conditionally support the government’s recommendations, according to his prepared testimony.

And then again, maybe not completely surprised by the next sentence:

“Sallie Mae supports bankruptcy reform that would require a period of good-faith payments, that is prospective so as not to rewrite existing contracts, and that applies to federal and non-federal education loans alike,” Remondi said.

I guess the conditionally did mean something in the first sentence in the context of the second sentance. Nevertheless, there is certain logic to having Sallie Mae, the largest student loan lender in the United States on board with student loan reform.

The first explanation and the most obvious, is being on the inside is better then the outside. By having Sallie Mae as part of the conversation from the start, they will have more influence over the process, the policy tracks and the agenda. Sallie Mae will have a great deal more power being part of the process and conversation then being on the outside having regulations pushed upon them. Sallie Mae seems to have learned some lessons from the year or two after the start of the economic crisis that resulted in private lenders being completely pushed out of the federal student loan programs.[1]

Not to mention having the largest student loan lender in the same headline with the CFPB in a positive, non-agonistic manner, is a good PR move.

This still left me thinking of the question. Could student loan reform, even highly pro-consumer reform, be even better for Sallie Mae then current standards? A few of the pro-consumer reforms:

• Increased disclosure
• Reduce predatory lending practices (probably already elimiated due to strick lending standards currently)
• Allow loans to be discharged through bankruptcy

The first two have already happened either through regulations or the current credit lending market place. The last is the big sticking point. The arguments for making it extremely difficult to discharge student loans (prviate or federal) is that if loans could be discharged, most students after leaving college or university who did not have a job would declare bankruptcy, rid themselves of their loans and wait the seven years for their credit to clear. Lenders have argued that interest rates on both private and federal loans would have to increase for this factor and might even become unsustainable.

The thought that occured to me while reading this article was would this type of reform actually help Sallie Mae by increasing the barrier to entry and the cost of doing business in the market. While both of these might increase the cost of doing business for Sallie Mae, it might also keep other lenders with small student loan programs compared to the rest of their business operations from entering the market or even to exit. Both Chase and US Bank have all but exited the private student loan market as of July 1 or earlier. Citibank left last year with the sale to Discover and Sallie Mae.

Sallie Mae currently makes up the largest portion of the private loan market followed at a distance by Discover/Citi as well as some regional strong holds like Wells Fargo in the West. A small, but decent chunck of the market also comes from small regional credit unions that have gone together under umbralla groups like Credit Union Studnet Choice or the Student Loan Market Place.

I am still left with the question of the reason why Salllie Mae is on board with these changes (yet still tentative) is that the increase in market share for them (due to decreased profit margins for other lenders) might outweigh the increase cost associated with discharges and additional regulator requirements?

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1. Sallie Mae was quick to learn their lessons and ended up being one of the Big Five Fed Loan Servicers  ↩

Department of Education’s Final Financial Aid Shopping Sheet → →

The Department of Education has been busy--new financial literacy counseling, new consolidated financial aid information website that does not look like it was last updated in the '90s and now a finalized Financial Aid Shopping Sheet.

It looks pretty good and many schools have already been moving to provide this type information to students (since long before this became a discovered political issue). Yes, all of this information is needed in order to make an informed choice. A few things:

1. I can hear many third-party system vendors growning about how they are going to pull this off. First who sends out paper award letters/packets, so this will need to be put on student portals.
2. More paper and disclosurers are not the answer. One-on-one personal contact and counseling is the solution. This is a little hard for many schools in an environment of declining resources and increases regulations. Many schools are finding great ways to still do this and have student-centered financial aid processes.
3. If you have to find better ways to explain something (because it is complicated), it might mean that it is too complicated and needs to be rebuilt.

The Department of Education should be leading the way to simplify how higher education is funded, instead of pilling a dozen extra "things" on top of the problem.

When you agree 80%, this might not show up in the fall debates → →

Scott Fleming, a Romney education adviser:

“Nobody is saying we shouldn’t have an emphasis on college access, on college success,” Fleming said, estimating that the campaigns agree on “80 percent” of higher education issues. “Nobody is saying that we shouldn’t find a way to get more students through the door. Those are principles we all agree on.”

And the differences:

“The role needs to be less focused on checking boxes and implementing regulations, and more on the core of improving access and affordability,” said Fleming, whose criticism of increased regulation under the Obama administration drew applause from the audience of financial aid administrators.

Good summary of the talking points of both campaigns and gives some perspective on where finanical aid, politically, will be headed over the next four- to five-years.

Waiting for the FSA Conference Hotel to Open ♦

The Department of Education still has not openned up their room block for the Federal Financial Aid Conference November 27th to the 30th (it was already open and fully booked at the MGN Las Vegas by this time last year), but I was trying to find a way to be notified as soon as they change the page. Granted, this conference is free and the room block does not fill up at the same speed as the Apple WWDC conference, but I wanted to see if it is possible to be notified as soon as it does open. Do you really want to have to stay at one of the secondary hotels or even worse?

While I have never used this service, I figured it was worth a try. I setup monitoring of the main confernce page with ChangeDetection.com. I set it to send an email to an email address that is setup on my iPhone using push notification, so there should not be a lag between the email being sent and receipt on the iPhone.

While not a guarentee, it is worth a try. If I find a little more time, I will test it out with my own site.

If you wanted to get really serious about this (and who really would), you could always sign up for a Pingdom account, but that starts at $9.95 a month after a 30-day free trial and is really meant for monitoring mission critical services.

Department of Education Still Learning UI Design ♦

The Department of Education rolled out their finanical literacy program through StudentLoans.gov this week. From my inital look, it looks really good and I am sure many schools will be pushing it out to their students and even making it some type of requirement in order to receive intitutional aid (since it does not appear that you can make it a requirement in order to receive federal finanical aid, ironically).

My one gripe is what they decided to call it and where they put it. Most schools now use the loan entrance counseling built into studentloans.gov that students are required to complete before receiving federal student loans. Students are usually instructed to login to studentloans.gov and click on "Complete Entrance Counseling". The Department of Education decided to call the financial literacy program "Complete Financial Awareness Counseling" and placed the link right above "Complete Entrance Counseling".

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Just when you thought that the Department of Education was finally figuring out user interface design, they do this. I am all for finanical literacy and intergrating it into the financial aid process, but do we have to confuse students in order to get them to do it? I found out a few days before the department announced that it was live by a handful of confused students calling into to see which one they are supposed to do.

Two steps forward, one step back.