Government Support for Student Loan Companies: Bailing Out Banks Instead of Helping Out Students
Giant finance companies like Citibank and Sallie Mae made a lot of money securitizing student loans into asset backed securities. When that market dried up, Congress was frightened into believing that students wouldn’t be able to continue their educations and that colleges and universities would be in grave peril.
The obvious solution to that problem was to increase direct federal loans. But that wouldn’t help the big finance companies. Instead of doing something sensible, it continued its practice of bailing out corporations and passed the Ensuring Continued Access to Student Loans Act (ECASLA). That bill salvaged the old private student loan business model of companies like Sallie Mae.
One of the programs set up under ECASLA was the “Participation Program”. Sallie Mae sets up a pool of government backed student loans. The Department of Education lends the pool the face amount of the loans, charging interest at the commercial paper rate plus .5%. By September 30, 2010, Sallie Mae must either buy the student loans back from the pools at face value and repay the Department; or sell the loans to the Department at a price equal to the sum of a) face amount of the loan plus b) accrued interest plus c) a 1% origination fee which Sallie Mae paid at the outset of the transaction plus d) $75.
The Department also created a Purchase Program under which loans made after May 1, 2008 could be sold to the Department for the same price.
Sallie Mae took advantage of both programs. Here’s how they describe it in the 2010 10-K, p. F-53:
As of December 31, 2009, the Company had $9.0 billion of advances outstanding under the Participation Program. Through December 31, 2009, the Company has sold to ED approximately $18.5 billion face amount of loans as part of the Purchase Program. Outstanding debt of $18.5 billion was paid down related to the Participation Program in connection with these loan sales. These loan sales resulted in a $284 million gain. The settlement of the fourth quarter sale of loans out of the Participation Program included repaying the debt by delivering the related loans to ED in a non-cash transaction and receipt of cash from ED for $484 million, representing the reimbursement of a of one-percent payment made to ED plus a $75 fee per loan.
Even by the standards of financial reporting, that’s opaque. Let’s just say that somehow they made a huge pile of money off taxpayers.
The Participation Program works just like the HICA deal described here. Sallie Mae borrows the money on a very short term basis to make government-guaranteed loans to students. It sells the loans into an asset trust, which in turn sells a participation to the government. The participation money is used to pay for the loans from Sallie Mae. Sallie Mae uses that money to repay the very short term loan. The government charges the asset trust interest at a rate equal to the sum of the commercial paper rate plus .5%. A subsidized student loan made after July 1, 2009, bears interest at 5.6%. The commercial paper rate is about .32%, so in this example a $10,000 loan made September 1, 2009 and sold to the government on September 30, 2010, gives Sallie Mae a gross profit of $591.
Sallie Mae had $9 billion in the participation program at 12/31/09. We can get a rough guess at the amount of money Sallie Mae made by using the $10,000 example above. If all of Sallie Mae’s loans were like that, it looks like a government gift to Sallie Mae in the range of $532 million. As commenter Hoofin points out, the government could have loaned the money to students at that concessionary rate and saved ordinary people millions. It’s a perfect demonstration of the commitment of Congress to bailing out companies, not people.
Oh, and Pulaski Technical College in North Little Rock, AR? Delaware Tech? Money that could have gone to your students in Pell Grants will be used to stuff the bottom line of Sallie Mae unless you and your students call Blanche Lincoln and Mark Pryor and Tom Carper and insist that they support Students Not Banks, by voting for SAFRA. We have the tools to help you help yourself, right here.