Tuesday, May 29, 2007

A dispatch from the literary world in New York magazine, by an older novelist, though it could apply to any number of creative persuasions: acting, music, design, painting, dance...

"And here is what seems most insane—young and not-so-young writers take out student loans to get M.F.A.’s in creative writing. This does not add up. I once taught in the M.F.A. program at Columbia, and so I know the extraordinary gifts that student debt can confer. But the Marshian in me says it’s impossible to start a life committed to literary fiction when you are $60,000 in debt. The very size of the loan assumes there is a market, a business to go into, a living to make. But the hard truth is that only a sucker writes literature with the intention of making money. This was so obvious in Australia in 1961, you never needed to say it. Today, when people seem to be breaking through all around you, it might be good to bear in mind that the only reward you can rely on is in the work itself."

Remember when Al Lord made $1.4 million in extra profit by selling one third of his holdings in his own company, three days before Bush's budget came out with billions in subsidy cuts and sent the stock to a two-year low?

Today, as part of that investigation, House ed committee chairman George Miller (D-CA) sent a letter to Lord requesting additional information.

"The committee has been investigating the circumstances surrounding Mr. Lord's sale of Sallie Mae stock, which took place just days before the release of the President's budget. This internal document (pdf) shows that Sallie Mae intended to have discussions with the administration about the President's budget before it was released to the public. That raises the question of what information Mr. Lord had, when he had it, and what he did with it."

According to Fortune's Bethany McLean Sallie Mae "has been reaching out to members of the Congressional Black Caucus, implying that a decrease in its subsidies will mean that the company will be forced to cut back on loans to students who attend historically black colleges and universities."

I'll just keep quoting. Bethany McLean kicks ass."Needless to say, the "Talking Points" memo doesn't say anything about the fact that Sallie is so profitable that it's being taken private in a $25 billion buyout, a buyout that will add to executives' already considerable fortunes. Nor does it mention that Sallie's aggressive debt collection arm targets many of those same students. And while Sallie argues that FFEL loans are cheaper for students than the government's direct loans, the company doesn't point out that's the case because Sallie and other lenders can afford to kick a sliver of taxpayer's money back to students, in the form of a reduced origination fee for instance."

I'm writing this post from the Maine Statehouse in Augusta on a particularly beautiful day. The students and citizens who are part of Opportunity Maine invited me up here to testify before the Taxation Committee.

OppME is a ballot initiative that would provide a tax credit in the full amount of their student loan payments to graduates of Maine colleges for each year they stay in the state. Employers could also assume the loan payments and claim the credits on their own taxes. The measure is projected to start paying for itself within six years due to the higher earnings of more educated people staying in the state.

I met Andrew Bossie, the outgoing student body president of the University of Southern Maine and the president of this effort, last fall when I spoke at U Maine-Orono. In order to get this done, it took the work of experienced activists, community organizers, and communications people, not to mention hundreds of student volunteers. I want to see the federal student loan system reformed wholesale, but I can also see the real benefits of measures like these to enhance economic development and peoples' ability to stay in the places where they grew up.

Maine is one of the oldest states and somewhat less educated than average, so they have a serious incentive to enhance the qualifications of their workforce. This bill has gotten lots of support from both sides of the aisle, not to mention the 73,000 signatures that Opp ME volunteers collected in a record time over the winter. If it doesn't pass outright now, it will go before the citizens next fall--and I'll be back to find out how they're doing.

Wednesday, May 23, 2007

An amazing piece, which I wish I'd written, in Business Week about the rise of subprime credit. Part of the reason is better technology that helps companies find rich targets in people without much money. And part of it is about unregulated interest rates.

Sidebar on how many poor students who study at for-profit schools get stuck with high interest private loans--presumably through deceptive tactics because they should qualify for Pell Grants and federal loans. I'm looking at you, Sallie Mae.Some borrowers say they were unaware that private loans are different from less expensive federally guaranteed loans. "When you hear Sallie Mae,' you think of somebody's favorite aunt baking them a pie," says borrower Molly Cosgrove of Portland, Ore. "You don't think of high-interest loans." Once a federally sponsored organization, Sallie Mae became a fully independent corporation in 2004. It offers both private and federally backed loans.

Tuesday, May 22, 2007

“Mr. Fitzpatrick’s abrupt departure suggests that the lending industry is beginning to recognize that business as usual is no longer acceptable at Sallie Mae or any other company participating in the federal student aid programs. However, while new leadership in the industry is certainly welcome, the fact remains that simply replacing individual executives won’t stop the corrupt practices that Congress and state attorneys general have recently uncovered. ”

From the Post: J. Christopher Flowers, the investment banker who leads the takeover group, decided that the company's rocky relationships with the Democrats now in charge of Congress made keeping Fitzpatrick at the helm too risky for a company as dependent as Sallie Mae is on government subsidies, according to people familiar with the decision.

Emphasis on "dependent on government subsidies." It's time to cut off the subsidy junkies. No more dope, no methadone--cold turkey.

Monday, May 21, 2007

According to USA Today,"The growing divide between the rich and poor in America is more generation gap than class conflict, according to a USA TODAY analysis of federal government data. The rich are getting richer, but what's received little attention is who these rich people are. Overwhelmingly, they're older folks.

Nearly all additional wealth created in the USA since 1989 has gone to people 55 and older, according to Federal Reserve data. Wealth has doubled since 1989 in households headed by older Americans.

Not so for younger Americans. Households headed by people in their 20s, 30s and 40s have barely kept up with inflation or have fallen behind since 1989. People 35 to 50 actually have lost wealth since 1989 after adjusting for inflation, Fed data show...

Social Security and Medicare increasingly are functioning as a transfer of money from less affluent young people to much wealthier older people.

Because the older generation hasn't set aside enough money to cover promised government benefits, young people will have to make up the difference or older people will face benefit cuts. The financial shortfalls of Social Security and Medicare over the next 75 years are so large — $340,000 per household — that they dwarf the wealth of every age group. This hidden debt will make it a challenge for young people to accumulate as much wealth late in life as their parents have."

The difference in average net worth is not small.

"•Ages 55-59: Median net worth — the middle point for all households — rose 97% [IT NEARLY DOUBLED] over 15 years to $249,700 in 2004, the most recent year for which data is available. Median income rose 52%.

Sunday, May 20, 2007

When Moore interviews Tony Benn, a leading figure on the British left, his larger concerns come into focus. Benn argues that for-profit healthcare and the other instruments of the corporate state, like student loans and bottomless credit-card debt, perform a crucial function for that state. They undermine democracy by creating a docile and hardworking population that is addicted to constant debt and an essentially unsustainable lifestyle, that literally cannot afford to quit jobs or take time off, that is more interested in maintaining high incomes than in social or political change. Moore seizes on this insight and makes it a kind of central theme; both in the film and aloud, at the press conference, he wondered whether some essential and unrecognized change has occurred in the American character.

Thursday, May 17, 2007

Even big corporate lobbyists sometimes forget to use BCC.The following email answers the question: "If you're a DC-based bank lobbyist trying to stop reform to student lender subsidies, who's on your email list?" Well, if you're Terry Muilenburg, former Senate staffer and lobbyist for Sallie Mae subsidiary USA Group, your list includes a veritable who's who of a) lenders, b) lobbyists and c) former Hill staffers, who are often both a) and b).

Take a look behind the curtain at the men and women working to keep billions of dollars in excessive subsidies flowing to their lender bosses at the expense of the American taxpayer and student.

Here's what's at stake.The email refers to the 2008 Congressional budget conference report, released on May 16th 2007, which includes so-called "reconciliation instructions." Reconciliation instructions are legislative language that, in this case, will make it easier to cut subsidies to private banks and direct it to student aid with filibuster protection.Real reform is on the horizon, yet these lenders have likely opposed the inclusion of such language in an effort to stymie legislative action. Ironically, in her zeal Ms. Muilenburg has misread the budget overview - nothing in the budget precludes Congress from using the reconciliation process to reform the loan programs.

The send-to list has been annotated with some links and quick IDs.-----Original Message-----From: REDACTEDSent: Wednesday, May 16, 2007To: REDACTEDSubject: Fw: Budget Reconciliation

The attached Democratic summary of the budget agreement says not one word about reconciliation for student loans. There is a statement that "The plan also allows budget reconciliation to be used for deficit reduction only." We will need to make that statement come back to haunt them.

Wednesday, May 16, 2007

Sallie Mae, the nation's largest student-loan provider, is enduring a new round of attacks from across the political spectrum. A pair of reports issued on Tuesday -- one by the American Enterprise Institute and the other by Education Sector -- assign Sallie Mae a leading share of responsibility for the scandals now buffeting the $85-billion-a-year student-loan industry.

"The story of Sallie Mae's rise from a government-sponsored agency created to help needy students to a private corporation with a $142-billion loan portfolio goes a long way toward explaining how and why the student-loan industry has landed at the center of controversy," Erin Dillon, a policy analyst at Education Sector, wrote in her report, "Leading Lady: Sallie Mae and the Origins of the Student-Loan Controversy."

Awesome. Although I wouldn't really call that progression a "rise." How about "The story of the private takeover of Sallie Mae and the perversion of its original mission from helping needy students to being a profit machine"?

And thinking about it, honestly, although the leadership of Sallie Mae acted badly here and there, they played mostly by the rules of capitalism as it exists. The company had a shareholder revolt and installed a CEO who cared only about profits. They manipulated the law, lawmakers, and college aid officials disgustingly, yet within the boundaries of existing campaign finance and inducement laws. I have to point the finger at our federal government, both civil servants and elected leaders, for their abdication of responsibility and pandering to corporate interests.

Monday, May 14, 2007

A reader sent me this excellent story of yet another nefarious lender practice, discovered by the Cleveland Plain Dealer. It works like this: once a student loan goes into default, lenders get up to 98% of their money back from the federal government (the guarantee in guaranteed loans). But instead lenders offload or "dump" the defaulted loan into the Direct Loan program by initiating Direct Loan Consolidation, pressuring the borrower to go along with it.

"the borrowers' bad debt, often multiplied because of earlier delinquencies and refinancing, gets turned into a new loan - with interest, late charges and an 18.5 percent handling fee for the industry. But this new, expensive loan is no longer the industry's liability; rather, industry employees convert it into a new government loan, issued under the federal Direct Loan program."

Let's see. So if you fall behind on your $40K loan, if lenders played by the rules they'd declare default after 9 months and collect, let's say, $38K plus interest--$45K?Instead, they let it balloon to $100K with penalties and fees. Then they "dump" it into direct loan consolidation and take home $118K of taxpayer money.

This practice is costing taxpayers $400 million a year in fees and expenses for collection, which is often futile because the loan is already in default. It accounted for 46% of the industry's so called default "recoveries" last year.These are the wonderful boons of competition between the direct and FFEL programs.

"The postmodern moment was at hand when the Republican Congressional leaders — whose previous 12-year tenure in majority will forever be remembered as the Gilded Age of loan industry rapacity — indicated that they, too, would introduce legislation to restore integrity to the system they had done so much to create. They even joined the Democrats to pass emergency loan legislation, if only to quickly declare the endemic problems of the loan program resolved and to prevent more meaningful reform of the corporate welfare program they have set up for their political supporters in the loan industry. The point of this street theater of contrition, atonement and conversion, of course, is not real change, but a sufficiently convincing appearance of reform."

Student Loan "Sunshine" is not enough. Reforming the relationships between lenders and college aid officials is a miniscule portion of the real problem.

Thursday, May 10, 2007

The Guardian UK printed the AP story--I think the internationalization is noteworthy.

Miller brought up the Nelnet overpayments on the 9.5% loophole. Spellings said she settled to avoid a costly lawsuit. Washington Post: "The Justice Department is reviewing an audit that found hundreds of millions of dollars have been improperly paid to a student loan company, House Education Committee Chairman George Miller said Thursday.Miller, D-Calif., made the review public during a hearing in which he pressed Education Secretary Margaret Spellings on her decision to ignore a recommendation by her department's inspector general, John Higgins, to recover an estimated $278 million. "

The Times covers a Gen Debt story they've written about many times before-- the unaffordabilty of housing for young arrivals in New York City. This time, it struck me that the examples they used are not particularly well chosen. Ok, so you've got nine students at NYU, a private university, from families who are "fairly comfortable financially," camping out for three months in free office space--donated by one of their fathers. This is a crisis? Sounds more like a lark.Also, many of the people in the article seemed to have the problem that they weren't looking beyond Manhattan or neighborhoods like Williamsburg. New arrivals have to search beyond the obvious to find bargains.Much, much more to the point would be to look at the living situations of young people who arrive in the city without family money or connections, just working and trying to make it. The words "Bay Ridge," "Bushwick," and "basement" come to mind.

Wednesday, May 09, 2007

I gave two radio interviews today to talk about the student loan ethical reforms passed in the House, Spellings' testimony tomorrow, Shaw's resignation, and everything else going on. You can hear me here on KCRW in Los Angeles,and tomorrow on The Bryant Park Project, a new, youthy show launching on NPR this fall (but they already have blogs, and podcasts, and iTunes downloads, and other good stuff.) If you care about student loans, go over to Bryant Park and tell them, because they're trying to figure out what best to cover.

Interview on Inside Higher Ed with the author of a new book, Peter Sacks, who argues that we need to focus on class barriers in higher education. Good, forceful argument.

"This uniquely American ideal — the promise of equal educational opportunity — is close to vanishing unless we change course. Education is becoming like health care and so many other aspects of American life where money rules the system. We are creating a system in which ability to pay is the main thing that separates those who go to college from those who don’t go to college.

Instead of a system of equal educational opportunity, we are creating a system of educational haves and have-nots that increasingly is based upon birthright. Yes, a system based upon class origins. For almost every measure of educational achievement and progress, the class divide between educational haves and have nots is getting worse — and getting worse at a time when we can least afford to waste an ounce of human talent as we head into the 21st Century."

Theresa S. Shaw, the Education Department's chief operating officer in charge of federal student aid, is stepping down, effective June 1, the department announced on Tuesday.

Ms. Shaw has spent five years at the department, after a 20-year career at Sallie Mae, the nation's largest student lender, and a few years at a start-up technology company.The announcement of Ms. Shaw's resignation comes two days before Education Secretary Margaret Spellings is scheduled to testify before Congress concerning recent entanglements and conflicts of interest in the $70-billion-a-year program that provides federally guaranteed loans to college students and their parents.

Wonder if the private-equity Sallie has a job for her?update: here's her email to Federal Education Dept. employees.

Today, Secretary Margaret Spellings will announce my resignation fromFederal Student Aid, effective June 1, 2007. I spoke with both UnderSecretary Sara Martinez Tucker and Secretary Spellings in February to informthem of my plans to leave Federal Student Aid prior to the September 2007expiration of my appointment to pursue other career opportunities. Duringthose discussions, both the Secretary and Under Secretary asked me to remainat Federal Student Aid until June 1st and I agreed. I will spend the nextseveral weeks working with the Secretary, Under Secretary and the ExecutiveManagement Team of Federal Student Aid to ensure and support a smoothtransition and the ongoing work of Federal Student Aid.

The Federal Student Aid team is so incredibly passionate about our mission.Every day I am both amazed and humbled by the dedication, commitment and,most of all, the hard work of each and every one of you. The recentattention on our programs and our work only confirms how very important ourprograms are to the students and families we serve. It has been my honorto work with you and be a part of the Federal Student Aid team. We haveaccomplished a considerable amount since September 2002 and I am proud tohave been a part of these successes with you. I am confident that togetherwe established a solid foundation for Federal Student Aid's continuedsuccess.

I deeply appreciate and thank each of you for your efforts over the pastfive years.

Tuesday, May 08, 2007

Hasbro is issuing a new version of its beloved LIFE board game with Visa cards instead of fake cash.from blog Consumerist:

They also changed the goal of the game from accumulating the most money to earning the most "life points." Supposedly this a combination of wealth and life experiences, but it's not hard to see parallels between "life points" and the reward points and airlines miles offered by certain credit cards.

The New York Times profiles chefs laboring under staggering private loan debt. they go to private culinary schools only to enter a field where entry-level wages are $10 an hour. Obviously something's not right with this equation.

Monday, May 07, 2007

The Times profiles Jon Oberg, the Dept. of Ed official (now retired) who blew the whistle on the 9.5 % loophole.

I interviewed Mr. Oberg last month. He has a slew of great reform ideas of how to introduce competition back into the loan program. He is one of the few reformers to address the problem of private student loans. He suggests removing all direct and indirect subsidies from private loans such as bankruptcy protection, tax exemption, and the ability to securitize them together with federal student loans--except for private loans that followed most of the standards of federal student loans: " cost of attendance limitations, forbearances, deferments, discharge standards, non-discrimination, illegal inducements, and the like."These private loans would be quasi public, administered by states and nonprofits.In one way, you could look at this idea as eliminating private loans as we know them. The idea adheres to the fundamental principle that Department of Education subsidies should be directed toward students, not lenders.

Wednesday, May 02, 2007

Thursday, May 10, 2007Full CommitteeHearing on "Accountability for the Department of Education’s Oversight of Student Loans and the Reading First Program," scheduled at 10:30 a.m. in room 2175 Rayburn H.O.B.

"After spending tens of thousands, or hundreds of thousands, of dollars on elementary school, secondary school, college, admissions exams, applications, etc., is it any wonder that parents feel significantly invested in their kids' success?I understand that some of this behavior is ridiculous, but allow me to play devil's advocate for a second: is behavior necessarily inappropriate just because it is new to this generation?One more thought: as we all know, wealthy and connected parents often call on their friends and professional networks to help their kids get jobs. So why is it always wrong when less wealthy parents try to vouch for their kids?"

This is a really good point. Some of this will come to be accepted as a cultural change. I actually read a similar story about India--young adults increasingly have American-style professional opportunities with professional companies, but it's still the norm for people to live with their folks till they're married, so recruiters are not hesitating to market to Mom and Dad.It's not so outlandish to think that America's love affair with extreme individualism will have to alter a bit to accomodate the challenges of the 21st century, and that includes families being more economically dependent on one another, and invested in each other's success.Still and all, parents have a difficult task to pull back and accept that their offspring must flail and fail on their own in order to become adults.

This newspaper article inadvertently illustrates how little the public knows about the student loan game. The information is mostly correct, yet unless you read carefully, it confuses Direct Loans with Stafford Loans:"About 20 percent to 25 percent of colleges and universities require that students who get so-called Stafford loans borrow directly from the federal government. Stafford loans are government-backed and have subsidized or deferred interest."

and calls private loans 'unsubsidized' loans:"Another thing to be aware of is the kind of loan one is taking, he noted. Many of the offers made to students are for unsubsidized loans, which carry no government guarantee or interest rate subsidy."

To clarify: from the student's point of view, there are three kinds of loans, by ascending cost: Subsidized (Stafford) loans, Unsubsidized loans, and Private loans. "Subsidized" from the student's point of view refers to the fact that the interest is subsidized (paid) by the federal government while you are in school, while with unsubsidized loans, it accrues and is added to the balance at the end of school. There are federal limits on both Sub and Unsub loans--lower for Sub loans. That's where private loans come in. You can spot them because they're more expensive than the fixed 6.8% rate.

From the program's point of view, there are five types of loans: FFEL Sub and Unsub, Direct Sub and Unsub, and Private. Direct loans are cheaper for the taxpayer but not for the student. Currently the discrimination between Direct and FFEL is not the students' decision to make. IF you are lucky enough to go to a school that uses Direct Loans, later on you will have better options such as 25-year cancellation, and in some cases, Direct Loans have more borrower-friendly decision making policies. But in most cases it won't matter much. Not nearly as much as if you have private loans.

Tuesday, May 01, 2007

A Washington newspaper has a refreshing editorial on the coddled-gen-y-in-the-workplace phenom. What is going through parents' minds when they write a reference letter, show up to an interview, or call a prospective boss to complain?

"The article states, "As Generation Y enters the job force, parents of new hires are calling employers to negotiate salary and benefits, and some are even showing up at job fairs."These parents are kindly known as "helicopter parents" (hence the hovering) rather than, say, clinging, controlling, overly-involved, infantilizing, freaky weird parents."

The Washington Post prints a long letter from my favorite student-loan industry mouthpiece, Kevin Bruns of America's Student Loan Providers, in response to the excellent April 23 editorial "Lender's Paradise." He's often found sending me gently scolding emails and I think once or twice in the comments section on this blog. Hi Kevin!

Kevin provides a 3 point argument for maintaining the status quo on FFEL.In order from most valid to least:1) "The private sector has been responsible for major technological and service innovations in the federal student loan program. "This is true. It's hard to get federal bureaucracies to invest in the latest technology. However, this is exactly where competitively bid servicing contracts come in.2) "Since 1965 Congress has understood that it's unreasonable to expect well-run financial institutions to lend at below-market interest rates to individuals with no credit histories, income, collateral or cosigners...Without the subsidies, we would not have a low-cost, private-sector-based program. "That was true in 1965. But now major financial institutions will lend money to your dog at a zero percent introductory rate, and private student loans, which require none of the above and have no federal subsidies, are the fastest-growing sector of the student loan business. Clearly, they can and they will.Also, this whole "involving the private sector is always better regardless of bloat, cronyism, or just plain incompetence" line smacks of W's first term. I thought we were all disgusted with that by now. Remember what a fine job Halliburton did rebuilding Iraq?Which leads us directly to the worst point,3) "because loan providers compete with one another, borrowers typically save thousands of dollars. In fact, federally guaranteed loans are the lowest-cost student loans available."In fact, the vast majority of loan providers do NOT compete on price. (MyRichUncle is a notable exception.) They charge the federal maximum. That's because they didn't have to discount--they just "induced" schools to put them on the preferred lender list, and business followed. Now that there's more noise about the fact that you do have the right to shop around, all of a sudden there are some discounts on offer, as the Austin American-Statesman reports:

"Student lender Nelnet Inc. said borrowers who take out new Stafford loans after July 1 will be able to get a rate cut of 1 percentage point if they sign up to have their payments automatically debited from their bank accounts, up from the current 0.25 percent discount.Citigroup Inc.'s student lending unit said it will automatically drop its rate 1 percentage point once students start repaying their loans, typically after graduation."

Real competition is great for students, and reducing subsidies will create real competition.