Sallie Mae is using a particularly unpleasant form of racial politics in an effort to lobby itself out of a tough position, says Fortune's Bethany McLean.
NEW YORK (Fortune) -- Supposedly, the departure of Sallie Mae CEO Tim Fitzpatrick, which was announced Tuesday, is a way for the embattled student loan giant to improve its image in Congress. This is critical, because both Democrats and President Bush want to slash the rich subsidies that student lenders, including Sallie Mae (Charts, Fortune 500), receive. That's obviously not in Sallie's best interest, particularly given Sallie's pending $25 billion buyout, led by private equity firm JC Flowers.
Fitzpatrick's departure may be a public way to placate critics, but behind the scenes, Sallie is doing exactly what Sallie always does, which is to lobby. And right now, Sallie's lobbying involves a particularly unpleasant form of racial politics. While Sallie has suffered a setback, the battle is far from over.
The budget reconciliation instructions released by the House Budget Committee last week include a provision that mandates $750 million of savings from the Education and Labor Committee over five years. The word in Washington is that Democrats plan to use that procedural vehicle possibly to force more radical reform. Theoretically, Congress could arrive at the $750 million figure by cutting $20 billion in subsidies to lenders, and spending $19.25 billion to reduce the interest rates students pay. As part of that, Congress could make a renewed push for the government's direct loan program, which provides loans directly to students, bypassing private lenders.
Not surprisingly, Sallie doesn't want this to happen. So Sallie 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.
In the past week or so, a document entitled "Talking Points on the Token Reconciliation Instruction in the FY 2008 Budget Resolution" has made its way around Washington. The document says that the "token resolution" will have a negative impact on the Federal Family Education Loan Program, which is the program under which lenders like Sallie make loans to students, and "will have an especially negative impact on predominantly black colleges and universities and other post-secondary institutions participating in the FFEL program."
The memo goes on to say that most historically and predominately black colleges and universities rely on the FFEL program to provide loans for their students, and that FFEL is "better suited for the unique challenges faced by these institutions." One of Sallie's arguments is that FFEL loans are cheaper for students than direct loans. Another is that proposed cuts to default insurance - right now, the federal government reimburses lenders for 99 percent of a defaulted loan, which Senator Edward Kennedy, D-Mass., wants to cut to 85 percent - are a "particularly alarming threat" to historically black institutions because their students default on loans at a higher rate. View the properties of the "Talking Points" document, and you'll see that it appears to be authored by one Mark Schuermann, a Sallie Mae lobbyist.
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.
But if it's true, as some studies suggest, that direct loans are dramatically less expensive for taxpayers, then by cutting subsidies to Sallie, the government might be able to cut the interest rates that students pay - which could make a real difference in student debt.
Sallie Mae spokesman Tom Joyce says that "we are concerned that the reconciliation instructions not be used to fast-track cuts to the student lending program that would reduce competition and raise prices for students and families." He adds that the proposed cuts are "terrible public policy" because they will "reduce choice and access to low-cost guaranteed and private loans at schools with higher default rates - including HBCUs, community colleges and Hispanic-serving institutions." As for Sallie's profits, he points out that the company has diversified away from guaranteed student loans, and says that the margins Sallie makes on that business are "already razor-thin - less than half a penny for every dollar we lend in the program."
Although the budget reconciliation passed, this was just round one, and the final cuts to Sallie Mae's subsidies could still be large, small or nonexistent.
There are indications that Sallie's campaign is succeeding. Both Rep. Lincoln Davis, D-Tenn. and Sen. Mary Landrieu, D-La. have written letters opposing reform of student lending. "Some of the changes being discussed could have a very harmful impact on students, parents, colleges and universities in Louisiana, particularly those students attending the many historically Black colleges and universities in our state," wrote Landrieu in a May 17 letter, to Harry Reid, D-Nev., the Senate majority leader.