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Student loans

05/22/07 12:00AM By Allen Gilbert
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(HOST) Got student loans? The New York attorney general has been investigating the agencies making the loans. Commentator Allen Gilbert takes a look at the industry that has developed because college costs keep rising.

(GILBERT) If you had bought stock in the company Sallie Mae in 1997, it'd be worth a lot today - triple its original value, in fact.

What's Sallie Mae selling, that it can reward investors so handsomely?

Sallie Mae sells student loans. And the story of Sallie Mae is a window into the big money world of higher education.

Any parent who's had a kid in college knows what "big money" means in terms of tuition. Tuitions have been rising at rates way above inflation. College costs now range up to nearly $50,000 per year at pricey private schools. Even at state universities, an annual bill of $20,000 is not unusual.

How can people afford this? The answer is that they borrow - a lot. Student loans have been the capital that's financed the huge growth in higher education costs. Without loans, few Americans could afford college.

Sallie Mae is one of the financial agencies that make student loans. It used to be a quasi-government agency. In 1997 it cut its ties with the government. That transformation said a lot. There was major money to be made in student loans.

The student loan business has two great advantages for investors. First, it's a guaranteed growth business. Every year that college costs rise, families need to borrow more. Second, the student loan business is virtually fail-safe. The federal government backs the loans. Lenders can even make money off failed loans through collection efforts.

These factors help to explain the recent investigations into companies such as Sallie Mae and other student loan agencies. With so much money on the table, there were bound to be abuses. And New York State Attorney General Andrew Cuomo found them. Cuomo determined that some lenders were cutting deals with colleges so they'd be designated the "preferred" lender on campus. These inducements tallied in the hundreds of thousands of dollars, in some cases. But to the lenders, it was worth it. The school would steer students to them - even if cheaper loans were available elsewhere.

Attorneys general in other states have joined New York's Cuomo in investigating the practices of lenders in their home states. Presumably the Vermont attorney general is doing the same here, and one trusts he'll find no wrongdoing among lenders. But whenever there is the aggregation of large sums of money, strong oversight is warranted.

So many intangible things in our lives have become commodities, requiring huge financial structures to prop them up. Health care, in addition to higher education, comes to mind. Insurers play the role for health care that student loan agencies play for colleges. They pay the bills. That's great for the institutions providing health care or education, because they have a steady stream of cash. But it's also great for the companies providing the financing. They have a steady stream of profits. In the case of the nonprofit companies operating in the field, they have a comfortable operating margin.

Is it any wonder that Sallie Mae was the target of a takeover bid this spring? There's a lot of money to be made in higher education.

Allen Gilbert is a former journalist, teacher, and consultant currently serving as executive director of the ACLU of Vermont.

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