Sallie Mae Sale

Washington Post business columnist Steven Pearlstein was online Wednesday, April 18 at Noon ET to discuss antitrust enforcement and the Sallie Mae sale to JP Morgan and Bank of America.

Read the column: For Consumers, the Raw Deal (Post, April 18).

A transcript follows.

About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

His column archive is online here.

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Boston, Mass.: Mr. Pearlstein, is it fair to say that new private management of Sallie Mae will both increase profitability and risk?

Steven Pearlstein: Not clear that it will in either case. There is certainly a potential for increased profit, in that the company will have interesting new partners with which to share information, operations, etc. that may allow it to expand its product line and increase its market share. But at the same time, in taking on all that debt to finance the buyout, it will increase interest payments. Obviously, the buyers think they can increase profitability, which is why they paid a 50 percent premium. But its not certain. As to risk, the higher debt increases shareholder and bondholder risk, but having deep pockets mitigates risk.

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Arlington, Va.: Steven, thanks for the great article (For Consumers, the Raw Deal) about the recent loosening of antitrust enforcement. I think this goes along with the general Bush/Republican ethos that any business/health/environmental regulation that reduces corporate profits is bad. They can't eliminate the EPA, so the next best thing to do is to refuse to enforce the regulations. They can't gut the labor laws, so make your Labor Secretary invisible (when's the last time you heard anything from her?). You can't change antitrust laws, so ignore them. As long as corporate profits increase, consumer health/safety and competition are unimportant. Are these changes going to be difficult for the next President to undo?

washingtonpost.com: For Consumers, the Raw Deal

Steven Pearlstein: No, they will be fairly easy to undo, which is why changing the laws would have been the first choice of the Bush crowd. This will be a very important election for business interests because of the change in regulatory enforcement.

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Clinton, Md.: Will this have an effect on student loans?

Steven Pearlstein: I can tell you one thing: it won't make them any cheaper. Whatever savings the deal might generate will go to the new owners, not customers, because the competitiveness of the industry will be significantly reduced. That's the way markets work. More competitive markets transfer any surplus to customers. Less competitive markets transfer surplus to owners. That's the logic on which the antitrust laws are based. That said, it could also result in a wider range of products available to students and parents. I doubt it will either improve or deteriorate service, no matter what the company says. If anyone out there has some experiences that would enlighten us as to Sallie's customer service, I'd love to hear it.

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Chicago, Ill.: Isn't the availability of credit more important than the antitrust issue?

College tuition prices will keep rising as long as students and their parents can borrow the money. To me, debt financing plays the same role here that it did in the housing bubble.

Steven Pearlstein: This is exactly right, and one of the great fallacies of public debate about college loans. Right now, it has got to the point where I would say that any additional subsidy the government adds to the pot will merely be captured by the universities in higher tuition payments. We're just chasing our tails right now. The only exception to that might be grants to the poorest students, although for many schools, this will merely allow them to offer less of their own financial aid. Someone has to challenge the education industrial complex at 1 Dupont Circle on this issue. This is one of the only industries I know of where productivity is actually going down.

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Washington, D.C.: I was just wondering how this sale will effect the loans of individuals who currently are in repayment through Sallie Mae. While i'm assuming not much will change, maybe i'm wrong?

Steven Pearlstein: No change.

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Burke, Va.: Hi Steve,

Different Q from Sallie Mae. What's your prediction on the federal decision concerning the proposed merger of Sirius and XM? Yeah or Nay?

Steven Pearlstein: Nay is my prediction, but perhaps because of political pressure from the conventional radio broadcasters.

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Washington, D.C.: Steve

don't be so sure the SLM deal is a slam dunk. The buyout is for $60, yet it is trading at $56. The market is telling us there is a tremendous amount of uncertainty that the deal will close. Otherwise, $4 per share is simply sitting on the table waiting to be claimed.

Steven Pearlstein: That's a good point, although I'd say if you assigned a probability associated with that discount, it suggests an 80 percent probability of success, based on the previous selling price of about $40 a share.

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Laurel, Md.: When asking whether a particular company (or merger) is monopolitistically anti-competitive or not, one does has to look at potential competition -- the ability of new firms to get in. In some industries, the barriers to entry are so high that large firms can dissuade upstarts through short-term loss-leader pricing. But if the cost and difficulty of entry are low, that isn't much of a threat.

So how difficult is it to enter the student loan market? I haven't shopped for one in modern times; but if it's anything like the mortgage market, it's not hard.

Steven Pearlstein: That is one of the key questions, and I don't pretend to be an expert. But it seems to me that while it may be easy to hang out a shingle and offer loans, scale is increasingly important in this business. You need scale to be able to afford the most efficient systems to keep track of loans and collect payments and run a good call center operation. You need scale to be able to get a good price from the Wall Street cartel to securitize your loans. And you need scale to have the sophistication, reach, inducement money to get designated as the preferred provider for large universities. So I think the day of small banks having a big presence in this market is going away, and the future favors the big players. That makes entry by a small player difficult. And by small I dont just mean small businesses, but even large financial corporations with small market share. Those large players would have to be willing to absorb sub-part returns, or losses, for a number of years to gain the scale necessary to be competitive. Or so it seems to me.

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Arlington, Va.: All of the Maes were originally set up to provide cheaper somethings, usually loans, and their performance was evaluated based on how they did their jobs. Now performance seems to be based upon profits and/or perks for the leadership. The same thing is true of the Smithsonian where Small, while a great fundraiser, seemed to be focused on using the funds to reward himself and his followers and not use them to improve the product.

Steven Pearlstein: I'd quibble with you a bit about the original purpose of the Maes. They were set up really to provide liquidity in the secondary market for these loans, which would have the effect of shaving off a quarter or a half of a point in the interest rate and making sure that they were available even when banks and other lenders decided they'd rather put their money in leveraged buyouts. The federal subsidy for the government backed loans, a subset of the market, are more directly responsible for lowering the interest rates below market.

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Washington, D.C.: Given the choice, 80 percent of colleges and universities choose the Federal Family Education Loan Program over Direct Lending. Students attending FFELP schools are free to get their loan from any private lender in the program. However, the 20 percent of students attending DL schools have no choice and can only get their loan from the government. Doesn't the lack of choice result in negative benefits for students-higher rates and less efficiencies?

Steven Pearlstein: Not sure, frankly. For some people price is the most important factor. Others value choice. But I think it disingenuous for the industry to deny, as it routinely does, that the government loans are less expensive to the borrower.

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Freising, Germany: Do you think that the trend towards ever larger companies, having ever larger market share, is part of the concept of globalization?

If the prevailing thought is that globalization is a juggernaut that can't be turned around, do you think that antitrust laws will have a future?

Steven Pearlstein: Yes, globalization of industries, in theory and practice, leads to consolidation. That's a good thing because, as long as the now-larger globalized market remains competitive, there should be no net reduction in competition, which will insure that most of the efficiencies from scale and scope are passed along to consumers. That's the theory, anyway.

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Roseland, N.J.: Full disclosure: I have owned stock in Student Loan Corporation (STU) since 2000. I ask not as someone who owns stock in that company, but as someone who holds stock in the industry.

The private takeover of Sallie Mae is encouraging, since it seems to signal people still think there's money to me made in the student loan business, despite the recent scandals and pending legislation. But I am still anxious, and think this is could just be a short-term bump up. Long-term, is the student loan game a good investment, do you think?

Steven Pearlstein: I don't like to give investment advice. The question isn't whether the pie will grow (it almost surely will) because more students will be going to school and there is absolutely zero chance that the cost of going to school will decline. But as an investor, you have to ask whether a company will be able to profit from this increase, or whether there will be so many other competitors that they will compete away any benefit to shareholders through price and service wars, which would transfer the benefits to consumers.

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Washington, D.C.: Your article expresses concern about eliminating competition in the student loan marketplace, as well as uncertainty regarding how the Democratic congress will change the Federal Student Loan Program. If passed, won't the legislation being considered by Congress eliminate the Federal Family Education Loan Program by forcing schools to join the government-run Direct Lending program? How does/will this scenario create a competitive marketplace?

Steven Pearlstein: If the government decides that it wants to channel its subsidies through a government run program, that will obviously reduce competition in this segment of the market (which, let me remind again, isn't the entire student loan market). But reducing competition in which the government takes the risks and sets prices isn't really such a bad thing. Its not really a market anyway. There may be some deterioration of service (or not). But I don't see any other potential downside. And the benefit, of course, is that the loans would be cheaper because there would be no need to pay profit, to pay inflated executive compensation and to pay for the higher overhead costs of the private sector.

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New York, N.Y.: Steve,

I understand your skepticism questioning the consumer benefits of the Sallie Mae buyout. However, why not focus on the real problem---soaring college costs? Why should parents pay enormous amounts for college for professors who teach one or two classes per term?

Steven Pearlstein: They shouldn't, and you are right to focus on this as the real problem for why paying for college is becoming such a problem for families and students. Whether the government or the private sector initiatives the loan is really small potatoes compared to the soaring tuitions, which are totally unnecessary. My favorite example this season comes from the president of Dartmouth, where my daughter goes to school. There was a quote on Bloomberg in which Dr. Wright justified a 10 percent tuition increase because it would allow Dartmouth to continue on its holy mission of "making college more affordable." Think about that: raising the price to make something more affordable. I presume Dr. Wright doesn't have his Ph.D. in economics.

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College Park, Md.: How would the new Sallie Mae use its clout to drive out other lenders?

Steven Pearlstein: Any way it could. Demanding exclusive contracts. Having its partners, Bank of America and JP Morgan demand higher prices from marginal competitors to securitize their loans. Using predatory prices in certain cases to drive competition out of certain pockets of the business. Refusing to cooperate with certain lenders in refinancing or consolidation loans. Lobbying for changes in regulations that favor its business model over others. The antitrust literature is full of examples like this.

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Princeton, N.J.: Me again. In the end both of my daughters had to take out maximum ($19,600) Stafford loans. We were never offered the opportunity to use the direct Federal program by either college. In fact, for my older daughter, I had arranged to go through another Bank which had a better program than Sallie Mae. Her college, however, told here she had to use Sallie Mae. So both of my children have Stafford loans from Sallie Mae.

Steven Pearlstein: This is the perfect response to the previous questioner. And the bigger Sallie becomes (with the integration, in effect, of the Bof A and JP Morgan business), the more places it will be able to throw its weight around in just the way that it has done at Princeton. By the way, Princeton may have exacted a big price from Sallie to win that exclusivity. And that money may have been used to improve your daughter's education, but we also know that it has gone to improving the lives of the faculty and administration at Princeton.

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Washington, D.C.: In terms of the antitrust issues you raised in your article, how do student loan companies differ from credit card companies and home loans in terms of their concentration in the marketplace?

Steven Pearlstein: Not sure. But it is a good question. However, just because some other industry may be more concentrated is not an very credible defense, in my opinion. The law prohibits mergers that substantially lessen competition. It doesn't allow for a merger that substantially lessens competition if a similar industry turns out to be more concentrated. The reason is simple: Sometimes industries are more concentrated because one player is just so good that he gets a big market share. But there is no reason we have to allow players to get big through merger. That's a horse of a different color. The first is the product of robust competition. The second may be an effort to avoid competition or get the benefits of winning without actually winning in the competitive marketplace. Or put another way, getting big through merger is always good for the executives. Getting big because a company competes and wins is always good for consumers.

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Sallie Mae Customer Service: I've never had a problem. I've generally gotten through almost immediately if I needed to speak with someone and their online application process is very very simple.

When I noticed something amiss with a loan application a few days ago, the customer service agent got me all the details I asked for with no hassle.

Steven Pearlstein: Thanks for sharing that.

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Direct Lending!: Thankfully, Clinton started that program when I went to grad school. My nasty Graduate Debt (my only debt) is at 2.45 percent, once you get the .25 percent discount for monthly autopayment.

I don't know one person stuck in the private loans who comes close. And the supposed "choice and service" is usually a lot of junk mail trying to get you into the SL equivalent of a sub-prime adjustable mortgage with a low teaser rate.

Time to knock out the fat-cat profiteers from student education, and get the Direct Program running full blast.

Steven Pearlstein: Thanks for sharing that, as well.

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Princeton, N.J.: Come on Steve, if college and university faculty had to spend all their time teaching, where would basic research and scholarship get done in this country? Just because one only teaches two courses doesn't mean one spends the rest of the time on the beach. Basic research is one of the prime reasons this country does better than most other countries. BTW doing research makes one a much better teacher, If you didn't believe this, why did your daughter go to Dartmouth rather than a small poor school where the faculty teach 35 hours a week?

Steven Pearlstein: If research is important for the whole economy -- and I agree it is--then the whole economy ought to pay for it, and not tuck it into tuition bills. Its very distortive and inefficient, as any Princeton economist would tell you.

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Alexandria, Va.: The student loan industry has not exactly been on a winning streak politically, even before the Cuomo investigation and the Sallie buyout. Bush proposed student loan cuts in his budget this February, and Republicans in Congress have for years been yelling about rising college costs -- the implication being that taxpayer subsidies are being used to artificially prop up both demand and tuition prices. This week, Ted Kennedy began shopping around an HEA reauthorization that would cut $22.3 billion from the lenders, on top of the cuts made last year in budget reconciliation.

Given all this, why would these lenders make a big move that will certainly raise more political hackles, at least among Democrats? Do they think the savings from a merger would exceed the level of any subsidy cuts from Congress, or do they feel they need to merge to survive in a "leaner" environment?

Steven Pearlstein: They probably figure that, no matter how the rules governing the industry change, the combined Sallie/MOrgan/Bank of American combine will be in the best position to take advantage of it.

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Re: Rising College Prices: Rising tuition rates are one thing that makes a college "competitive" and "elite" in national rankings like the Princeton Review. While some attraction is paid to "Best Bargains" (such as my alma mater), even they have felt pressure to increase tuition rates simply to increase their prestige. So, it's the tail wagging the dog.

Steven Pearlstein: This is a great point -- that colleges raise tuitions so people think they are better, and therefore willing to pay more. Of course sellers of luxury goods have been doing this for years. Isn't it heartwarming that the education establishment has now joined in that game, all in the name of doing good for society.

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Washington, D.C.: A 10 percent increase actually COULD make college more affordable -- IF all or most of that increase was devoted to increasing need-based financial aid, i.e. an institution's discount rate. It would essentially amount to a re-distribution of resources, similar to a progressive tax system. The only difference between the two is that the "discount" in a progressive tax system (i.e. a lower rate) is clear up front, as opposed to college tuition, where everyone pays the same rack rate and then gets a discount based upon what the Department of Education's computers say is a student's "need."

Steven Pearlstein: Yes, this is the standard excuse offered by universities and private schools -- that all the money is really going to the poor students, to create a more diverse student body. It just simply isn't true. It is partly true. But the rest of the money goes to better facilities, higher pay for faculty and staff and generally fiscal flabbiness. The real losers in this process are people in the middle income range, who can't afford the higher tuitions but don't qualify for much, if any, aid. And it is time that people start to call the universities on this big lie, because enough is enough already. They are simply OUT OF CONTROL.

By the way, the only reason they are able to get away with it now is because taxpayers have refused to fund state universities to the extent they should. That would provide much more price competition to hold the private schools in check.

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North Potomac, Md.: Steve -- given that Sallie Mae got its start with government advantages, aren't the taxpayers owed some of the $25 billion sale price? Also, do you think Sallie Mae will continue to move jobs to India?

Steven Pearlstein: This is inevitable when you privatize something like Sallie or Fannie or Freddie. But the time to recoup the money is when the shares are first issued. The government should have retained a minority stake, which it could have cashed in later when the real value of the enterprise was revealed.

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Atlanta, Ga.: I have to differ with you about rising tuition costs. Most colleges are getting about 10 applications for each spot - so going on supply and demand, they could easily raise tuition and people would still be willing to pay for it, perhaps applications would decrease slightly, but that would hardly make up for the higher numbers that are attending college.

Steven Pearlstein: The increase in applications is not a proxy for the increase in demand. Its a reflection of changing strategies of applicants in the admission process. I think next year will be the peak year for demand for undergraduate spaces at universities, based on the demographic trends. After that, demand will slacken. And then we can see if tuitions go down (yeah, right) or even just flatten out. But I bet they won't. This is fairly standard cartel behavior: you compete on the basis of everything EXCEPT price.

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Hartford, Conn.: I guess this explains why Sallie Mae settled the kickback and other charges with the NY Attorney General so quickly. The cost of doing business, I suppose.

Steven Pearlstein: You said it, not me.

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Seattle, Wash.: As a law student, I studied antitrust law extensively, especially from the perspective of many "law and economics" judges and professors. They ignore competition as a standard for mergers and focus on efficiency-the ability to make greater profits-on the theory that the newly created company will cut prices as a result of increased efficiency. The real problem with recent enforcement, then, is that antitrust regulators are focused on efficiency instead of competition, which is the real target of the Sherman Antitrust Act.

Steven Pearlstein: Precisely.

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Princeton, N.J.: I couldn't agree more about everybody paying for research. But that's not the way things are now. When large research institutes are set up, then things can change. BTW I really do think this would deteriorate teaching quality, but you can't have everything.

Steven Pearlstein: Thanks.

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Washington, D.C.: Isn't the timing rather odd in light of the scandal that is being exposed about Federal Student Aid (most of them are from Salle Mae) and all the universities and colleges?

Steven Pearlstein: Odd. Or, as the last correspondent suggested, maybe it makes perfect sense.

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Silver Spring, Md.: Steven,

Will the sale change SLM to full-private from quasi-private? Or will they still enjoy the same implicit backing and guarantee of the US Gov?

Thanks!

Steven Pearlstein: There is no implicit guarantee of Sallie Mae bonds. The government does insure some of the loans it writes and holds, but that subsidy goes with the loan and is not unique to Sallie. Sallie is different from Fan and Fred in this regard.

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Baltimore, Md.: The timing of this sale seems a bit fortuitous, given the scandal about relationships between colleges and "preferred lenders." (The woman in charge of the student loan process at Johns Hopkins has been suspended. It was found that she had taken something like $60K in "consulting fees" from a lender.) Is this just coincidence, or is perhaps someone trying to get out ahead of a widening scandal? Thanks.

Steven Pearlstein: I suppose you could argue that the owners of Sallie, who know more about this than the rest of us, are getting out at the top of the market. That might apply to the executives. But with a public company, it is hard to say it applies to the shareholders. In the case of the top executives, they get the benefit twice: first, they get a premium price for their shares; second, they get longterm contracts from the new owner with big incentives if they meet targets. As always with these deals, the really big winners will prove to be the executives who negotiate the deals.

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New York, N.:. Steve,

My understanding is that Sallie was formed as a government-sponsored enterprise. As such does Sallie need any special approval (other than FTC) for a buyout? After all, if Sallie received help from our government to get its operations running, should our government have to approve, or at the very minimum benefit from a buyout?

Thanks!!

Steven Pearlstein: I think Sallie went through a full privatization process several years back.

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Steven Pearlstein: That's it for today, folks. Good discussion. I can't wait to hear from 1 Dupont Circle this afternoon.

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