Big Money On Campus
In the multibillion-dollar world of student loans, big lenders are finding new ways to drain Uncle Sam's coffers
Twice each decade, lawmakers overhaul this system. They get the chance again soon. Debate begins early next year on loan provisions of the Higher Education Act. Opponents of direct loans want the Clinton-era program eliminated. At a recent education conference, Rep. Peter Hoekstra, a Michigan Republican, was blunt: "We should put a stake through its heart." However, Democratic Sen. Edward Kennedy of Massachusetts wants to strengthen the direct-loan program so that it can compete more aggressively against private banks. Sen. John Edwards, a North Carolina Democrat, would wipe out the FFEL program and switch all schools to direct loans. At current interest rates, he says, his plan would save up to $4 billion a year. "We have to use taxpayer money efficiently," Edwards told U.S. News. "That money shouldn't be used to provide subsidies to lenders but to get kids in college."
This tension has persisted ever since President Clinton signed the direct-loan plan into law in 1993 and positioned it to replace the FFEL program. Supporters thought schools would flock to the new system. Within five years, direct loans had captured 34 percent of the business, an alarming development to private lenders.
By then, Sallie Mae was on a war footing. First, it reinvented itself. Originally a government-sponsored enterprise, Sallie Mae got approval to privatize in 1997, which allowed it to originate its own loans and acquire other companies. The new company quickly bought its two major rivals and improved its loan-processing services to compete better against the direct-loan program. Along with other companies, Sallie Mae began offering discounts on fees and interest rates that the government was not allowed to match.
At the same time, Sallie Mae stepped up its lobbying presence in Washington and began scoring big. In 1999, its lobbyists persuaded lawmakers to create a new interest-rate formula that boosted the company's profits, allowing it to offer further discounts to schools. Then, last year, Sallie Mae got Congress to eliminate a planned interest-rate reduction that would have curbed the company's profits and reduced student-borrower debt. That change may cost taxpayers $8 billion by 2011, say education and banking lobbyists.
Sallie Mae cemented its political ties with campaign donations. The company and its employees poured large sums of money into the coffers of Republicans and Democrats alike, according to the Center for Responsive Politics, a Washington watchdog group. Its "soft money" donations alone--those not restricted by federal contribution limits, until outlawed last year--jumped to $552,000 in the 2002 election, a 10-fold increase over 1998. Others in the student loan industry also cranked up their giving, pouring tens of thousands of dollars into congressional campaigns.
Sallie Mae is well positioned as Congress prepares to debate the student loan provisions of the Higher Education Act. Some of its campaign gifts went to important members of budget, appropriations, and education panels, all of which deal with the student loan program. The company's political action committee and its employees were the second-largest donor to last year's re-election campaign of Rep. Howard "Buck" McKeon, a California Republican and chairman of a key House education panel. They gave him $11,500. McKeon has been a speaker at Sallie Mae events, and the company has paid for his travel to Las Vegas and Panama City, Fla.