Here is a piece I just submitted to Forbes...
My Response to Sallie Mae
Two weeks ago, Peter Reilly (noted accountant, and courageous Forbes contributor) was invited by the top brass at Sallie Mae to meet to discuss my contributions to this column, and comments I made regarding the company in particular. While it was a bit difficult to extract any specific criticism they had about my claims, they did make it clear that they felt I was wrong about my assertions that the company makes more money from defaulted student loans than loans that remain in good stead. In response, I would like to lay out the facts about defaulted student loans. They are well proven, not controversial, and unambiguous.
Lenders are paid full book value on defaulted loans (principal plus interest. For defaulted loan collections, collectors get to keep 25 cents on every dollar collected. If the loan is rehabilitated, the new, much larger, loan is sold, and the guarantors get paid (in addition to 10 months of payments that go straight into their pockets) something like 18% of the inflated balance.
For lenders who only lend to students (and don't guaranty, or collect on defaulted loans), they lose no money on a default. The money they are reimbursed can (and is) immediately used to fund another loan. Therefore, these lenders, fiscally, have a neutral outlook about defaults (ie they don't care one way or another if a loan defaults).
If a company both loans, and also owns collection subsidiaries, then as long as collection of defaulted student loans is profitable (and it is extremely profitable), then this company clearly an unambiguously has a financial interest that loans default rather than remain in good stead.
If a company not only lends, and collects, but also owns a guarantor company (guarantor's lifeblood is penalties and fees attached to defaulted loans), then this incentive is increased significantly.
Sallie Mae went on an acquisitional tear in the late 1990's, acquiring some of the largest collection companies, and also multiple guaranty agencies (including the largest, USA Funds *http://business.highbeam.com/...). Therefore it is impossible for Sallie Mae to claim that they would rather loans remain in good stead than default.
This is back of the napkin stuff, here.
60 Minutes pandering to the Rich and Famous on Student Loans
60 Minutes recently did their first piece on student loans since May 2006 with an interview with Peter Thiel, Billionaire Paypal founder who now runs a foundation that funds young peoples entrepreneurial projects as an alternative to going to college. The piece was full of the shocking statistics about the skyrocketing cost of college, diminishing returns of going, etc.
Pointing out the problems with college(ie high price, high debt, high default rate, etc.) is an increasingly popular tool for people needing a springboard to showcase their pet projects. While that is fine and good, the conversation doesn't examine why the system is failing, possible solutions, etc. So we get a distracted conversation that frankly does the problem a disservice. Even Thiel acknowledges that his idea was never intended as anything more than a niche, boutique, experiment. Certainly he would agree that it can't solve the problem that is staring us in the face.
The 2006 piece was a hardhitting investigative piece that led to mass firings across academia, nationwide scandals, a furor in DC, etc. Even still,it turned out that there were some hugely important errors that they made in the piece because of lack of information (they wrongly reported that the default rate was low, for example). So this, combined with the now crisis proportions of the problem begs for a follow-up. They really own this story, so I am left baffled at their abrupt change in focus.
60 Minutes still does good stories, but man do they suck up to the "billionaire of the week" - and their spiels alot lately! I'd have thought that with 3 anchors of the show now gone, they'd be redoubling their efforts to re-affirm their hard-nosed journalism credentials, instead of this type of piece.
Disgruntled Law School Grads have a Golden Opportunity to fix what is broken, if they would only seize it.
Over the past 7 years, there has been an explosion of so-called "Scambloggers": unhappy (and generally un- or underemployed) law school graduates who write profusely about the misleading marketing practices, quality, and cost of their law schools, and related issues. To be sure, their consternation is not without merit. There has even been special legislation introduced to provide special relief for law school graduates.
The beefs, of the law school grads, however, are not unique from those graduating (or not) from all manner of both colleges and graduate schools across the country. Unfortunately, the vast majority of these scambloggers fail to see the commonalities that render their plight virtually indistinquishable from those of the general citizenry.
There is no doubt that law school is expensive, but this can be said for many types of schools, many with even more dismal earning/employment prospects than what newly minted attorneys face today. Moreover, the marketing and recruitment practices of schools across the spectrum use misleading "sales pitches" that render them virtually indistinguishable from law schools. Many school, small and large are guilty of badly misrepresenting their post graduation employment statistics as well.
So, then, what exactly distinguishes law schools from the rest of academia? I honestly cannot find anything quantitative that would explain the spike in outcry. Law school graduates, however, are unique from graduates in other disciplines in that they tend to be more skilled, and inclined to engage in public discourse, politics, debate, and so forth. This is the best explanation I can point to for the spike.
I hope that these people will soon recognize that there is a huge opportunity for them by recognizing the larger problem, and attacking this instead of focusing only on law schools. With the current focus, I'd say they are doing themselves, and their profession, a huge disservice. This sort of "Help the law school grads, forget everyone else" mentality is precisely why so many citizens can't stand lawyers.
To be fair, there are a couple of really good scambloggers who are seeing this (http://lawschooltuitionbubble.wordpress.com/ ), but not nearly enough. I do hope they will come around soon for the good of the country. Using their collective muscle to get bankruptcy protections restored would be, by far, the most noble, efficient, and valuable use of their skills in my view. This could definitely launch more than a few "rockstar" political careers, for those seeking that. Hopefully the few guys who get this will be rising above the cacophony soon.
