Critics decry Sallie Mae merger as monopolistic

By David King

Daily Bruin Contributor

The name might sound innocent enough, but critics of Sallie Mae
““ the nation’s largest financer of federal student
loans ““ compare the company to an overbearing Goliath of the
student loan industry.

Sallie Mae, the primary loan purchaser for UCLA students
receiving Federal Family Education Loans, has come under attack for
its growing dominance in college financial aid offices.

“I worry about (other loan agencies) surviving not for
their sake, but for the sake of the consumer,” said Robert E.
Andrews, D-NJ, to The Chronicle of Higher Education. “The
best loan system maximizes competition, so that students have
choices.”

Some critics fear lack of competition from other loan agencies
will allow Sallie Mae to increase its interest rates and offer
fewer student services.

But having a primary loan purchaser is beneficial for both loan
offices and students, said Jonathon Beres, associate director of
UCLA Student Loan Services. He said dealing with one primary
purchaser frees up time for his office to address other student
needs.

“It’s easier to deal with one entity,” he
said. “If you’ve got multiple systems going on
it’s going to be more difficult from a business
standpoint.”

Students aren’t necessarily bothered if a company is
monopolizing the loan industry either.

“I’m not complaining,” said Erwin Ong, a
third-year economics student. “Although monopolies are bad
because of a lack of competition, if it’s ultimately
benefiting students, then it doesn’t really
matter.”

Sallie Mae specializes in direct lending, which provides loans
to students directly through their schools.

Created in 1993 by President Clinton, direct lending now
accounts for one-third of the federal loan market and eliminates
the role of banks and guarantee agencies.

Beres said his office receives electronic money transfers from
Sallie Mae, which then distributes the money to students.

In June, Sallie Mae came under attack when it bought out USA
Group ““ the most prominent student-loan guarantee agency in
the nation ““ for $770 million.

As a guarantee agency, USA Group buys loans from banks,
guarantees them to students and reimburses banks for default
loans.

With the acquisition, Sallie Mae now controls the entire loan
process ““ from making the loan to collecting payments ““
a problem for some bankers and lenders, critics say.

According to The Chronicle of Higher Education, several banks
asked the U.S. Justice Department to block Sallie Mae from
purchasing USA Group, but the request was denied.

Representatives of Sallie Mae maintained the merger helps
students.

“We believe the transaction will eventually benefit
schools and give better customer service through combined
services,” said Erin Love, a Sallie Mae communications
specialist. “It gives us functionality that we didn’t
have before.”

The two companies are currently in an integration phase and will
eventually become USA Education Inc., she said.

Beres said loan features promised to students won’t change
even if purchasers change or merge since strict federal regulations
prohibit banks and loan purchasers from taking advantage of
students.

Despite criticisms that the company is monopolistic, Love
maintained Sallie Mae still faces strong competition from the U.S.
Department of Education, which originates about 30 percent of
federal loans.

“(The acquisition) gives us a better opportunity to
compete with them ““ it’s not really decreasing
competition,” she said.

A BRIEF HISTORY OF SALLIE MAE 1972 Sallie Mae is created by
Congress to pump more money into the fledgling federal student loan
program, using U.S. Treasury funds to purchase government-backed
loans from banks. early 1990s Sallie Mae’s assets have multiplied
eightfold due to increased student loan volume, and Wall Street
investment. 1993 Congress approved legislation to gradually replace
guaranteed-loan program with direct lending; Sallie Mae’s
livelihood is threatened. 1996 To protect itself, Sallie Mae
gradually cuts ties to the federal government with Congressional
approval. It will be completely independent by 2008. 1997 Under the
new leadership of Chief Executive Officer Albert Lord, Sallie Mae
forms relationships with several banks to help them make loans
independently. 1998 Sallie Mae introduces Web site Laureate, which
allows students to apply and gain approval for loans over the
Internet. 1999 Sallie Mae purchases Nellie Mae, the 17th-largest
lender to students, and forges an exclusive relationship with Chase
Manhattan Bank, the third largest student lender, which originated
$1.7 billion in student loans in 1999. June 2000 Now the largest
financier of student loans, Sallie Mae purchases USA Group, the
largest student loan guarantee agency, for $770 million. SOURCE:
Chronicle of Higher Education, August 11, 2000 Original graphic by
YU WANG/Daily Bruin Senior Staff Web adaptation by CHRISTINE
TAN