January 23, 2008

Wounded Giant Sallie Mae Slashes Student Loans

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Troubled student loan giant Sallie Mae struggled to weather a perfect storm in 2007, brought on by the credit meltdown, a failed $25 billion takeover deal, and legislation that cut funding for government-backed loans issued by private organizations. Sallie Mae, a public-private partnership, is the nation’s largest student loan company. Starting in 2008, the company will begin cutting back the amount of student loans it issues, according to a Securities and Exchange Commission filing earlier this year. Despite this announcement, financial aid at Cornell will remain largely unaffected.
“Cornell does not participate in the FFELP (bank funded) version of the Stafford Loan program. So, the announcement should not impact us. We participate in the Direct Loan (federally funded) version of the Stafford Loan program,” stated Thomas Keane, director of financial aid for scholarships and policy analysis, in an email. “Students don’t choose a lender at Cornell for their Stafford Loans [because] we obtain the loan funds directly from the federal government.”
There are two types of Stafford loans: subsidized and unsubsidized. A student who demonstrates financial need will receive a subsidized Stafford loan, where the government pays for the interest accruing on the loan while the student is in school and six months after graduation. Any student, regardless of financial need, can take out an unsubsidized Stafford loan; however, he will be responsible for paying the interest that accrues during the school year.
The announcement came as a surprise to Keane as well as to many students. However, after learning about Sallie Mae’s decision, many students, such as Mark Thompson ’08, were unconcerned that it would affect them.
Thompson has private student loans, but not from Sallie Mae. If he did have a Sallie Mae loan, he “would just get another loan. It’s like applying for a credit card,” he said.
Some students were also puzzled by a lack of available information about their loans, such as whether the loans are federally guaranteed or not. hey don’t tell you specifically. They do tell you that the reason you’re getting an alternative bank loan is because there’s only a limited amount of funding that will go to you through the school. How would you even tell what it was though?” said Stephanie Wege ’09, who has a private, Signature Student loan from Sallie Mae.
Private loans currently consist of 17 percent of Sallie Mae’s $160 billion student-loan portfolio, according to the Wall Street Journal. The decision allows the firm more potential for profit as private loans have much higher interest rates.
“My interest rate is 7.5 percent,” said Wege, (as opposed to the fixed 6.8 percent rate for Stafford loans disbursed after 2006, according to the federal student aid website).
Part of the $20 billion that originally went to private organizations like Sallie Mae will now go to Federal Pell Grant, as a result of the College Cost Reduction and Access Act of 2007.
“The bill the President signed … will expand this program by increasing funding for Pell Grants by $11.4 billion over the next five years and allowing the maximum Pell award to increase from $4,310 in 2007 to $5,400 by 2012,” according to a press release from the White House.
According to the Sallie Mae website, approximately 78 percent of all student loans were distributed under the FFELP in the 2004 – 2005 academic year, totaling more than $50 billion.

“I have no idea how you would figure out if [the loan] was government-backed or private because