Depending on which paragraph your eyes happen to run across, you’ll find insinuations that a) the student loan market is about to see a wave of defaults similar to what’s going on with subprime mortgages, b) First Marblehead is cramming expensive loans down students’ throats when less-expensive alternatives are available, c) the company is engaged in unfair and deceptive marketing practices, and d) the company overcharges its borrowers. Oh, and competition from Sallie Mae (SLM) is about to heat up and will torpedo the company’s business.
What nonsense. Before I get into the specifics of Dash’s complaints, a few points, to put things in context. To begin with, a college diploma is indisputably a good thing. People who have college degrees tend to earn a lot more than people who don’t, and tend to have more interesting and fulfilling jobs. Perhaps because of this, demand for higher education is soaring, which is one reason tuition prices have risen faster than inflation for as long as anyone can remember. Students have to pay that tuition somehow. They have a variety resources at their disposal, from savings, to federal loans, to home equity loans, to private loans. Many students are indeed saddled with debt when they graduate, sometimes a lot of debt. (I was in debt to Continental Illinois when I graduated.) On balance, that’s a good thing, not a bad thing: if they didn’t owe the money, they wouldn’t have the sheepskin.
Now, to what’s bugging Dash. Let’s go through his nits one at a time:
1.The private student loan market is about to blow up the way subprime mortgages have. “Policy makers and regulators say that there are dangerous parallels between the private student loan and subprime mortgage market,” he says darkly, “. . . And, as was seen in the subprime market, many student loans that were made in the last couple of years are resetting at much higher rates.”
Fooey. Dash implies that student lenders relied on ultra-low introductory teaser rates, the way subprime mortgage lenders did, to lure students into borrowing, and that the teaser periods are about to come to an end and borrowers’ monthly payments balloon. But that’s simply not so. Student lenders don’t use teasers; they write plain-vanilla variable rate loans that are tied to Libor and reset every six months. Borrowers are not about to be hit with sharply higher payments. If anything, assuming the fed-funds futures is right, student loans are about to reset down, not up. As for the private student loans themselves, no, they are not subprime. Recall that 80% of Marblehead’s loans are co-signed (usually by a parent). Average FICO score of co-signer: 710.
2.First Marblehead is facilitating loans to students who could borrow more cheaply elsewhere, such as via federally guaranteed loans. “Educators are . . . concerned that student borrowers are choosing private loans before borrowing the maximum from the government,” Dash says, “. . . In fact, one in five student borrowers passes up a less expensive federal student loan, and half do not even bother to file the paperwork necessary to qualify for federal, state, and institutional aid.”
Wrong again. Dash points out (in an accompanying graphic) that the federal loan limit for a first year student is $3,500, while average annual tuition runs $12,000 at a public university and close to $30,000 at a private one. So guaranteed loans won’t come close to financing more than a fraction of the cost of college. Sure enough, 80% of Marblehead’s borrowers have maxed out on the federal aid that’s available to them. Of the 20% that have not, many (non-citizens, for instance) don’t qualify for aid in the first place. There just aren’t that many people, if any, who are borrowing via Marblehead who could get cheaper money elsewhere.
3.Marblehead is engaged in deceptive and misleading marketing practices. “Industry analysts say that students who seek private funding from a mail or Internet offer—the very business that [ex-CEO Dan] Meyers helped start through First Marblehead—can wind up paying unnecessarily high rates and fees. While decades of deregulation have allowed lenders to offer students and homeowners more loans through a broadening array of financial products, those same forces have also curtailed government supervision of possibly abusive practices in the lending business, critics say.”
It seems Dash is hallucinating. He doesn’t provide a single example of a Marblehead marketing practice that might be considered shady. The reason why is simple: something like 80% of the loans Marblehead facilitates come about as the result of marketing efforts by the company’s lending partners, not by Marblehead. I’m not aware of any allegation, ever, that Marblehead is deceptive or misleading in its own marketing. Dash simply makes this smear up, in my view.
4. Marblehead overcharges its borrowers. “The direct-to-consumer channel, which Mr. Meyers helped to create, may be the most expensive option for students.”
Not by a long shot. Without a private student loan, borrowers would have to finance their tuition costs with either credit card debt or personal loans, both of which would cost substantially more than the 10% or so (not 11% as Dash says) rate Marblehead charges on a typical loan. It’s true that private loans originated via a school’s financial aid office can be cheaper than loans originated D.T.C., but that’s only because federal lenders have historically subsidized the private loans they offer in return for a school’s federal loan business. But thanks to the “reforms” brought on by the New York Attorney General’s office, that practice is about to come to an end, and school-channel loans will shortly cost the same as D.T.C.
5. Competition from Sallie Mae is about to heat up. Sallie has been in the private student loan business for years, to no apparent harm to Marblehead’s ability to generate torrential volume and earnings growth. What’s more, Sallie is about to be saddled with $16 billion of new debt once its buyout closes, and will shortly be a less-fearsome competitor than ever.
Yes, Marblehead recently received a subpoena from the New York A.G.’s office. From what I can tell, every company that’s involved in the student lending business has received a subpoena from the New York A.G.’s office. I understand the A.G. is looking into Marblehead’s GATE lending, which is a tiny (like, 2% of originations), marginally profitable part of its business that the company is in the process of winding down. The subpoena is completely immaterial; the only reason the company even disclosed it is that people in the Attorney General’s office insist on blabbing to the New York Times.
I understand why reporters start researching stories with a set of preconceived notions about what they’re going to find. That’s what I do when I look at companies! But when the facts don’t fit my initial expectations, I change my mind.
Why can’t New York Times reporters manage that? Eric Dash apparently spent months researching this story. He talked to members of the board, to former employees, to competitors, to me—to anyone who had anything of interest to say about the company. He clearly did not find anything incriminating. Is it too much to expect that the tone of his article match that fact? Instead, Dash piles insinuation on baseless allegation, and unfairly smears a company that’s actually doing a lot of good for student borrowers.
Disclosure: Author has a position in First Marblehead.
Tom Brown is head of BankStocks.com.