Lobbying showdown over the future of student loans

Introduction

When Sallie Mae, the nation’s largest provider of student loans, saw the possibility of its own extinction in a plan advanced by the Obama administration, it did what just about any big corporation would do: It hired the best lobbyists money can buy.

That was standard procedure for Sallie Mae, which for two decades has almost single-handedly stymied attempts to reduce or eliminate federal subsidies to the multibillion-dollar private student loan industry.

This time, however, Sallie Mae has elected not to fight to preserve the current system. Rather, it is trying to leverage its lobbying muscle and years of showering money on lawmakers to push an alternative plan that would position itself not only as a survivor, but a clear winner — with an even larger share of the market.

Even so, despite ramping up its spending on lobbying — nearly $2 million in the first half of the year according to disclosure reports released this month — Sallie Mae faces an uphill struggle in Congress. Legislation that would radically reshape the financial aid landscape along the lines proposed by President Obama cleared a key House panel last week. Credit rater Standard & Poor’s immediately warned investors that it might downgrade the company’s debt to junk level because “we believe the likelihood has increased” that within a year Sallie Mae will no longer be able to originate loans.

Rep. George Miller (D-Calif.), chair of the House Education and Labor Committee, said at a committee meeting that the bill would stop “wasteful taxpayer subsidies that are keeping a broken system afloat.”

The plan would end lending by private firms by giving the Department of Education a monopoly over federally backed student loans. That could save the government $87 billion in subsidies over ten years, according to the Congressional Budget Office — money that would be redirected to Pell Grants for low-income students. Sallie Mae and other lenders would be confined largely to servicing loans held by the government and collecting on defaulted loans.

Presently there are two types of government-backed loans: At schools that have signed up for direct federal lending, students can borrow directly from the government. Or they can borrow from a lender such as Sallie Mae as part of the Federal Family Education Loan Program. Either way, the taxpayers take on the risk that a borrower might default.

Sallie Mae surprised the rest of the industry earlier this year when it announced it supported Obama’s plan – but with certain caveats. The company argues that if lenders are still allowed to originate and service the loans that the government holds, they could produce similar savings that could also go toward Pell Grants. Under its proposal, companies that don’t already service loans wouldn’t be able to participate in the new system and thus could be pushed out of the business, leaving Sallie Mae with a bigger share.

Based in Reston, Va., Sallie Mae, formally known as SML Corp., was created four decades ago as a government-sponsored enterprise. It went private in the late 1990s. As the number of college students and tuition costs skyrocketed, so did Sallie Mae’s profits — at least until the credit crisis hit. Last year, chief executive Albert Lord earned $4.6 million in cash and stock and Jack Remondi, its vice chairman and chief financial officer, more than $13.2 million in cash and stock, including the use of a company airplane.

Sallie Mae derives about a third of its earnings from federally backed loans, and the rest comes from private loans and other lines of business. Its financial future looks weaker not only because of the political threat but because of growing delinquencies in its non-subsidized student loans. The company reported a loss of $122 million for the most recent quarter, compared with a profit of $265 million a year earlier.

Calling on the Lobbyists

Most Republicans support a continuing role for private student lenders. Thus the battle over Sallie Mae’s future is taking place among Democrats, which is why the company turned largely to that side of K Street.

“The banks and lenders who have reaped a windfall from these subsidies have mobilized an army of lobbyists,” Obama said in a weekly radio address earlier this year. “I know they’re gearing up for a fight as we speak. My message to them is this: So am I.”

Sallie Mae’s key hire was Jamie Gorelick, a former deputy attorney general in the Clinton administration, who signed on in February to lobby White House and Education Department officials on student-loan issues.

Gorelick is a partner in the Washington law firm of Wilmer, Cutler, Pickering, Hale and Dorr, which billed Sallie Mae $270,000 for its work in the first half of 2009. Gorelick said in an interview that while she was initially hesitant to work for Sallie Mae because it had fought the Clinton administration’s efforts to boost direct lending by the government, she decided to do so because Sallie Mae’s plan, like Obama’s, provides funding for Pell Grants. She argues that Sallie Mae’s proposal is better than Obama’s because “many schools need the help that [private] lenders provide in managing the flow of information, processing and reconciling changes, and educating students about their choices and how to manage debt.”

In March, less than a month after hiring Gorelick, Sallie Mae retained the Podesta Group, founded by Tony Podesta, a legendary Democratic fundraiser whose brother headed the Obama transition team. In addition to Podesta himself, the firm, which was paid $110,000 for its work in the first half of the year, assigned at least four of its lobbyists to push Sallie Mae’s case on Capitol Hill: Paul Brathwaite, the former executive director of the Congressional Black Caucus and a former Clinton Labor Department official; Israel “Izzy” Klein, a former aide to Sen. Charles E. Schumer of New York and Rep. Edward J. Markey of Massachusetts, both Democrats;Lauren Maddox, a former assistant secretary for communications and outreach at the Education Department in the Bush administration; and Donni Turner, a former aide to Sen. Richard Durbin of Illinois, Rep. David Scott of Georgia, and former Sen. Max Cleland of Georgia, all of them Democrats.

Sallie Mae also has tapped several other Washington lobbying firms for help, including Clark & Weinstock, Global USA, ML Strategies, and Von Scoyoc Associates, which together were paid $302,500 in the first half of 2009.

Clark & Weinstock detailed more than a third of its lobbyists to the Sallie Mae account, including Vin Weber, the firm’s managing partner, a former Republican congressman from Minnesota, and a half-dozen veteran Capitol Hill staffers: James Dyer, a former staff director of the House Committee on Appropriations; Niles Godes, who most recently was chief of staff to Sen. Byron Dorgan (D-N.D.); Ed Kutler, a former senior adviser to the Speaker of the House; Peg McGlinch, who most recently was chief of staff to Rep. Tim Walz (D-Minn.); Jonathan Schwantes, a former general counsel to the Senate Judiciary Committee; Deirdre Stach, a former legislative director to Rep. Robert Walker (R-Pa.); and Sandra Stuart, a former chief of staff to Rep. Vic Fazio (D-Calif.).

Sallie Mae also has a sizable in-house lobbying staff, including six individuals who are registered on Capitol Hill. They include Carmen Guzman Lowrey, a former legislative assistant to Sen. Barbara Boxer (D-Calif.), and Brent Hartzell, a former chief of staff to the Education Department’s chief financial officer.

Many of Sallie Mae’s rivals in the private loan business, including Citigroup’s Student Loan Corp., based in Stamford, Ct., and, Nelnet, based in Lincoln, Neb., felt blindsided by the company’s survival strategy and have been lobbying on their own to preserve much of the current system. All three companies are members of a trade association, America’s Student Loan Providers, that represents originators, guarantors (including dozens of state agencies with that role), and servicers of federally guaranteed student loans.

Nelnet spent $300,000 on lobbying in the first half of this year, according to its disclosure reports. One of the company’s registered lobbyists is Amy Tejral, a former legislative director for Sen. Ben Nelson (D-Neb.), who is one of the most vocal opponents of the administration’s proposal.

Nelson’s state is home to Nelnet, which employees about 1,000 people. The lender was the third largest contributor to Nelson’s campaign committee in the 2008 election cycle, with its PAC and employees donating $49,100, according to the Center for Responsive Politics.

Spreading Campaign Cash

Sallie Mae also has forged close ties to lawmakers in both parties by using its political action committee to shower them with campaign contributions — more than $2.5 million in the past decade, according to the Center for Responsive Politics.

Since the Democrats took control of Congress in 2006, Sallie Mae has wooed key Democrats. In the 2008 election cycle, Sallie Mae’s PAC gave $10,000 to the Blue Dog PAC, and an additional $145,500 to the individual campaign committees of Blue Dogs and Democrats on the House Committee on Financial Services, according to a Huffington Fund review of campaign finance data compiled by the Center for Responsive Politics.

Rep. Paul Kanjorski (D-Pa.), chair of a House Financial Services subcommittee, is one of Sallie Mae’s most loyal friends. Sallie Mae is one of the largest employers in Kanjorski’s district, and it was the second largest contributor in 2008 to Kanjorski’s campaign committee and leadership PAC. The company and its executives donated $26,150.

Kanjorski has boasted of how he has used his leverage on the committee to keep Sallie Mae happy. “I got Sallie Mae here and I kept Sallie Mae here because of my activities with them at a federal level,” he once told the Wilkes-Barre Times Leader, “making sure that we have a very favorable climate for them to remain.”

An internal strategy document obtained by Miller, the House education chairman, and published by Higher Ed Watch, a blog of the New America Foundation, shows that top executives of Sallie Mae saw “Democratic control of Congress” as the No. 1 challenge facing the company. They then laid out, as their top “high-level political strategy,” a plan to channel PAC contributions to fiscally conservative “Blue Dog” Democrats and Democrats on the House Financial Services Committee. The objective, as Sallie Mae’s strategy document put it, was simple: “grow pro-FFELP [Federal Family Education Loan Program] coalition within the Democratic Party.”

Miller soon announced that he was siding with Obama’s plan and on July 21 his committee approved legislation along those lines by a vote of 30 to 17.

Sallie’s Lifeline

But even if Sallie Mae’s lobbyists fall short and the company’s alternative fades, it isn’t likely to face massive layoffs or cutbacks. Instead, Sallie Mae has a pretty good backup plan in place -thanks, ironically, to the government-run Direct Lending Program that it has fought for so long.

When the credit crisis disrupted the availability of education loans last summer, Congress authorized the government to buy tens of billions of dollars in existing loans to keep the money flowing to students. Then, just last month, the Education Department picked Sallie Mae to be one of four companies that will, under a renewable five-year contract, service those loans in exchange for fees.

Tucked in the Education Department’s press release about the deal was this highly important sentence: “The selected contractors will also service loans originated by and sold to the Department in the future.”

Sallie Mae already services more than 35 percent of all student loans. A new huge stream of servicing business under its contract with the Education Department could offset losses under the Obama plan.

“We’re very confident that even in a servicing mode, that we have the earnings power to generate a substantially higher stock price,” Lord told Wall Street analysts this spring.

Danielle Knight is a former investigative reporter for U.S. News & World Report. The Huffington Post Investigative Fund is an independent nonprofit journalism venture based in Washington, D.C.