Routing Around Government Pay Scales
posted by Frank Pasquale
I know, you’re expecting a post on the new compensation czar. But before commenting on that, I want to think a bit about the way in which Sallie Mae–once a GSE, now “fully privatized”–may amount to a de facto end-run around the usual pay scales for government work.
Back in May, Gail Collins editorialized on “the epicenter of the college loan strangeness,” guaranteed student loans. For such loans, she says, the following holds:
We the taxpayers pay the banks to make loans to students.
We the taxpayers then guarantee the loans so the banks won’t lose money if the students don’t pay.
We the taxpayers then buy back the loans from the banks so they can make more loans to students, for which we will then pay them more rewards.
As she noted in another column, “The White House believes that if it cuts out the middlemen, and just gives the loans to the students directly, it can save $94 billion over 10 years.”
Predictably, the middlemen have furiously lobbied to preserve their prerogatives. Sallie Mae has “hired two prominent lobbyists, Tony Podesta, whose brother, John, led the Obama transition, and Jamie S. Gorelick, a former deputy attorney general in the Clinton administration.” The lobbyists are to press the case that private lenders create value via “marketing, customer relations, billing, default prevention and collection of delinquent loans.” Collins counters that “The real competition among the lenders is not to win over students so much as the school financial aid officers . . . [leading to] thinly disguised bribes and kickbacks.” The Wall Streeting of higher education encourages such shenanigans.
I only have a couple of comments on the situation.
First, I have to wonder if we really can say that Sallie Mae has been fully privatized. All the guarantees it enjoys suggest a great deal of government intervention here. It spent $2,758,700 for lobbying “in the first half of 2007, and gave $572,000 to federal candidates in the 2006 election.” Though perhaps it’ll never be a state actor under what Michael Froomkin calls “our deeply twisted and narrow state action jurisprudence,” it seems more like an agency of the government (or perhaps a QUANGO?) than a contractor. Stephan Padfield gives several compelling reasons to think of such entities in this way.
So while Sallie Mae has many of the prerogatives of an agency, it can pay very high salaries to executives–such as the $13.2 million earned by its vice chair last year. Perhaps the ultimate rationale for keeping Sallie Mae around is to break the Procrustean bed of the Government Pay Scale. Do readers have any other rationales to offer? If it is superior to direct federal lending in “marketing, customer relations, billing, default prevention and collection of delinquent loans,” is that superiority worth $94 billion over 10 years? I think Chris Sagers’ article “The Myth of Privatization” (59 Admin. L. Rev. 37) suggests an answer to that question:
the basic choice in the organization of society is not between organization by government bureaucracy on one hand, and markets on the other–a choice that is assumed in the privatization literature. Rather, the basic choice is between two kinds of bureaucracy, which really do not differ much at all. Indeed, the chief difference seems to be that one of them lacks even a nominal obligation toward the public interest.
If the student loan status quo continues, Sagers’ pessimistic conclusion may well be warranted.*
*The pessimistic conclusion: “We have evolved to a state in which neither the individual franchise nor individual buying and selling decisions have any real significance at all, and all individual decisions are constrained by an astonishing array of restrictions set in ways that are neither democratic nor efficiently incentivized.”
June 10, 2009 at 6:41 pm
Posted in: Administrative Law, Economic Analysis of Law, Law School
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Responses (2)
SL Esq. - June 20, 2009 at 6:59 am
Your characterization of taxpayer funding for student loan originators and servicers reflects a lack of understanding about the industry.
First, the fact that Sallie Mae’s federal student loan program relies on guaranties from the federal government can hardly qualify it as a state actor. That’s equivalent to calling Sirius/XM a state actor because the government negotiated the terms under which the companies could merge or calling every physician a state actor because the government sets Medicare reimbursement rates.
Sallie Mae’s federal loans are made on the same terms as every other federal loan, whether written by JPMorgan, Fifth Third, Keybank, PHEAA, etc. Last year, Sallie Mae wrote less than 25% of all federal (FFELP) student loans.
The reference to Ms. Collins column also reflects a lack of knowledge about the industry. The reason taxpayers subsidize FFELP loans is because the public has an interest in ensuring student loans are available at certain interest rates. I suspect your post doesn’t sincerely intend to insinuate that these lenders would continue to make these loans to the same recipients at the same interest rates without taxpayer guarantees. The market has already proven that notion incorrect based on the rates available for private loans from these same lenders. The terms for the private loans include higher interest rates and more difficult credit criteria.
So, sure, the government could stop supporting these loans. And just as assuredly, these loans would stop being available.
Now, to the question of whether the government could save money by writing the loans itself. There may or may not be an opportunity for savings, but it certainly isn’t $94B over ten years. Servicing student loans requires a massive infrastructure including call centers, data centers, marketing teams, financial aid advisors, banks, accountants, lawyers, etc. The government could certainly do all these things, but not without creating a massive new branch of the Department of Education. And ironically, the easiest way to save money would be to eliminate many of the requirements the government places on the lenders now, including detailed record-keeping and communication responsibilities. The way the government saves $94B is by choosing to not meet its own standards for good servicing.
If you look at the numbers, the $94B is pure fiction. As of a year ago, there were about $375B in outstanding FFELP loans. $9.4B is 2.5% of those loans. Do we really think the government can service all those loans with overhead of less than 3% of assets?
The real opportunity for the government is probably in switching to Direct Loans, while letting the current industry infrastructure service those loans. That lets the government capitalize on its position as guarantor without requiring a massive expansion of the Department of Education (not to mention the loss of thousands of private sector jobs). There’s no reason to think the government can service the loans cheaper and better than the private sector, but there may be a small margin of savings by writing the loans directly.
Warren Miller - March 3, 2010 at 12:20 pm
There’s a simple solution to this entire mess: privatize the student loans. Let the institutions make the loans. . .and collect them. All the government program does is jack up demand, which pushes up prices in higher education, which leads to more “help” from the government, which leads to higher prices, etc.
Anyone who cares to take a look can see that those prices have skyrocketed over the last 20 years, well above the inflation rate. The fact that “SL Esq” doesn’t have the spine to put his/her full name on the post pretty much tells the story. Get the government and its nameless, overpaid, and unaccountable bureaucrats OUT of our lives, except for national security and the courts. Get ‘em out. They’re too expensive, too incompetent, totally unaccountable, and completely comatose.
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