The story I want to know more about: SAFRA and Great Lakes Higher Education Corporation

Here’s a story idea for Madison journalists: what do the recently passed SAFRA student loan reforms mean for 1200-employee strong and Madison-headquartered Great Lakes Higher Education Corporation?

The brief synopsis of SAFRA/the Budget Reconciliation that is relevant to this post: beginning in July, all Stafford loans will be publicly-funded and government guaranteed Direct Loans, and not privately-funded but government guaranteed and subsidized FFEL loans. President Obama argued that the FFEL program was a waste to the taxpayers, because the subsidies went to bankers and middlemen instead of students and families.

Under FFEL, lenders – private organizations (for-profit corporations, non-profits, and some state-government sponsored enterprises) raised money from the capital markets (by borrowing money/selling bonds, or by taking in deposits like a bank) and then lent that money out as student loans. Because the lenders are borrowing money to make the student loans, the Federal Government helps the lenders by paying some of the interest on the borrowed money. The Federal Government also promised to step in and pay for students who default on their student loans, in effect making the loan risk-free for the lender, which meant the lender never had to worry about how it would pay off any bonds or loans it had taken out. That guarantee made bonds sold by the lender a safe investment, and as such the bonds didn’t have to pay a very high interest rate.

All together, the lender just profit off the difference in the interest rates the student paid to the lender and the interest rate the lender paid on the funds it borrowed to make the student loan (which, remember, were also being subsidized by the Federal Government!) There are hundreds of lenders, and why not, because it’s a pretty easy way to make money, and the lenders fought tooth-and-nail to keep the FFEL program going, but the gravy train is coming to an end soon. It’s going to be a difficult transition for companies in the business, and there well may be some layoffs, but that’s what happens in creative destruction.

Great Lakes is not a lender, but a big part of their business is supporting lenders by acting as the guarantor and provider: in effect, doing all of the hard work for the lenders. The WSJ gives a good overview in a December 2007 story “Working with Students to pay for college”. With the elimination of the FFEL program, no new loans will be issued, and there will be less and less demand by lenders for Great Lakes services. It won’t go away immediately – all of the existing loans under the FFEL program will continue to exist, and will need to be managed, but it won’t be a growth industry and it would be a slow twilight for Great Lakes.

However, Great Lakes is not a member (at least, not publicly) of the lobbying effort to keep the FFEL program. That can get to the other scenario for Great Lake’s future.

Great Lakes is one of four companies under contract by the Department of Education to “service” the FFEL loans that the Feds already have. You see, sometimes when banks want to get out of the business of handling student loans, they can sell the loans they have to other banks, or, additionally, to the Federal Government. This was especially important in the 2008 credit crunch: banks that needed to refinance loans or roll over bonds couldn’t get credit, and the Feds acted as buyers of last resort. The Federal Government needs to keep track of all of the loans it owns, and make sure that students make their payments, have access to updated balances, etc. Even more importantly, the contracted companies are expected to play a role in servicing the Direct Loan program – which is what all future Stafford and PLUS loans will be after July. Even if SAFRA hadn’t passed, many schools were switching to the Direct Loan program and away from private lenders. (UW Madison announced earlier this year that they were making the switch) Undoubtedly, the news that the Obama Administration was pushing to eliminate the FFEL played a role in pushing some schools to jump ship anyway, but as the FAQ at UW Madison points out, there are benefits to the Direct Lending Program regardless. This summer, Direct Lending activity is going to double, and as an NPR story wonders, will the Department of Education be able to handle the increase in load? Will the Dept of Ed have to rely more on their private partners, in an example that is right of Donald Kettl’s book on the nature of leveraged-governance.

So, what it sounds like, and in talking with some friends at Great Lakes, is that the downturn in FFEL business will likely be more than made up for in growth in servicing the Department of Education directly. (There’s also the possibility of expanding into the private market too, but I didn’t ask much about that.) Even more so, what I’m hearing is that Great Lakes is very bullish and may be looking towards expansion. So, to any enterprising journalist reading this, part of your story should be on what the City of Madison can do to help.

Madison can do the usual, boring things, like put in new stoplights or expand traffic lanes coming up to their headquarters, and if it will help we should. But we can also do something bold. While some of the jobs will be technical – Great Lakes employs a lot of computer programmers – there’s a good chance that at least some of the jobs that will be created aren’t necessarily going to require specific technical skills. Instead, many will just need a solid “liberal education” (after all, you can’t really major in “Servicing Student Loans”.) This doesn’t necessarily mean a full college degree, just some core competency skills.  If Great Lakes knows its going to need people, and if some of the jobs are amenable to it, let’s help them with recruiting – and even more importantly – training. Let’s create a couple month bootcamp and lift more Madisonians into the middle class. Madison will find people and take the risk on the training, and Great Lakes can hire out of that pool at the end. Let’s treat investing in people as economic development instead of bricks-and-mortar.

(If you want to read more about SAFRA and its impact, check out the Student Lending Analytics blog, which is where I found a lot of the links in this post. In particular, check out this roundup of reactions to SAFRA, this post on the day after SAFRA, and the Two Days After post. Also, this roundup from Inside Higher Ed was great, especially the comments, and covered the legislative process from the past few days. )

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