This blog used to be about debt. Now it's about a few more things. But really, it all comes back to debt. Trust me.

Thursday, January 18, 2007

Everything Is Connected


Funny how related events happen in pairs. Sallie Mae, which you may know as the country's largest student loan lender, announced earnings to Wall Street today, just one day after congress tried to halve student loan interest rates over 5 years.

It wasn't pretty. And it had nothing to do with the watered down bill congress passed. Last year's quarterly earnings per share: 96 cents. This year's quarterly earnings per share: 2 cents. Ouch.

Why? Because their derivatives and hedging business took a $245 Million dive.
Uh. Derivatives and hedging?

And now a brief summary of Sallie Mae's business model:

Case 1
Sallie Mae loans Mildred money.
Mildred pays the money back over many years.
Sallie Mae makes tons of money.

Case 2
Sallie Mae Loans Franky money.
Franky pays his bill for a couple of months.
Franky gets wise and decides to move to Micronesia, where no debt collector can find him.
Sallie Mae makes tons of money.

That's right. Even if you default on your student loans, the government guarantees the amount and the interest you would have paid to student loan lenders.

After many years of perfectly legal lobbying, congress made it virtually impossible for student loan lenders to lose money.

My momma always told me to stay away from derivatives and hedging.

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4 Comments:

Blogger Mike Perry said...

It looks as if financing student education is a problem the world over - it is in the UK.

Lots of students in the UK finish University owing £10,000 or more (nearly $20000). This is crazy!

Loans are available to students and they have to repay them monthly once they reach a certain income. It means they could be paying off student debts for many years. This is also crazy!

Now if we didn't spend so much policing and attacking other countries ...

Such is life,
Mike.

January 20, 2007 10:30 AM

 
Blogger reversed said...

very true, Mike! Interesting that you call it crazy. It's good to see the perspective from someone who lives in a country that keeps educational costs down -- close to free, from what I understand.

I have noticed a lot of anger surrounging student loans in the UK, New Zealand, even the phillipines. As if we are creating a worldwide caste system -- those in debt and those debt free.

Americans seem to take the cake at the moment.

I have more than $100,000 in student loans. I'm a crazy outlier, but the average, depending on who you believe, is $20-30K. For 2/3 of all college students!

Solutions to this, anyone? This blog sure does rant a lot, but I'd like to use it as a platform to discuss your stories and solutions.

In fact I'll be getting back to these basics in the next post.

January 20, 2007 11:07 AM

 
Blogger Tisha! said...

You're mama is one wise lady!

January 22, 2007 4:29 PM

 
Blogger Tisha! said...

I was invited to be a guest on My Point Radio tomorrow and have put all the details about the show on my blog. I would be delighted if you would listen in!

Take care
Tisha

January 23, 2007 9:44 AM

 

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