University endowments and teachers’ pension funds are among big investors in Sallie Mae, the private lender that has been generating enormous profits thanks to soaring student debt and the climbing cost of education, a Huffington Post review of financial documents has revealed.
The previously unreported investments mean that education professionals are able to profit twice off the same student: first by hiking the cost of tuition, then through dividends and higher valuations on their holdings in Sallie Mae, the largest student lender and loan servicer in the country, which profits by charging relatively high interest rates on its loans and not refinancing high-rate loans after students graduate and get well-paying jobs.
Sallie Mae is a former government-sponsored enterprise that was fully privatized in 2004 and now trades publicly as SLM Corp.
“It’s a conflict of interest,” said Barmak Nassirian, a longtime higher education analyst who most recently served as associate executive director of the American Association of Collegiate Registrars & Admissions Officers. “There is something inherently problematic about benefitting from the financing of the tuition you charge through investments in any lender.”
On average, the annual cost of education at public schools has risen 57 percent since 2005 to nearly $18,000, according to College Board figures Sallie Mae cites in its latest quarterly pitch to investors. Students at private schools are paying more than $39,000, or nearly 44 percent more than they did in 2005.
The so-called “cost of attendance gap”, or the difference between what a four-year degree will cost incoming freshmen versus the amount of government loan money available to them, has risen over the past 10 years by 59 percent to nearly $152,000 for the typical student who started at a private school in 2011, Sallie Mae tells investors. For public school students, the gap has increased 90 percent to about $69,000.
Sallie Mae loans, which are relatively more expensive now than they were before the financial crisis, help “bridge the funding gap,” the company says.
The funds’ investments in Sallie Mae come as Washington policymakers increasingly turn their attention to student debt burdens, weighing stimulative measures that could boost refinancings or increase loan modifications for distressed borrowers, in the face of increasing evidence that student debt is hurting the economy.
The highly profitable company -- it generated a 21 percent return on equity last year -- attributes its earnings in part to the lack of competition in a market in which borrowers’ need for credit is only increasing.
“The margins here are really a function of alternative financing opportunities,” John Remondi, Sallie Mae president and chief operating officer, told investors in January. “And if you think about our products, were making loans to the parents and students, family education loans. Their alternatives are fairly limited.”
Sallie Mae reported $939 million in net income last year, its highest since 2006. The publicly-traded company, which enjoys a government guarantee on most of its $174 billion in assets, has been profitable in eight of the last 10 years, generating a cumulative $7.3 billion profit.
Its shares have risen 54 percent over the past year, outpacing the 19 percent gain in the Standard & Poor’s 500 Index, America’s benchmark equity gauge.
The endowments of Furman University, Harvard University, Mount Holyoke College, and University of Michigan all hold stakes in Sallie Mae through their investments in Highfields Capital Management, a hedge fund that manages more than $11 billion and is the second-biggest Sallie Mae shareholder. As of the end of last year, Highfields owned nearly 40 million shares of Sallie Mae, or 8.6 percent of the company’s common stock.
Highfield investors, according to securities filings, primarily consist of charitable foundations, endowments, pension plans, and governmental entities, among others. The hedge fund was founded by two top executives of the Harvard Management Co., the Ivy League universitys investment arm, which kicked in $500 million to launch the fund.
Pension funds for teachers and other school employees such as the New York State Teachers’ Retirement System, State Teachers Retirement Board of Ohio, Pennsylvania Public School Employees Retirement System, New Mexico Educational Retirement Board, Teacher Retirement System of Texas and California State Teachers Retirement System (CalSTRS) also own significant chunks of Sallie Mae, as does asset manager TIAA-CREF, which oversees retirement funds for teachers, among others.
Highfields Capital declined to comment. The funds either declined to comment or said their ownership stakes were due to passive investments in index funds. Sallie Mae’s shares form part of the S&P 500 and the Russell 3000 Index.
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