After watching a bit of the ‘grilling’ the House Financial Services Committee handed out to eight of the world’s most brilliant financial minds Wednesday, it’s convincing that most of the representatives on the HFSC are members of the wrong committee and that these head honchos have learned little.
Ever the enterprising individual, Lloyd Blankfein, chief executive at Goldman Sachs, offered in response to a question regarding current lending practices that his bank just issued $13 billion in loans to various groups, one being the student loan giant Sallie Mae.
Last year Sallie Mae was the third most profitable financial services firm in the world. Have the giants taken a hit, as these capital contributions would suggest? Or is this just another case of the politicos servicing one of their own? To answer this let us take a look at the student loan business from which Sallie Mae reaps its profits.
Student loan organizations benefit from a host of government regulations that make it impossible to turn in a loss. Roughly three-forths of student loans are backed by the U.S. Treasury, meaning any defaulted loans will be subsidized by the U.S. government. Granted, this keeps interest rates down, but also encourages predatory lending practices.
Student Loans can only be consolidated once, thereby committing the borrower to one lender for the life of the loan. Considering most student loans are given in 10 or 30-year terms, it’s a safe assumption to assume you’ll be getting to know your lender quite well.
The future looks bright for these student loan entities as post secondary enrollment continues to rise. Barring college students suddenly being able to pay for tuition in cash, massive profits are guaranteed.
An increasing customer base with a guaranteed increasing rate of return for as long as it takes customers to pay off these debts – now that is some business plan.
Sallie Mae, like most financial services firms, really could care less if you don’t get your student loans paid off until you are at retirement age. The purpose of Goldman Sachs loan was merely to increase customer base, and thus, profits.
