With the government takeover of the student loan business, L.A.’s big loan originator, ALL Student Loan, would seem to be headed toward a quick extinction.
But thanks to an aggressive campaign that involved hiring a well-connected Washington lobbyist, the non-profit lender appears to be one of the few beneficiaries of the change.
ALL Student Loan is expected to be the only entity in California and one of just a few dozen across the country selected by the U.S. Department of Education to service newly originated student loans under the legislation.
The subject of bitter partisan debate, the legislation eliminated federal subsidies for commercial banks and non-profit lenders and moved origination of federally backed student loans solely into the hands of the government – a move that backers contend will save taxpayers billions but has upended a decades-old industry.
Like other lenders, ALL Student Loan will lose a substantial portion of its business. But under a controversial provision in the legislation, several dozen non-profit organizations will be awarded servicing contracts with the government in the coming months to ensure timely repayment of up to 100,000 loans each – a potentially lucrative deal.
“The big opportunity that the new legislation provides for us is to become a servicer of federally originated loans,” said Quentin Wilson, chief executive of ALL Student Loan. “Our future prospects depend largely on our success in implementing a new business model based on this opportunity.”
Indeed, ALL Student Loan has a big hole to fill after ending lending operations; it originated 43,000 federally guaranteed student loans totaling $220 million over the past academic year.
Like most lenders, the organization makes money on loans it originates. That business is going away, but it stands to make fee income by keeping track of payments and other service work for the student loans that will be made by the government. Whether that new business will be enough to offset the old one is unclear, but it should certainly be hefty enough to keep ALL Student Loan a thriving concern.
In addition to expanding its servicing business, the organization also is exploring the feasibility of offering private student loans.
Such a loan, which has no government backing, works much like any loan a commercial bank would make to a borrower.
Service king
Founded in 1980, ALL Student Loan, on Center Drive West not far from Los Angeles International Airport, ranks among L.A.’s largest non-profits. It has about 50 employees and $1.7 billion of loans under management. The organization is the only non-profit student lender in California, competing primarily with large banks such as Wells Fargo & Co. and U.S. Bancorp, two of the most active lenders in Los Angeles.
Currently, four large student loan companies – Sallie Mae, Nelnet Inc., American Education Services/PHEAA and Great Lakes Education Loan Services Inc. – provide the bulk of the servicing work for newly originated loans. Such work involves collecting, tracking and processing payments during the life of a loan. The four companies will continue to service the majority of new loans, but non-profits that meet eligibility criteria will compete for contracts to service up to 100,000 loans each in their state.
ALL Student Loan is the only organization in California that would be eligible, according to a Democratic Education and Labor Committee aide who spoke on condition of anonymity. The contracts will likely be awarded in the coming months.
Mark Kantrowitz, publisher FinAid, a financial aid information Web site, said there are about 35 eligible non-profit student loan companies in the country. While the overhaul legislation will likely lead to considerable layoffs and contraction in the industry, those servicers could be the biggest winners.
“They’re losing their origination volume, so they’re losing the fees that they had been getting for originating loans, but they are gaining servicing volume,” he said. “In fact, their servicing volume might compensate.”
Lobby fight
The overhaul, though dramatic and wide-ranging, was overshadowed after being tacked on to the historic health care reform legislation that was signed into law in March.
As a result, the Democratic Party-backed student loan legislation passed despite boisterous objections across the aisle. Minnesota Rep. John Kline, the ranking Republican on the House Education and Labor Committee, called the overhaul “yet another one-size-fits-all government bureaucracy” that would rob the student loan industry of vital competition.
As iterations of the overhaul legislation made their way through Congress over the past year, lenders spent millions to try to influence the final language.
ALL Student Loan was one of the top lobbyists, shelling out $180,000 in 2009, up threefold from the previous year.
The organization had not been a big lobbyist in the past, Wilson said, but it made the effort after receiving indications that lawmakers were interesting in giving non-profits a role in servicing loans.
The organization was facing a “life-or-death situation,” he said, because lawmakers were weighing proposals that would not have given non-profits any role in servicing.
ALL Student Loan hired several lobbyists, including Vincent Reusing, who has been described by the Chronicle of Higher Education as a personal friend of California Rep. George Miller, D-Concord, who chairs the Education and Labor Committee and sponsored the legislation. ALL Student Loan looked at several lobbyists before settling on Reusing, who showed a keen knowledge of the student loan industry and a familiarity with key lawmakers, Wilson said.
“He had worked for other student loan companies,” he said. “We didn’t want to have to educate somebody on the whole student loan industry. It’s complex and challenging.”
Reusing did not respond to requests for comment. A representative of Miller was traveling and not available for comment.
ALL Student Loan has caught flak for its efforts. Both the Wall Street Journal and Fox News have suggested recently that the organization received unfair favoritism at the expense of private banks as a result of the lobbying.
But Wilson has no regrets.
“We made a business decision that we should communicate as strongly as possible … with Washington,” he said. “I’m glad we made the commitment. It’s given us a chance. It doesn’t guarantee success, but it’s given us a chance to succeed.”
Exploring alternatives
There is a variety of federally backed financial aid for education, including Stafford loans for undergraduates; PLUS loans for parents of students; and consolidation loans, which combine multiple loans into one.
Lenders must stop offering all of these government-backed loans by July 1. Many, however, have already begun pulling back. Wells Fargo, one of the area’s largest student lenders, has been moving toward private loans over the past year.
“The private loan business is a priority for us,” said Jeff Blount, senior vice president for marketing in the bank’s education financial services business.
Many banks tended to favor government-backed loans because while they weren’t highly profitable, the federal guarantee made the risk from defaults near zero, Kantrowitz said.
With that option gone, he expects many lenders to explore private loans because the demand is still significant. Though even the private loans have thin margins, they can spark valuable long-term customer relationships, are about as profitable as credit cards and are simple to manage.
“It doesn’t have the same regulatory burden as the federal loans did, so it’s actually a little easier for them to manage,” Kantrowitz said.
The industry has endured a considerable and sometimes painful contraction in recent years due to a variety of factors, including the difficult economy, the expected legislative changes and industry scandals.
Bank of America Corp., which was implicated in a 2007 controversy in which lenders provided gifts to university financial aid officers in exchange for preferential treatment, has since ended its student loan program.
Wells Fargo, U.S. Bank, ALL Student Loan and Bank of America – prior to its recent move – have been some of the most prominent lenders to local students, said Ronald Johnson, director of financial aid for UCLA.
But instability in the industry has prompted the university to transition away from the private sector recently and begin pushing federally backed loans. Johnson cited the recent industry scandals as factors in its decision.
“We made a very conscious and deliberate and logical move,” he said.
Because the school has already begun the transition, Johnson said it will be ready before the next school year begins. “It will be fairly seamless as far as students are concerned.”
