According to the Huffington Post, Sallie Mae has been drawing huge profits from the dramatic increases in college tuition fees and student debt. Now, colleges and teachers are investing in the private lender to get a piece of the pie.
The annual costs to attend public and private schools have risen has risen 57% and 44% since 2005. This means students at private schools are paying over $40,000 more for school than what they would have paid nearly ten years ago.
Also rising tremendously is the “cost of attendance gap,” or the difference between what a four-year degree will cost versus how much government loan money is actually available. The typical public school student needs to make up for a $69,000 gap and the average private school student faces a $152,000 hole.
As a result, Sallie Mae generated a 21% return on equity last year, mostly due to the lack of competition. This is rather strange considering the 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, we’re making loans to the parents and students, family education loans. Their alternatives are fairly limited.”
Sallie Mae made $939 million last year, and its highest net income in 2006. Sallie Mae receives $174 billion in government assets and has achieved a cumulative $7.3 billion profit over the last ten years.
Any company making this much money is obviously worth investing in. Its shares rose 54% in 2012, which is why many colleges such as Harvard, Mount Holyoke and the University of Michigan hold stakes in Sallie Mae through their investments in Highfields Capital Management. Founded by two top executives of the Harvard Management Co., Highfields is a hedge fund manager that owns nearly 40 million shares of Sallie Mae, or 8.6% of its entire stock.
The executives kicked in $500 million to launch the hedge fund. Some of its investments include pension plans, endowments and charitable foundations.
A great deal of these pension funds belong to 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 the California State Teachers Retirement System.
Sallie Mae brought in capital gains of $284 million in 2009 and $321 in 2010 thanks to the student loans it sells to the U.S. Department of Education.
This is actually nothing compared to 2006 when Sallie Mae reported at least $1 billion in profit and an equity return above 20%, primarily because students were borrowing at interest rates almost 5.0 percentage points above the usual corporate rate.
Last year, students were paying interest rates up to 7.5 percentage points above this benchmark corporate rate. Sallie Mae, however, just borrowed $2.1 billion from the government with an interest rate of .30%. Probably because it spent more than $1.4 billion lobbying members of congress.