Student loans generate profits Middlemen provide guarantees, chase after defaulters

March 02, 1997|By David Folkenflik | David Folkenflik,SUN STAFF

FISHERS, Ind. -- The USA Group puts up none of its own money to lend to students for college loans. It assumes almost no risk if they do not pay their loans back. What this ostensibly nonprofit company does best, however, is earn tax-free profits of more than $100 million a year from students and taxpayers alike.

Susan Conner, USA Group's vice president for public affairs, describes the Indiana company's business this way: "We don't make a loan, but we make a loan possible."

In guaranteeing more than $5 billion in college loans last year, including $217 million for students at Maryland campuses, USA Group has established itself as the largest guarantor of student loans in the nation and the state. It handles one of every three college loans in the country.

Yet critics say that USA Group and other companies like it are unnecessary middlemen who absorb money that could otherwise go toward subsidizing college students.

"You have these organizations that are really federal entities that think of themselves as these corporate types," said Art Hauptman, a scholar at the American Council on Education. "They've created a monster."

The reason for the guarantee agencies' existence can be traced to a basic fact -- banks do not trust college students to pay back their loans.

In the 1960s, the government began a program to lend money to students, but it collapsed a decade later. After that failure, the federal government promised banks they would not lose money if they made loans to students.

To carry out its pledge, the government created huge pools of money to be managed by guarantee agencies, which are either divisions of state governments or private, not-for-profit companies. From these reserves, a guarantee agency can repay a bank when a student defaults on a loan. The agency's own reserves are replenished by the federal government.

For processing each loan and for chasing bad debts -- and this is key to the debate -- the company is paid substantial fees by the government, students and banks. President Clinton has sought to eliminate those fees by having the U.S. Education Department lend money directly to students.

Although it is technically a not-for-profit company, USA Group's executives are paid lavish salaries -- the president earns more than $1 million a year. And in the current congressional fight over how best to finance college loans, the company has spent more than a million dollars on Washington consulting firms well-versed in political brawling.

The company

To understand what is at stake, it helps to take a 20-minute drive northeast on Interstate 69 from Indianapolis. As Fishers nears, a gleaming complex appears next to a man-made lake off the highway. USA Group's headquarters stands as a $32 million testament to the importance of a college education to the American dream.

USA Group started in 1960 as a modest charity effort by Indiana executives to help local residents pay for college. Now the company occupies a 400,000-square-foot, five-wing building made of glass and Indiana limestone. About 2,000 employees work there. (Another 700 employees work in other Indiana offices, and 400 workers are at sites around the country, including Maryland.)

The "group" in USA Group is a family of college aid companies dominated by USA Funds, the guarantee agency. USA Group guarantees loans in nine states and handles the paperwork for other guarantors in 11 states.

USA Group's president, Roy Nicholson, 48, is a clean-cut man with a broad smile and a firm handshake. Nicholson could not be a better advertisement for his company: He took out loans to help pay for college, a business degree and a law degree.

"I'm a true believer," Nicholson said. "It worked for me. And it works for the vast majority of students."

It has certainly worked out for his company, as well.

USA Group is a not-for-profit entity, so it does not have to pay dividends. The parent company earned $23.6 million above its expenses for the year ending Sept. 30, 1995. USA Funds, the loan guarantee part of USA Group, made additional profits of $94.3 million on revenue of $216 million for the year, the most recent for which tax documents are available.

Well-paid executives

For 1995, Nicholson received a salary of about $1 million, and his total compensation was just shy of $1.1 million. USA Funds President Edward E. Pollack, Nicholson's chief lieutenant, was paid $555,000 plus $46,800 in benefits. The parent company's top 10 officials averaged $400,000 in annual salaries. Six other executives made six-figure salaries.

That is unusually high pay for the not-for-profit world. Elizabeth Dole, president of the American Red Cross, made $200,000 that year, for example. Rockefeller Foundation President Peter C. Goldmark was paid $408,000. And Elaine Chao, head of the United Way of America, earned $195,000.

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