Editor’s note: This commentary is by Nathan Freeman of Northfield.
The Vermont Student Assistance Corporation recently launched a legislative lobby campaign against the Student Aid and Fiscal Responsibility Act, President Obama’s direct student lending proposal. VSAC, a middle manager for federal loans, is looking to Sens. Patrick Leahy and Bernie Sanders to include language in the bill that will require Vermont students to work with the Winooski office in the application and disbursement of Stafford loans, PLUS loans and the like. Essentially, VSAC wants to maintain the virtual lending monopoly it has created over the last several years.
According to a WCAX report, Leahy and Sanders are not ready to say how they will vote on the bill.
As the student lending bill moves forward in Washington, D.C., VSAC is rallying its supporters through its “Save Our VSAC” campaign. On Jan. 25, the lender presented vetted letters solicited on Facebook, praising its outreach program and customer services.
Let me say right off that it’s important to acknowledge the fine work of VSAC’s counselors and customer service representatives. The lender’s 300-plus employees are among the best in the nation. This is the face of VSAC that Vermonters identify with as they rally around the “Save our VSAC” lobbying campaign.
What most people don’t see, however, is VSAC’s financial dealings behind the scenes – its huge losses in the bond market and its in-house corporate largess.
VSAC’s losses should raise alarm bells. Last year, VSAC pulled $23.1 million from emergency reserves, using $10.1 million just to cover day-to-day operations. The remaining $11.9 million shored up the lender’s creditworthiness. Because of VSAC’s long record in withholding information from the public as required by law, it’s difficult to know how much more money has been lost since June 30, the date of the company’s last annual report.
In short, VSAC is bleeding money at a frightening rate, and it may be too late to save VSAC no matter what legislation is passed.”
In short, VSAC is bleeding money at a frightening rate, and it may be too late to save VSAC no matter what legislation is passed.
Why? The financial crisis can’t be blamed entirely for VSAC’s desperate situation. Nine months after Wall Street’s crash, the executive team from Winooski’s swank offices reacted hastily in an attempt to raise money for new student loans. VSAC’s traditional source of capital, the auction rate market, failed in January 2008 unexpectedly, catching bond issuers and investors off guard. VSAC executives panicked and, neglecting systemic market risk, jumped into the variable rate market about six months later despite reports and warnings.
The move proved unwise. The variable rate market froze and VSAC was soon stuck once again. Investors weren’t buying. VSAC found new money for loans that year, but it was only because the federal government intervened.
Another side of VSAC Vermonters don’t see is its slippery, money skimming practices. Between 2002 and 2007 at least 10 public non-profit student lenders abused a loophole in the law in a scheme to access a pre-1993 federal guarantee of 9.5% on loans when loan rates fell as low as 3.5%. Across the public lending industry, tens of billions of dollars have been skimmed from American taxpayers as VSAC and similar institutions took advantage of a very clever scheme, slicing, dicing and selling complex investment vehicles, not unlike Wall Street’s mortgage hustle taking place at the same time. Finally, in January 2007, after the Inspector General had declared these types of manipulations illegal, VSAC refused to submit to an independent audit requested by the Department of Education.
VSAC has also been named as one of 10 public student lenders in a whistleblower lawsuit to be heard in federal court. At the present time, the lender has been dismissed from the case due to its argument that VSAC is part of the State of Vermont. Other state authorized student lenders also named in this case include VSAC’ peer non-profit lenders in Pennsylvania, Kentucky, Texas, Arizona and Arkansas as well as Sallie Mae. The plaintiff intends to appeal VSAC’s exemption from the lawsuit, “at the appropriate time.”
Meanwhile, back in Winooski, despite VSAC’s perilous situation, CEO Don Vickers continues to take home almost $250,000 in total compensation.Travel expenses, another indicator of corporate largess, topped $660,000 in 2008. Corporate largess has been a decades-long issue of controversy at VSAC, beginning in the early 1980s when Gov. Madeleine Kunin ousted Ron Iverson for excessive compensation and travel expenses.
Vickers, Iverson’s deputy, has held the top position ever since.
Today, in opposition to President Obama’s direct lending bill, VSAC is framing the debate in the same way Teabaggers make their case against the national healthcare bill. The federal government, the lender argues, cannot provide adequate customer service or efficient provision of services. In an emotional plea to its supporters and a political cry for help, VSAC has somehow escaped this obvious irony and duped its supporters into a state of amnesia.
In the 1990s thousands of Vermont students benefited from low interest rates afforded by federal loans administered through the financial aid offices of colleges and universities. The opportunities and advantages of direct lending offered during that time arrived because of the hard work of people who understand the inner workings of government and higher education. Among those was Vermont’s own Madeleine Kunin in her role as Deputy Secretary of Education under the Clinton administration.
President Bill Clinton campaigned on the promise of a cheaper and simpler lending opportunities for students and a less costly program for taxpayers. Direct lending was a program Vermonters wanted. It was a reality that we enjoyed and now seem to have forgotten.
Direct lending funds were severely cut back in the earliest years of the Bush administration. Worse, officials at the Department of Education, against the will of Congress and the Inspector General, began to encourage and assist student lenders to access the aforementioned 9.5% federal guarantee loophole. Direct lending was a gift for many students under President Clinton. The illegal taxpayer funded 9.5% subsidy was a gift to VSAC under President Bush.
A final point of note is the potential loss of 200 jobs in Winooski should the direct lending proposal pass into law as written today. Before we bemoan the economic impact to Chittenden County, we should remember that due to VSAC’s financial spiral, these jobs are in jeopardy already. We should also remember that Vermont students and families ultimately pay for VSAC’s corporate largess. Like banks on Wall Street, VSAC has created its own financial troubles through poor management decisions, and it is patently unfair to limit student borrowing choices primarily to VSAC. Young Vermonters who attend higher education should not be forced to carry their lender’s burdens.
It’s time to take a step back and objectively examine both the “Save our VSAC” publicity campaign and the benefits direct lending may provide. Ramming VSAC’s emotionally driven campaign into legislation on either the state or federal level would be a tragic mistake and could lead to unfortunate consequences.
Who knows, maybe there’s a completely different lending solution in the offing. In the months to come, the Vermont House Finance Committee will hear testimony regarding another financing solution for Vermont agencies and quasi-government institutions, including VSAC.
Let’s not make a hasty, emotionally driven policy decision on student lending — all for the love of VSAC.
