Pennsylvania Legislators Question Sallie Mae's Bid to Take Over State Loan Agency.

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Author: Burd, Stephen

Dateline: HARRISBURG, PA.

FOR THE PAST two months, officials with Sallie Mae, the nation's largest student-loan provider, have been making a full-court press to persuade Pennsylvania legislators to accept its $1-billion bid to take over most of the operations of the state's student-loan agency.

But so far, the loan giant's efforts do not appear to be paying off.

This was especially evident at a hearing held by the Appropriations Committee of the State House of Representatives in which a top Sallie Mae executive faced hard questions from mostly skeptical legislators about the company's efforts to gain control of the Pennsylvania Higher Education Assistance Agency, commonly known as Pheaa.

Speaking before the appropriations panel, June M. McCormack, an executive vice president at Sallie Mae, charged that the Pennsylvania agency had a stranglehold on the student-loan market in the state, and that students had suffered as a result of the lack of competition.

"The question for this legislature is whether this virtual monopoly status benefits Pennsylvania taxpayers, schools, and students over the long term," she said, "or whether it is possible to create a better economic proposition for higher education in Pennsylvania that strengthens lender choice and competition at the school and borrower level."

But several of the legislators pointed out that Sallie Mae had already made inroads in the state -- having made $750-million in loans to students at nearly 300 Pennsylvania colleges in the past year. They questioned how the takeover of Pheaa by one of its strongest competitors would bring increased competition into the state's loan market.

"To make that leap, to say that we should now merge the two main players in the student-loan business, it's counterintuitive to me to think that this promotes competition," said Rep. Dan B. Frankel, a Democrat.

The hearing, which was expected to take four hours but ran all day, gave officials from Sallie Mae and Pheaa the opportunity to make their best case for why the deal, which the loan company offered in December, should or should not take place.

Under the proposed arrangement, Sallie Mae would give the state $1-billion over five years to purchase Pheaa's assets, including its student-loan portfolio, and to manage the agency.

The state would continue to run Pheaa's grant programs, which provide financial aid to students attending Pennsylvania colleges. In addition, Pheaa would still be able to make new student loans under its name. However, Sallie Mae would administer the loans and collect payments on them.

In return, said executives of the loan giant, the state could use the $1-billion to increase support for its public universities and provide more financial aid to its students.

Soon after the offer was announced, Gov. Edward G. Rendell, a Democrat, called it "intriguing." But officials at Pheaa were furious. Two days after Christmas, the agency's board held a special session in which it unanimously rejected the proposal and passed a resolution opposing any effort to sell.

Since then, Sallie Mae officials have focused their energy on building support for their offer in the legislature, which will ultimately decide whether to accept or reject the deal.

A week before the hearing, the company announced that its charitable arm, the Sallie Mae Fund, had made a $500,000 grant to start an endowment for the Fattah Conference on Higher Education. The annual conference, which was created by U.S. Rep. Chaka Fattah, a Pennsylvania Democrat, aims to help motivate and prepare low-income high-school students from Philadelphia for college.

Meanwhile, Pheaa officials have not taken the challenge lying down. In fact, the agency went on the offensive, waging a public-relations campaign that accused the company, in a 60-page publication and in radio advertisements, of overcharging borrowers, overpaying its executives, and outsourcing jobs to India.

The agency also promised to sweeten the pot for Pennsylvania students. With Governor Rendell at his side, Richard E. Willey, Pheaa's president, announced in early February that the agency planned to contribute an extra $300-million over four years to low-income students.

Sallie Mae's critics and competitors are anxiously watching the company's pursuit of Pheaa, the 14th-largest lender in the federal guaranteed-loan program in 2003. They warn that as Sallie Mae grows, diminished competition in the loan program will lead to a decline in services and to higher prices for students, with fewer and less-generous discounts on fees and interest rates.

Mr. Willey echoed those concerns in his testimony at the February hearing before the appropriations committee. He warned the legislators that it would be a mistake to replace a nonprofit enterprise with a for-profit one like Sallie Mae. He noted that nonprofit lenders are required to either return most of their earnings from the student-loan program to the U.S. Treasury or use the revenue to offer generous rebates to borrowers.

"Year in and year out, no organization other than Pheaa has consistently offered lower-priced student loans" in Pennsylvania "because we have no corporate shareholders who demand and deserve a return on their investment," he said. "Our shareholders are our constituents -- Pennsylvania students and families."

Much of the hearing was devoted to allegations made by Sallie Mae that Pheaa routinely intimidates colleges that consider working with other loan providers. The Pennsylvania agency is able to do that, Sallie Mae officials say, because it distributes state grants to colleges and conducts audits of the institutions.

"We certainly encounter the perception from many schools in Pennsylvania that using Pheaa's loan products is the key to ensuring timely grant aid and avoiding unnecessary audits," Ms. McCormack said.

To back up her case, Ms. McCormack referred to an article that ran in January in The Patriot News, the daily newspaper here, about a letter Mr. Willey sent to Chatham College, in Pittsburgh, after it started working more closely with Sallie Mae. In the letter, dated June 22, Mr. Willey wrote, "Chatham College is in effect diverting revenues away from the agency, revenues that are used to support programs at your institution."

Pheaa officials have denied that the letter was meant to intimidate the college. "We don't make threats," said Vincent Racculia, Pheaa's executive vice president for state and federal programs. "We never have."

Representative Frankel, who represents the district in which Chatham College is located, read aloud from a letter that a college official, who had been mentioned in the article, sent to the newspaper charging that he had been misquoted. "I did not say that I considered the letter threatening in any way," wrote Walter B. Fowler, the college's vice president for finance and administration.

One of the witnesses who testified for Sallie Mae -- Michael R. Wisniewski, director of student financial services at La Salle University, in Philadelphia, which uses the loan company as its primary lender -- said he had been surprised to learn he was being audited by Pheaa only a couple of weeks after being interviewed for the Patriot News article.

Mr. Wisniewski was not mentioned in the article, and he acknowledged that La Salle was due for an audit and that the timing could have been a coincidence.

"I don't have any evidence" that the audit was related to the interview, Mr. Wisniewski told the committee.

Some legislators faulted Ms. McCormack for making allegations without having firm evidence to back them up. "I don't think you can come to this committee and make that kind of charge without documentation to verify it," said Rep. Thomas A. Tangretti, a Democrat.

Ms. McCormack encouraged the legislators to investigate the allegations to see if they had merit. Under the deal Sallie Mae has proposed, a potential conflict of interest would no longer exist, she said, because while the company would run the loan program, the state would administer the grant program.

"By separating the grant and loan functions," she said, "schools will be free to use whichever loan provider they choose to do business with, which means more competition for student loans in Pennsylvania."

But several legislators Republicans and Democrats alike said that even if the allegations were true, the legislature could find a remedy that was less risky than allowing Sallie Mae to take over Pheaa.

"It seems like there would be a whole lot easier ways to deal with this," said Representative Tangretti.

It is unclear whether the Pennsylvania legislature will hold any more hearings on Sallie Mae's proposal.

Speaking to reporters after the hearing, Brett Feese, the appropriation panel's Republican chairman, questioned "whether it is even worth the committee's time to look at the issue any further."

PHOTO (COLOR): Richard E. Willey, chief executive of Pennsylvania's student-loan agency: "Our shareholders are our constituents--Pennsylvania students and families."

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By Stephen Burd