Al Lord Profited When College Tuition Rose. He Is Paying for It. – WSJ

Al Lord, the former chief executive of student-loan giant Sallie Mae, has a complaint about higher education: The price of college is too damn high.

Paying for his grandchildren’s education in recent years, he said, left him appalled at the tuition bills that land on his desk every semester. For those who know (or in some cases, revile) Mr. Lord, that is quite the twist. He led Sallie Mae through a time of wild success and near-collapse, a period when the company put in place new practices that drove a massive increase in student loan debt starting in the early 2000s.

The sting of high tuition hit him several years back when a grandson enrolled at the University of Miami, which currently charges $75,230 a year for tuition and room and board. That is a far cry from the $175 a semester Mr. Lord recalls paying for his own education at Penn State University in the 1960s. He has also paid for the education of three other grandchildren, to attend Villanova University, University of Miami and Davidson College. The bills have approached $200,000 a head.

“It’s criminal,” he said of what schools are charging these days. He has gained sympathy for families of lesser means. “Boy, am I sure glad we saved for my grandkids. If the average income is $40,000 or $50,000 or $60,000, I just don’t know how you do it.”

Few people had as close a perspective on the cost of college as Mr. Lord, who is now 75 years old. He said he watched with bewilderment for decades as colleges persistently raised their prices faster than inflation. Parents complained; investors and analysts predicted that schools would eventually be forced to stop. They never did. “They raise them because they can, and the government facilitates it,” Mr. Lord said.

 

The irony is that for many years Sallie Mae was the government’s partner, and Mr. Lord’s business model—an unusual blend of capitalist finance and government subsidies—depended on those tuition increases. Mr. Lord acknowledges that many of the universities that charged high tuition were also effectively part of Sallie Mae’s sales force. And few profited so handsomely from the tuition increases Mr. Lord now resents. At Sallie Mae’s zenith, he said, his stock holdings were worth more than $300 million.

Mr. Lord retired as Sallie Mae’s chief executive for the second time in 2013. Eight years later, he admits he and the company profited from the tuition that some families can no longer afford.

“There was no question in my mind I knew what was going on,” Mr. Lord said on a recent evening, staring out the window of an office in his stone front house on a hill overlooking the Severn River in Annapolis, Md.

‘They’re going to take these profits from you’

Mr. Lord, who joined Sallie Mae as its accounting chief in 1981 after stints at a big accounting firm and a bank, was the eldest of three boys raised in a blue-collar family in Philadelphia. His father was a typesetter for the Philadelphia Inquirer. Raised for much of his childhood by a single mother, he and his two brothers shared a room in an apartment growing up.

As a teenager, he stocked shelves, bagged groceries and pushed shopping carts up a hill at the local grocery store to make money. He worked construction during summers. He also delivered newspapers. The money he earned—along with a few hundred dollars his father chipped in—was enough to cover tuition at Penn State, where he majored in accounting. He graduated in 1967.

With piercing blue eyes and a thin build, he said he exuded confidence and had no qualms about speaking his mind. To escape his modest upbringing, he wanted, above all, to make money.

Sallie Mae in the beginning used taxpayer money to ensure that banks made enough money on their student loans. Banks sold those loans to Sallie Mae for a profit.

Photo: Kristoffer Tripplaar/Sipa USA/Associated Press

The student-loan market was on the rise when he arrived at Sallie Mae. Formed by Congress in 1972 as the Student Loan Marketing Association, Sallie Mae used taxpayer money to ensure that banks earned enough on their student loans. Banks sold those loans to Sallie Mae for a profit and used the proceeds to lend even more. Schools were able to hike tuition since students now had expanded access to loans, and they benefited from a rise in Sallie Mae’s market value. The for-profit corporation was owned by universities and banks and governed by a board partly appointed by the U.S. president.

On Mr. Lord’s first day at Sallie Mae, he took home the company’s financial documents and read them that evening. “You’ve got to be shitting me. This place is a gold mine,” he said he recalls thinking.

With tuition rising, college enrollment increasing and the government essentially guaranteeing a 3.5% return on every student loan that Sallie Mae held—nearly double the average return that banks made on other products—he knew such a good deal likely wouldn’t last. Congress agreed to cover any losses that Sallie Mae had while also paying the company an interest rate equal to the 91-day Treasury plus an additional 3.5 percentage points on each loan.

“They’re going to take these profits from you,” he said he remembers telling Sallie Mae’s CEO, Ed Fox, at the time, referring to Congress. Mr. Fox said he also was of the same mind.

Mr. Lord, who became the company’s chief financial officer in 1983, said he pushed for the company to find a new source of money—from investors—so it would no longer be at the mercy of Congress. Other company executives agreed with him. In 1983, the company started selling stock to the public, and less than a year later it joined the New York Stock Exchange. Enjoying a so-called implicit guarantee—the assumption among investors that the government would bail out the company in a crisis—it could borrow in private markets at low interest rates. It instantly became a hot stock.

President Bill Clinton dampened that momentum. In 1993 he called for Congress to sever its ties to Sallie Mae and the private banking industry in a bid to save hundreds of million in profits the government guaranteed to the company and banks each year. Congressional Democrats, in a compromise with Sallie Mae’s defenders, authorized the Treasury Department to make student loans directly and gave schools the option to choose which loan program it would recommend to students. Sallie Mae’s stock plummeted.

SLM share price

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Source: FactSet

The change created chaos in Sallie Mae’s executive suite. Mr. Lord, then Sallie Mae’s CFO, and CEO Larry Hough clashed over how the company should respond to Mr. Clinton’s challenge. Mr. Hough said he wanted to shift away from lending into other types of consumer products; Mr. Lord said he wanted the company to aggressively retake the student-loan market. Mr. Hough fired Mr. Lord in 1993.

In 1995, as Sallie Mae’s stock languished, Mr. Lord organized Sallie Mae’s biggest shareholders to attempt a takeover of the board. Mr. Lord said his pitch to the board was for Sallie Mae to lend directly to college students, and not simply buy loans from banks.

He said one of the main reasons he wanted to do that is because tuition was rising so quickly, and he had a sense the trend wouldn’t end soon. Starting in the 1980s, colleges raised tuition at more than double the rate of inflation, Labor Department data show.

In 1997, the dissident group succeeded, with the shareholders appointing new board members who installed Mr. Lord as CEO, replacing Mr. Hough.

Mr. Lord was a brash CEO. He obsessed over keeping costs to a minimum. He said he told department heads to cut their budget each year by becoming more efficient. He would walk in on meetings and demand that at least one of the employees leave to get back to work. He also rode around in a personal chauffeured bus emblazoned with Penn State colors, and once ended a conference call with analysts by uttering an expletive.

Shrinking giant

As CEO, Mr. Lord promoted student debt as an investment for households and said despite tuition growth, a college education led to high-paying careers. “There seems to be a lot of noise about whether a college education is worth it,” he told Fox Business Network in 2011. “I would say it’s very much worth it.”

To boost the company’s stock value and reduce shareholders’ risk of losses, he turned to securitization—or bundling loans into one package and then selling pieces to investors. Any potentially problematic debt immediately came off Sallie Mae’s books.

His challenge was to persuade schools to steer students to Sallie Mae or the banks—from which Sallie Mae still purchased student loans—instead of the Treasury Department. Sallie Mae promised schools that students would be able to borrow from an additional pot of money that came from private investors. That would allow students to borrow more—and thus schools to charge more.

The incentives worked. A year after Mr. Lord retired for the first time and became chairman, Sallie Mae stood as the single biggest student lender in 2006. It originated more than a quarter of all federally guaranteed loans; the next competitor originated 6%. Sallie Mae held $142 billion in student debt—roughly a third of all student debt. Its stock soared.

When a deal to sell Sallie Mae fell apart in 2007 and the value of the company plummeted, Mr. Lord said friends worried whether they should put him on suicide watch.

Photo: Stephen Voss for The Wall Street Journal

Sallie Mae’s dominance wouldn’t last. A 2007 deal to sell the company for $25 billion to an investor group fizzled when Congress cut the profits it guaranteed Sallie Mae and other banks under the federal program, slashing the company’s profitability. Sallie Mae’s value plummeted, as did Mr. Lord’s stock in the company. Friends worried whether they should put him on suicide watch, Mr. Lord said.

Mr. Lord returned as CEO late that same year, just as the subprime mortgage crisis roiled financial markets. Congress infused the company with billions to ensure it continued to lend to students under the federal program, but in 2010 it took away the government’s student-loan guarantee to banks. That left the Treasury Department as the biggest source of financing for college students. When Mr. Lord retired again three years later, Sallie Mae was a much smaller company making only private loans to students with no guarantee.

A spokesman for SLM Corp., Sallie Mae’s corporate owner, pointed out that Sallie Mae is no longer involved in the federal student loan program. “Sallie Mae offers private student loans to those who have shown an ability to repay, an approach that continues to work for students and families,” the spokesman said.

An epiphany

A year into retirement, Mr. Lord joined the board of his alma mater, Penn State. That is when, he said, he had an epiphany: Colleges were incredibly inefficient businesses, and the student-loan program enabled them.

He was stunned to learn how big Penn State’s budget was, about $5 billion, and how quickly it grew. (Penn State’s budget is currently $7.7 billion.) He recalled the athletic department requesting approval for a costly renovation of the football stadium to improve the experience for fans. Mr. Lord was aghast. “All they need to get fans is to win,” Mr. Lord said.

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Mr. Lord said that after raising spending concerns at one board meeting, a fellow member— Kenneth Frazier, executive chairman of drugmaker Merck & Co.—took him aside in a hallway. “Al, this isn’t your company. They don’t think the way you’re thinking,” Mr. Frazier said, according to Mr. Lord. Mr. Lord said he replied: “That doesn’t make it right.” Mr. Frazier couldn’t be reached for comment.

Mr. Lord declined to run for a second term on the board in 2017 after a statement he made to the Chronicle of Higher Education—he said he had been losing sympathy for the sexual-assault victims of Jerry Sandusky, longtime assistant to Penn State head coach Joe Paterno—drew ire. Mr. Lord said he was pressured to resign, but he said he had been planning on leaving the board before the incident.

It was also around that time that his grandchildren started attending college, which he said triggered thoughts about how he was able to work his way through school. “A thousand dollars or a $1,500-a-year education was in bounds,” he said. “You could reach for it or pay for it, and I didn’t take on any debt.” In-state tuition and room and board at Penn State now costs as much as $36,278 a year.

As student debt approaches $2 trillion, congressional Democrats have called on President Biden to cancel a huge swath of it.

Photo: Drew Angerer/Getty Images

As student debt approaches $2 trillion and congressional Democrats call on President Biden to cancel a huge swath of it, he said he opposes proposals for free college and for forgiving student loans. “Are we trying to create deadbeats out of our young people at age 22?” he asked.

He does, however, admit he had a hand to play in the rising expense of higher education. At Sallie Mae, he said, he viewed his role as single-mindedly increasing the company’s stock value, which prevented him from publicly raising concerns about high tuition. His responsibility was solely to shareholders, not to society at large, he said, and that meant catering to colleges.

“Our customer was almost every bit as much the college as it was the student,” he said. “It didn’t behoove me to lose 100% of the business for something that might make an iota of a difference. No one was looking to me for that kind of information.”

Adapted from “The Debt Trap” by Wall Street Journal reporter Josh Mitchell, to be published by Simon & Schuster Inc. on August 3.

Source: Al Lord Profited When College Tuition Rose. He Is Paying for It. – WSJ

Visa to Card Customers: Lose the Signature – WSJ

Visa Inc. is ditching the signature.

The largest U.S. card network announced Friday that merchants, starting in April, will no longer be required to make consumers sign for debit and credit-card purchases, signaling the demise for a procedure that was once a linchpin of keeping transactions secure.

The other major U.S. networks, Mastercard Inc., MA 0.88% American Express Co. and Discover Financial Services , DFS 0.19% in recent months said they would take the same step.  The signature will still be used by merchants who choose to keep it and, in Visa’s case, will still be required at merchants that don’t accept the security chips that are installed in newer cards.

The companies say improved security features, in particular the chips that in recent years have been embedded in most Americans’ debit and credit cards, outweigh the security provided by signatures. Some say a written name scrawled on a slip of paper or electronic pad fails to provide much protection these days. Removing the signature will also speed up in-store checkout for many consumers, they add.

Many consumers have caught on—signing their name with speed rather than with legibility in mind. The increasing number of card transactions in recent years has basically made something that seemed official more mundane.

A customer signs for a purchase with a Barclaycard MasterCard chip credit card at a Walmart store in Burbank, Calif.
A customer signs for a purchase with a Barclaycard MasterCard chip credit card at a Walmart store in Burbank, Calif. PHOTO:PATRICK T. FALLON/BLOOMBERG NEWS

Some consider it more of a frill and long ago stopped taking it seriously. Colby Gergen, a 28-year old software product manager in Phoenix, says he signs almost every credit card receipt using two triangles. At times, he has used a smiley face.

Mr. Gergen used to sign his full name, then switched to signing only C and G until his signature began to look like two halves of a triangle. One day about three years ago, he figured he’d draw two triangles on a card receipt and see if any store would reject it.

No one did. The new approach is “a combination of speed, laziness and knowing the signature didn’t really matter,” Mr. Gergen says.

Others are showing off on social media more creative signatures they’ve offered to merchants, including stick figures, whale drawings and phone numbers asking cashiers or waiters to call them.

Sadie Morrison, co-owner of Portland, Ore.-based Peruvian restaurant Las Primas, takes screenshots of some of the more interesting signage that customers leave on their receipts. Among her favorites: A signature that consisted of two stars, two swirly circles and a stick-figure face with a unibrow and earrings.

Another one read: “You’re my favorite Las Primas!”

Some merchants say consumers who play around with their signatures aren’t the ones who are likely trying to pay with a stolen credit card. “Someone paying with a stolen credit card isn’t likely to spend a lot of time drawing attention to themselves,” Ms. Morrison said.

As more commerce has migrated online and to mobile phones, signatures have been replaced by passwords, fingerprint recognition and other biometrics. Many gas stations require entering a ZIP Code instead of a signature when paying with a credit card.

Card GiantsU.S. credit and debit cards in circulationSource: The Nilson ReportNote: As of 3Q 2017
VisaMastercardDiscoverAmEx0 million250500750

In many countries outside the U.S., debate about signatures long ago became anachronistic. In most of Europe, consumers have used chip credit cards for decades and have had to validate a transaction using a personal identification number, or PIN. The method has also been adopted in Australia and Canada.

In the U.S., chip cards came into mainstream use in 2015. But the credit cards didn’t feature the PIN as some card companies feared this would slow transactions. Signatures were largely left in place instead of instituting PINs.

Card companies say that chip cards have helped to reduce fraud and that new measures under way, including biometric identification like fingerprints and facial recognition, will provide additional security in the future.

Visa, which processed $836 billion in U.S. transactions in the third quarter, is requiring chip-cards for the signature change in part to incentivize more merchants to accept chip cards. Card companies say that some types of fraud have declined due to chip cards, because chip transactions generate a unique one-time code that is needed for the transaction to be approved—a feature that is very difficult to replicate in a counterfeit card. But some merchants have stuck to accepting the magnetic strips on cards that consumers swipe in part due to the costs of installing the technology to accept the new cards.

Card networks have required signatures for decades, though changes implemented over the years loosened that requirement depending on the dollar amount of the transaction. Roughly 75% of Visa U.S.-based debit and credit card transactions currently don’t require a signature because they are below certain dollar amounts.

Even so, the fact that signatures have held on for some long amazes some. When Mastercard in October said it was ditching signatures, a consumer wrote on its message board: “Congrats on catching up with the rest of the world, America. About time.”

Write to AnnaMaria Andriotis at [email protected]

Source: Visa to Card Customers: Lose the Signature – WSJ

If You Have 29 Credit Cards, You’re Probably a Millennial – WSJ

When Kyle Allen gets home from work each day, he heads straight for his mailbox. “It does give me a rush,” says the 29-year-old financial analyst from Orlando.

What he hopes to find is yet another offer for a new credit card. He and his wife together have 40 of them and have earned, so far, 1,492,500 rewards points. They have used the points in an almost-completed quest to visit each destination named in the chorus of the Beach Boys song “Kokomo.”

Kyle Allen’s credit cards
Kyle Allen’s credit cards

“I keep waiting for them to decline me,” says Mr. Allen of the card companies. “It just doesn’t happen.”

Forget comic books or vintage lunchboxes. Credit cards, and the prizes they earn, are the hot new collectibles for millennials. Fanatics sign up for new cards in every city they visit. They get multiple versions of the same card. (That’s often allowed.) They angle to use their cards to cover tabs at restaurants.

Driving their obsession is an arms race among credit-card companies to offer the best rewards. The trend has spawned blogs and message boards where card holders trade tips and brag about their conquests.

J.P. Morgan Chase & Co.’s Chase Sapphire Reserve card until recently offered a sign-up sweetener of 100,000 rewards points, potentially worth thousands of dollars when redeemed for travel, as many collectors have done. The card, launched last August, proved so popular that 10 days later the bank ran out of the metal required to make them.

Citigroup Inc., American Express Co. and other rivals have enhanced their own cards to compete.

In an effort to get a Chase Sapphire Reserve card, Mary Xu made a card costume.
In an effort to get a Chase Sapphire Reserve card, Mary Xu made a card costume. PHOTO:MARY XU

“I’m kind of a credit-card—maybe junkie is not the right word—but I’m a credit-card enthusiast,” says Mary Xu, a San Francisco cybersecurity manager. In pursuit of points, she spends more than $1,000 a year on annual fees for high-end cards.

She was so disappointed to be rejected for the Sapphire Reserve last October that she spent hours constructing a costume of the card out of cardboard. She sent the bank a photo of herself dressed up, hoping for a second chance.

She was approved about three months later.

“They got the sweet end of the deal over all,” she says. “I went to a Halloween party wearing it, and I’m positive they got at least a dozen referrals from me.”

Rewards fanatics are one reason new credit-card sign-ups in the third quarter of last year were 14% higher than in the year-earlier period, according to the most recent data from credit-reporting firm TransUnion Corp.Credit-card balances in the fourth quarter rose sharply among those under age 40, the firm says.

Many issuers don’t limit the number of cards an individual can acquire. Payment history and overall debts usually are weighed more heavily than numbers of cards in application decisions. TransUnion Vice President Heather Battison says heavy card collectors who miss a payment date could see their credit scores fall disproportionately compared with casual users.

Some cardholders move on to a fresh card as soon as they charge enough to earn their sign-up bonus on one.

Washington, D.C., communications director Daniel Seaton, 31, signed up for a new card not available at home when he was on business in New York in February. It was his 29th new card in the past 18 months. “I’ve definitely kind of scolded friends for using a debit card,” he says.

Ike Lee, 25, a student at Yale School of Medicine, has 16 cards and no income. When friends told him they needed furniture for a new apartment, he hatched a plan to pay for it himself with a card that offers 5% cash back on furniture purchases. He intends to give them a 3% discount when they reimburse him, netting himself a bit of cash.

When Levi Broderick, 32, and a friend recently moved to split the bill at a restaurant, both slapped down the same rewards-heavy card. “He didn’t say anything to me and I didn’t say anything to him, but you could tell by the milling glances that we knew something was going on,” says Mr. Broderick, a Seattle software engineer.

Benjamin Gowdy of Gorham, Maine, a 34-year-old real-estate investor, pitched his girlfriend on a four-hour road trip to nab a Chase sign-up bonus that required an in-person application. “I don’t really feel like blowing up a whole Saturday to sit in a bank,” he recalls her responding.

Benjamin Gowdy of Gorham, Maine, made a four-hour road trip to sign up for a card.
Benjamin Gowdy of Gorham, Maine, made a four-hour road trip to sign up for a card. PHOTO: BENJAMIN GOWDY

He eventually prevailed, and he and his girlfriend, Anna Gardner, set off at dawn in early March in his decade-old Toyota Prius for the nearest Chase branch—in Connecticut. They arrived to find a charged-up mob of other applicants from across New England.

“The crowd made Anna feel like I was a little less insane,” Mr. Gowdy says. Ms. Gardner, 32, signed up for a card, too. “I ate a little crow there,” she says.

A J.P. Morgan Chase spokeswoman marvels at the motivation of applicants. “They’re crazy!” she says.

Over the past year, Chase has signed up tens of thousands of new credit-card customers, with more than half of the high-priced Sapphire Reserve cards going to millennials, the spokeswoman says.

San Antonio engineer Marshall Sharp, 31, uses an Excel spreadsheet to track the due dates for the 24 credit cards he has acquired in the past 11 months.

Because he doesn’t spend enough to qualify for all the rewards, he heads to a local mall and uses his credit cards to buy cash-equivalent prepaid cards, earning points in the process. Then he uses the prepaid cards to pay off his credit-card balances. He recently had to wait a long time to check out because someone ahead of him in line was doing the same, he says.

“The same sort of loop is used for money laundering,” Mr. Sharp says. “Some of my co-workers joke that if the FBI comes, we’ll know where to point them.”

The practice is legal, though discouraged by card companies.

Donovan Frost, 25, a Los Angeles software account manager, broke out his card at a New Year’s celebration this year to cover a $300 group bar tab so he could collect a hefty credit-card bonus tied to restaurant spending.

Some of his friends reimbursed him with cash.

“Cash?” he recalls thinking. “What am I going to do with that?”

 

Source: If You Have 29 Credit Cards, You’re Probably a Millennial – WSJ