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


Al Lord

is CEO










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

Struggling Americans Once Sought Greener Pastures—Now They’re Stuck – WSJ

WEST BRANCH, Mich.—When she graduated from high school, Taylor Tibbetts was a bright star in this small Northern Michigan town. She won an $18,000-a-year swimming scholarship to Converse College in Spartanburg, S.C., and departed for her freshman year with high hopes.

Once on campus, however, she felt overwhelmed by her courses and scared and isolated among students from all over the country with different values. After just a week, her mother reluctantly agreed to bring her home.

Three years later, sitting on a vinyl booth at her family’s pizzeria in West Branch where she now works, Ms. Tibbetts, 21, says she longs to live in a thriving city like Denver or Nashville, and regrets her inability to leave here.

“I can’t be the kid that just stays here forever,” she says.

Like a lot of small towns in sparsely populated American counties, West Branch, population 2,067, is in an economic funk brought on by the decline of manufacturing and farm consolidation. In recent years, a handful of retailers, a flour mill and a carpet shop have all closed their doors.

What is troubling about this rural town and many places like it is that while lots of struggling residents see leaving as the best way to improve their lives, a surprising share remain stuck in place. For a number of reasons—both economic and cultural—they no longer believe they can leave.

West Branch is a small town in northern Michigan hurting from the decline of manufacturing and farm consolidation. Brynden Smith, left, and Jaydon Botkins watch as Nate Smith lights a fire.

West Branch is a small town in northern Michigan hurting from the decline of manufacturing and farm consolidation. Brynden Smith, left, and Jaydon Botkins watch as Nate Smith lights a fire.

When opportunity dwindles, a natural response—the traditional American instinct—is to strike out for greener pastures. Migrations of the young, ambitious and able-bodied prompted the Dust Bowl exodus to California in the 1930s and the reverse migration of blacks from Northern cities to the South starting in the 1980s.

Yet the overall mobility of the U.S. population is at its lowest level since measurements were first taken at the end of World War II, falling by almost half since its most recent peak in 1985.

In rural America, which is coping with the onset of socioeconomic problems that were once reserved for inner cities, the rate of people who moved across a county line in 2015 was just 4.1%, according to a Wall Street Journal analysis. That’s down from 7.7% in the late 1970s. It has fallen faster than the mobility rate in metropolitan areas, which the rural rate is now slightly below.

This drop in mobility is not only keeping rural residents from climbing a ladder to better livelihoods, it is choking off the labor supply for employers in areas where jobs are plentiful. This limits the economic growth that naturally occurs when people and capital cluster together, says David Schleicher, a professor at Yale Law School who has studied the issue.

It has also contributed to the nation’s deepening political divide. Small-town residents fed a populist revolt that helped put Donald Trump in the White House last year, reinforcing the administration’s plan to focus on issues such as curbing immigration and creating jobs through infrastructure spending.

Settling In

The share of Americans who reported moving in the past year is at its lowest level since measurement began just after World War II.

Source: Census Bureau

For small towns, mobility has always been something of a problem: When the brightest youngsters leave and don’t return, “brain drain” can be a drag on the community, even if it is a boon for the other cities they settle in. Now, the lack of mobility has become a drag on the entire U.S. economy.

“We’re locking people out from the most productive cities,” says Peter Ganong, an assistant professor of public policy at the University of Chicago who studies migration. “This is a force that widens the urban-rural divide.”

A decade ago, Ogemaw County hit an economic peak thanks to a stable of manufacturing jobs that accounted for more than one-fifth of payrolls in the county, plus work on dairy, soybean and corn farms. Automotive industry workers from Detroit, 175 miles to the south, for decades snapped up waterfront cottages, creating a flow of people between town and country.

Longtime residents say they love the rhythms of the place; schools close for the first day of deer-hunting season and Friday summer festivals bring lots of residents downtown.

Today, manufacturers employ only a third the number of workers that they did 10 years ago, according to census data. Their payrolls have plummeted by 74% adjusted for inflation, or by $30 million. Unemployment has averaged 7.7% over the past year, compared with 4.7% nationally. In one of many ominous signs, census figures show that more residents are using wood to heat their homes.

A derelict building in West Branch that used to house a bicycle factory.
A derelict building in West Branch that used to house a bicycle factory.

Driving through town, Denise Lawrence, the mayor of West Branch, offered a bleak assessment. “The county is the closest thing to bankrupt that you could be,” she says.

Nevertheless, the inflow and outflow of people in Ogemaw County is so small that among its 21,000 residents, it only loses a net of one person a year for every 1,000 residents. Even some young people, who yearn to move to thriving nearby cities like Grand Rapids, find they can’t.

Julie Madsen, the assistant manager at the St. Vincent de Paul thrift store in West Branch, says as many as 80% of queries for financial help come from people under age 35.

Economists say there are several practical reasons for the declining rural mobility—the first being the cost of housing. While small-town home prices have only modestly recovered from the housing market meltdown, years of restrictive land-use regulations have driven up prices in metropolitan areas to the point where it is difficult for all but the most highly educated professionals to move.

Denise Lawrence, the mayor of West Branch, says, ‘The county is the closest thing to bankrupt that you could be.’
Denise Lawrence, the mayor of West Branch, says, ‘The county is the closest thing to bankrupt that you could be.’

A lawyer who leaves Alabama, Mississippi or South Carolina for a job in New York, New Jersey or Connecticut would spend just 21% of his income on housing after moving, Prof. Ganong has found. But a janitor making such a move would have his higher salary gobbled up by housing costs equal to 52% of income.

Shiloh Maier, 38, is desperate to leave West Branch and move to Grand Rapids so she can be closer to her 8-year-old daughter, who lives near there with her ex-husband. The graphic designer has applied for about 70 jobs this year. She is a college grad but finds that employers are bypassing her in favor of younger graduates, which are cheap and abundant in the state’s second-largest city.

She continues to work in West Branch as a customer service manager for a manufacturer earning $20 an hour. Every other weekend, she makes the nearly three-hour trip to bring her daughter back for a visit—two loops that result in 12 hours of weekend driving.

“I’m stuck,” she says.

Shiloh Maier, at top with her son, would like to move to Grand Rapids to be closer to her daughter, who lives with her father near there, but she hasn’t been able to find work.

Shiloh Maier, at top with her son, would like to move to Grand Rapids to be closer to her daughter, who lives with her father near there, but she hasn’t been able to find work.

For many rural residents across the country with low incomes, government aid programs such as Medicaid, which has benefits that vary by state, can provide a disincentive to leave. One in 10 West Branch residents lives in low-income housing, which was virtually nonexistent a generation ago. Civic leaders here say extended networks of friends and family and a tradition of church groups that will cover heating bills, car repairs and septic services—often with no questions asked—also dissuade the jobless and underemployed from leaving.

Tom Quinn, president of the local Kirtland Community College, says the rationale boils down to: “I’ve got good social services. I’m stuck in one big rut. If you ask me to go to Indianapolis, I can’t—even if there’s a job there.”

“People can’t move,” says Mandi Chasey, county economic development director.

Another obstacle to mobility is the growth of state-level job-licensing requirements, which now cover a range of professions from bartenders and florists to turtle farmers and scrap-metal recyclers. A 2015 White House report found that more than one-quarter of U.S. workers now require a license to do their jobs, with the share licensed at the state level rising fivefold since the 1950s.

Stuck in Place

Few people are moving in many low-opportunity regions such as Appalachia, the Mississippi Delta and the rural Midwest.

Source: Census Bureau

Janna E. Johnson and Morris M. Kleiner of the University of Minnesota found in a nationwide study that barbers and cosmetologists—occupations that tend to require people to obtain new state licenses when they relocate—are 22% less likely to move between states than workers whose blue-collar occupations don’t require them.

Beyond the practical difficulties, rural residents and experts say there is another impediment to mobility that is often more difficult to overcome—the growing cultural divide.

Tom W. Smith, who runs the University of Chicago’s General Social Survey, says that cities’ welcoming attitudes toward immigrants from abroad, same-sex marriage and secularism heighten distrust among small-town residents with different values. That widens the cultural gulf.

Motorcycle fans take part in a raffle on ‘Bike Night’ at the Ogemaw Lanes & Lounge bowling alley.
Motorcycle fans take part in a raffle on ‘Bike Night’ at the Ogemaw Lanes & Lounge bowling alley.

Economists have tried to measure whether Americans’ eroding trust in one another is damping mobility—such confidence helps ease the transition to a new town—and found signs that this sliding trust may be keeping people from uprooting.

According to the GSS, the share of Americans who agree with the statement “Most people can be trusted” has fallen over the past four decades to 31% in 2016 from 46% in 1972. Raven Molloy, an economist with the Federal Reserve Board of Governors, found in research that states with large declines in overall trust were also places where job-switching had decreased markedly.

Cody Zimmer, 29, of Ogemaw County toyed with moving to work for an uncle in New Jersey or closer to Detroit after a decadelong career in skilled manufacturing periodically left him unemployed. But student debt and a divorce damaged his finances, and he says his best option ended up being renting his mom’s house outside West Branch. “If anything happened there, I’d be right back out on my own,” Mr. Zimmer says of these other places.

Bad experiences in cities also turned him off. In one job, he traveled the country cleaning Home Depotlocations and recalls feeling uneasy when a black worker at a Kansas CityMcDonald’s told him to leave because white boys didn’t belong in that part of town, he says. He took his children to Detroit for a motocross event at Ford Field and panhandlers hit him up for money.

“Mainstream news media—not to degrade your position—they say Detroit is getting better, but I don’t trust it,” Mr. Zimmer says.

To and Fro

The populations of rural and small towns are fairly stable, with small numbers leaving to go to small cities while similar numbers arrive from suburbs and larger cities. Larger numbers of people in small cities, suburbs and large cities are moving in and out.

Note: The centers of large metros are core counties of metropolitan areas with more than 1 million people. Their suburbs are the other counties in those metros. Medium or small metros are anchored by a city of at least 50,000. The remaining counties are small towns and rural areas.

Graphics by Andrew Van Dam and Paul Overberg. Source: WSJ analysis of Census Bureau data

Many West Branch residents say that the town’s economic woes aren’t enough to make them leave. They point to the safety net the community provides—a helping hand to pay bills, or the way people come together when a neighbor is diagnosed with cancer. “One of the big cultural divides when people move from small towns to cities is this feeling that you can’t be involved in your community,” says David J. Peters, associate professor of sociology at Iowa State University. “You feel powerless to change large cities.”

Christopher Palazzolo grew up just north of Detroit, but after living in West Branch for 26 years, he can’t imagine going back. The 49-year-old father of three has watched his income slide to $11.63 an hour as a retirement home cook, down from the $15 per hour he paid himself when he co-owned a nearby restaurant until 2009. He calls the skinnier wage “rough.”

The bank foreclosed on his family’s home, and for the past eight years they have lived in a low-income housing development, where black rubber tires are strewn around the sand-filled playground, and early-model Pontiac Grand Am cars fill the parking lot. About 70 applicants are on a waiting list for units there.

“I don’t need a fancy car or a bigger house,” Mr. Palazzolo says. “I have no interest whatsoever in dealing with the city, the congestion. I like my little corner of the world.”

The many lakes around West Branch are a big draw. Above, Larry Scott fished on Lake George.
The many lakes around West Branch are a big draw. Above, Larry Scott fished on Lake George.

After leaving Converse College, Ms. Tibbetts enrolled the next year at Lincoln College in Lincoln, Ill., joined the swim team and felt more confident in the classroom. But she returned home after a semester because she clashed with her swim coach. As a conservative Christian, she also found the cultural divide on campus difficult to bridge. Students smoked pot, engaged in casual sex and had parties at their parents’ homes behind their backs. “Our world now is godless,” she says. “I don’t know if the places where I’ve been are places where I could discover God better.”

Determined to try again, she started at Olivet College in south central Michigan in 2016. But she struggled to fit in there, too. She felt uncomfortable when a professor asked students to write about why Donald Trump would make a bad president. Ms. Tibbetts began racing back to work at the pizzeria on weekends to avoid roommates who threw up in the shower after excessive drinking. She eventually moved home.

On a recent evening inside the pizzeria, where Tiffany-style lamps dot the ceiling, Ms. Tibbetts said she isn’t content with her decision. She looked around at the familiar faces and confessed she gets embarrassed when customers rib her about abandoning college.

After a brief stint teaching skiing in Colorado, she is still eyeing other paths out of town, such as a traveling job pitching Red Bull energy drinks at entertainment events.

“I was ready to go from the minute I graduated,” she says. “It was just so hard.”

Taylor Tibbetts attends the Faith Alive Church with her boyfriend, Eli Engebretson.
Taylor Tibbetts attends the Faith Alive Church with her boyfriend, Eli Engebretson

Source: Struggling Americans Once Sought Greener Pastures—Now They’re Stuck – WSJ