This article in the Wall Street Journal, Al Lord Profited When College Tuition Rose. He’s Paying for it is an example of how violating God’s purposes for business creates inefficiencies and inequities in our society (or any society for that matter).
The article (adapted from the book The Debt Trap: How Student Loans Became a National Catastrophe) reveals that back in the seventies – nearly 50 years ago – Congress decided to form the Student Loan Marketing Association and ensured 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.”
The all-too-cozy relationship between the government, the banks and the politicians distorted the cost of a college education, and that distortion increased the price which was ultimately paid for by the students.
At that time, the government was guaranteeing a 3.5% return on every loan Sallie Mae held, which was nearly double the average return that banks could make on other products they sold.
In an effort to save guaranteeing millions to Sallie Mae, in 1993, President Clinton tried to sever ties with Sallie Mae and the banking industry. What resulted was a compromise in which the Treasury department was allowed to make loans directly to students and gave schools the option of working with Sallie Mae or the Treasury Department. Sallie Mae’s stock plummeted.
When Mr. Lord became CEO, he promoted student debt as an investment in the student’s future. He also bundled the loans into packages and then sold off pieces of each package to investors, which increased the value of Sallie Mae and reduced his risk. His marketing and securitization efforts paid off – at least temporarily. In 2006, Sallie Mae originated over a quarter of all Federally guaranteed student loans in the United States.
In 2007, Congress cut the guaranteed profits to Sallie Mae and the banks. His profits plummeted. In 2010, Congress removed the government’s guarantee to banks for student loans and that left the Treasury Department as the biggest source of financing for student loans. Today, Sallie Mae does not—cannot—offer federally guaranteed loans and so they only offer private loans to those who have an ability to repay the loans.
Mr. Lord is reported to have 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.”
In my book A Christian Theology of Business Ownership, I discuss God’s four purposes for Business. I think the Wall Street Journal article shows how Mr. Lord violated two of the four purposes.
One purpose violation relates to products (business exists to create products and services that allow the community to flourish). In the case of students loans, Mr. Lord didn’t create a product that allowed the entire community to flourish. And the real problem here is that Congress incentivized Mr. Lord’s behavior. If the providers of a service profit from the transaction while the customer (the students, not the colleges) are left worse off, then the product/service being offered doesn’t pass the test. He enriched himself at the expense of doing what was right for the students (James 4.17). He didn’t look out for the interests of the students, but only for the interests of his shareholders (Philippians 2.3-4). His influence allowed colleges to raise their tuition at a steady pace and not need to worry as much about inefficiencies, such as building unneeded fancy stadiums or offering degrees in subjects which are spurious, at best. The government guarantee of profits incentivized poor decision making by the colleges and Sallie Mae. But Mr. Lord felt no ethical problem taking guaranteed government profits even when he knew the entire system was increasingly harmful to the student. Instead of providing a healing characteristic to a broken situation, the long-term effect was to create a broken situation.
Anytime a business owner or business leader favors one stakeholder group over another (in this case, shareholders over customers), someone wins at the expense of someone else losing. While many students gained an education, millions are in debt and our national student debt is approaching $2T. Tuition has risen to the point where students can’t afford college without loans and they don’t earn enough after graduation to pay off the loans. In addition, the long-term effect has been to harm those who are poor disproportionately more than those who are rich.
The other purpose which was violated was profits (business exists to create profits, which provides the business sustainability and gives the owner the opportunity to further God’s kingdom through fulfilling the other three purposes). Profits that are created through oppression don’t last long. When Congress takes money from the public to ensure the viability of a private corporation by guaranteeing that corporation’s profits, that’s a form of government oppression on the people, no matter how small the impact is to each individual in our society. A Christian Business Owner would not have participated in this scheme.
In addition, these loans artificially increased demand for a college education. Some, perhaps many, went to college who should not have gone: “The cost of studying is one of the main reasons for giving up on college. In 1989, the cost of one year at a private college was $17,010 and $3,360 at a public college. Today, the prices are $35,830 and $10,230 on average.” Moreover, students have been subjected to rising tuition rates at rates far above the rate of inflation (here and here). The profits earned by the banks and Sallie Mae were faux profits: that money would not have existed had it not been for the full faith and credit of the United States. The market, by itself, would have never supported those profits.
Christian business owners should learn that when they offer a service or product, they must keep all four purposes in view. But they must also be aware of government influence and how such influence can distort their markets. For sure, there are difficult decisions to be made in our increasingly socialistic economy where the government is either licensing, regulating and/or taxing just about every economic activity while also incentivizing preferred economic behavior through the tax code. But by listening to the voice of God, Christian business owners can still navigate these waters and be stewards who fulfill all four of God’s purposes for business.
Bill English, Publisher
Bible and Business
