Saturday, March 25, 2006

How Do Intelligent People Get into such Avoidable Mess?

There appears to be some disturbing elements at work in the market for student loans, at least in the USA. In a piece that could only appear in a US newspaper, protected by a welcome degree of freedom of speech not found elsewhere (certainly it would be risk to speak so wildly in the UK). So I shall confine my comments to the issues raised by monopoly practices, protected by law.

Alan Collinge writes in the Baltimoresun.com: “Student borrowers over a barrel” (22 March).

And Sallie Mae doesn't want anyone else on the playground. Its spokesman, Tom Joyce, smugly predicted recently that the legislation preventing the refinancing of student loans should make smaller lenders think twice about entering the market.
Combine this with Sallie Mae's acquisition of many of the largest non- and for-profit student loan companies and default collection agencies (with no end in sight), and one can easily see why even the most conservative thinkers (including finance columnist and commentator Terry Savage, the Adam Smith Society and others) are beginning to question how free this market really is.
Sallie Mae's response to this sort of criticism has been to say that it has broken no laws. This may well be true. But as anyone who is familiar with this industry will tell you, Sallie Mae doesn't need to break the law; it has already bought it
.”

Comment

Adam Smith wrote extensively about government sponsored monopolies, as in the Royal Chartered trading companies, such as the East India Company, in none too flattering prose. His experience of them was so prejudicial that he dismissed the role of joint-stock companies as being efficient, or ethical. In sum, he considered they had pillaged the countries they had worked, with the exception of the Hudson Bay Company, protected from competition by the additional barriers to ‘independents’, on top of legislative protection provided by its Royal Charter, from its location in the barren wastes of northern Canada and an atrocious climate.

In the USA a student loans organization, ‘Sallie Mae’, dominates the sector. Some students fall into debt, by carelessness more than mis-selling by Sallie Mae employees, which itself is worrying. One would think that students educated enough to gain admission to a campus university would be protected by their above average intelligence to an above average degree from signing documents they do not understand. This is worrying, and, strangely, is even admitted by Alan Collinge:

Unfortunately, these students don't think twice about signing their student loan papers. In fact, most unfortunately, these students don't think twice about signing their student loan papers. In fact, most don't even bother to read the fine print - or the bold, for that matter.”

Speaking from a negotiator’s point of view, I often advise managers at the Business School where I have taught for 22 years (now retired, but I still deliver once a year the Negotiation class in the MBA course):

“Beware: in contract negotiations you only get the terms you agree to, and must do without the ones not included in the contract.”

So, if Collinge is right and most students don’t “even bother to read the fine print - or the bold”, then I must conclude that any complaints that follow when avoidable things go wrong for them should be referred to themselves for their lapse in the intelligent management of their business affairs. If they do not use their undoubted intelligence enough to protect themselves, should they be admitted to a university, until they wake up?

This does not relieve Sallie Mae from its own corporate responsibilities. Where opportunities for misleading customers abound – especially the absence of competition – it should worry corporate leaders who are implicated, inevitably, in suspicions about the conduct of their loan managers out of sight of adequate supervision. Also, it should worry legislators who allow such circumstances to arise, and who allow them to continue, when evidence exists of possible unfair trading practices. Monopoly markets always involve behaviours that act against the interests of consumers.

It should also worry universities, whose students get into this kind of avoidable financial trouble. If attention was paid by faculty to these problems, and preventing them, at least as intensely as they pay attention to diversity, gender equality and PC behaviours, it may be they could be spared suspicions of complacency in what appears to be a failure in their ancient role of ‘locus parentis’.

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