Case study #1 – Student Loans – page 25 of the textbook
Student Loans Sallie Mae is a publicly traded U.S. corporation that lends billions of dollars in student loans. Twenty-five percent of all student borrowers hold Sallie Mae loans. There are two types of student borrowers: (1) students who qualify for federally guaranteed loans—the students are responsible for the loan, and, if they default, the lender is guaranteed reimbursement; (2) students who do not qualify for federally guaranteed loans because they are high risk—the students are responsible for the loan, and, if they default, the lender loses the loan amount. Lenders such as Sallie Mae greatly prefer to issue federally guaranteed loans because it does not put them at financial risk.
One Sallie Mae marketing strategy is to provide some loans to students who don’t qualify for federally guaranteed loans as a way to build better relationships with schools. The rationale is that these schools are then more likely to direct students who do qualify for federally guaranteed loans to Sallie Mae.92 Even though Sallie Mae loses money on these “designed to fail” student loans, the financial losses are minimal compared with the large profits generated by the additional applications from students who do qualify for federally guaranteed loans.
Critical Thinking Questions
1. If you were a Sallie Mae loan officer, what would you do if you were directed by your boss to issue a high-risk loan to a student who, according to your calculations, has a 92 percent likelihood of default?
2. Issue the loan without highlighting the risks
3. Emphasize the negative consequences of defaulting and let the student decide
4. Refuse to issue the loan
5. Why is this the right option to choose?
6. What are the ethics underlying your decision?”