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?"
Guide On Rating System
Vote
1. If I were a Sallie Mae loan officer and directed by my boss to issue a high-risk loan to a student with a 92 percent likelihood of default, I would have a few options to consider.
2. One option is to issue the loan without highlighting the risks to the student. This would entail downplaying or omitting the information about the student's likelihood of default. However, this option would not be ethical as it would involve withholding important information from the student that could impact their financial well-being in the future.
3. Another option is to emphasize the negative consequences of defaulting and let the student make their own decision. While this option allows the student to have all the necessary information to make an informed decision, it fails to address the potential harm and unfairness of knowingly lending money to a high-risk borrower.
4. A third option is to refuse to issue the loan. This option upholds ethical principles by not putting the high-risk borrower in a precarious financial situation. However, it could potentially harm the relationship between Sallie Mae and the school, which may negatively impact future federally guaranteed loans.
5. The right option to choose would be to refuse to issue the loan. By doing so, I would act in accordance with ethical principles and prioritize the well-being of the high-risk student borrower. It would be unethical to knowingly issue a loan to a student with a high likelihood of default, as it could lead to severe financial consequences for the student.
6. The ethics underlying this decision are centered around fairness, integrity, and responsibility. Refusing to issue the loan demonstrates a commitment to treating borrowers fairly and responsibly, not putting them in unnecessary financial risk. It also upholds the integrity of the loan officer and the organization by refusing to engage in unethical lending practices.
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