Nellie Mae, the nation’s largest non-profit provider of student loans, is now a taxable, for-profit corporation.
With the switch -- which troubles some consumer advocates -- the company will continue to make loans to students, but it will also use the assets it built as a tax-exempt organization to start a $250-million foundation aimed at expanding educational opportunities.
For more than 15 years, Nellie Mae was a not-for-profit, state-chartered entity that provided loans to college students. It began as a “secondary market,” buying loans made to students by banks and then managing the loans. In 1986, it began making private loans directly to students, and in 1992, it began originating federal loans. Nellie Mae is the nation’s eighth-largest holder of loans to students, with assets of $2.7-billion. The company is based in Massachusetts.
A 1996 change in federal law gave non-profit student-loan providers a one-time opportunity to divide their assets between two entities: a taxable corporation and an education-related foundation.
Accordingly, under Nellie Mae’s new structure, which took effect on July 1, the company has been divided into two parts: the taxable Nellie Mae Corporation, which will continue to make and administer federal and private student loans, and the Nellie Mae Foundation, which through grants and studies will promote “educational quality, access, and effectiveness,” its officials say. Nellie Mae has made similar grants since 1990.
Company officials say that the change will enhance service to students by giving Nellie Mae new ways to raise money.
Some critics, however, fear that the primary beneficiaries of the transfer will be Nellie Mae officials. Consumer advocates argue that many of Nellie Mae’s assets were accumulated by not having to pay taxes on its revenues, and through other benefits of non-profit status. The critics worry that too great a proportion of those assets will wind up in the for-profit company and will eventually enrich Nellie Mae officers, as well as stockholders if the company becomes publicly traded.
“Our concern is that not enough of it will be put into the charitable foundation, and that more than should be will end up in pockets of shareholders and top management there,” said Elizabeth Imholz, a lawyer at Consumers Union, a non-profit group that has raised similar questions about the conversion of health-care organizations from non-profit to for-profit status.
Nellie Mae officials say they have met with Consumers Union, and worked closely with the Massachusetts Attorney General, to deal with any potential conflicts of interest.
The company made significant changes in its transition to satisfy those concerns, and the Attorney General has approved the change in its structure.