No, you’re not getting any free money.
OK, maybe that’s not fair — but I like to put that disclaimer up front, for those who haven’t been around Stock Gumshoe very long and might mistakenly believe that the marketing craziness put out by the investment newsletters is somehow a fair reflection of reality.
Christian Dehaemer is using a spiel that’s been used by many ad copywriters, the idea of a “rebate” that will get back the cash that you’ve had to pay out for something distasteful or irritating (Real Estate Tax Rebate! Gas Rebate!). It’s almost irresistible — who isn’t sick of paying student loans, or helping their family members deal with huge tuition payments? Wouldn’t it be great if there were some “rebate” that would get you that money back?
No, not going to happen, sorry. No matter how bitter you might be about paying off $60,000 in loans for that Philosophy degree, there’s no magic form that’s going to get you thousands of dollars in “rebates” (there are various forgiveness programs, of course, often tied to doing underpaid public service work — that’s not what Dehaemer’s talking about).
But there is, as usual, enough truth in the ad to probably keep the lawyers happy — and if you don’t feel like paying $499 for a subscription to Dehaemer’s Crisis and Opportunity to get his “real” explanation, I’ll try to explain what they’re talking about in the ad as well as I can. Ready?
Here’s a taste of the ad:
“If you overpaid for college, then get your personal…
College Rebate Account
“If you went to college before 1989 or co-signed your kid’s student loan… you’re entitled to a college “cash rebate.”
“Some fortunate college grads have seen their rebate accounts swollen over 1,900% recently.”
Shall we start parsing? Don’t want to make you sit through too much of the spiel here, but that “if you went to college before 1989” part is an odd requirement… what does that mean?
Here’s how he goes into a little bit of detail on that later in the ad:
“… don’t think it’s just for the government and well-connected folks. It’s for every American who wants to get involved. Especially if you went to college before 1989….
“I am sending this to you because I believe you went to college before 1989, and that means you have the resources available to take advantage of this opportunity.
“Not every college grad can. Your position today gives you full liberty to start your personal rebate account.
“The truth is, you have to start with a small amount of money to get your account going.
“Every well-connected individual earning rebate cash begins this very same way. You’re not the only one doing this.
“You can start with $500, $1,000, or $5,000. It’s really up to you.”
So what does that mean?
Well, mostly it means “you need to be old enough to have some money.”
Investment newsletters market primarily to folks who are 50-80 years old, because those are the folks who are mostly likely to have enough money to consider spending $500 or $5,000 on a newsletter subscription a reasonable cost that their investment portfolio can bear… and enough interest (and maybe time, for those who are retired) to be excited about detailed discussions of individual stocks. Along with, perhaps, a bit of pre-retirement anxiety that they need some windfall returns to boost their portfolios in their final earning years. If you graduated from college with an undergraduate degree before 1989, you’re at least in your late 40s. I might miss that “cutoff” slightly since I graduated in 1992 (I’m 45, in case you’re wondering), but I fearlessly kept reading the ad anyway — there is almost certainly no “age qualification” for whatever this “rebate” investment is.
And yes, as you can see with the “you can start with $500” bit, this is an investment that he’s pitching. That means the “payout” is either capital gains or dividends, not a “rebate.” And you can bet your bippy that if you invest $500, that “rebate” is going to be vanishingly small for the foreseeable future.
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It’s also probably worth reminding ourselves at this point that quotation marks around key terms in newsletter ads are a good sign that the copywriter is either lying or making stuff up — I consider it to be code for “not really.” So “cash rebate” means not really a cash rebate.
So what kind of investment is this?
Well, let’s get back to the ad…
“Nixon created two things that rocked the lives of Americans, even if most people are clueless about them.
“First, he created the college loan system that has plagued the lives of Americans with hefty college debt over the last four decades.
“The other thing Nixon created was a profit-making machinery, thanks to this very same nasty student loan system.
“But the shocking thing is that this moneymaking opportunity wasn’t available to everyday individuals until four years ago.
“Today, the college ‘cash rebate’ is a low-hanging fruit… and ripe for the picking.
“But fair warning…
“I ask that you go through this presentation with an open mind before you defy it.
“Some things here will shock you… even make you angry.
“But you can also earn a paycheck on the college money you spent back in the day.”
Well, I wish I could say that I was shocked — but after reading so many thousands of these hype-filled ads over the years, not much really shocks me. I’m still a little angry, mostly because these ads are going to so many folks whose education, college or otherwise, failed to bolster their analytical skepticism or critical thinking skills, and they’re going to believe that there’s really some “rebate” they can collect. And they’re going to email me about it. Quite a few of them, in fact, will come to Stock Gumshoe but will probably not read this whole article and will instead skip to the bottom and post a comment that goes something like “I’ve got $18,000 in student loans, how do I sign up for my rebate?”
That happens with almost every newsletter ad I write about, of course… and while it’s a sad commentary about the failure of our education system when it comes to almost anything financial, it’s not really germane to explaining what this “college rebate” stuff means, so I’ll get off my high horse and move along.
More from the ad:
“You’re reading this because I think you qualify to earn this ‘cash rebate.’
“Over $20,000 in “Rebate” Cash
“I’m talking about several thousand dollars. It could well be in the region of $20,500… even $70,250. Sometimes it could be as high as $129,000.
“The amount depends on a few things, which I’ll explain in a bit.
“But it’s shocking to see some college grads who have earned more than these amounts combined. I’ll introduce you to a few.
“I’ll also give you a full rundown of how you can take advantage of this opportunity right now.
“But as you piggyback on this college bonanza, keep in mind that it’s cold, hard cash you can use however you like.
“Buy the new boat you’ve always wanted, or take that exotic vacation you need.”
Another lesson to add to the “quotation marks mean we’re lying” reminder: Anytime a newsletter ad mentions the new boat or new car you can get, stop reading, put your computer away, and go play with your dogs or grandkids or take a walk. And if they talk about the mansion or boat or Lamborghini that the actual newsletter editor owns, pour yourself a stiff drink, too. Do whatever you have to do to get that boat or car or vacation out of your head.
But we’re past that point now — though I hope you have noticed that the only numbers they mention for the “cash rebate” dwarf the numbers that are mentioned for the “you have to put up a little money” part. What the copywriter is hoping will stick in your head at this point are the appealing extremes: Invest $500, get returns that might be as high as $129,000! Woohoo!
Not going to happen. Sorry, again.
How about those “college grads who have earned more than these amounts combined?” Are there really some examples that are relevant to us?
Here are a few of the folks that Dehaemer names in the ad:
“Barry A. Munitz is a professor at California State University. His “college rebate” account once stood at over $309,000.
“Diane Suitt Gilleland, an associate professor at the University of Arkansas, got over $125,490 at the same time.
“Even Virginia state senator Benjamin J. Lambert is cashing in on his “rebate” account with over $290,800….
“E. Andrews pulled in a rebate payday of over $281,370
“Sandra L. Masino banked $666,165
“Kevin F. Mohen’s cash rebate payout was valued at over $430,200….
“R. Bowen, former president of Texas A&M University, got compensated over $1.1 million
“Rodney A. Erickson, former president of Pennsylvania State University, received $1.4 million
“Joseph A. Alutto from Ohio State University got $996,169….
“Ann Torre Bates is a strategic financial consultant. Her “cash rebate” stake once stood over $108,000. That could easily clear an entire student loan today.
“Barry L. Williams, president of Williams Pacific Ventures, had a college “cash rebate” stake valued over $250,570. That’s a cool retirement-type payday.
“And W. Schoellkopf of Lycos Capital Management was due to collect over $80,900.”
I think that’s all the names mentioned in the ad, designed to make you think that these kinds of payouts for folks who “went to college before 1989” are a possibility for you. What do they all have in common? There are a few of the usual typos or name “mistakes” to throw us off the scent, but from what I can tell all of these folks are former or current board members or employees of SLM Corp (SLM) or its spinoff Navient (NAVI).
And, being highly placed folks or board members at a publicly traded company, they got compensated with stock and owned substantial numbers of shares of either SLM or NAVI or both at some point in the past decade or so.
So is that what Dehaemer is talking about? Just buying SLM or NAVI to profit from the ongoing ballooning college debt crisis, and consider your dividends (for NAVI) or any possible capital gains (for SLM) to be your “rebate?”
Kind of seems like it. But let’s check a few other clues:
“Just look at the endowments of Furman University, Harvard University, Mount Holyoke College, and the University of Michigan…
“They all hold stakes in the ‘college rebate’ fund through Highfields Capital Management.
“It’s an $11 billion fund that was set up by two guys who used to run Harvard University’s investment arm.
“According to SEC filings, endowments, pension plans, and governmental entities access “college rebate” money through this hedge fund.
“The New York State Teachers’ Retirement System…
“State Teachers Retirement Board of Ohio…
“Pennsylvania Public School Employees Retirement System…
“New Mexico Educational Retirement Board…
“Teacher Retirement System of Texas…
“California State Teachers Retirement System…
“When the numbers pan out, roughly $1 billion went to the accounts of ‘rebate funds’ recently.
“Had you started your own account, you could be well on your way to hauling in over $20,000, even touching figures as high as $100,000.”
Of course, “hauling in” $20,000 or $100,000 would have been possible with just about any investment you can imagine… as long as you started with a large amount of money, and these ads almost never mention the investment you’d have to make. It’s quite easy for each of us to imagine that our personal typical stock position of, say, $5,000 or $10,000 creating profits of $100,000 is awesome… but if you invest a million dollars at a clip, “hauling in” $100,000 is just an average year of profit (roughly) in even the broad stock market. Everything is relative, especially when you leave one big part of the equation blank and let readers imagine the input number.
So what’s the story with Highfields Capital Management? Well, they do manage a lot of endowment and pension fund money for institutions, including colleges… and they were a major holder of SLM shares until fairly recently, it was one of their very biggest concentrated positions until maybe three years ago, when they started selling it down. As far as I can tell from their 13F filings, they haven’t owned shares of SLM since June of 2014. They don’t have any SEC-reportable positions in companies that are focused on student loans right now (major investors and institutional money managers only have to report US-listed equity positions on their 13F forms, not derivatives or debt or foreign holdings, etc.).
So there’s some further indication that Dehaemer is just recommending Sallie Mae. What else do they drop in the way of clues?
“This Opportunity Became Available in 2011
“To put it bluntly, this ‘college rebate fund,’ as I call it, wasn’t available until 2011 for folks outside of the education fraternity and Wall Street.
“And quite frankly, no one’s talking about it. You won’t hear about it on the campaign trail, either.
“How does this rebate scheme works?
“As I said, you’re not adding your name to any list and automatically getting a few hundred dollars. And the cash doesn’t come to you monthly, either.
“You could earn dividends, alright… but the real payday is watching your account grow and cashing in when the time is right….
“According to my investigations over the last four months, your college “rebate” account could have swollen nearly 1,900%.
“Start with a modest $500, and you’d have banked an extra $9,500.
“$1,000 would have given you $19,000.
“Start with $5,000, and you’d bank a solid $95,000. That’s the cost of a full degree from an Ivy League…
“If you up the ante and throw in $10,000, you’d walk away with a cool $190,000.”
That’s the first little “hiccup” in this match — it’s a serious stretch to say that “this opportunity became available in 2011” … especially if you’re throwing around that 1,900% return potential.
And as an aside, do you think that the copywriters might be counting on folks not reading commas carefully? The sentence, “According to my investigations over the last four months, your college ‘rebate’ account could have swollen nearly 1,900%” is technically true, I guess, but if you move that comma over a bit and read it as, “According to my investigations, over the last four months your college ‘rebate’ account could have swollen nearly 1,900%” it really gets the heart racing about potential rapid, windfall returns.
Sallie Mae has existed since Nixon launched the enterprise in 1972, and has been publicly traded since 1984, but it did increase substantially in profile in the mid-2000s as it became fully privatized in 2004 (it was government sponsored or controlled before then, at least in part), and it did switch to trading on the Nasdaq in 2011. But you could, of course, have bought it anytime between 1984 and 2011 while it traded on the NYSE.
Sallie Mae is the leading originator of student loans in the country, and yes, if you had bought shares in 1984 you would have been sitting on gains of about 1,900% as of late last year (it’s down a bit since then, so that “since the beginning” gain now would be more like 1,600%… or, if you look at the total return including dividends, about 6,000%). That’s a holding period of 31 years, in case you didn’t do the math. The phrase “ante and throw in $10,000, you’d walk away with a cool $190,000” doesn’t really conjure up the image of “buy and hold for 30+ years,” but I guess it’s not technically untrue.
If you had waited until SLM started trading on the Nasdaq in 2011, of course, the returns would be far less dramatic — you’d be up about 60%, including dividends. If your timing was worse than that and you bought near the top in 2006 or 2007, you’d be sitting on a 60% loss in your SLM shares. (If you like daydreaming, the maximum return would have meant buying in 1984 and selling in 2007 for a total return, dividends reinvested, of more than 15,000%.)
And dividends are the other way that 2011 kind of fits — 2011 was the year in which SLM restarted their dividend, so if you want an actual income “rebate” from the investment, that’s when SLM would have started paying you again. Of course, they paid dividends before that, too, but they canceled the dividend in 2007 (when they were also the target of a takeover attempt by JC Flowers and a couple banks) and didn’t restart it until 2011.
So what’s the investment? Well, it could really be either SLM or NAVI at this point — there really aren’t other meaningful student loan investments you can make that come anywhere near matching the clues in the ad. There are preferred shares and publicly traded debt available for SLM as well, but those won’t provide meaningful growth… so what’s the deal with SLM and NAVI?
Sallie Mae is the original, of course, but the dividend-paying side of the business was spun off as Navient about two years ago. Here’s how they described the separation in their press release at the time:
“Navient will begin trading on the NASDAQ under ticker symbol “NAVI” on May 1, 2014. After the distribution, Navient will be an independent company, and Sallie Mae will retain no ownership interest. Navient will service nearly $300 billion in student loans, providing customer support to assist 12 million customers in successfully paying their education loans. Navient will continue a strong track record of results: its federal loan customers default at a rate 30 percent better than the national average. Navient also will continue to perform asset recovery for government, higher education and business clients, as well as manage a portfolio of FFELP and private education loans.
“After the separation, Sallie Mae will continue as the nation’s No. 1 financial services company specializing in education and the largest originator of private education loans. Sallie Mae will offer innovative saving products, robust planning tools, responsible private education loans, and insurance products designed to safeguard the investment in education. To grow the bank’s high credit quality private education loan portfolio, Sallie Mae will continue to emphasize disciplined underwriting, require school certification, encourage customers to make payments while in school, and maintain proactive customer contact with customers and cosigners during school.”
Right now, SLM is essentially an “asset light” loan originator but doesn’t actually hold much in the way of debt or loans on its own books, and NAVI is a giant portfolio of student loans backed by a huge debt position — it works somewhat like a pass-through, as far as I can tell from a quick glance at the balance sheet, because they have $125+ billion in both lending and borrowing, but it makes the numbers look a little crazy because it gives them an enterprise value of about $130 billion even though the market capitalization (the value of the outstanding stock in the company) is only about $3 billion.
SLM does not pay a dividend, but NAVI took up the SLM dividend as of the spinoff date and has grown it slightly since then (it was 60 cents/year as of the spinoff in 2014, now it’s 64 cents/year — but as of March the dividend will have been flat for five quarters, so they’re apparently not committed to an annual growth track). That dividend now means you get a yield of about 6% if you buy NAVI today, which sounds appealing, but it’s certainly not without risk — there’s both political risk (what happens to all those securitized loans on their books if the student loan universe changes dramatically after the election?) and regular old interest rate and bank-type risk (what amounts to their interest spread, which effectively is the margin between what it costs them to borrow and what they can charge borrowers, wasn’t so great last quarter, which brought revenue down a bit).
And yes, despite the risk it’s still true that student loans are very hard to default on (an education can’t be repossessed, after all) and they can’t generally be charged off in bankruptcy — despite the fact that 15% or more of NAVI’s federal loan borrowers are not current on their loans — so there is some “seniority” in these kinds of loans, at least theoretically. There has been some pressure on the securitized loans from the ratings agencies, which is probably part of the reason why NAVI’s shares are down, but the company seems pretty confident that cash flows from their student loan portfolios are more robust than they’re getting credit for (though, of course, even companies that are circling the drain often have management that’s “confident” of success).
And, of course, everyone’s apopleptic about how ridiculous tuition inflation has become, and about the unsustainable size of student loan debts for a lot of people, but that doesn’t necessarily mean anything pro or con about SLM and NAVI as they stand today, other than an increase in regulatory risk if there’s going to be something like a new low-interest refinancing of existing loans or other major reset mandated by the government. The problem appeared fairly gradually, as universities expanded to take new students and as bureaucracies developed in academia and, as bureaucracies do, multiplied incestuosly… and it’s a big problem, but I don’t know how fast it might be solved (it’s not just fancy dining halls and swimming pools and football coaches that have brought costs up, though those catch the eye — most of the growth in expenses at colleges over the last 40 years has been because of new administrators and support staff, actual teaching has gotten cheaper — the huge growth in college students brought a wave of cheaper and cheaper grad student and adjunct laborers with no other market for their skills, and they do most of the “retail” teaching now).
Analysts are relatively positive about NAVI following the 50% drop in the shares since last Summer — they think the company will earn $1.85 a share this year (that’s about 1% growth from last year), and that’s easily enough to cover the 64-cent dividend, and then they see earnings rising by 5% or so in 2017. So that’s reasonable, if they can really earn that much… but the leverage obviously comes with some substantial risk — that’s why the shares are trading at this depressed level that gives them a 6% dividend and a PE of 5. There’s a relatively cautious note from TheStreet here that calls them out as ‘depressed’ company to keep an eye on if you’d like another perspective. You can see the company’s latest earnings press release here, and the conference call transcript here if you want to begin to dive a little bit deeper.
Papa SLM, alternatively, seems like a little tiny shadow of its former self now that it has bounced that $125+ billion balance sheet down to Navient. SLM has about $11 billion in deposits balancing its $11 billion in loans and seems to be a nicely profitable consumer banking operation, though I certainly haven’t delved deeply into the books and I don’t know how their large tranches of preferred stock slot in — it doesn’t pay a dividend, but I think it’s probably fair to say that SLM is more dependent on continued growth in student loan demand, and Navient is probably more dependent on managing their loan portfolio and minimizing defaults and whatever the interest rate risk is in their business.
SLM is expected to earn about 50 cents a share this year, after estimates have been cut over the past few months, and they’re also expected to grow much more quickly — so the stock trades with a PE of about 11 and analysts think they’ll grow earnings by more than 10% a year going forward, but, unlike Navient they don’t pay a dividend and haven’t been meaningfully buying back shares. That slots them in as a decent growth stock in the financial sector.
Does one or the other sound more appealing to you? My guess is that Dehaemer is probably pitching Navient, due to the “rebate” term and its connotation of dividends… but the historical 1,900% (31 year) return is certainly a reference to SLM, and he is also careful to say that “You could earn dividends, alright… but the real payday is watching your account grow and cashing in when the time is right….” So on that, given the slight fudginess of the clues, you can make your own call about which (if any) of those two corporate student loan siblings is more appealing.
And no, even if SLM does restart a dividend someday neither of these companies are likely to send you any free “rebate” money if you don’t invest in shares…. and even if these investments end up working out from what looks like a depressed (or, arguably, even “too depressed”) share price, your returns would be, of course, commensurate with the investment you make. If analyst price targets mean anything (they don’t, usually, but we have to start with something), then both NAVI and SLM have the potential to rise about 50% to their average price target in the next year or so. That would be a very high return, which should remind us that investors see a lot of risk still in this sector, but it would also mean that both would still be trading well below their highs of last Summer.
So with that, I’ll leave you to cogitate and thinkolate on your own — let us know if you’ve got a hankering for some Sallie Mae or Navient in your portfolio.