This is a free preview of Porter & Co.’s Distressed Investing. In the full issue, analyst Marty Fridson details the steady progress of a leading American student-loan company: recommending both its stock and bond to readers. To get the full issue, click here.
Leading In The High-Growth Private Lending Business
Consider a student-loan company that’s
Got borrowers with these incredible stats:
Their average loan balance is nine thousand – and
Their gross income verges on two-hundred grand.
– Martin Fridson
It was late at night in the Oval Office and President Lyndon Johnson was tired and frustrated.
Weary from the relentless legislative gridlock of the mid-1960s, LBJ paced before his top domestic-policy aide Wilbur Cohen, demanding, "Wilbur, how do we get this done without Congress tearing the roof off?"
“Well, Lyndon,” Cohen said, unruffled, outlining a strategy of administrative expansion – wielding executive authority to bypass the most restrictive legislative hurdles getting in the way of their great ambitions. It was the birth of a style of governance that prioritized immediate, sweeping social implementation over the slow grind of traditional consensus-building.
Cohen, a man of methodical intellect, had spent decades at the Social Security Administration, quietly designing the machinery of the modern American safety net. When LBJ, a man of titanic political energy, set his sights on fundamentally restructuring the American education system and the general social contract, he knew he needed more than just bluster and votes – he needed the man who knew which government levers to pull.
Cohen became chief architect of the Higher Education Act of 1965, a cornerstone of Johnson’s domestic agenda. The vision was intoxicating: a nation where access to higher education was a right, not a privilege. Cohen helped craft the structure of federal student aid, creating a system where Uncle Sam would guarantee loans, encouraging an explosion of enrollment.
The logic tapped into a nation full of unprecedented optimism. In the shadow of the Cold War and the race to the moon (we must beat the Russians there!), the belief was that an educated populace was the ultimate national defense. Money flowed into colleges and universities that blossomed across the landscape, fueled by an endless supply of federally backed student credit.
Yet, as the years stretched into decades, the administrative camel’s nose that Cohen helped slide under the tent began to exert its full weight. The structure he helped build – a vast, intricate architecture of entitlements and subsidies – proved difficult to contain once the initial, idealistic purpose was served. The programs expanded, and with them, the scope of federal involvement in daily life. As these programs matured, they necessitated vast, ongoing infusions of capital, driving federal expenditures to heights that were once considered fiscally impossible.
The mechanism was simple, almost elegant in its initial efficiency: government guarantees reduced risk for lenders, which expanded access, which pushed tuition costs upward, which necessitated even more government guarantees. It was a self-perpetuating cycle. When the funding requirements for these programs began to outpace tax revenue, the deficit was the natural, silent beneficiary. What began as a strategic investment in the American intellect slowly morphed into a structural fiscal burden.
Today, 60 years later, the marks of Cohen’s work are visible in the ledger books of the nation. The dramatic increases in government spending that characterize the modern era often trace their lineage back to the expansive ambitions of the 1960s. The deficits, now a permanent and growing feature of the fiscal landscape, are fundamentally linked to these broad-based entitlement systems that operate on autopilot, regardless of the economic cycle or cost.
And then there is the persistent, gnawing inflation that has defined the recent economic climate – it is the quiet tax that underwrites such large-scale government expansion. When the government spends far beyond its means, financing that consumption through debt that is monetized by the Federal Reserve, the currency inevitably loses its potency. The ambitious programs of the Great Society, built by architects like Wilbur Cohen, were intended to be engines of national strength. Yet they laid the groundwork for an era where the government’s reach consistently exceeds its grasp, leaving future generations to grapple with the high cost of yesterday’s idealism.
One such entity created during Cohen’s tenure has spun itself out of the constraints of Uncle Sam and become a leading provider of student loans – and we currently see an opportunity to invest in that company’s debt and its soon-to-be rising share price.
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