Taxes & Spending

Sallie Mae: Fueling $1 trillion federal student loan crisis

Sallie Mae: Fueling $1 trillion federal student loan crisis

This article originally appeared on watchdog.org

Sallie Mae, a government-sponsored enterprise turned “private,” exhibits a “pattern of breaking the rules and ignoring its contractual obligations,” said U.S. Sen. Elizabeth Warren (D-Mass.)

All the while, Sallie – originally the Student Loan Marketing Association — has raked in record profits on student loans with Washington’s help.

Years after Sallie went private, the federal government continues to grant the company favorable loan contracts worth hundreds of millions dollars.

“These contracts are in addition to a number of indirect and direct benefits the government has already provided to Sallie Mae,” Warren said.

Private Company, Public Backing

A new report from the National Consumer Law Center finds the “private” Sallie Mae:

  • borrows billions of dollars at “astonishingly low interest rates” through the federally backed Federal Home Loan Bank of Des Moines.
  • reaped profits of $321 million in 2010 (the latest year available) by selling government-guaranteed loans to the federal government.
  • benefits from “an asset-backed commercial paper conduit facility” through which it borrowed billions at the rate of 0.82 percent.
  • has nearly 39 million borrowers who carry more than $1 trillion in federal student loan debt. About $120 million was delinquent in 2012 – a 30.5 percent increase from 2011.

“Its profits — boosted by special deals and breaks from the federal government — go to its shareholders,” Warren said.

There have been a few bumps along the way.

  • In 2007, Sallie Mae paid a $2 million settlement to New York to resolve claims relating to improper marketing of student loans.
  • In 2008, the Treasury Department found that Sallie’s debt-collection arm, Pioneer Credit Recovery Inc., violated its contractual obligations regarding recovery and disclosure.
  • More recently, the Department of Education determined that Sallie Mae failed to report verbal complaints it received from student loan borrowers.

‘Slap On the Wrist’

Warren dismissed the government sanctions as a “slap on the wrist” for a lending giant whose net income rose from $530 million in 2010 to $1.4 billion in 2013.

“While the government has helped Sallie Mae maintain its profitability, it is not nearly as generous when it comes to student borrowers,” the Massachusetts senator said.

“Defaulted borrowers face onerous collection practices without even the hope of discharging their student loan obligations through bankruptcy. Where is that kind of accountability for Sallie Mae?”

The Federal Family Education Loan Program insures Sallie against financial losses due to loan defaults. With the trading of student-loan paper, Sallie Mae channels the quasi-governmental roles played by Freddie Mac and Fannie Mae in the real-estate boom and bust.

From Sallie to Education Dept.

Sallie’s hand is further strengthened by having more than 20 of its former employees working at the Department of Education, which is supposed to oversee lending and collection practices.

“I always thought the strangest notion about Sallie was this idea that it was ‘private,’” said Bethany McLean, who co-authored All The Devils Are Here, a book about the 2008 Wall Street crisis.

“Sallie Mae was privatized, but the profits of student loans were still mostly guaranteed by the government. What kind of ‘private’ business is that?” she asked.

Reason Foundation, a libertarian-leaning think tank, notes that with bipartisan support, Sallie Mae secured “massive servicing contracts from the expanded Direct Loan Program, acquired a multibillion-dollar bailout of the student-loan industry and removed significant debtor protections from privately issued student loans, of which the company is the largest originator.”

Reason recommends that the federal government “exit higher-education finance altogether.”

“This would stop the cronyism rampant in the system. With no federal guarantee . . . such an industry would likely establish a vetting process to reduce the risk of default.”

Big Government, Big Business Alliance

Robert Merry, political editor of The National Interest, a conservative publication, said Republicans need not take a back seat to Democrat Warren on free-market reform.

“Republicans too often rail against big government but then give big government a pass when it aligns itself with big business,” Merry said. “The country is being strangled by bigness.”

Merry predicts “a reckoning is inevitable, but the two [political] parties resist it because they operate in a political culture created by all this bigness. Meantime, ordinary Americans (including debt-laden students) are left feeling more and more like chumps.”

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