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Sallie Mae: How feds fuel student-loan fiasco

By   /   February 10, 2014  /   No Comments

AP file photo

IT’S A MESS: Indiana University senior Randall Burns holds a sign he said represents the average debt a college student has after graduating.

 

By Kenric Ward | Watchdog.org

WASHINGTON, D.C. — While wringing their hands over America’s student-loan crisis — a $1-trillion debt bubble resembling the 2008 mortgage meltdown — federal officials ought to look in the mirror. Washington started the mess and enables it to worsen.

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 has raked in record profits with Washington’s help.

Years after Sallie went private and dominated the student-loan market, 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.

A new report 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.

Nearly 39 million borrowers carry more than $1 trillion in federal student loan debt. About $120 million was delinquent in 2012 – a 30.5 percent increase from 2011.

But Sallie, who got her start as a government-sponsored enterprise like siblings Fannie Mae and Freddie Mac, is doing just fine.

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

A slap on the wrist for Sallie

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.
PROTECTION RACKET? Sen. Elizabeth Warren, D-Mass., says the federal government enables bad behavior by Sallie Mae.

PROTECTION RACKET? Sen. Elizabeth Warren, D-Mass., says the federal government enables bad behavior by Sallie Mae.

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?”

At least part of the answer can be found on Capitol Hill, where Sallie spent $22.74 million lobbying federal officials from 2007-2013.

Sallie Mae officials contend the student-loan marketplace is healthy. It certainly is lucrative for them, with D.C. enablers keeping taxpayers on the hook.

The Federal Family Education Loan Program ensures Sallie against financial losses due to loan defaults.

With the frenzied trading of student-loan paper, Sallie Mae channels the quasi-government roles played by Freddie Mac and Fannie Mae in the real-estate boom and bust.

“It is a climate that has empowered the lending industry to act aggressively at every turn, placing students at risk of paying inflated interest rates and fees on their federal loans and leaving taxpayers to pick up the tab for hundreds of millions of dollars in excessive subsidies,” according to an Education Sector report.

Another Education Sector study found that Sallie Mae’s buyouts of other lenders tighten its relationship with college financial officers. For borrowers, outstanding balances balloon as fees are added every time a loan is sold or repackaged on the secondary market that Sallie dominates.

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.

MORE DEVILS: Financial writer Bethany McLean sees excesses in the student loan industry, like the ones she exposed in the mortgage crisis.

MORE DEVILS: Financial writer Bethany McLean sees excesses in the student loan industry, like the ones she exposed in the mortgage crisis.

“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” 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.

Here’s a thought: Stop the cronyism

Are student loans lurching toward a Wall Street-style debacle?

The 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 like establish a vetting process to reduce the risk of default.”

Robert Merry, political editor of The National Interest, a conservative publication, said Republicans need not take a backseat 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 that “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.”

In some extreme cases, the feelings run to suicide. Huffington Post reported on the deadly fallout of student-loan debt.

SEE VIDEO OF SEN. WARREN SPEAKING ABOUT HR 3892, THE STUDENT LOAN BORROWERS BILL OF RIGHTS ACT.

This article was undated at 12:30 p.m. Thursday.

Kenric Ward is a national correspondent for Watchdog.org and chief of its Virginia Bureau. Contact him at kenric@watchdogvirginia.org or at (571) 319-9824. @Kenricward

 

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Kenric Ward is a veteran journalist who has worked on three Pulitzer Prize-winning newspapers. A California native, he received a BA from UCLA (Political Science/Phi Beta Kappa) and holds an MBA. He reported and edited at the San Jose Mercury News and the Las Vegas Sun before joining Watchdog.org in 2012 as Virginia Bureau Chief.

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