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	Don’t pay extra for Sallie Mae’s goof-up IF YOU HAVE received a letter from Sallie Mae indicating that your monthly payments will go up due to a computer-installation error, and you can’t afford the increase, you should take the following steps. 1) Call the dedicated line established by the company for these complaints: (800) 890-9798. 2) Explain your situation, then make sure you’re put through to a supervisor. 3) Ask to enter into a reduced-payment agreement, one that does not involve paying more interest — either through capitalization or extended payments. 4) If you are asked to sign a forbearance form, make sure it states in writing that interest capitalization will be waived. 5) If Sallie Mae makes none of these options available to you, contact your US senator or representative and ask him or her to assist with your request. — CT

SALLIE MAE’S aggressive tactics don’t stop with the questionable tacking on of late fees. Nor are such tactics confined to its federally guaranteed student-loan business. During the late 1990s, the lender began making what culminated in approximately 300,000 private loans — regulated not by the HEA but by state and federal consumer-protection and banking laws — to students attending the hundreds of computer-training schools that had sprung up throughout the country during the peak of the dot-com economy. Many of these schools, however, lacked proper state licensing, and therefore Sallie Mae should not have been in business with them. Schools that aren’t properly licensed, after all, can go out of business overnight and leave students high and dry. Mark Powell, of Alexandria, Virginia, was one such student. An auto-parts clerk, Powell enrolled, on June 10, 2002, in a school called Ameritrain, which ran seven computer-training facilities in five states. Upon completing classes, students were supposed to receive a certificate permitting them to take tests for certification in a variety of commercial software; the school was also supposed to provide job-placement services. But on August 7, when he showed up for class with just four days left in his eight-week program, Powell found that the school had been closed up overnight. "The doors were locked, the lights were out, all the stuff was gone," he says.

When Powell and several others contacted Sallie Mae’s school-closings department, on August 8, to try to learn more, no one called back. It took a while, but a local consumer-advocacy group finally discovered that Ameritrain filed for bankruptcy on September 26. So on December 4, the intrepid band of stiffed borrowers — whose number had grown to nearly 300 of the 500 students at Powell’s facility — attended the mandatory creditors’ meeting conducted by the US Justice Department in the event of bankruptcy. It was here that they learned that Sallie Mae did not view itself as a "creditor." As Powell recalls, Sallie Mae’s representative told them, "This is between you and Ameritrain." In other words, Sallie Mae had every intention of collecting on the students’ misfortune.

After hiring an attorney to organize a class-action suit, they learned that Ameritrain was not fully licensed to offer its educational services and that Sallie Mae had made loans to students enrolled in many other unlicensed computer schools. They also found that they could not file a class action because the promissory notes they’d signed on their loans prevented them from doing so; their only recourse was to go to "mandatory arbitration," with no right to a jury trial and no further means of appeal through the courts (an increasingly common and "devastating" industry practice of which most people are unaware, according to an NCLC consumer alert. See www.nclc.org/initiatives/arbitration/shtml). Before long, in a bid to further deprive the borrowers of legal recourse, Sallie Mae sent out a "Request for Partial Loan Discharge" form to the students, which would make them responsible only for those classes they’d taken on condition that they give up all claims to recover their losses and win damages, as well as forfeit their right to an attorney.

Tom Domonoske and Dale Pittman, the attorneys representing Powell and nearly 200 other clients in similar cases, are appalled by Sallie Mae’s computer-school gambit. Under the FTC holder rule, they claim, student lenders are responsible for making sure the schools they cover are legit. "Compliance is simple, says Domonoske, adding, "unlicensed schools aren’t even allowed to charge tuition." In fact, they say, the student-loan industry has been through this before: back in the early ’90s, after lenders bailed out on students enrolled in fraudulent vocational schools offering instruction in such skills as truck driving and hairstyling, Congress amended the HEA to give students with federally guaranteed loans the same protections as those contained in the FTC holder rule — that is, to make lenders responsible for the legitimacy of the schools they fund. It was one of those landmark changes well known to everyone in the field of consumer finance. But now, just a decade later, Sallie Mae seems to have found a way to avoid its legal responsibility to deter educational fraud — indeed, to profit from it — this time through its private loan program and use of the mandatory-arbitration clause, which keeps disputes with the company out of the courts. With this protective tool in hand, allege Domonoske and Pittman, Sallie Mae may have intentionally made loans to shaky schools in order to drum up business.

Company spokesperson Joyce concedes that Sallie Mae needs to do a better job of "tightening up" its scrutiny of school licensing. But he also maintains that the company is offering fair terms in arbitration, such as "teach-outs" at other schools where students can complete their training. It’s hard to know whether student borrowers are themselves pleased with the terms, however, since the proceedings are by law shrouded in secrecy. And as Domonoske points out, Sallie Mae still stands by its loose interpretation of the FTC holder rule.

SALLIE MAE’S business practices haven’t alienated student borrowers alone. The company has also angered another titan in the student-loan industry: College Loan Corp (CLC). In 2000, CLC contracted with Sallie Mae, among others, to market student-loan-consolidation programs. The HEA’s "single-lender rule" holds that if a student-loan company is the sole lender, borrowers can consolidate loans — and thereby take advantage of today’s plummeting interest rates — only with them; other companies cannot compete for their business. But CLC alleges that Sallie Mae, which buys up tons of loans without borrowers’ knowledge, has violated its single-lender privileges through its private subsidiary businesses, by failing to process applications for consolidation properly and diverting applications to lenders with which it is affiliated. CLC further claims that Sallie Mae offers inducements such as free software to financial-aid offices to encourage students to sign on with lenders that then sell their loans to Sallie Mae (allegations that the US News and World Report article details more thoroughly). Besides, many borrowers report that when they’ve agreed to consolidate with Sallie Mae, their interest rates have gone up rather than down. (See "Alternatives to Sallie Mae," this page.)

In July, Sallie Mae won the loan-consolidation lawsuit brought against it by the CLC, arguing successfully that only the Department of Education, and not the courts, can rule on disputes over the HEA’s single-lender rule. (CLC has just filed an appeal.) Indeed, it’s well worth stressing that in both the CLC and the Washkoviak rulings, Sallie Mae won on questions of statutory jurisdiction — that is, on who has the authority to hold the company accountable. And at this point, it appears, the answer is no one, while student borrowers are left holding the bag.

Is it any wonder, then, that when Sallie Mae sent letters to more than 800,000 borrowers this spring, claiming that a computer "installation error" had miscalculated their monthly payments by anywhere from below $40 to more than $100, consumer advocates were skeptical? (Since then, the number of affected borrowers has risen to 1.127 million.) "In light of Sallie Mae’s questionable business practices," says Kate Rube, the State Public Research Interest Groups’ Higher Education Project associate, "we’re watching closely to see how they’re going to be accountable to their borrowers on this."

It remains an open question. Consider the correspondence received by Cristina Kaiden, whose monthly payment rose as a result of the computer error from $366.16 to $460.79, a $94.63 increase. In a letter dated June 19, 2003, Sallie Mae informed her that she had two options: she could either pay off the difference in a lump sum of $6521.06, or she could engage in "a variety of repayment options, including reduced payment forbearance." Sounds reasonable, right? Except that signing a forbearance form would allow Sallie Mae to capitalize interest — meaning that it could add the interest to the principal balance — so the borrower ends up paying interest on the interest. If Kaiden entered into such an agreement in order to keep her monthly payments the same, she’d end up paying $674.71 in extra interest in the first year alone.

So far, the Department of Education, which is staffed with Bush appointees eager to advance the interests of private lenders and, as Nassirian says, to "gut" Clinton’s direct-student-loan program, has been ineffectual in exercising its oversight responsibilities with regard to the computer-glitch issue. In correspondence made available to the Phoenix, last summer Representative Miller asked education secretary Rod Paige to look into how the alleged technical failure occurred and what remedies were in place to ensure that students wouldn’t end up spending more — in interest — to pay back their loans. In one letter dated July 16, Paige provided Miller with a number of statistics and chronologies, none of which committed the DOE to requiring Sallie Mae not to charge borrowers extra interest, adding: "Answers to questions relating to Sallie Mae’s activities were obtained directly from Sallie Mae. The Department has not independently verified this information."

At this point, it’s the understanding of Miller’s office, according to an aide, that the company is working with the DOE ombudsman’s office to develop special arrangements for 10,000 borrowers (of the 130,000 who have complained to date) who have claimed that financial hardship prevents them from making higher monthly payments. Will those arrangements involve paying Sallie Mae extra interest? The DOE Office of Federal Student Aid, returning a call placed to Ombudsman Deborah Wiley, issued the following general statement, when asked to comment on Miller’s specific concerns about interest and verification of the computer problem: "The Department is in ongoing discussions with Sallie Mae to resolve the company’s system error that caused over one million borrowers to make inaccurate monthly payments." Apparently, the department has continued to evade the issue, not only with the press but with Congress. On November 14, in a bipartisan effort, Senator Edward Kennedy, joined by Representative Miller and two Republican congressmen, called on the Department of Education to "conduct a thorough investigation" of Sallie Mae’s "serious billing error."

Joyce, for his part, says that Sallie Mae will waive additional interest incurred as a result of entering into another payment plan, such as a reduced payment forbearance, though he could not produce a form stating those terms or any other written evidence that the company had instituted a waiver policy for students affected by its error. "You don’t even have to ask for it," he said. "It is automatically granted."

But it was three days after Joyce made these claims that Cristina Kaiden learned from a Sallie Mae representative how much extra interest she’d pay if she opted for a reduced-payment plan ($674.71 in the first year alone). When Kaiden asked for an extra-interest waiver, she was told flatly, "No." The Phoenix was unable to reach Joyce for comment on what the Sallie Mae representative told Kaiden — which contradicts what Joyce told the Phoenix. (See "Don’t Pay Extra for Sallie Mae’s Goof-Up," this page.)

Sallie Mae borrowers are also subject to what Cristina’s husband, attorney Robert Kaiden, calls "particularly cutthroat collection practices." Over and over, he and other consumer-services attorneys, who deal with aggressive collection tactics every day, say they rarely see other companies go to such extremes. That’s because, where ordinary debt collectors must go through a judge to, say, garnish wages — which gives debtors some mechanism for appeal — Sallie Mae’s federal protection permits it to impose nonnegotiable administrative garnishment, not only of wages, but also of Social Security payments to elderly parents (who have acted as co-signers). Sallie Mae — as a holder of federally guaranteed loans — is even able to suspend bank credit cards, regardless of how exemplary one’s credit has been. Says Dale Pittman: "Sallie Mae’s refusal to abide by the FTC holder rule — the brutal collection tactics they use against their borrowers in general — are by far the worst among all the lenders I’ve dealt with in 25 years of practicing consumer law."

SALLIE MAE may throw its weight around more confidently than most because it has cultivated friends in high places. A subplot in the presidential-election crisis of 2000 that went largely unnoticed, according to Salon’s Joe Conason, involved the use of corporate jets by the Bush-Cheney campaign to fly back and forth from Florida and who knows where else. Among those offering aviation services to the high cause? Enron, Halliburton, and, yes, Sallie Mae — a federally sponsored program. The State PIRGs’ Higher Education Project became so alarmed by the growing presence of student-loan-industry lobbyists in Washington that it issued a report in October 2002 titled "Lending a Hand: A Report on the Lobbying Expenditures and Political Contributions of the Five Largest Student Loan Corporations." The report found that Sallie Mae (which founded its first PAC in 1998), together with its next-largest competitor, Citigroup, spent $42.9 million in lobbying over the last three election cycles, accounting for almost 90 percent of lobbying funds spent by the top five student lenders. In fact, according to the report, Sallie Mae’s lobbying expenses "outpace even notorious special interest corporations"; the company spent more on lobbying in the 1998 and 2000 election cycles than RJ Reynolds Tobacco. Overall, the report concludes, "the student loan industry is making it a priority to increase its involvement in the political process," a trend that is "likely to continue as the ... 108th Congress begins the process of reauthorizing the Higher Education Act."

That promises to be something of a battle this time around. As Nassirian says, the student-loan industry "shouldn’t be regulated by a bunch of education majors, but under the Department of Treasury, where they better understand banking regulations." As it stands, however, given the state of the HEA, Sallie Mae can bite at borrowers through a number of regulatory cracks.

It’s ironic that President Clinton’s direct-loan program, intended to introduce competition into the student-loan industry, has resulted in the rise of this "behemoth," as consumer advocates routinely refer to Sallie Mae. That’s bad enough. But for young adults facing what Manning calls the "triple-witch hour of higher ed" — high student-loan and credit-card debt, and a lousy job market — putting a check on this emerging monopoly is rapidly becoming a necessity.

Catherine Tumber can be reached at ctumber[a]phx.com