As federally sponsored student-loan giant Sallie Mae prepares to go private, it’s squeezing every last penny from student borrowers while opening up scads of new businesses. How can you protect yourself?
BY CATHERINE TUMBER
Alternatives to Sallie Mae
MANY BORROWERS REPORT having no difficulty — as far as they know — working with Sallie Mae. But even these borrowers often say they felt coerced into doing business with the student-loan giant, and aren’t quite sure how their business ended up with the company. If you’re interested in exploring alternatives, here are a few suggestions:
• If your school participates in the federal direct-student-loan program, that is by far the most convenient and cheapest way to pay for school. It also tailors repayment plans to accommodate borrowers’ income levels. For more information, click here.
• Schools can participate in either the direct-loan program or the federally guaranteed student-loan program (Federal Family Education Loan Program, or FFELP), but not both. If your school participates in FFELP, however, there is one way you can get involved with the direct-loan program: through the US Department of Education’s loan-consolidation program. Unlike mortgages or other forms of consumer credit, student loans can be consolidated only once. If Sallie Mae is your sole lender, which is increasingly likely as it purchases more and more loans and gets preferred status on more campuses, you will be unable to consolidate with anyone else — unless you exercise this one-time option offered by the Department of Education. For more information, go to their web site.
• Sallie Mae is able to buy up so many student loans originally made by other companies because all banks are free to sell. However, some — called "make and hold" lenders — have a track record of hanging on to their loans. If you take out a student loan with a "make and hold" lender, you could have greater control over it in the years ahead, including more loan-consolidation choices, and you won’t even pay more in fees and interest. Not surprisingly, Sallie Mae is one of the biggest "make and hold" lenders; the other two are Citibank and Wells Fargo, but there are lots of smaller banks that tend to keep their own loans, too.
• Many schools work with a "preferred lender" to whom they try to steer students in need of education loans. You are not required to work with the school’s preferred lender, however, and if you are told you must, your financial-aid officer is breaking the law.
MUCH OF WHAT Sallie Mae does may be legal. That’s why regulatory reform of the student-loan industry is necessary. Congress and consumer advocates are currently considering several types of legislation that, if you’re concerned about this issue, need your support.
• Higher Education Act of 2004: approximately twice a decade, the HEA is reauthorized by Congress, and this time around a large number of organizations are pushing for reform of its student-lending regulations. Of those seeking to preserve both the federally guaranteed and the direct student-loan programs, the American Association of State Colleges and Universities recommendations are among the most comprehensive, although they are still under development. See this site.
• Student-loan late-fee initiative: the State PIRGs’ Higher Education Project is currently looking into pushing for tighter regulations on late fees in the HEA-reauthorization process. If you have had a troubling personal experience with this matter, the project wants to hear about it: contact Kate Rube at email@example.com. And see the State PIRGs’ HEA-reauthorization recommendations.
• Student-loan-consolidation legislation: the House Committee on Education and the Workforce is considering two types of legislation to give student borrowers more options to reconsolidate under the HEA. HR 2505, among other versions, urges amending the HEA to change the rule that permits student borrowers to consolidate their loans only once. HR 942 would do away with the HEA’s single-lender rule, which today forces so many borrowers to consolidate only with Sallie Mae.
• Reform of state laws governing mandatory arbitration, based on the model provided by the National Consumer Law Center. See this site.
— Catherine Tumber
IF YOU HAVE had to borrow money to pay for school, chances are good you’ve borrowed from Sallie Mae, the largest student-loan company in the US, which currently handles between 40 and 45 percent of the business. Even if you haven’t borrowed from Sallie Mae, chances are good you’ll be dealing with the company in the future: part of the loan giant’s business involves buying out loans from smaller companies. And if you’re dealing with Sallie Mae, chances are you could be heading for serious financial trouble and not even know it.
Interviews with 22 consumer-finance attorneys, plaintiffs in lawsuits against Sallie Mae, consumer advocates, and higher-education experts show that Sallie Mae engages routinely in questionable business practices. Borrowers are charged excessive and undisclosed late fees. Aggressive collection tactics are employed against borrowers who have been unable to resolve billing disputes with Sallie Mae — which is, by industry standards, unresponsive to questions and complaints. And the company prevents many of its borrowers from consolidating loans with anyone else but Sallie Mae — which doesn’t always offer the lowest interest rates.
In addition, more than a million borrowers have seen their monthly payments increased by as much as $100 or more, due to what the company describes as a computer-software glitch, and will see their overall payoff amount increased if they want to extend their loans to keep their monthly payments level. Moreover, tens of thousands of students enrolled in failed, improperly licensed computer-training schools are being held accountable for their loans — even though student lenders are required by law to make sure the schools they loan to are properly licensed. Even worse, these borrowers have no right to seek relief from the courts.
The frequent use of such aggressive tactics, combined with the company’s relative unreceptiveness to borrowers’ complaints, has led many experts to wonder whether these methods, taken together, have become policy with the multi-billion-dollar lender. After all, the company stands to profit not only directly from these practices, but also by throwing students into default. That’s because borrowers of federally guaranteed student loans (issued through the Federal Family Education Loan Program, or FFELP) who have fallen on hard times can only under rare circumstances discharge student-loan debt if they file for bankruptcy. Usually, they must default, which not only carries harsher long-term penalties for borrowers than bankruptcy does, but guarantees lenders like Sallie Mae full compensation. Furthermore, Sallie Mae has recently gone into the debt-collection business, which means it can reap even more interest and fees of up to 20 percent of the balance from defaulted borrowers.
Sallie Mae’s business practices have come under close scrutiny in the last month. The cover story of the October 27 US News and World Report documents the deals federally guaranteed student-loan leaders are making in increasing numbers with colleges and universities to get them to market their loans exclusively, at the expense of federal direct-loan programs that are cheaper for students and taxpayers alike. Sallie Mae is featured in the report, titled "Big Money on Campus: How Taxpayers Are Getting Scammed by Student Loans." As a result of the article, US Representative George Miller of California, the senior Democrat on the House Committee on Education and the Workforce, has called for hearings investigating the Department of Education’s oversight of the federally guaranteed student-loan business. (See "Patching Up the Regulatory Cracks," this page.)
While statistics on the precise number of aggrieved borrowers are not available, those with a finger on the pulse of the consumer-credit industry are sensing the mounting trouble. Economic sociologist Robert Manning, author of Credit Card Nation (Basic, 2000), who’s currently researching a book with the self-explanatory title Generation in Debt, reports that young adults are "talking about the trouble they’ve had with student loans more than ever before." Likewise, attorneys affiliated with the National Consumer Law Center (NCLC), an organization devoted to consumer litigation and public-policy development, have fielded so many complaints over the past few years that the organization devoted an entire session of its annual conference in late October to "The New Wave of Student Loan Abuses and Problems." It’s the first time the organization has been compelled to hold such a session since the early ’90s.
It's true that Sallie Mae is not the only student-loan company to come under greater scrutiny by Congress and consumer-finance advocates. What is clear, however, is that the partly private, partly federally sponsored business is throwing its massive heft into pioneering ways to allow student lenders to slip through state and federal regulatory statutes, and putting up fierce resistance to efforts to hold it accountable. As Vallerie Oxner, a business-law attorney who's tried a case against Sallie Mae for abusive debt collection and failure to address billing errors, puts it, "No laws seem to apply to Sallie Mae."
SALLIE MAE, which calls to mind the image of a big-hearted mountain gal who wouldn’t even dream of scammin’ folks, was formed in 1972 as a "government-sponsored enterprise," under revisions to the Higher Education Act (HEA) of 1965. Originally called the Student Loan Marketing Association (SLMA), its purposes were noble: to make more student loans available by buying them up from private banks with funds borrowed against low-interest federal Treasury loans, and providing billing and collection servicing for them. This arrangement made it less risky for banks to issue student loans and easier for students — especially lower-income students who otherwise could not afford a higher education — to get them, and at lower interest rates to boot. The company was profitable from the start and went public in 1984, creating the holding company now called SLM Corporation.
The federally guaranteed student-loan program was a cushy deal for banks as well as for Sallie Mae, as all the company’s businesses are commonly known. But despite mounting federal subsidies, banks weren’t making enough student loans available to meet the need, and their services were cumbersome and confusing. To force lenders to compete for students’ business and offer a better product, President Bill Clinton established the William D. Ford Federal Direct Loan Program, in 1994, which offered borrowers a low-interest alternative with no origination fee (a three-to-four-percent charge lenders take off the top), an income-contingent repayment option, and more streamlined servicing. In other words, by removing the middleman, the Department of Education offered cheaper, more convenient loans. At the same time, Congress also required Sallie Mae to come up with a plan either to liquidate or completely privatize by 1998. As a result, Sallie Mae’s stock fell by 35 percent.
Enter Al Lord, who in the mid ’90s led a dissident Sallie Mae stockholders group dubbed "The Committee To Restore Value" (CRV). Rather than continue servicing student loans as a private company, they wanted to compete with both their former bank clients and the feds’ newly formed direct-loan program, and originate loans themselves. After all, CRV reasoned, Sallie Mae had enormous name recognition, a third of the nation’s student-loan business, and $47 billion in assets. Though their vision met widely publicized resistance from the board, CRV finally won. Soon thereafter, Lord was installed as CEO.
After CRV’s plan passed Congress in 1996, Sallie Mae continued taking full advantage of its federal privileges, such as tax exemptions and access to cheap government capital (available until 2008), while penetrating pre-existing loopholes in the HEA, which regulates federally guaranteed student loans, and consumer and finance law, which governs private loans. It also expanded into the mortgage, credit-card, insurance, and debt-collection businesses. Today, Sallie Mae has $86 billion in assets, nearly double its worth in 1994. Indeed, it now leads the field. Lord’s plan is going so well, in fact, that the company plans to be fully privatized by 2006 — a full two years ahead of schedule.
Along with its growing stash of money, however, Sallie Mae has amassed a long list of outraged borrowers. Take the class-action suit brought by John Washkoviak of Milwaukee, Wisconsin, and two other named plaintiffs, filed in Washington, DC, District Court, in December 2001. Earlier that year, Washkoviak noticed that Sallie Mae had begun billing him, in 1999, for mounting balances for which it supplied no explanation. As it turned out, the company had charged him late fees and interest without disclosing it. This was accomplished by charging a late fee for each month a balance was past due, even if required monthly installments were paid in a timely fashion in subsequent months. For example, if you had one late payment for which you had been penalized $20, and you didn’t pay it, you would be assessed an additional $20 every month thereafter, even though you continued to make on-time monthly payments. Over the course of a 10-year loan, that could add up to a $2400 bill after making what you thought would be your last payment. The late fees were not listed on borrowers’ bills and, in some instances, the bills actually reflected a late-fee balance of "$00.00." (This was accomplished, the suit alleges, by "pyramiding," or applying part of each monthly payment to late-fee charges, so that technically the fee balance would be zero, but the payment would not cover the balance — which would incur yet another late fee.)
Remarkably, many of these actions are legal. As federal-education-policy analyst Barmak Nassirian observes, "federal law facilitates this behavior," and the courts seem to bear him out. The Washkoviak case, for example, which went before DC Superior Court judge James Boasberg — a recent Bush appointee — was dismissed. Why? The judge ruled that both federal truth-in-lending laws and state laws governing "disclosure requirements" and the banning of late-fee pyramiding were "pre-empted" by federal statutes that recognized only the "duplicate regulations" of the HEA in such matters. The trouble is, as attorney Richard O’Reilly wrote in his appeal, since these matters are in fact not regulated by the HEA, student borrowers are left "without any recourse for fraudulent misrepresentations or illegal practices relating to the imposition of late fees."
Sallie Mae spokesperson Tom Joyce insists that the company doesn’t pyramid fees (though he cannot explain how else someone’s late-fee balance could consistently show up as zero, when in fact that person was being charged every month); nor, he says, does it charge duplicate fees for one late payment. That’s why, he says of Washkoviak, which is now under appeal, "We will win that lawsuit." Whether or not he’s right about the facts in the case, given the HEA’s Swiss-cheese-like regulations on late fees, he may well be right about legal victory.