Opinion: New Congress should rein in Sallie Mae
By Alan Collinge
When Congress amended the Higher Education Act 10 years ago, defaulted student loans became the easiest and most lucrative debt to issue and collect.
The amendments imposed huge fees on defaulted student loans and took away bankruptcy protection for student borrowers. It banned refinancing of many student loans, and also allowed draconian collection measures to be taken against student borrowers. These included wage and tax garnishment, withholding of professional certifications, termination from employment, and even Social Security garnishment.
Harvard Professor Elizabeth Warren told The Wall Street Journal in January of 2004 that "student loan debt collectors have power that would make a mobster envious."
The chief beneficiary of these legislated powers have been Albert Lord and his Student Loan Marketing Association, also known as Sallie Mae. Lord and current CEO Tim Fitzpatrick have made about $367 million since 1999, making them some of the highest paid executives in the country. Sallie Mae stock has also increased twentyfold in the same period.
There are only two ways to enjoy that kind of growth and profit. One way is to do things smarter, better, and faster your competitors, The other is to do what Sallie Mae did: Get into a business where government assumes all the risk – guaranteed student loans – but a private company reaps all the reward.
As a result, Sallie Mae became the largest student loan company in America, larger than most of their rivals combined.
In the company’s 2003 annual report, Lord attributed his company’s 29 percent core cash earnings-per-share growth in large part to fees collected from defaulted loans. He forgot to mention that the law allowed him to forbid Sallie’s customers from refinancing with competitors offering better deals.
Meanwhile borrowers suffer. Many student loan debtors in default find themselves unable to function in society, and face the prospect of making payments on a massively inflated amount – often double, triple or even quadruple what they originally borrowed.
StudentLoanJustice.org has received thousands of stories from citizens who have been adversely affected by their student loan debt burden. Most people who default on student loans agree that they are responsible to pay back what they borrowed; but most cannot afford to pay back the wildly increased amounts that the Federal Law has allowed to be imposed upon them.
Sallie Mae executives have succeeded using their weight in Congress to erect insurmountable barriers to competition.
Here are just two examples: Sallie Mae convinced Congress that allowing borrowers to reconsolidate student loans would cost taxpayers money. Congress banned the practice last July, and also permitted Sallie Mae to loan schools money to make student loans in the school’s name, then sell them to Sallie Mae for a "commission."
Congress will likely lower the interest rates for undergraduate loans in its first 100 hours. Let’s hope they address the issues for those who have already been through the system in the second hundred hours.
Alan Collinge is the founder of Student Loan Justice (studentloanjustice.org), a grassroots group based in Washington State.
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