The cost of a college education continues to climb — and with it the amount of debt students and taxpayers assume to pay for this stepping stone toward the American dream.
Near-universal access to higher education has been a national policy priority since the 1960s. Everyone deserves the opportunity for a college education and the financial boost that it provides, goes the rationale.
But few have profited from this educational egalitarianism more than America’s student loan leviathan — SLM Corp., better known as Sallie Mae. Managing $123 billion of educational debt, Sallie Mae is considered the country’s largest private provider of student loans.
The average student borrower graduates from college with $17,000 of educational debt and from professional school owing nearly $74,000, the Wall Street Journal reports. If a student falls behind on payments, interest and penalties can quickly balloon his debt to an unmanageable size. Sallie Mae charges students high interest rates and fees totaling as much as 28 percent on loans, says Fortune magazine.
And the company has thrived: From 1995 to 2005, its stock soared by nearly 2,000 percent.
In 2003, now-retired Chief Executive Officer Al Lord allowed, “It would be very hard for me to tell you that what I make is not a lot of money.” From 1999 to 2004, Mr. Lord received total compensation of $225 million.
SLM reaps the rewards of providing a service for which there is great demand, but the taxpayers cover many of its risks — and losses.
Students are a poor credit risk. So the federal government protects the interests of Sallie Mae and other private student loan companies. The feds pay interest rates on student loans that are at least 2.34 percent higher than the rates on commercial loans. And if a student defaults, the government pays off his debt. So Sallie Mae and other lenders reap extra-high interest payments at public expense — and the taxpayers get stuck paying for the defaulters.
But the student’s debt obligation doesn’t end there. The loan can still go to a collection agency — and Sallie Mae owns some of the largest. So after the taxpayers have fronted the principal and interest on defaulted loans, SLM Corp.’s collection subsidiaries can still dun the students — and Sallie Mae gets to take 25 percent of what its collection agencies recover. And unlike collectors of commercial debt, these agencies can even garnish a borrower?s wages, tax refunds, and Social Security disability payments — without a court order.
“Student-loan debt collectors have power that would make a mobster envious,” Elizabeth Warren, a Harvard Law School professor and bankruptcy specialist, told The Wall Street Journal.
Even these special rules aren’t enough for Sallie Mae’s collectors. In 2005, after a yearlong probe, the state of Minnesota imposed a record fine of $125,000 on Arrow Financial Services, a collection company in which SLM purchased a majority interest in 2004. Minnesota found Arrow liable for 15 violations, including unauthorized withdrawals of money from a debtor’s bank account, placing harassing calls to debtors’ employers, and even trying to employ a felon as a collector.
The Education Department’s Office of Inspector General has raised concerns as well. In a September report, ED-OIG found Financial Partners, the division responsible for overseeing the Federal Family Education Loan program, “had not implemented an acceptable level of internal control over its monitoring and oversight” of the FFEL program and its guaranty agencies, servicers and lenders.
But Sallie Mae couldn’t keep reaping the exclusive advantages of government sponsorship without an effective lobbying operation. Since 2002, SLM and its employees have given more than $2.7 million to members of Congress and their political action committees, according to “60 Minutes.”
Sallie Mae also cultivates cozy relationships with campus financial aid officers. According to a 2003 article in U.S.News & World Report, it even offers schools special pools of money that can be lent to students. In exchange, schools agree to promote other Sallie Mae loans on campus.
In one case, an internal e-mail showed the company offered $4 million in special loans to a major university in exchange for its business. Because until recently it was exempt from all state and local taxes, Sallie Mae is in an even stronger position to pursue these tactics.
But while the system has been lucrative for Sallie Mae, it has been downright harmful to the students and taxpayers whose interests federally guaranteed student loans were supposed to serve.
Students assume the debt; taxpayers bear the risks, and Sallie Mae reaps the rewards.
Leslie Carbone is an adjunct scholar at the Lexington Institute.