Student borrowers over a barrel

March 22, 2006|By ALAN COLLINGE

Remember the old adage, "You break it, you bought it"?

Twice a year, financial aid lines at colleges and universities swell with middle- and lower-income Americans heeding the advice drilled into them from an early age: Go to college, get an education. Unfortunately, these students don't think twice about signing their student loan papers. In fact, most don't even bother to read the fine print - or the bold, for that matter.

Most likely, these students will receive their loans from Sallie Mae. In the confusion with Ginnie Mae, Fannie Mae and Freddie Mac, most will wrongly assume that Sallie Mae is a government agency.

What these young people don't realize is that the only relationship Sallie Mae has with the government is in the millions of dollars its executives push into congressional campaign coffers and the billions it takes in the form of federal subsidies.

Judging from the weight that Sallie Mae - otherwise known as the SLM Corp. - throws around inside the Capital Beltway, one has to wonder if Congress has been fooled as well. Since its privatization began in 1997, Sallie Mae has led a relentless lobbying effort that has stripped nearly all consumer protections from student borrowers.

To put it in perspective, Sallie Mae executives gave more than twice as much to elected officials as Fannie Mae, a mortgage holding company roughly 20 times larger. And the payoff was huge. Refinancing is now illegal (consolidation is allowed one loan at a time, but only with the original lender). Bankruptcy is now off the table for federal and private loans. Huge penalties and fees are permitted on delinquent debt.

Imagine that two brothers each borrow $50,000. One goes to Las Vegas and quickly loses his fortune. The other puts himself through school but finds there is no job market for his degree. Under current law, the first brother will enjoy the full protection of bankruptcy and other laws and thus be able to negotiate an extremely reasonable settlement of the debt. The second brother, for all his troubles, will be liable for not only the principal and interest but also massive fees and penalties, and interest on those fees and penalties.

What's more, Sallie Mae and the student loan industry generally have collection powers that would make a mobster envious (to quote Harvard professor Elizabeth Warren). People who fall behind are now subject to wage garnisheeing, income tax seizure, withholding of professional certifications, even Social Security seizure, in addition to the standard damage to their credit records and other collection activities.

Sallie Mae no longer has to negotiate. The penalties, fees and interest stick, regardless of the financial condition of the borrower. Stories have been documented of AIDS patients signing over their Social Security checks, nurses unable to practice in their field, even suicides. And the problem appears to be worsening as legislation makes student loans even more oppressive for borrowers and more profitable for lenders.

One can easily see how a defaulted loan could be a preferred outcome for Sallie Mae. Not only is it guaranteed by the federal government to be repaid principal plus interest, but it also stands to make a killing in fees and penalties down the road as the borrower is forced to repay far more than the original debt.

In fact, Sallie Mae Chairman Albert L. Lord states in the 2003 annual report that its record earnings were attributable to fees collected from defaulted loans. Sallie Mae's stock price accelerated in the aftermath of the dot-com recession.

This legislated power has drowned Sallie Mae and its executives in cash. The stock has risen a whopping 1,800 percent since Sallie Mae's privatization. The company has set aside $3.6 billion in stock for its employees (about $640,000 for each employee).

Mr. Lord has earned $224 million since 1999, is attempting to purchase a Major League Baseball team (the Washington Nationals) and is about to break ground on his own luxury golf course. In fact, Mr. Lord and CEO Tim Fitzpatrick together have made well over a third of $1 billion in the past six years.

And Sallie Mae doesn't want anyone else on the playground. Its spokesman, Tom Joyce, smugly predicted recently that the legislation preventing the refinancing of student loans should make smaller lenders think twice about entering the market.

Combine this with Sallie Mae's acquisition of many of the largest non- and for-profit student loan companies and default collection agencies (with no end in sight), and one can easily see why even the most conservative thinkers (including finance columnist and commentator Terry Savage, the Adam Smith Society and others) are beginning to question how free this market really is.

Sallie Mae's response to this sort of criticism has been to say that it has broken no laws. This may well be true. But as anyone who is familiar with this industry will tell you, Sallie Mae doesn't need to break the law; it has already bought it.

A company that is in business ostensibly to help students get through their college or university years should not be in the business of earning excess profits and saddling students with such unjustifiably strict regulations.

Congress should pass a law that would allow students stuck in this money trap to repay what they originally borrowed plus a small amount of interest, without any attached penalties.

In addition, consumer protections that have been legislated away for Sallie Mae should be given back to the students.

Alan Collinge is the founder of StudentLoanJustice.org. His e-mail is justice@studentloanjustice.org.

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