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?
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, [ http://www.ed.gov/offices/OSFAP/DirectLoan/index.html ]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 increasinglyb 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 [ http://loanconsolidation.ed.gov/ ]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• Sallie Mae is able to buy up so many student loans originally made by other companies because all banks are free to sell.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" lendersb; 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 [ http://www.aascu.org/ppa03/sfa.htm ]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 [ mailto:firstname.lastname@example.org ]email@example.com. And see the State PIRGs’ HEA-[ http://www.pirg.org/highered/highered.asp?id2=7967 ]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 [ http://www.consumerlaw.org/initiatives/model/index.shtml ]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 troublbe 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 sbure 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 obn 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 obn 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 bbeen 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 lbow-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 publibcized 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 gobing 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 ibt, 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, sbo 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.
(Part II) Don’t pay extra for Sallie Mae’s goof-up
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 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 firstname.lastname@example.org
This story ran on Boston Phoenix on November 28 - December 4, 2003.