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Student-loan debt? Feds and Sallie Mae built that

Sen. Elizabeth Warren, D-Mass., says the federal government is exercising lax, or non-existent, regulation of student-loan giant Sallie Mae, an agency created by Congress.
Sen. Elizabeth Warren, D-Mass., says the federal government is exercising lax, or non-existent, regulation of student-loan giant Sallie Mae, an agency created by Congress.
Photo by Chip Somodevilla/Getty Images

WASHINGTON, D.C. – While they wring their hands over America’s student-loan crisis – a $1 trillion debt bubble resembling the 2008 mortgage meltdown – federal officials ought to look in the mirror. Washington started the mess.

Sallie Mae, a government-sponsored enterprise turned “private,” exhibits a “pattern of breaking the rules and ignoring its contractual obligations,” charges Sen. Elizabeth Warren, D-Mass.

All the while, Sallie has raked in record profits with Washington’s help, reported Monday.

Years after Sallie went private and dominated the student-loan market, the federal government continues to grant the company favorable loan contracts worth hundreds of millions dollars.

“These contracts are in addition to a number of indirect and direct benefits the government has already provided to Sallie Mae,” Warren says.

A new report finds that the “private” Sallie Mae:

  • Borrows billions of dollars at “astonishingly low interest rates” through the federally backed Federal Home Loan Bank of Des Moines.
  • Reaped profits of $321 million in 2010 (the latest year available) by selling government-guaranteed loans to the federal government.
  • Benefits from “an asset-backed commercial paper conduit facility” through which it borrowed billions at the rate of 0.82 percent.

Nearly 39 million borrowers carry more than $1 trillion in federal student loan debt. About $120 million was delinquent in 2012 – a 30.5 percent increase from 2011.

But Sallie, who got her start as a government-sponsored enterprise like siblings Fannie Mae and Freddie Mac, is doing just fine.

“Its profits – boosted by special deals and breaks from the federal government – go to its shareholders,” Warren says.


There have been a few bumps along the way.

In 2007, Sallie Mae paid a $2 million settlement to New York to resolve claims relating to improper marketing of student loans.

In 2008, the Treasury Department found that Sallie’s debt-collection arm, Pioneer Credit Recovery Inc., violated its contractual obligations regarding recovery and disclosure.

More recently, the Department of Education determined that Sallie Mae failed to report verbal complaints it received from student loan borrowers.

Warren dismisses government sanctions as a “slap on the wrist” for a lending giant whose net income rose from $530 million in 2010 to $1.4 billion in 2013.

“While the government has helped Sallie Mae maintain its profitability, it is not nearly as generous when it comes to student borrowers,” the Massachusetts senator noted.

“Defaulted borrowers face onerous collection practices, without even the hope of discharging their student loan obligations through bankruptcy. Where is that kind of accountability for Sallie Mae?”

At least part of the answer can be found on Capitol Hill, where Sallie spent $22.74 million lobbying federal officials from 2007-2013.

Sallie Mae officials contend that the student-loan marketplace is healthy. It certainly is lucrative for them, with D.C. enablers keeping taxpayers on the hook.

The Federal Family Education Loan Program ensures Sallie against financial losses due to loan defaults.

With the frenzied trading of student-loan paper, Sallie Mae channels the quasi-government roles played by Freddie Mac and Fannie Mae in the real-estate boom and bust.

“It is a climate that has empowered the lending industry to act aggressively at every turn, placing students at risk of paying inflated interest rates and fees on their federal loans and leaving taxpayers to pick up the tab for hundreds of millions of dollars in excessive subsidies,” according to an Education Sector report.

“I always thought the strangest notion about Sallie was this idea that it was ‘private,’” says Bethany McLean, who co-authored “All The Devils Are Here” about the 2008 Wall Street crisis.

“Sallie Mae was privatized, but the profits of student loans were still mostly guaranteed by the government. What kind of ‘private’ business is that?” she muses.


Are student loans lurching toward a Wall Street-style debacle?

Robert Merry, political editor of The National Interest, a conservative publication, says Republicans needn’t take a backseat to Democrat Warren on free-market reform.

“Republicans too often rail against big government but then give big government a pass when it aligns itself with big business,” Merry says. “The country is being strangled by bigness.”

Merry predicts that “a reckoning is inevitable, but the two (political) parties resist it because they operate in a political culture created by all this bigness.

“Meantime, ordinary Americans (including debt-laden students) are left feeling more and more like chumps.”

In some extreme cases, the feelings run to suicide. Huffington Post reported on the deadly fallout of student-loan debt.

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