February 26, 2014. New York. After the economic crash of 2008, Americans were given a crash course on how their economy works. One of their horrifying discoveries was that the federally-funded student loan agency called Sallie Mae was actually a for-profit Wall Street corporation. Hundreds of millions of taxpayer dollars intended for America’s students were being pocketed by global millionaires and billionaires instead. That was supposed to change. But has it?
Predatory taxpayer-backed corporate loans to students didn't taper off in 2010 like most Americans thought. Image courtesy of the St. Louis Federal Reserve.
Until 2010, Sally Mae was little more than a massive financial scam perpetrated upon the American people with the help of Republican and Democratic leaders. Taxpayers want to help America’s kids go to college. But instead of loaning hundreds of billions of dollars to poor and working class children at 0% interest, the American people have been loaning that money to the for-profit corporation Sallie Mae at 0.8% interest.
Sallie Mae then loans the taxpayers’ money to America’s students at inflated interest rates, skyrocketing for students with bad credit, as if Sallie Mae’s wealthy investors stood to lose that money if the child defaulted. In reality, Sallie Mae had nothing to lose because the federal government reimbursed the corporation for every loan that defaulted. It was billions of dollars in free money for wealthy global investors at the expense of millions of American families.
Readers may remember President Obama scoring huge points with regular Americans four years ago when he announced that the above student loan scam was ending. Going forward, the federal government would make loans directly to American and foreign students, backed 100% by US taxpayers. They were cutting the middleman, Sallie Mae, out of the picture. Now, four years later, how much has really changed?
$1 billion annually diverted to shareholder pockets
When Sallie Mae released its 4th quarter 2013 earnings report, shareholders were pleased but nervous. As detailed in the corporation’s earnings statement released last month, investors made $1.4 billion in pure profit by doing little more than servicing taxpayer loans to students in 2013. That was up a staggering 50% from their $939 million net profit in 2012. Somehow, while the laws were changed back in 2010 to cut Wall Street out of the process, the problem has miraculously gotten worse.
According to the 44-page report from the corporation, 90% of Sallie Mae’s business is still in the area of government-backed loans. The company has been trying to change its business model to prepare for a drop-off in government loan business by offering private loans, funded by banks like Bank of America and other Wall Street titans, but not backed by taxpayers. Sallie Mae also recently announced its intention to split in two. 90% of the current company would manage the country’s student loans while 10% of the current business would spin off into a bank.
Global investors insist they are doing nothing wrong by borrowing hundreds of billions of taxpayer dollars at 0.8% and loaning it to poor American kids at exponentially higher rates. According to FinAid.org, the rates for student loans as of today range from 6.8% to 7.9%. That’s quite a hefty profit margin, resulting in over one billion dollars per year going to wealthy investors instead of America’s students - a practice most Americans thought ended in 2010. While Sallie Mae is officially separate from the federal government, its taxpayer-guaranteed student loan business still amounts to $118 billion, representing 76% of the corporation’s yearly revenue. That compares to a paltry $9.9 billion in non-taxpayer-backed loans.
Sallie Mae Bank and Navient
Yesterday, it was announced that Sallie Mae had decided on a name for the half of its business that is spinning off to do nothing else but loan servicing. The new name will be Navient and it will manage $300 billion in student loans, the vast majority being taxpayer-backed. The smaller half, representing about $10 billion in assets, will retain the name Sallie Mae and according to Associated Press yesterday, ‘will make student loans, offer savings accounts and sell insurance.’
Not many people, other than wealthy investors, are happy with what has resulted in the Obama administration’s 2010 revamp of the taxpayer-funded student loan industry - a $1 trillion industry and growing. A report two weeks ago from Watchdog.org sounds the alarm and goes as far as calling the current system a ‘fiasco’. The article, written by Kenric Ward, quotes newly elected US Senator Elizabeth Warren (D-MA) extensively.
“Sallie Mae,” the Massachusetts Senator warned recently, exhibits a “pattern of breaking the rules and ignoring its contractual obligations.” Warren also takes issue with the continuing ‘favorable loan contracts’ worth hundreds of billions of dollars. “These contracts are in addition to a number of indirect and direct benefits the government has already provided to Sallie Mae,” Sen. Warren argued.
The publication also quoted a January 2014 report from the National Consumer Law Center which analyzed data from Sallie Mae covering the year 2010 - the year for-profit student lending was supposed to end. The report revealed that in 2010, Sallie Mae:
Thanks to Sallie Mae’s own corporate profit filings last month, we know that the $321 million profit the company made in 2010 has risen to $939 in 2012, and $1.4 billion in 2013 - 76% of which still comes from profiting off of taxpayer-backed loans to America’s students. The road to those profits hasn’t exactly been ethical either. The same report from Watchdog.org reveals that in 2007, Sallie Mae paid a $2 million settlement to New York over improper marketing and advertising. The following year, the Treasury Dept confirmed Sallie Mae’s over-zealous debt collectors were violating the law. And just recently, the Dept of Education showed that Sallie Mae had covered up and failed to report widespread complaints made by student borrowers.
The report leaves readers with two quotes. First, Senator Warren sums up her frustration saying, “While the government has helped Sallie Mae maintain its profitability, it is not nearly as generous when it comes to student borrowers.”
And a separate report from the American Institutes for Research was just as critical. The independent education researchers wrote, ‘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.’
Many financial analysts warn that the student loan industry is a bubble on the verge of bursting. Currently, there are over $1 trillion in student loans out there, more than the entire US credit card industry. Hundreds of millions of dollars worth are already in default, and unlike credit card debt, student loans cannot be written off in bankruptcy. That, they warn, is a recipe for disaster.
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