Can't pay your student loan on time? The fat cats at Sallie Mae are
so glad to hear it.
Albert Lord, the chairman and past CEO of student loan leviathan Sallie
Mae, is riding high these days. He holds a million shares of company stock,
valued at $57.25 per share in the second week of January; he exercised options
on another $15 million in the past two years. He leads a group bidding on the
Washington Nationals baseball team, a power contest as much as a money one,
with George Soros and Colin Powell also among the contenders. It was reported
in early January that he's building his own private 18-hole golf course in suburban
Meanwhile, Alan Collinge, a 35-year-old former aerospace engineer
in Washington State, is feeling a little low. He originally borrowed $38,000
in student loans from Sallie Mae to complete three degrees at the University
of Southern California. In 2001, after making about $7,000 in on-time payments,
he left his gig at Caltech on the promise of a government job that evaporated
after 9-11. He was underemployed for two years, making ends meet as a short-order
cook in Alaska; his student loans went into default. "When I got back from
Alaska, I got a bill for $85,000 and it pretty much blew me away. That's when
I realized that somebody is making a lot of money around this deal." Today,
Collinge owes $105,000 to the Department of Education.
Collinge believes Lord got to the top by trampling student borrowers like him.
Sallie Mae has transformed over the past 10 years from a government-sponsored
enterprise—or GSE—with the limited function of providing a secondary
market for student loans, into a vertically integrated private corporation dominating
all aspects of the student loan business, all while never losing its grip on
billions in government subsidies or the federal guarantee on much of its risk.
Since 1997, the volume of loans the company manages has grown from $43.7 to
$107.4 billion. It owns four times as many federal student loans as the next
competitor. The practices that have made fortunes for the company's executives,
and fueled a 1,900 percent growth in its stock price since 1995, include increasingly
cutthroat treatment of the millions of students who depend on the company to
finance their education. And Collinge, as an activist with the website studentloanjustice.org,
is starting to get the ear of politicians and the media.
Collinge started studentloanjustice.org in the spring of 2005. "I lose
hours of sleep because of my personal situation," he says. "So I spend
my time on this." He pores over SEC filings to find out how much student
loan execs earn, and he reads sites like fundrace.org and opensecrets.org to
find out how much they give to politicians.
For example, Sallie Mae has set aside $3.6 billion in stock options for employees
since 1997. Albert Lord and Tim Fitzpatrick, the current CEO, together have
received $367 million in total compensation since 1999. John Boehner, the representative
from Ohio currently running for House majority leader to replace Tom DeLay,
is Sallie Mae's favorite member of Congress; he has received $122,470 from the
Sallie Mae PAC in the 1989–2006 election cycles.
Collinge has also raised the question of antitrust violations. As a GSE, Sallie
Mae was all but immune to allegations of monopoly, since its market advantages
were conferred by federal law. Today, its status has changed. "They're
becoming more and more a direct competitor to the banks and others," says
Robert Shireman, a student loan expert and director of the Project on Student
Debt, an adviser to President Clinton during the creation of the direct-loan
program. "There are certainly concerns over whether we are nearing an oligopoly
situation. They are by far a dominant player."
In 1999, Sallie Mae bought the nonprofit USA Group, the largest guarantee agency
in the country. USA Group CEO Jim Lintzenich got $4.1 million in salary and
stock options valued at $21 million, plus an "early departure" clause
of $5 million if he left Sallie Mae within the year (he left within nine months).
After the acquisition of USA Group, some banks called for an antitrust investigation.
Members of Congress leaped to Sallie Mae's defense. "The student-loan business
is very big, and while Sallie Mae is big, there are a lot of other major lenders
and guarantors out there," said Senator Howard "Buck" McKeon,
as reported in The Chronicle of Higher Education. The Chronicle also noted that
McKeon had accepted $19,250 in contributions from both Sallie Mae and the USA
Group in the 1999–2000 election cycle. At the same time, Rose DiNapoli,
at the time Sallie Mae's VP in charge of lobbying, was married to Michael Sitcov,
a directing attorney at the Justice Department.
Sallie Mae went on to purchase several other nonprofit and for-profit student
lenders. The Pennsylvania Higher Education Assistance Agency, known nationally
as American Education Services and the nation's largest nonprofit guaranty agency
and loan servicer—with a $56.5 billion portfolio—spent the last
year fending off its unsolicited takeover bid in the amount of $1 billion. "PHEAA
is not now and never will be for sale, especially to a profit-driven corporation
with a track record of overcharging borrowers, laying off workers, and gobbling-up
any organization that stands between students and a quest for bigger profits,"
said Elinor Z. Taylor, chairman of PHEAA's board of directors, in rejecting
the bid. As a protest measure, Pennsylvania representative Tim Holden, a conservative
Democrat, introduced a bill at the end of the most recent congressional session
that would require Sallie Mae to pay $300 million in annual fees to compensate
for the 32 years of tax advantages it enjoyed as a GSE.
Collinge's most powerful ammunition is the hundreds of testimonials he has
collected from student loan borrowers in distress. He shared with me the stories
of a dozen whose original balance has doubled, tripled, or quadrupled. Most
of them are long sagas of unemployment, medical problems, missed payments, endless
paperwork, defaults, delinquency, and miscommunication. Susen Gench of New York,
for example, borrowed $59,000 starting in 1982, has never gone into default
but has had deferments, and has made $41,000 in payments by her own accounting
(Sallie Mae says $30,000). Total debt now? $53,000.
photo: Heather Green
In a twist, Sofia Echegaray, a 30-year-old singer-songwriter living in Austin,
got into trouble for overpaying on her $35,000 in loans. Last summer, she says,
"I was working a contract job and worried I was going to get laid off.
So I paid $450 ahead—about a month and a half of payments." Then
she got a letter saying she was actually delinquent with $60 in late fees. The
customer service representatives at Sallie Mae informed her that extra payments
count toward the principal, but don't cover the interest or other charges, unless
you pay a whole month in advance at once.
All debtors are vulnerable to compounding interest and confusing charges if
they get behind on their payments. Under federal law, student loans are supposed
to be easier on borrowers than other kinds of credit. Lenders must offer deferments
and forbearance, both ways to safely postpone payment if you are unemployed
or go back to school. Under the law, mandatory forbearance is granted if you
can demonstrate that you earn the same as the poverty line for a family of two,
$1,069 a month, or if your payments exceed 20 percent of your income. Above
that level, forbearance is granted at the discretion of the lender. Student
loan borrowers say that these concessions are hard to wrangle from lenders,
and that monthly income can be hard to establish with today's shifting, temporary
employment. Most importantly, because student lenders have the full power of
the federal government behind them to collect on loans, and because the loans
are not dischargeable in bankruptcy, lenders are less likely to agree to a settlement
below the full amount they say is owed. The charges can include late fees, penalties,
interest added to the principal, and the costs of collection and litigation.
"I've made repeated offers to repay what I borrowed plus interest,"
says Collinge. "I begged, I pleaded. They say, no no no. You're going to
pay that plus penalties, plus fees, plus the interest on these fees." The
Department of Education has seized Collinge's tax refunds and is threatening
to garnishee his wages. He can't find work in his chosen field because his credit
rating is so poor. He can't get a credit card or a regular mortgage to buy his
house. "I had to put $20,000 down on it. I got a private loan at 14 percent
interest. The house was only $70,000, a total piece of crap."
Tom Joyce, a spokesperson for Sallie Mae, points out that student loan default
rates remain at a record low of 4.5 percent, down from 22 percent in the early
1990s. He reviewed the data of two student loan borrowers from Collinge's site
who asked to remain anonymous, but who had similar stories of large increases
in balances. "I can attest that all of the actions taken on both accounts
were in strict accordance with the rules set by Congress," he says.
Although Joyce talks about "borrower-friendly tools" and "default
prevention," Sallie Mae has bet that extra fees from delinquent accounts
will be a growing source of revenue. According to its 2004 annual report, these
"debt-management revenues" increased more than 30 percent, more than
any other cash stream. "We've been growing on the collections side for
some time now," says Joyce. In 2004, the company purchased a majority interest
in Arrow Financial Services, a major player in the collections business. The
company purchases debts that have already been written off for pennies on the
dollar— credit card debts, auto loans, utility bills, as well as student
loans—and pursues the borrowers for a settlement through telemarketer-
style phone farms. Last year, the state of Minnesota assessed a state record
fine of $125,000 to Arrow for 15 violations, including an unauthorized bank
withdrawal, harassing calls to debtors' employers, and attempting to employ
a felon as a collector.
Arrow's website entices universities to turn over their receivables: "We
understand that your institution's reputation remains linked with the loan,
so we take extra care when dealing with your current and former students."
When it comes to student loans, Arrow has little incentive to back down. In
December, yet another federal circuit court reiterated that student loans are
not dischargeable in bankruptcy, and the Supreme Court ruled in another decision
that Social Security payments can be seized to pay the government back.