Sallie Mae Insulting the American Public
By Alan M. Collinge
January 23, 2007

Inside Higher Ed reported today that Sallie Mae CEO Tim Fitzpatrick made an unusually blunt statement regarding Senator Ted Kennedy, calling statements Kennedy made "baseless and insulting attacks" whose aim was to "smear the integrity of the lender, the student loan industry, and financial aid professionals".

Insulting? Perhaps. Baseless? Hardly.

Senator Kennedy has publicly decried the fact that Student lenders like Sallie Mae can make far more money when students default on their loans than when they remain in good stead. Under current federal law, Lenders are guaranteed nearly full payment for loans that go into default. Furthermore, with the massive fees, penalties, and increased interest legally allowed to be attached to such debt, lenders such as Sallie Mae (who own collection companies) can, and do get a "second bite of the apple" through fees on collection of this massively inflated amount. In fact, Chairman Albert Lord said in the 2003 annual report that their record profits were attributable to penalties and fees collected from defaulted loans. This has caused astonishing hardship on millions of students who couldn't afford to pay the original amount in the first place, but are strongarmed into paying the inflated amount.

Senator Kennedy has also lamented so-called "preferred lender" arrangements, whereby universities collude with certain lenders to steer students towards these loans, and receive what amounts to a kickback in return for the business. Sallie Mae inherited massive residual power when it privatized away from the federal government beginning last decade. The company took with it a captive portfolio of Universities, and used this residual clout, and these "preferred channel originations" to hold and expand their market, allthewhile convincing Congress to erect insurmountable barriers to competition.

For instance: The Sallie Mae lobbying machine has successfully thwarted efforts to allow for refinancing in the student loan industry. Despite the fact that there are lenders out there willing to offer better terms, it remains illegal to refinance the debt. This also has caused increased defaults, and hurt students.

Sallie Mae tried to portray Kennedy's statements as insulting to not only the lenders, but also the financial aid professionals. This sucking up may score points with the Universities, but only reinforces that students, and the taxpayers are down the list of the people they are trying to please.

Sallie Mae executives may feel insulted by recent events, but it is truly the taxpayer and most of all, the students, who should be insulted.