Student Loans and the New Congress:
Time to Stop the Bleeding
By Alan M. Collinge
January 9, 2007
When Congress amended the Higher Education Act ten years ago,
defaulted student loans became the easiest and most lucrative
debt to issue and collect.
The amendments imposed huge fees on defaulted student loans and
took away bankruptcy protection for student borrowers. It banned
refinancing of many student loans, and also allowed draconian
collection measures to be taken against student borrowers, including:
wage garnishment, tax garnishment, withholding of professional
certifications, termination from employment, and even social
Harvard Professor Elizabeth Warren told the Wall Street Journal
that "student loan debt collectors have power that would make
a mobster envious."
And no one makes the mobsters greener than Al Lord and his Student
Loan Marketing Corporation. Also known as Sallie Mae.
Lord and current CEO Tim Fitzpatrick have made about $367 million
since 1999, making them some of the highest paid executives in
Sallie Mae stock has also gone up almost twenty times in the
same period. Way more than Microsoft.
There are only two ways to get that kind of growth with that
kind of profit: You do things smarter, better, fast. Or do what
Sallie Mae did: get into a business where government assumes
all the risk - guaranteed student loans - but where a private
company gets all the reward.
They quite wisely chose the later. And as a result, Sallie Mae
became largest student loan company in America, bigger than most
of their rivals combined.
In the company's annual report, Lord attributed his company's
29% core cash earnings-per-share growth to fees
collected from defaulted loans. He forgot to mention that the
law allowed him to forbid Sallie's customers from refinancing
with competitors offering better deals.
Meanwhile, the borrowers suffer.
Many student loan debtors in default find themselves unable to
function in society, and are faced with a decision to either
continue the paralysis and live in fear, or begin making payments
on a massively inflated amount - often double, triple or quadruple
what they originally borrowed.
StudentLoanJustice.Org has received thousands of stories from
citizens whose lives have been shattered by their student loans.
These stories are from decent citizens who have been forced to
live "off the grid;" postpone marriage and children; leave the
country and even commit suicide.
That is not being overly dramatic. That is simply reporting to
you some of the thousands of stories that people tell us.
People who default on student loans are typically decent citizens,
who for one reason or another, were not able to capitalize on
Most agree that they are responsible to pay back what they borrowed,
but most cannot afford to pay back the wildly increased amounts
that the Federal Law has allowed to be imposed upon them.
The Student Loan system in America has been hijacked by Albert
Lord and his friends.
Let there be no mistake: These are not creative geniuses who
invented a new product or service. These are not captains of
industry who built markets, and competed their way to the top.
Rather, these are nothing more than well connected executives
who took an existing market, and used their weight in Congress
erect insurmountable barriers to competition.
Here are just two examples: Sallie Mae convinced Congress that
allowing borrowers to reconsolidate student loans would cost
taxpayers money, so they banned it. Then they sidestepped the
law against inducements (also known as kickbacks) by permitting
Sallie Mae to loan schools money to make student loans in the
school's name, then sell them to Sallie Mae for a "commission."
Imagine if any other business tried that. It would be ridiculous.
For Sallie Mae, it was a business model.
This cannot be what Congress intended when the Higher Education
Act of 1965 was created.
And must be among the first things the new Congress fixes this