Former Sallie Mae Unit Up For Lucrative Education Department Contract

Former Sallie Mae Unit Up For Lucrative Education Department Contract

The U.S. Department of Education is seriously considering granting a potentially billion-dollar, decade-long contract to a former unit of Sallie Mae, the student loan company the Justice Department last month accused of cheating U.S. soldiers.

In a previously unreported move, the department said May 30 that Navient Corp., the nation’s largest student loan company, was one of four finalists for a new contract to run its system for originating and disbursing new federal student loans and grants and keeping track of existing ones. The current contract, held by Accenture LLP, was valued at $880 million as of May 19, according to the Education Department.

If Navient wins the contract, it would have a role in originating new federal loans for borrowers, keeping track of their debts, collecting monthly payments on their loans, and chasing them if they default. In other words, a borrower’s entire interaction with the Education Department — from the moment she takes out a loan to the day she pays it off — could solely be through Navient.

Senator Elizabeth Warren, then a professor of law, questioned Sallie Mae’s dual role as both lender and collector

In 60 Minutes segment with Leslie Stahl on May 5, 2006, Senator Elizabeth Warren, then a professor of law, questioned Sallie Mae’s dual role as both lender and collector:

On top of that, Sallie Mae also owns some of the biggest collection agencies in the country. Once a student borrower goes into default, the government pays Sallie Mae all the principle and compounded interest that have accrued. 

The loan then passes into the collection phase. If Sallie Mae is the collector, it gets to keep up to 25 percent of whatever is recovered. In 2005, nearly a fifth of its revenue came from its collection business. 

“Sallie Mae makes money if you pay back on time. And Sallie Mae makes money if you don’t pay back on time,” says Elizabeth Warren, a professor of bankruptcy law at Harvard Law School. 

Warren says it’s a mistake to allow Sallie Mae to be both a lender and a collector.

“It shouldn’t be the case that Sallie Mae gets to play every hand at the poker table while the government is the one that keeps anteing up the money,” Warren tells Stahl. “But let’s be clear. That by itself isn’t enough. We have to decide collectively as a country: do we want to encourage the young people who are trying to get college diplomas? And if the answer to that is yes, the way to encourage them is not to double and triple the amount that they owe when they get into financial troubles.”

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Since 2002, the company and its employees have doled out more than $2.7 million to congressmen and their political action committees, including more than $200,000 to House Majority Leader John Boehner and his PAC. Over the years, Congress has written laws that give the student loan industry special advantages.

“If you don’t pay Sallie Mae, then Sallie Mae gets to come after you in ways that virtually no other creditors in America can do,” says Elizabeth Warren.

Asked if he ever considered going into bankruptcy, Alan Collinge says he thought about it. “But in the case of student loans, it doesn’t matter because bankruptcy is not an option for the vast majority of borrowers for student loans.”

“The bankruptcy laws were written, once again, to give this extraordinary protection to the student loan agencies, to Sallie Mae. The idea behind …” Warren explains.

“A special law just for them on this?” Stahl asks.

“A special law just for those who make student loans,” Warren continues. “Credit card companies don’t get that kind of protection despite all tier lobbying. Home mortgage lenders don’t get that kind of protection.” 

And Congress passed more laws that squeeze the student borrowers. 

“Suppose you get hurt and you have to live on disability insurance from your Social Security,” Warren says.

The government can attach that. Stahl asks if there are any other cases where Social Security funds are garnished.

“Only child support,” Warren replies.

But all these special protections have produced results. The default rate, over 20 percent in the late 1980s is now down below 5 percent.

Here is the 60 minutes segment with Leslie Stahl. Click here.

Sallie Mae Torments Faithful Student Borrowers After Co-Signers Die

Sallie Mae Torments Faithful Student Borrowers After Co-Signers Die

Note: The Student Loan Marketing Association (Sallie Mae) was originally created in 1972 as a government-sponsored enterprise (GSE) and began privatizing its operations in 1997, a process it completed at the end of 2004 when Congress terminated its federal charter, ending its ties to the government. The company remains the country’s largest originator of federally insured student loans. Unfortunately, this is a private company and no longer tied to the government.

Seven borrowers who had been paying their Sallie Mae student loans on time for years were unexpectedly threatened with asset seizures after a Sallie Mae contractor demanded they immediately repay tens of thousands of dollars simply because a family member had died.

Regina Kibler, a retiree who lives off payments from her late husband’s life insurance policy, spent days agonizing over how to help her son, Christopher, pay back nearly $22,000 neither had. Samantha Flora hired a lawyer to fight attempts to recoup some $20,000 from her dead grandmother’s estate that have turned members of her family against one another.

JPMorgan Charges Students 10.25% on Unscrupulous Loans

JPMorgan Chase & Co. (JPM) charges Mirella Tovar as much as 10.25 percent annual interest on her student loans — a rate as high as a credit card.

The 24-year-old aspiring graphic designer, the first in her family to go to college, is among millions of former students paying off high-interest loans to private lenders, among them JPMorgan, SLM Corp. (SLM) and Discover Financial Services. In a good month, Tovar earns $730 as a part-time hostess in a pizza parlor, and most of that money goes toward her debt of $98,000.

Unlike the federal student-loan program, which lets consumers borrow at fixed rates directly from the government, these loans from at least 30 banks and other private lenders feature mostly variable rates that can be more than twice what some people pay in the U.S. program. With college costs spiraling, the marketing and interest rates of these loans are drawing increasing complaints from borrowers and regulators, who say teenage consumers often don’t understand their terms.

“It was like signing up for iTunes,” said Austin Bousley, 25, who applied on the Internet for a private loan from SLM, known as Sallie Mae, as a student at Suffolk University inBoston. Some of his loans, which he began taking out in 2006, carried rates as high as 9.25 percent. “The interest is accruing and accruing. I have a feeling I’ll be making payments forever.”

Read on.