This article originally appeared in the November 28, 2003 issue of the Boston Phoenix.
If you have had to borrow money to pay for school, chances are good you've borrowed from Sallie Mae, the largest student-loan company in the US, which currently handles between 40 and 45 percent of the business. Even if you haven't borrowed from Sallie Mae, chances are good you'll be dealing with the company in the future: part of the loan giant's business involves buying out loans from smaller companies. And if you're dealing with Sallie Mae, chances are you could be heading for serious financial trouble and not even know it.
Interviews with 22 consumer-finance attorneys, plaintiffs in lawsuits against Sallie Mae, consumer advocates, and higher-education experts show that Sallie Mae engages routinely in questionable business practices. Borrowers are charged excessive and undisclosed late fees. Aggressive collection tactics are employed against borrowers who have been unable to resolve billing disputes with Sallie Mae — which is, by industry standards, unresponsive to questions and complaints. And the company prevents many of its borrowers from consolidating loans with anyone else but Sallie Mae — which doesn't always offer the lowest interest rates.
In addition, more than a million borrowers have seen their monthly payments increased by as much as $100 or more, due to what the company describes as a computer-software glitch, and will see their overall payoff amount increased if they want to extend their loans to keep their monthly payments level. Moreover, tens of thousands of students enrolled in failed, improperly licensed computer-training schools are being held accountable for their loans — even though student lenders are required by law to make sure the schools they loan to are properly licensed. Even worse, these borrowers have no right to seek relief from the courts.
The frequent use of such aggressive tactics, combined with the company's relative unreceptiveness to borrowers' complaints, has led many experts to wonder whether these methods, taken together, have become policy with the multi-billion-dollar lender. After all, the company stands to profit not only directly from these practices, but also by throwing students into default. That's because borrowers of federally guaranteed student loans (issued through the Federal Family Education Loan Program, or FFELP) who have fallen on hard times can only under rare circumstances discharge student-loan debt if they file for bankruptcy. Usually, they must default, which not only carries harsher long-term penalties for borrowers than bankruptcy does, but guarantees lenders like Sallie Mae full compensation. Furthermore, Sallie Mae has recently gone into the debt-collection business, which means it can reap even more interest and fees of up to 20 percent of the balance from defaulted borrowers.
Sallie Mae's business practices have come under close scrutiny in the last month. The cover story of the October 27 US News and World Report documents the deals federally guaranteed student-loan leaders are making in increasing numbers with colleges and universities to get them to market their loans exclusively, at the expense of federal direct-loan programs that are cheaper for students and taxpayers alike. Sallie Mae is featured in the report, titled "Big Money on Campus: How Taxpayers Are Getting Scammed by Student Loans." As a result of the article, US Representative George Miller of California, the senior Democrat on the House Committee on Education and the Workforce, has called for hearings investigating the Department of Education's oversight of the federally guaranteed student-loan business. (See "Patching Up the Regulatory Cracks," further in this article.)