While statistics on the precise number of aggrieved borrowers are not available, those with a finger on the pulse of the consumer-credit industry are sensing the mounting trouble. Economic sociologist Robert Manning, author of Credit Card Nation (Basic, 2000), who's currently researching a book with the self-explanatory title Generation in Debt, reports that young adults are "talking about the trouble they've had with student loans more than ever before." Likewise, attorneys affiliated with the National Consumer Law Center (NCLC), an organization devoted to consumer litigation and public-policy development, have fielded so many complaints over the past few years that the organization devoted an entire session of its annual conference in late October to "The New Wave of Student Loan Abuses and Problems." It's the first time the organization has been compelled to hold such a session since the early '90s.
It's true that Sallie Mae is not the only student-loan company to come under greater scrutiny by Congress and consumer-finance advocates. What is clear, however, is that the partly private, partly federally sponsored business is throwing its massive heft into pioneering ways to allow student lenders to slip through state and federal regulatory statutes, and putting up fierce resistance to efforts to hold it accountable. As Vallerie Oxner, a business-law attorney who's tried a case against Sallie Mae for abusive debt collection and failure to address billing errors, puts it, "No laws seem to apply to Sallie Mae."
Sallie Mae, which calls to mind the image of a big-hearted mountain gal who wouldn't even dream of scammin' folks, was formed in 1972 as a "government-sponsored enterprise," under revisions to the Higher Education Act (HEA) of 1965. Originally called the Student Loan Marketing Association (SLMA), its purposes were noble: to make more student loans available by buying them up from private banks with funds borrowed against low-interest federal Treasury loans, and providing billing and collection servicing for them. This arrangement made it less risky for banks to issue student loans and easier for students — especially lower-income students who otherwise could not afford a higher education — to get them, and at lower interest rates to boot. The company was profitable from the start and went public in 1984, creating the holding company now called SLM Corporation.
The federally guaranteed student-loan program was a cushy deal for banks as well as for Sallie Mae, as all the company's businesses are commonly known. But despite mounting federal subsidies, banks weren't making enough student loans available to meet the need, and their services were cumbersome and confusing. To force lenders to compete for students' business and offer a better product, President Bill Clinton established the William D. Ford Federal Direct Loan Program, in 1994, which offered borrowers a low-interest alternative with no origination fee (a three-to-four-percent charge lenders take off the top), an income-contingent repayment option, and more streamlined servicing. In other words, by removing the middleman, the Department of Education offered cheaper, more convenient loans. At the same time, Congress also required Sallie Mae to come up with a plan either to liquidate or completely privatize by 1998. As a result, Sallie Mae's stock fell by 35 percent.