Enter Al Lord, who in the mid '90s led a dissident Sallie Mae stockholders group dubbed "The Committee To Restore Value" (CRV). Rather than continue servicing student loans as a private company, they wanted to compete with both their former bank clients and the feds' newly formed direct-loan program, and originate loans themselves. After all, CRV reasoned, Sallie Mae had enormous name recognition, a third of the nation's student-loan business, and $47 billion in assets. Though their vision met widely publicized resistance from the board, CRV finally won. Soon thereafter, Lord was installed as CEO.
After CRV's plan passed Congress in 1996, Sallie Mae continued taking full advantage of its federal privileges, such as tax exemptions and access to cheap government capital (available until 2008), while penetrating pre-existing loopholes in the HEA, which regulates federally guaranteed student loans, and consumer and finance law, which governs private loans. It also expanded into the mortgage, credit-card, insurance, and debt-collection businesses. Today, Sallie Mae has $86 billion in assets, nearly double its worth in 1994. Indeed, it now leads the field. Lord's plan is going so well, in fact, that the company plans to be fully privatized by 2006 — a full two years ahead of schedule.
Along with its growing stash of money, however, Sallie Mae has amassed a long list of outraged borrowers. Take the class-action suit brought by John Washkoviak of Milwaukee, Wisconsin, and two other named plaintiffs, filed in Washington, DC, District Court, in December 2001. Earlier that year, Washkoviak noticed that Sallie Mae had begun billing him, in 1999, for mounting balances for which it supplied no explanation. As it turned out, the company had charged him late fees and interest without disclosing it. This was accomplished by charging a late fee for each month a balance was past due, even if required monthly installments were paid in a timely fashion in subsequent months. For example, if you had one late payment for which you had been penalized $20, and you didn't pay it, you would be assessed an additional $20 every month thereafter, even though you continued to make on-time monthly payments. Over the course of a 10-year loan, that could add up to a $2400 bill after making what you thought would be your last payment. The late fees were not listed on borrowers' bills and, in some instances, the bills actually reflected a late-fee balance of "$00.00." (This was accomplished, the suit alleges, by "pyramiding," or applying part of each monthly payment to late-fee charges, so that technically the fee balance would be zero, but the payment would not cover the balance — which would incur yet another late fee.)
Remarkably, many of these actions are legal. As federal-education-policy analyst Barmak Nassirian observes, "federal law facilitates this behavior," and the courts seem to bear him out. The Washkoviak case, for example, which went before DC Superior Court judge James Boasberg — a recent Bush appointee — was dismissed. Why? The judge ruled that both federal truth-in-lending laws and state laws governing "disclosure requirements" and the banning of late-fee pyramiding were "pre-empted" by federal statutes that recognized only the "duplicate regulations" of the HEA in such matters. The trouble is, as attorney Richard O'Reilly wrote in his appeal, since these matters are in fact not regulated by the HEA, student borrowers are left "without any recourse for fraudulent misrepresentations or illegal practices relating to the imposition of late fees."