Sallie Mae not

By CATHERINE TUMBER  |  July 25, 2011

Tom Domonoske and Dale Pittman, the attorneys representing Powell and nearly 200 other clients in similar cases, are appalled by Sallie Mae's computer-school gambit. Under the FTC holder rule, they claim, student lenders are responsible for making sure the schools they cover are legit. "Compliance is simple, says Domonoske, adding, "unlicensed schools aren't even allowed to charge tuition." In fact, they say, the student-loan industry has been through this before: back in the early '90s, after lenders bailed out on students enrolled in fraudulent vocational schools offering instruction in such skills as truck driving and hairstyling, Congress amended the HEA to give students with federally guaranteed loans the same protections as those contained in the FTC holder rule — that is, to make lenders responsible for the legitimacy of the schools they fund. It was one of those landmark changes well known to everyone in the field of consumer finance. But now, just a decade later, Sallie Mae seems to have found a way to avoid its legal responsibility to deter educational fraud — indeed, to profit from it — this time through its private loan program and use of the mandatory-arbitration clause, which keeps disputes with the company out of the courts. With this protective tool in hand, allege Domonoske and Pittman, Sallie Mae may have intentionally made loans to shaky schools in order to drum up business. Company spokesperson Joyce concedes that Sallie Mae needs to do a better job of "tightening up" its scrutiny of school licensing. But he also maintains that the company is offering fair terms in arbitration, such as "teach-outs" at other schools where students can complete their training. It's hard to know whether student borrowers are themselves pleased with the terms, however, since the proceedings are by law shrouded in secrecy. And as Domonoske points out, Sallie Mae still stands by its loose interpretation of the FTC holder rule.

Sallie Mae's business practices haven't alienated student borrowers alone. The company has also angered another titan in the student-loan industry: College Loan Corp (CLC). In 2000, CLC contracted with Sallie Mae, among others, to market student-loan-consolidation programs. The HEA's "single-lender rule" holds that if a student-loan company is the sole lender, borrowers can consolidate loans — and thereby take advantage of today's plummeting interest rates — only with them; other companies cannot compete for their business. But CLC alleges that Sallie Mae, which buys up tons of loans without borrowers' knowledge, has violated its single-lender privileges through its private subsidiary businesses, by failing to process applications for consolidation properly and diverting applications to lenders with which it is affiliated. CLC further claims that Sallie Mae offers inducements such as free software to financial-aid offices to encourage students to sign on with lenders that then sell their loans to Sallie Mae (allegations that the US News and World Report article details more thoroughly). Besides, many borrowers report that when they've agreed to consolidate with Sallie Mae, their interest rates have gone up rather than down. (See "Alternatives to Sallie Mae," further in this article.)

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