The bad policies and practices of Sallie Mae continue to live down to the public’s already low opinion. It now appears that despite holding almost 40 percent of the debt owed by students through the Federal Family Education Loan Program (FFELP); Sallie Mae has only 15 percent of its borrowers enrolled into the Income Based Repayment Program. That 15 percent means that out of over 900,000 students, only about 140,000 are enrolled in the program designed to help and protect them. This all while defaulted student loans are at a record 30% of all borrowers. It’s a wide disparity that many government officials and student advocates point to as a reason why the student loan system needs an actual overhaul and not just another band-aid legislation that does very little for the people who actually need relief.
As we pointed out last time, the roots of this problem go back for years. This time however, we’ll focus on what happened last year and why it doesn’t look good for current and future students. In 2012, Sallie Mae offered up a $225 million debt package to investors. If you don’t recall hearing about this, it may be because the offer was made using Sallie Mae’s formal name of SLM Corporation. This is what the folks at Sallie Mae prefer to be called now and they went to great lengths to keep their original name out of anything having to do with the new offering.
It didn’t work. Despite offering a rate of 3.5 percent, investors completely ignored it. Apparently those people who are generally willing to invest in higher risk investments finally found their lower limit and will absolutely not cross it. Until this offering, investors would snatch them up as soon as they hit the market because they were backed by the federal government, which meant low risk and a guaranteed return. That is as safe as it gets. The last time investors began abandoning such loans was in 2007 and it led to the collapse of the housing market. It would appear that Sallie Mae (excuse me, SLM) has extended itself as far as it can to many investors. Since over 30 percent of student loan holders are now more than 90 days late in payments, some investors and student advocates believe this could be the “tipping point” for student loans. With fewer investors willing to take on their standing debt, Sallie Mae only has one other source of income outside of interest payments: Defaulting students.
Income Based Repayment Helps Prevent Default
Earlier this year, President Obama touted the Income Based Repayment Program as the primary tool to help students get out from under the threat of defaulting and to begin shrinking the amount of student debt. When he pointed out that this debt not only holds back graduates, but the economy itself, it may have been the most bipartisan comment he has made in four and a half years as President. Graduates and their families enrolled in Income Based Repayment have their monthly payments capped in direct relation to their income and provides for full forgiveness of their remaining loan amounts once they meet a minimum number of monthly payments. Neither of these benefits put a single dollar into Sallie Mae’s pockets except for a smaller amount of interest payments compared to the original loan or especially when those loans go into default.
Sallie Mae, of course, denies any wrongdoing or manipulation of student loan holders. Any report or news story that points out their low enrollment numbers is dismissed as “misguided”. However, the number of eligible students compared to those enrolled cannot be as easily pushed aside. When pushed for clarification or at least more accurate data, Sallie Mae has gone completely silent except for an occasional, generic press release that promises to do something. The National Consumer Law Center continues to ask for more information, but has so far received nothing from Sallie Mae and little more than that from the Department of Education.
Even without directly answering questions, the Department of Education has made some decisions that point to Sallie Mae’s misdeeds. The department recently announced that it would reduce the number of federal loans the company would be allowed to provide in 2014. This new number of loans now makes Sallie Mae the smallest of the Department of Education’s four major lenders.
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Sallie Under Fire
This isn’t the only punishment that Sallie Mae is facing either. The FDIC announced in August that it would take action against the company for what it calls violations of the Servicemembers Civil Relief Act. The claims are that Sallie Mae has used debt collection practices on military members and their families that are not allowed when the serviceman or woman is deployed or stationed overseas. If action is taken, this will put at risk the over $300 million in contracts that Sallie Mae has with the Department of Education.
Ironically, it may be the Income Based Repayment that saves Sallie Mae’s reputation. Right now, the Income Based Repayment Program has roughly only 2 million student loan holders
enrolled. If more graduates and their co-signers are not brought into the program and soon, it could collapse in just a few years. It would be very easy for Sallie Mae to identify those students at risk or even those already in default and get them into the Income Based Repayment before the end of this calendar year and help assist the drowning borrowers.
In order to do that, Sallie Mae would have to give up two income streams from their defaulting student loan holders. In addition to the interest they receive (and is guaranteed by the Federal Government), Sallie Mae generates income from their collection agencies. They are allowed to put both a 25 percent collection fee on defaulted loans and even receive a commission of up to 28 percent on every loan that they collect for themselves. The person who pays this is the student loan holder of course. Obviously, there is no financial incentive for Sallie Mae to do this.
Despite this, SLM Corporation (the new name, remember?) continues to insist that it does everything it can for its loan holders. In one of their few press releases, they claim that they only hold FFELP loans made before July 2008 which have a lower Income Based Repayment rate of enrollment. Well, the problem with that statement is that it is true for every loan servicing agency. All FFELP loans issued after July 2008 were purchased by the federal government as part of closing out the program in 2012. SLM even tries to claim that their very small 15 percent Income Based Repayment enrollment is a positive. However, over 70 percent of their enrollees came into the program over the last 18 months, when public pressure began to build as to why Sallie Mae had such poor numbers for helping graduates compared to other loan servicers.
The answers as to why should be fairly clear to anyone who can read and do simple math. Sallie Mae has no incentive to help their loan holders find the best option to help them meet their financial responsibilities. Their only monetary incentive actually puts graduates and their co-signers into debt that can follow them for decades to come. This keeps them from purchasing a home or put money aside for their children’s education, providing a way to break the dependency on loans for an education that no longer assures anyone of improving their financial status in a very weak economic recovery.
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.