While members of both political parties are patting themselves on the back after lowering the student loan rates, they still haven’t addressed the heart of the problem. The largest provider of those loans, Sallie Mae, still has extremely close ties to the federal government and absolutely no interest in helping students keep their loans on track and out of default.
This isn’t a problem that just appeared in the last four years. It’s been 35 years since the Federal government first started interfering with the student loan programs and bankruptcy laws that now has students and their families crushed under a loan debt that topped $1.2 Trillion this year. That is now larger than even the credit debt of the U.S. and is squarely on the shoulders of the people we depend on to expand the economy.
When Student Loan Borrowers Lost Their Rights
In 1978, the Bankruptcy Reform Act was passed to prevent students from filing bankruptcy for five years after graduation. The law was passed after a handful of doctors and lawyers fraudulently filed to avoid repayment of their student loans. Instead of applying the existing bankruptcy laws to a handful of people trying to scam the student loan system (less than one percent of all loan holders), the Bankruptcy Reform Act took a hammer to them and set a precedent that eventually turned student loans into a protected financial product; protected for the benefit of Sallie Mae. In 1990, this non-discharge period was extended to seven years.
For those of you who don’t know the origin of it, the Student Loan Marketing Association (Sallie Mae) was created in 1972. It began as a Government Sponsored Enterprise (GSE) designed to manage the federal loan programs created by the Higher Education Act of 1965. It continued in this function until 1997, when then CEO, Albert Lord led the charge to privatize all operations. This was completed in 2004 and all official ties to the U.S. government were supposedly severed.
Post Privatization of Sallie Mae & Further Loss of Rights for Borrowers
Right after privatization began Congress passed, and President Clinton signed into law in 1998, legislation that completely eliminated the ability to discharge Sallie Mae student loan debt in bankruptcy proceedings. This makes student loans the only type of loan that has this restriction. Student debt holders now are in the same situation as people who commit murder and are then sued by the family of their victims.
Then, in 2005, further amendments to the Bankruptcy Code provided this same protection to private student loan providers. The same legislation also removed five consumer protection regulations for student loan holders. These protections were:
- Adherence to State Usury Laws
- The Fair Debt Collection Practices Act
- Right to Refinance
- Statute of Limitations on Debt Collection
- The Truth in Lending Act
Thanks to these changes, the harshest debt collection methods can be used on people who miss just a few payments. These same methods were previously reserved for ex-spouses who try to dodge child support payments and people found guilty in civil court such as O.J. Simpson. They include garnishing wages without a court order, garnishing social security and disability income, suspension of state professional licenses to include practicing medicine and withholding IRS Tax Refunds.
60 Minutes Investigates Sallie Mae
In a very short time, the negative attention Sallie Mae earned its self went public. In 2006, the now supposedly private organization came under the scrutiny of no less than “60 minutes”. Leslie Stahl made a main point of her piece that despite being separated from the government for only two years, then company chairman Albert Lord had already been so well compensated that he was constructing his own private golf course.
Sallie Mae’s response did not help their case or serve to convince anyone of their good intentions. First, they refused to be recorded in an interview and only provided answers on paper. Prior to the story being aired, Sallie Mae also sent out a memo to colleges nationwide with the answers they provided as well as their opinion on the story itself.
“With nine million borrowers, it is disappointing that ’60 Minutes’ chose to spotlight three of our former customers who have not repaid their taxpayer funded loans. It certainly does not reflect the experiences of the vast majority of our customers, who have had the opportunity to attend your schools and fulfill their dreams of obtaining a college education,” said the letter from Sallie Mae to its clients.
Sallie Mae’s statement added that, “60 Minutes appear to accept without question that the government can administer and manager the student loan program more efficiently and less expensively than private lenders. This is not the case and, in fact, we believe that the competition and choice that schools have enjoyed … have expanded and improved college access and fueled vast improvements in the delivery of student loans.”
Now you’re thinking “OK, this all happened under George Bush or the Presidents before him, right? The student loan program was streamlined earlier this year and the loan rates are back where they belong.” That is true, but the only item that helps students is the lower rates.
Obamas Attempt to Help Backfiring
Students and their families still do not have the consumer protections returned to them taken away in 2005. What President Obama’s streamlining did reduce interest rates that had risen on federal student loans, and implemented the pay as you go plan. Sallie Mae still has zero risk on a defaulted federal loan as its backed by the government. Sallie Mae is going to turn a higher profit when student loans go into default and fees begin to accrue.
When a student defaults on his or her loan, Sallie Mae loses nothing. The federal government fully guarantees the complete loan amount. It even pays the interest that would have been paid to Sallie Mae over the lifetime of the loan.
Sallie Mae Interest In Collections Agencies & Defaulted Loans
Next, the government sends the loan to a collection agency. In the late 90s, just after Sallie Mae started severing its government ties, the company also began buying up collection agencies. It now owns two of the U.S.’s largest collection agencies, General Revenue Corporation (GRC) and USA Funds. These agencies and others are allowed to add a 25 percent collection fee to the loans they recover as well as receive a commission of up to 28 percent of the loan. It is the student loan holder who has to pay the fee and commission.
In case you haven’t been counting, that means Sallie Mae only gets paid once for every loan that stays in good standing. They get paid three times on every loan in default. It is impossible for Sallie Mae to lose money on any loan, no matter how small. The only losers in this situation are the students who are unable to keep their original, scheduled payments and the taxpayers who have to provide more every year to Sallie Mae because the government still guarantees every loan just as when Sallie Mae was a GSE.
Universities Interest In The Swindle
The nation’s universities and colleges are also in on the act. Since defaulted loans result in no penalties to anyone except the students and co-signers; the government, Sallie Mae and their collection agencies have no interest to actually lower the cost of tuition. In fact, lower tuition will cut into their profits when it comes to interest, collection fees and commission rates. Higher tuition means higher pay for professors, bigger buildings and course curriculums that “lead to nowhere”. How else could college tuition rise at twice the rate of inflation and four times the rate of wages over the last twenty years?
Defaults are at an all time high so the money is flowing. The last studies showed that one in four students who had attended four year universities were defaulting on their loans. For students attending two year programs, the rate of default is 40 percent; almost half.
It’s these numbers that are beginning to frighten a lot of people. When the sub-prime mortgage rate crisis turned into a housing collapse, defaulted loans were at these numbers. However, it’s not the banks handling the loans now. It’s Sallie Mae and the government is not going to bailout what is, for them, a no loss situation.
Time for Change
Since Sallie Mae is the largest lender of student loans in the U.S., they certainly bear the largest share of responsibility in fixing this situation. With the current bankruptcy laws benefiting them and the government underwriting their bottom-line, they have no need to do so. No matter what their customers do, Sallie Mae WILL turn a profit. The only way to end this is for you to have your Representatives and Senators stop financing Sallie Mae’s operations, put back the basic consumer protections into student loans that everyone enjoys for every other type of loan and to stop treating citizens who are having trouble meeting their responsibilities like criminals.
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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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.