What Sallie Mae Won’t Tell You About Its Proposal

Specifically, Sallie Mae is pushing lawmakers to allow private lenders to continue marketing federal student loans to colleges as is done under the existing FFEL program. The company’s proposal mirrors the president’s in that all new federal student loans would be held by the government, but the key difference is lenders would still be allowed to originate loans at schools on behalf of the government. This difference ensures college financial aid administrators remain in charge of choosing lenders to originate their students’ federal loans. Sallie Mae claims it preserves “choice” and “competition” in the program. But in reality, the company wants to ensure federal loans are marketed at the school level so that it can maintain its predominant role in the private loan market.

Over the last decade, Sallie Mae has aggressively used the relationships it has forged with colleges to cross-sell its more expensive private loans to students who already receive Sallie Mae’s federal loans. Here’s how it works: Sallie Mae uses the FFEL program to woo a school’s financial aid office, offering up administrative services and counseling for students to supplement the government-backed loans it makes at the school. In turn, the college recommends Sallie Mae private loans to its students.

Getting the college financial aid office’s imprimatur is extremely valuable to Sallie Mae because it gives the company a captive audience of students who usually stick to aid administrators’ recommendations. As a result, Sallie Mae doesn’t have to compete in a more open marketplace to win students’ business for private loans.

To Sallie Mae, as well as some other lenders, the importance of maintaining private loan marketing through a school’s financial aid office cannot be overstated. But don’t take our word for it. Here’s what one industry expert had to say in a study on private loan marketing practices posted on the Student Lending Analytics blog:

“The school is the be-all and end-all. From a brand point of view, the school is the trusted agent in higher education financing, not the bank. Students rely on the recommendations of schools, and until we have better consumer information, this is their best information resource.”

Once Sallie Mae has access to the financial aid office courtesy of the government-backed FFEL program, it aims to cross-sell additional, more-expensive loans to students who already have federal loans. Take a look at this description for an “Inbound Sales Specialist” position at Sallie Mae, also posted on Student Lending Analytics.

“The Inbound Sales Specialist is responsible for taking inbound sales calls for both current and new Sallie Mae borrowers… The Incumbent must possess the ability to transition a call into a sales opportunity along with cross-selling other loan opportunities within Sallie Mae…”

Under the 100 percent direct loan proposal pending in Congress, the cross-selling racket ends. The government would originate all federal student loans, and cross-selling would be prohibited, just as it is under the contracts to service direct loans that the U.S. Department of Education forged last year with loan companies, including Sallie Mae.

To be sure, cross selling additional products is a legitimate marketing approach. But the government prohibits it under the direct loan servicing contracts for good reason. Federal programs should not be a tool for private companies to sell participants products outside the scope of the program — especially when the products are high-interest loans that have few borrower protections.

So in the end, Sallie Mae’s proposal is not about preserving “choice” and “competition,” or even jobs. It’s about hijacking a federal program so that the company has maximum opportunities to saddle unsuspecting students with credit card-like loans that can’t be discharged in bankruptcy. The Direct Loan program explicitly protects students from such practices. But if Sallie Mae has its way, Congress will block that protection.