From the Archives: Predatory Lending at Sallie Mae

This week, The New
York Times had a cover story about lawsuits that the State Attorneys
General in Washington and Illinois have
filed against Navient, the private student loan company formerly known as
Sallie Mae. These lawsuits accuse the corporation of having made subprime
private loans to for-profit college students even though it knew that most of
these low-income and working-class students would never be able to pay them
back. This is a subject that I’m quite familiar with, as I’ve written repeatedly about Sallie Mae’s predatory lending practices since I joined New America in 2007. In
the interest of providing more background on this issue, here are some key pieces I’ve written about the subject over the years. (Editor’s Note: The links included in posts from our former blog Higher Ed Watch no longer work.):

“Class Action Lawsuit Challenges Sallie Mae’s Subprime Lending Practices” (3/20/08): In this Higher
Ed Watch post, I wrote about a lawsuit that Sallie Mae shareholders brought
against the company. In the lawsuit, the shareholders argued that the student
loan giant had “misled them about the amount of risk the company was taking on
in pushing high-cost private loans on subprime borrowers attending
poor-performing trade schools.”

“Blind-Sided at Sallie Mae?” (3/25/08): This post took issue with Sallie Mae’s response to
the shareholder lawsuit in which the company claimed it had been “blind-sided by the
rising default and delinquency rates on the subprime private loans they were
making to students at poorly-performing for-profit colleges.”  The post explained how Sallie Mae’s subprime “Orwellian-sounding
Opportunity Loan program” worked. “In deals with the largest for-profit college
chains, Sallie Mae agreed to provide private student loans, with interest rates
and fees totaling more than 20 percent per year, to financially-needy students
who normally wouldn’t qualify for them because of their subprime credit scores,”
I wrote. “Sallie Mae apparently viewed these loans as ‘loss leaders,’ meaning
that the company was willing to make these loans, many of which were likely to
go into default, in exchange” for becoming the exclusive provider of federal
student loans to the tens of thousands of students at these companies’ schools.

“Subprime Student Loan Racket” (Washington Monthly’s
November/December 2009 issue):  In this Washington Monthly article, I aimed to show the human
cost that Sallie Mae’s subprime lending practices were having on students who
often left these for-profit schools with mountains of debt but without
the training they needed to become gainfully employed. “Sallie Mae clearly
understood that these private loans were going mostly to subprime borrowers who
might not be able to pay them back,” I wrote. “In 2007, Senate investigators
uncovered internal company documents showing that executives expected a
staggering 70 percent of its private student loans at one for-profit school to
end in default.”  I argued that “the
appalling treatment of disadvantaged students at the hands of proprietary
schools” and unscrupulous lenders like Sallie Mae “ought to be a national
scandal.”

“Class Action Lawsuit Against Sallie Mae Gets New Life” (10/12/10) In this post, I wrote about how
the shareholder lawsuit, which a federal judge had allowed to move forward, alleged that
Sallie Mae officials had doubled-down on their subprime lending strategy to
raise the corporation’s value at a time when they were putting the company up
for sale. To mask the amount of risk they were taking on by lending high-cost
private loans to low-income students at shady for-profit schools, Sallie Mae
allegedly pushed thousands of delinquent borrowers into forbearance.” By doing
so, “they could ensure that delinquent borrowers would not default on their
loans until after the buy-out deal was completed and ownership had changed
hands.” The lawsuit argued that the strategy was ultimately harmful to the borrowers
because interest continues to accrue on loans in forbearance. As a result, their
loan debt ballooned, making it even harder for them to pay off.

“Sallie Mae’s Lame Defense” (10/14/10): In this Higher Ed
Watch post, I disputed the company’s claims in its response to the shareholder lawsuit that its leaders
had been “unsuspecting victims of a consumer credit tsunami that caused
unprecedented numbers of its student borrowers to default.” Instead, I
highlighted statements that company officials had previously made in which they
acknowledged that they had “acted incredibly irresponsibly (which, as we see
here, they have readily admitted) and put extremely vulnerable borrowers in
jeopardy.”

In 2012, Sallie Mae agreed to settle the shareholder lawsuit
for $35 million, without admitting any guilt for their predatory lending
practices. As I wrote at the time, Sallie Mae “essentially gets off scot-free
($35 million is hardly even a wrist slap for a company that holds nearly $140
billion of federally guaranteed student loans), many of these borrowers will be
stuck with this debt hanging over them for the rest of their lives.” Hopefully,
the Attorneys General in Illinois and Washington won’t go so easy on the
giant student loan company now known as Navient and will force it to provide real relief to its
unfortunate victims.