Student Loan Firm Spent Years Engaging In Predatory Loans To Boost Profits

Back in 2014, a company call Navient was spun off from the SLM Corporation (SLMC), the student loan agency known as Sallie Mae back when it was a government-run program before it was fuly privatized in 2004. When Navient was spun off, it took with it the loan servicing operation performed by Sallie Mae along with most if its loan portfolio.

Right before the Obama administration ended, the CFPB filed suit against Navient claiming that its loan practices drove up the cost of borrowing for millions of students and even overcharged active duty military service men and women on their outstanding student loans. Now a group of state attorneys general have filed and additional suit that the SLM Corporation has for years been engaged in a predatory lending scheme in order to boost sales and profits.

According to the suit, Sallie Mae used private subprime loans, not backed by federal loan guarantees, in order to gain favor with certain educational institutions. The loans were made to individuals that the company knew did not have the means to pay them back, essentially the "loans were designed to fail", according to the Washington State AG's office. The purpose of these failed loans was to ingratiate SLMC with the educational institution and thereby have that institution direct more federally guaranteed loans to the company. In addition, the educational institutions had an incentive for some students to use these private subprime loans because the law required that the tuition from federally guaranteed loans at an individual institution be less than 90% of the total tuition. The educational institutions were further complicit in the racket, with some agreeing to kick back anywhere from 20% to 25% of the SLMC losses on these private loans.

Essentially these private borrowers were just a marketing tool for SLMC and the fact that the loans would never perform was simply a cost of doing business. SLMC even estimated that the default rate on a majority of the loans would be as high as 92%. But those losses were offset by the increase in profits that SLMC could make when those institutions directed more federally guaranteed loans in their direction. Of course, it ruined the lives of those student borrowers, but that was simply a price that had to be paid.

Many of the institutions that benefitted from this program were nothing more than Trump University-like scams, in that they continually misled students about graduation rates and future job prospects. The students defrauded in this conspiracy between bogus educational institutions and the SLMC also run up against the usual hurdle of the fine print of their loans requiring arbitration for dispute settlement. Part of the states' lawsuit is asking that the private loans made to students who entered schools that deliberately misled them be voided. That protection applies to federally guaranteed loans but not to these private loans. For many of the students still suffering from having to pay off these never-ending, burdensome loans, this will be their only shot at relief.

Who could have thought that privatizing the student loan program would end so badly. As progressives have pointed out for years, it simply makes federally guaranteed loans more expensive by making a for-profit entity the middleman. But nothing will stop the GOP from funneling federal dollars to private corporations in the name of "competition" and "capitalism".