In discussing the company’s lending to “non-traditional” students, Sallie Mae CEO Al Lord said in a June 5, 2008 interview that “[i]t was obviously a mistake and I’m not going to step away from responsibility because I was either chairman or CEO when those loans were made. We got a little too confident in our own view that credit scores are of limited meaning for undergraduates. Maybe as early as 2004, we started lending with less selectivity. The culture of the company has been a FFELP [federal guaranteed loan program] culture for 35 years. That meant you made every loan to every student. I guess with 35 years of experience of saying yes, we were just not very good at saying no.”
I was at a conference recently and happened to sit next to a former Sallie Mae executive. We were talking about the loans Sallie Mae issued before the credit crisis. This former executive said those loans weren’t really so bad. He went on to repeat almost verbatim Mr. Lord’s comments that the company was accustomed to making FFEL loans and not accustomed to saying no to borrowers.
I have seen so many lives destroyed by these toxic products that I was in no mood for small talk. I pushed back, exclaiming that I have never seen such horrible loan products as the predatory student loans that were issued like candy during the heyday of subprime lending. End of conversation more or less.
But let’s take the comments at face value for a moment. Sallie Mae and others claim that they issued these loans because they were so used to the FFEL culture. In fact, the only thing that the predatory private loans and FFEL loans had in common was the lack of underwriting.
The comparison to FFEL loans ends there. I opened up my files and looked again at some of the loans we reviewed for our 2008 report on private student loans. I see initial APRs over 15% and in one case close to 19%. These are just initial, variable rates that kept going up in many cases. Despite the recent focus on government interest rates, there are no FFEL or other government loans with interest rates anywhere near these levels.
I then see a 9% origination fee. Once again, there are no such fees for federal loans. Before 2007, the maximum origination fee for FFEL loans was 2%. This decreased gradually and was eliminated at the same time that the FFEL program was eliminated. Unlike FFEL and other government loans, these private loans have no flexible repayment options, no right to cancellations in case of death or disability, no public service forgiveness, not even guaranteed deferment rights. And borrowers could be declared in default after missing just one payment. Compare this to FFEL loans where borrowers have 9 months (and sometimes more) before a delinquent loan is declared in default.
Why did the FFEL culture that Sallie Mae and others had so much trouble shedding impact business planning only when it came to handing out loans to borrowers with little or no ability to repay?
The reality is that lenders like Sallie Mae attained unprecedented growth and profits largely through their private loan products. Such loans contributed 23% of Sallie Mae’s “core” earnings in 2006 in what Fortune called an extraordinarily profitable business. Sallie Mae’s return on equity, which was over 30% in 2006, was one of the highest among American companies, and its executives reaped the rewards. According to Bethany McLean writing for Fortune, from 1999 through 2004, former chairman and current vice-chairman and CEO Albert Lord took home over $200 million.
When asked about the large profits in the student loan industry, a Sallie Mae representative responded that universities are huge businesses with huge endowments and then asked: Shouldn’t their vendors be in business too? The more important question is how much profit is too much and when do lender profits undermine our societal goal of promoting equal access to education.
It does not have to be this way. These predatory loans were unsustainable and unaffordable for a vast number of vulnerable borrowers. “Unsustainable” in human terms means individuals who pursue their dreams of upward mobility, only to find that these dreams are shattered due to unaffordable debt loads that they will never be able to repay.
Sallie Mae and others work hard to change the conversation. They talk about these loans from the past as ancient history. Sometimes they make excuses (see Al Lord’s comments above) and move on. The problem is that they left so much destruction along the way. It is not ancient history for our clients and others like them with ruined credit histories and shattered dreams. The companies must not be allowed to move on without doing their part to help troubled borrowers.
The Consumer Financial Protection Bureau (CFPB) recently summarized the responses to its request for comments about relief for existing student loan borrowers. These options are taken from the more than 28,000 comments the agency received. Policymakers should pay close attention to the CFPB report with its focus on the potential impact of student debt burdens and ways to spur affordable loan repayment options. NCLC provided our perspectives in these comments. We believe that much more must be done to provide assistance for struggling borrowers. The guiding principles of these policies should be:
1. Affordability for borrowers.
2. Preservation of borrower protections.
4. Efficiency and Scale. The program must be designed to reach as many as possible of the borrowers in or at risk of default, and
5. Fairness. The program must not be a bailout or giveaway to lenders.