How did a government student loan agency turn into a predatory loan vampire?In recent months, the student loan giant Navient, which was spun off from Sallie Mae in 2014 and retained nearly all of the company’s loan portfolio, has come under fire for aggressive and sloppy loan collection practices, which led to a set of government lawsuits filed in January. But those accusations have overshadowed broader claims, detailed in two state lawsuits filed by the attorneys general in Illinois and Washington, that Sallie Mae engaged in predatory lending, extending billions of dollars in private loans to students like Ms. Hardin that never should have been made in the first place.
“These loans were designed to fail,” said Shannon Smith, chief of the consumer protection division at the Washington State attorney general’s office.New details unsealed last month in the state lawsuits against Navient shed light on how Sallie Mae used private subprime loans — some of which it expected to default at rates as high as 92 percent — as a tool to build its business relationships with colleges and universities across the country. From the outset, the lender knew that many borrowers would be unable to repay, government lawyers say, but it still made the loans, ensnaring students in debt traps that have dogged them for more than a decade.While these risky loans were a bad deal for students, they were a boon for Sallie Mae. The private loans were — as Sallie Mae itself put it — a “baited hook” that the lender used to reel in more federally guaranteed loans, according to an internal strategy memo cited in the Illinois lawsuit.The attorneys general in Illinois and Washington — backed by a coalition of those in 27 other states, who participated in a three-year investigation of student lending abuses — want those private loans forgiven.In a pair of cases that could affect hundreds of thousands of borrowers, they have sued Navient. The lawsuits cover private subprime loans made from 2000 to 2009.
So now it has to make money, lots of it, for its investors. How?It got its start more than 30 years ago as a government-sponsored enterprise, collecting payments on loans that were backed by a federal guarantee. By the mid-2000s, Sallie Mae had become a for-profit, publicly traded company no longer tied to the government, although it still made most of its money by originating federally guaranteed student loans. [my bolding]
But the company also had a sideline in private loans. Those came with higher interest rates and fewer protections for borrowers than the federal loans. And if the borrowers stopped paying, Sallie Mae was stuck with the loss.Private loans were often profitable for the company, but a portion of them — the riskiest part of Sallie Mae’s portfolio — were not. The company made subprime loans to students who would not otherwise qualify, including borrowers with poor credit who took out loans to attend schools with high dropout rates.Those subprime loans were a bargaining chip, the government lawyers said, a tool Sallie Mae used to build relationships with schools so that the company could make more federal loans to their students. The federal loans were the real prize, because they came with a built-in safety net: If a borrower defaulted, the government would step in and reimburse the lender for most of its losses.Sallie Mae could afford to absorb the losses from its private loan business as, essentially, a marketing cost of snagging more lucrative loans. In a 2007 internal note, quoted in Illinois’s lawsuit, Sallie Mae described its strategy of using subprime loans to “win school deals and secure F.F.E.L.P. and standard private volume,” a reference to the Federal Family Education Loan program that generated most of the company’s profits. [my bolding]
Read the whole piece in the New York Times.Trigger warning: this might elevate your blood pressure to dangerous levels.Defaults on one set of subprime loan products were between 50 and 92 percent every year from 2000 to 2007, according to Illinois’s lawsuit. Students did not know about the risk, the state said in its lawsuit, but “this fact was no secret to Sallie Mae.”Those defaults did not discourage Sallie Mae, the lawsuits show. From 2000 to 2006, Sallie Mae increased the number of borrowers with one kind of troubled loan to 43,000 from 165, an increase of some 26,000 percent.[my bolding]