The privatization of a system meant to cure inequality
Jessie Suren borrowed about $71,000, most of it from Sallie Mae, to attend La Salle University in Philadelphia. But a job with the U.S. Marshals Service fell through, and by her 2010 graduation, she had a soaring loan balance and no career prospects. Jessie Suren borrowed about $71,000, most of it from Sallie Mae, to attend La Salle University in Philadelphia. But a job with the U.S. Marshals Service fell through, and by her 2010 graduation, she had a soaring loan balance and no career prospects. Credit: Peter van Agtmael/Magnum Photos Credit: Peter van Agtmael/Magnum Photos
It’s not hard to see why people such as Jessie Suren are feeling squeezed and misled – and why loans that appeared smart and easy turned out to be anything but.
Stories such as Suren’s are everywhere, whether the borrowers attended prestigious universities or for-profit colleges, whether they wanted to be computer programmers or fashion designers, whether they were studying biology or graphic design.
Members of the new debtor class talk about how easy it was to borrow to go to college and how no one, not even their parents, warned them about the risk they were assuming. They talk about colleges that made it seem safe to borrow by assuring them that everyone had loans. They talk about how they want to pay off their loans but can’t earn enough to do that.
They say they didn’t realize how dramatically their loan balance could soar if they missed payments. They speak of the embarrassment of being hounded by debt collectors. And they talk about the stress – the unrelenting stress – of knowing they probably never will be free of debt.
This is not the program that President Lyndon B. Johnson envisioned when he signed one of the signature bills of his Great Society program, the Higher Education Act of 1965.
A linchpin in Johnson’s effort to wipe out racial injustice and poverty, the act was meant to ensure that any student who wanted to go to college would be able to through federal scholarships and loans. “This nation could never rest,” Johnson stressed, “while the door to knowledge remained closed to any American.”
Before the law, most Americans who wanted to go to college had to finance it themselves. That meant paying out of their own pockets, securing a scholarship or taking out an expensive private loan. After the bill, students could go to a bank for a less costly student loan guaranteed by the federal government.
Under President Richard Nixon, Congress expanded the program in 1972 by creating a quasi-governmental agency – the Student Loan Marketing Association, or Sallie Mae – to increase the amount of money available for student loans.
Sallie Mae was viewed as an enlightened expansion of Johnson’s program because it established a market for federally backed student loans. Banks loaned to students, and Sallie Mae bought the loans from the banks, increasing the pool of money available for loans.
When the children of the Great Society had children of their own, the government’s role in student loans dramatically changed. President Bill Clinton would be the catalyst for change – but not in the way he wanted.
After he was elected in 1992, Clinton pushed through Congress a major revision of the student loan program that made the federal government the direct lender of the loans – not just the insurer.
Clinton’s program eliminated the middleman between the government-backed loans and students. The direct loan program alarmed Sallie Mae and the banks: Now they had to compete with a government-run program that could make loans at a lower interest rate without having to turn a profit.
When Republicans won control of Congress in 1994, they moved to kill the direct loan program and privatize Sallie Mae. A year of bitter political infighting ensued until Clinton and congressional Republicans reached a compromise, one that ostensibly saved his program. In return, Clinton agreed to privatize Sallie Mae.
Upon passage of the bill in 1996, Rep. Howard P. “Buck” McKeon, a California Republican, hailed privatization, saying it was “paving the way to the future of a smaller, less intrusive government.”
Clinton’s direct loan program had been saved, but it soon would be marginalized by Sallie Mae.
Before privatization, Sallie Mae had little flexibility: The U.S. president appointed one-third of its board, and the Departments of the Treasury and Education had to sign off on most major policy decisions. It couldn’t loan money to students; the banks did that.
The compromise freed Sallie Mae of those restrictions. Originally barred from acquiring other loan issuers, back-office operations or collection agencies, it now could buy any company. Earlier, it lacked the authority to issue federally guaranteed loans; now it could do so. And for the first time, Sallie Mae could make private student loans – ones not guaranteed by the federal government – that commanded much higher interest rates and greater profits.
Suddenly, a full array of services that had been parceled out among government agencies or contractors – from making loans to collecting premiums and penalty fees – could be consolidated under Sallie Mae’s umbrella.
Privatization had a dramatic impact. While the Department of Education technically still oversaw student loans, the message out of Congress couldn’t have been clearer: Bureaucrats, step aside and let the private market run the loan program.
Sallie Mae dominates the market
The man who would make the most of this newly privatized industry was Albert Lord, who became CEO of Sallie Mae in 1997. Tall and lean, Lord looked like a patrician born to the manor, but he was the son of a newspaper linotype operator whose approachable nature masked his driving ambition.
Under Lord, Sallie Mae grew by leaps and bounds. Free of government control, it emerged as the dominant company in the field.
Lord’s chief competition when he took over was the Education Department’s direct loan program created by Clinton. Since its adoption in 1993, the program had gained popularity steadily on college campuses and captured a third of the student loan market by the time Sallie Mae was privatized.
Sallie Mae undermined the federal program with sheer marketing muscle. The company paid colleges to drop out of the federal program and make Sallie Mae the campus student loan provider. It paid college financial loan officers to serve as consultants on Sallie Mae advisory boards. It paid a New Jersey agency $15 million to steer business to Sallie Mae.
It placed Sallie Mae employees in university call centers to field questions from students who thought they were getting advice from college loan officers. It sponsored trips and cruises for collegiate financial aid officers. Other student loan lenders engaged in similar practices. Needless to say, the Department of Education didn’t have a budget to entertain college aid officials with free cruises on the Potomac River.
Faced with industry lobbying and congressional opposition, the Department of Education struggled to maintain Clinton’s direct loan program. After President George W. Bush took office in 2001, the program was cut back further. By 2007, its share of the student loan market had declined by more than 40 percent.
