Student loans: Public vs. private
The vast majority of student loans come in one form or another from the federal government. The Federal Reserve Bank of New York has estimated that more than 90 percent of the $1.3 trillion in outstanding student loans are in that category. The government either directly issued these loans or backed them through a private company.The rest are so-called private student loans made by banks and companies and are not guaranteed by the government. In some years, private loans may make up as much as 20 percent of the total debt of graduating seniors, according to estimates from The Institute for College Access & Success in Oakland, California, one of the most authoritative sources for student loan data.
Whatever the figure for private loans may be, most education experts say federal loans are preferable for students because they are less costly than private loans and provide more consumer protections and repayment options.
For years, banks and other financial institutions charged fees to issue federally guaranteed loans, but in 2010, Congress adopted the Federal Direct Loan Program to make the U.S. the direct lender, eliminating the middlemen.
However, private contractors – such as Navient, the former Sallie Mae division – continue to collect fees to administer the federally backed loans. And banks and other companies continue to make private student loans.
Even though federal loans are much more beneficial to students, some borrowers turn to private lenders because they do not realize the advantages of federal loans, do not know how to compare federal loans with private loans or have borrowed the maximum in federal loans.
There’s no hard number for how much this will end up costing taxpayers. Projections from 1992 suggest the price tag will be billions of dollars.
Sallie Mae also began marketing private student loans. These loans have higher interest rates and fees and give borrowers fewer options for relief if they run into financial trouble.
Nevertheless, college loan officers say many students succumb to the sales pitch of private lenders because they either don’t realize that private loans are more expensive or have maxed out their federal loans. Private loans make up a small portion of the total student loan debt, but it’s still a huge number: about $100 billion.
Lord had created an integrated student loan operation encompassing every phase of the burgeoning industry. And the company became a financial juggernaut. In the decade after it was privatized, Sallie Mae’s stock price rose by 1,900 percent. From 1999 to 2004, Lord’s compensation topped $200 million. From 2010 to 2013, when students began to shoulder more and more debt, Sallie Mae’s profits were $3.5 billion.
Lord retired in 2013. The following year, Sallie Mae spun off most of its student loan business into a new company, Navient.
Lord declined to be interviewed for this story. In an email, he blamed the federal government and universities for the surge in student debt.
In the past 20 years, there has been “geometric growth in annual government student lending,” Lord said. This explosion in government lending has left taxpayers at risk for more than $1 trillion, he wrote, while allowing colleges to inflate the cost of higher education at the same rate that students rack up debt.
“The notion that private lenders … caused the monumental mortgaging of college graduate futures is a fantasy,” Lord wrote.
After privatization, Sallie Mae became a powerful political force in Washington. Since 1997, the company has spent more than $44 million lobbying Congress, the president and the U.S. Department of Education on hundreds of measures, according to the Center for Responsive Politics. Sallie Mae’s political action committee and company executives, led by Lord, have pumped about $6 million into the campaigns of favored politicians – half to Republicans, half to Democrats.
In Congress, the biggest recipient was Ohio Republican John Boehner.
Before he was elected speaker of the House in 2011, Boehner served as chairman of the Committee on Education and the Workforce, where Sallie Mae had frequent business. From 1995 until his retirement in 2015, Boehner and his Freedom Project PAC received $261,000 from Sallie Mae donors, records show.
Boehner flew with Lord on Sallie Mae’s corporate jet for golf outings in Florida, The Chronicle of Higher Education reported in 2006. Meanwhile, Boehner went out of his way to make it clear that he’d protect the industry.
In 2006, as Congress considered slashing federal money for the student loan program, Boehner gave a speech to the industry’s trade association reassuring its leaders that they would be protected from cuts.
“Know that I have all of you in my two trusted hands,” he said. “I’ve got enough rabbits up my sleeve to be able to get where we need to.”
Boehner declined to be interviewed for this story. A spokesman said his efforts on behalf of the private student loan industry reflected his support for free enterprise and skepticism about big government.
“The policy actions he took in the House had nothing to do with political donations or anyone lobbying him,” David Schnittger wrote in an email.
The states withdraw from funding higher education
In the summer of 2010, Saul Newton was a 20-year-old rifleman stationed at a small U.S. Army outpost in the remote, dangerous Arghandab River valley of Afghanistan.
It was a radical change for a kid from suburban Milwaukee who only months before had been a communications major at the University of Wisconsin-Stevens Point.
But after two years of tuition hikes, Newton found himself with $10,000 in student loans and the prospect of still more borrowing if he stayed in school.
“I couldn’t afford it anymore,” he said. He dropped out and enlisted, hoping to go back to college one day under the GI Bill.
