But the powerful student loan industry closed off that option in 2005, the year Brewer enrolled in college.
After a seven-year, $100 million lobbying campaign by financial interests, Congress overhauled bankruptcy laws to make debt relief tougher on all debtors. Over the years, the measure was the subject of intense debate, 24 congressional hearings and even a presidential veto.
See the faces of the student debt crisis
But a provision that was worth a fortune to Sallie Mae and other issuers of private student loans was slipped into the bill with no debate – and with bipartisan support.
At a 1999 hearing, then-Rep. Lindsey Graham, R-S.C., proposed barring debtors from discharging private student loans via bankruptcy, a transcript shows. Rep. John Conyers, D-Mich., who was leading Democrats’ opposition, said he had no objection. Graham’s amendment passed by a voice vote and eventually became part of the law.
Rep. Jerrold Nadler, D-N.Y., said the private student loan issue “wasn’t really on the radar screen” for opponents.
“In retrospect, it should have been part of the debate,” he said, “although there were ample other reasons to oppose that bill.”
The measure’s practical effect was to put student debtors in the same category as drunken drivers, fraudsters and deadbeat dads and moms seeking debt relief. From then on, it was easier to go bankrupt if you were a playboy who’d run up credit card bills living large in the Caribbean than if you were a former student who’d gotten sick or lost your job.
The law gave lenders tremendous leverage over student debtors, no matter how dire their circumstances, said Daniel Austin, a bankruptcy law professor at Northeastern University.
“It’s really awful what we’ve done,” he said.
While the bankruptcy measure was pending, Sallie Mae spent about $14 million lobbying Congress, according to data from the Center for Responsive Politics. The company made about $2.2 million in campaign donations during that period, $16,000 of them to Graham, Federal Election Commission records show. Graham’s office didn’t respond to a request for comment.
Over the next few years, bills were introduced in the House and Senate to overturn the bankruptcy exclusion.
In 2007, the newly elected Democratic majority presented the industry with a new threat.
A confidential planning document that surfaced in press accounts at the time shows Sallie Mae’s plan: Hire a public relations firm with ties to the Democrats. Meet with members of the Congressional Black and Hispanic caucuses to impress upon them how Sallie Mae was all about helping their low-income constituents. Set in motion grassroots efforts to turn back any action in Washington that might restrict Sallie Mae.
Later that year, Sen. Dick Durbin, an Illinois Democrat, introduced a bill to treat private student loans like any other debt in bankruptcy. It went nowhere, as have similar bills since.
The success was a testament to Sallie Mae’s evolution from a quasi-government agency into a full-fledged special interest in Washington whose primary goal is to protect and advance its own interests.
The government gets rich, too
The Department of Education has little incentive to fix the core problem. The loan program that began with the principal goal of helping disadvantaged students pay for tuition has become a moneymaker for the federal government.
The profit arises from the government’s ability to borrow money at a low rate and then lend it to students at a higher rate, thus charging students more than is necessary to recoup its costs.
The federal loans issued between 2007 and 2012 currently are projected to generate $66 billion in income for the government, according to a Government Accountability Office report.
Congress in 2013 lowered the interest rate on loans for incoming student borrowers, yet refused to extend the same benefit to more than 40 million student loan holders who had borrowed previously.
At a Senate hearing in 2014, Sen. Elizabeth Warren, the Massachusetts Democrat, quizzed the head of the Federal Student Aid office, James W. Runcie, about the government’s loan income.
Warren: “My question is … where do those profits go? Do they get refunded back to the students, who paid more than was necessary for the cost of their loans? Or are they just used to fund government generally?”
Runcie: “They are used to fund government generally. They do not come back specifically into the program.”
Warren: “We’re charging more interest than we need to run the student loan program, and there’s no mechanism to refund that money to the students. … I don’t think the student loan program should be designed so that it’s making profits for the federal government.”
The trillion-dollar bank
Federal Student Aid, the U.S. Department of Education office that oversees the trillion-dollar student loan program, is one of the most unusual agencies in the federal government.An offshoot of the movement that privatized Sallie Mae, FSA was created in 1998 as the first so-called performance-based organization, an idea supported by members of both parties and championed by then-Vice President Al Gore as a way to bring private-sector expertise and management practices to federal agencies.While technically under the education department, FSA operates much like an independent agency within the department – protective of its jurisdiction and generally oblivious to criticism that it has failed to oversee the private companies that actually run the program.For more than a decade, reports by the department’s own inspector general repeatedly have castigated FSA for failing to monitor student complaints, for failing to adhere to federal law and for refusing to follow its own procedures to protect student debtors.
One of the more egregious examples of this failure came to light in February in a scathing inspector general’s report about the department’s investigation of charges that American service members had been overcharged for student loans by education department contractors.
An internal department investigation had downplayed the problem, but the inspector general’s report said the department’s review was statistically flawed, inaccurate and invalid. Sen. Richard Blumenthal, D-Conn., one of the senators who had requested the inspector general’s review, called the department’s internal investigation a “sham study” and said the inspector general’s report revealed “a shameful abdication of responsibility” by the department for failing to look out for American service members in their dealings with student loan servicers.
