A Retrospective Look: Sallie Mae and Student Loan Controversy

We’re celebrating our 5th Anniversary this year. We know a lot can happen in five years, and we’re proud to have done our part in shaping education reform over the years. So, over the next few weeks, we’ll be reflecting on some of our past work just to see how far it’s come: What drew our analysts to the work? How have the issues evolved? And what’s next? Our “retrospective series” reveals what our analysts had to say.

Leading Lady: Sallie Mae and the Origins of Today’s Student Loan Controversy (May 2007)

In this report, Education Sector Senior Policy Analyst Erin Dillon explains how the student loan industry has evolved from a relatively small, government-sponsored program into a vast, aggressive, and highly lucrative industry. No company had been more ambitious than Sallie Mae, the industry’s dominant player, and the story of Sallie Mae’s rise from a government-regulated niche enterprise to a fully private, multi-billion-dollar corporation goes a long way toward explaining how and why the student loan industry has landed at the center of controversy.

Dillon chronicles Sallie Mae’s rise in the wake of skyrocketing college costs and escalating student borrowing, explaining how the company’s expansion, less-than-rigorous federal oversight, and the loan industry’s increasing complexity created a climate that was on the verge of collapse, and needed reform.

Education Sector: What drew you to this issue in the first place?

Erin Dillon: My interest in student loans started with a New America Foundation event in September 2006 during which they discussed the “9.5 percent loan scandal,” in which some student loan companies used creative loopholes to dramatically increase profits at the expense of taxpayers. The event featured the government whistleblower, Jon Oberg, who helped to bring the scandal to light and also Raza Khan, who founded the student loan company My Rich Uncle and was in the middle of his battle against “preferred lender lists” at colleges, a practice that steered students toward using certain loan companies. The event also involved a lot of arguing and finger pointing. I figured if people were so worked up over this issue it must be interesting, and there must be space for some good, independent research. I wrote the “Sallie Mae” piece in order to explain how the federal student loan system worked and how we got to things like “preferred lender lists” and loan scandals, with a focus on the industry’s biggest player, Sallie Mae.

ES: How has this issue evolved since your report came out? Anything surprise you?

ED: A better question may be, “how hasn’t it evolved?” Student lending has changed dramatically since I wrote “Sallie Mae.” When I wrote the report, Sallie Mae was about to be purchased for $25 billion, but shortly after it was published in 2007 the credit markets crashed and Sallie Mae’s profits and influence plummeted along with the rest of the student loan industry. The crash forced the government to bail out the loan companies and also put the brakes on the rapid growth in private student loans—loans that aren’t backed by the U.S. government. The bailout revealed how dependent student loan companies were on the federal government and also weakened their lobbying ability. This helped pave the way for President Obama to shift all student loans to the Federal Direct Loan Program, thereby cutting the loan companies out of the business of making federal student loans. Of course some—including Sallie Mae—are still in the business of collecting and servicing student loans, but they don’t have the same profits and clout as they used to.

ES: Over the course of the next 5 years, how do you expect this issue to develop? Where are the opportunities to continue research?

ED: President Obama managed to cut the loan company middlemen from the federal loan system, but that doesn’t address the fundamental problems of continually increasing tuition prices and growing student debt levels. It also doesn’t address the growing demand for Pell grants and current shortfall in funding. More families are relying on federal student aid right now, which is stretching the Pell grant program to the limit and is also forcing many students to borrow to pay for college. At the same time, cuts in state budgets mean that more of the cost burden of public colleges is being shifted to students and parents. I think there is a huge opportunity to rethink how we finance higher education and the role of federal grants and loans in the system—it’s simply not affordable to allow colleges to set prices while the federal government plays catch-up through Pell grants and student loans. We need a system that does a better job of balancing costs and risks across all players in the system—institutions, students, the federal government, and state governments.

Read Sallie Mae and the Origins of Today’s Student Loan Controversy, as well as Dillon’s other work on student loans and financial aid.

Tagged as: Fifth Anniversary Retrospective Series, New America Foundation, Sallie Mae, Student Loans