How The Student Loan Industry Became Big Business
Posted on August 2, 2007
Student loans are becoming a hot topic as students graduate each year with more student loan debt than the previous class. Tuition and fees are rising rapidly at the university level. Books continually have outrageous costs with little improvement in courseware. Housing costs for college students have skyrocketed in many parts of the country. To compensate for all the rising costs students are having to take out more in loans typically graduating with over $19,000 in debt for a four year degree.
The Student Loan Marketing Association (now known as Sallie Mae) originated as a financial services corporation created by Congress in 1972. The goal for Sallie Mae was to buy up student loans from banks to free up private capital for more loans. Operating more as a service than a corporation Sallie Mae provided opportunity for many students to attend college than would have been able to in the past. At this point Sallie Mae leadership becomes more aggressive and lobbies heavily for two important changes to its current role. It goes after and is awarded the opportunity to market and sell loans directly to students instead of just purchasing second hand loans from banks. Next, it breaks away from the federal government and becomes a publicly traded company, SLM. With its current status Sallie Mae begins to find ways to gain market share by courting college financial aid officers for special preference over the Federal Direct Loan Program. Between January 15, 1988 and August 1, 2007 Sallie Mae’s stock price has increased a staggering 1679%. By comparison the S&P 500 has increased 18.76% in that time. Making money in a very similar fashion to the credit card industry, business has been good for Sallie Mae the last 19 years. Late fees and penalties hurt students who were already having trouble paying the loans back, while sending Sallie Mae’s stock through the roof. Much like the credit card industry, the best customers are the ones that cannot repay the loans on time. Then in 1998 the bankruptcy laws were changed to make student loans non-dischargeable meaning even if you file bankruptcy you will still have to pay the loan back.
I was one of the fortunate that received the GI Bill after completing four years in the military. The GI Bill works by having service members contribute $100 each month their first year that goes into a revolving central fund. Four years later the service member has access to the money simply by enrolling in a university of their choice and is provided a payment each month that can be contributed to tuition, books, and living expenses at their discretion. The GI Bill is one of the best government programs out there and works far better than privatized student loans providing a true social service.
There is currently legislation passing through Congress in an effort to reform student loans. Without change it will become even more of a crisis for under served professions such as teachers, police officers, and social workers.
For more reading check out these links of investigations into Sallie Mae’s questionable practices:
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2 Responses to “How The Student Loan Industry Became Big Business”
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I wish I had never taken out any student loans at all. I only took out $20,000 or so, which is not bad for a Ph.D., but I probably could have made it through without it.
[…] With Me explains how the student loan industry became big business. As a student, I found this post very fascinating. The private student loan industry needs to take […]