Ever heard of the privatization of Sallie Mae? No? Well this little-known decision is the monster you’ve never heard of.
For the history. Back in the 1990s, when the Newt Gingrich caucus won back control of the House and Senate from the Democrats, one of the first major policies that they demanded was to undo the ‘93 student loan reform bill, and make the student loan industry into a ‘’free market.’’ What that really meant was that Republicans as well as their big-money donors in the loan industry were angry that the Clinton administration was by-passing private lenders through direct federal lending. How were they supposed to achieve this ambitious goal of getting the government out of the way?
Shut down one of the primary government student loan corporations and sell it off to the profiteers that were getting by-passed. According to the ‘’free market’’ dogma that the right pushes and foams at the mouth for, profit-motive is basically a god that will keep everything in order (because supposedly private enterprise will do nothing that harms its own reputation) and that markets almost always make the ‘’rational’’ and ‘’mutually beneficial’’ decisions.
Ultimately, in 1996, the bill went through congress and the GOP and their donors got what they wanted, although it was a significant compromise. Clinton got his direct federal lending program, and the Republicans freed Sallie of the government in order to compete. Here’s what a Republican senator had to say about it. [Common Dreams]
‘’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.”
Less intrusive government indeed. So, did unleashing private enterprise and ‘’getting big government out of the way’’ work? No, predictably, it did not. Predictably, of course, if you are not a Republican who worships private companies.
As of 2008, nearly ten years after privatization, Sallie Mae had become the new biggest loan shark in the business, holding market share twice their next competitor. SLM’s portion of the pie (that’s their official name) went from from 15% in 1999 to 28% by 2008. Finally, their net-income had also stayed level at about $400 million, until they were privatized, in which it quickly soared to $1.2 billion. The reason this occurred, is because until Sallie Mae were stripped of their ties to government as well as their federal charter, they had to abide by government regulations restricting their business capacity.
Common Dreams explains about the government restrictions that came with being a federally-backed GSE (that stands for government-sponsored enterprises):
‘’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.’’
To go along with the increased activity, the volume of student loan debt also exploded after Sallie Mae began offering private loan options in 2000 and after privatization was fully completed in 2004. I believe, this also had the effect of drawing other lenders into the market, which helped spur a predatory feeding frenzy. Pay attention to those years. Profiteers gained full control of the former-government lender and they were now handing out loans to people who could not afford them (sound familiar?) Only this time, the industry was higher-education.
According to data from the Securities and Exchange Commission, in 2006, a full 30% of Sallie’s loans were made to people with ‘’poor’’ credit scores. When coupled with the high interest that they were charging and the subsequent expansion of loan balances, defaults had more than doubled by 2010. They sold an entire generation of college students into this, and it shows. CNN reports that SLM, as of 2013, holds 15% of all the $1.3 trillion dollars of student debt, although they held more debt before the credit crunch.
Here’s the total credit issued by SLM during the 2000s, directly after privatization. If I’m not mistaken, ‘’ABS’’ is the debt that Wall Street firms invest in.
It is safe to say, the privatization of Sallie Mae made a normal government program designed to promote access to higher-education into a torrent of predatory lending and debt.
I know this is a bit goofy, but ‘’Adam Ruins Everything’’ has a nice segment summing up what I have to say. Enjoy.
One thing before I close off this diary: The GOP and Republicans should take note. While Republicans are busy, yammering-off about pell grants and ‘’evil big government’’ supposedly making higher-education worse, maybe they should first look to one of their flagship education policies first. The Sallie Mae privatization is probably the most significant education policy the Republicans have passed in decades, besides No Child Left Behind in 2001. Apparently, it hasn’t brought us far, shall we say? Worshipping Ayn-Rand and Milton Freidman isn’t really legit economics.