WASHINGTON–New insights into some of the student loan practices of Sallie Mae are being shared as part of allegations included in two lawsuits filed by the attorneys general in Illinois and Washington state, and backed by 27 other states.
Those suits essentially suggest that Sallie Mae engaged in predatory lending, extending billions of dollars in private loans to students that never should have been made, and further suggesting some collusion on the part of certain colleges.
The New York Times, meanwhile, also profiled one student who borrowed $150,000 to attend the Brooks Institute of Photography and after 10 years of payments at nearly $1,400 a month has paid down almost none of the debt. According to the lawsuits, SLM Corporation, which is the formal name of Salle Mae, understood many of the loans made could never be repaid. In addition, the suits allege that student loan provider Navient, which was spun off from Sallie Mae in 2014 and retained nearly all the company’s loan portfolio, has been aggressive and sloppy in its loan collection practices.
“These loans were designed to fail,” said Shannon Smith, chief of the consumer protection division at the Washington State attorney general’s office, told the New York Times.
The Times reported that when the state lawsuits were unsealed it allegedly showed how Sallie Mae used private subprime loans — “some of which it expected to default at rates as high as 92%— as a tool to build its business relationships with colleges and universities across the country. From the outset, the lender knew that many borrowers would be unable to repay, government lawyers say, but it still made the loans, ensnaring students in debt traps that have dogged them for more than a decade.”
While the loans were a bad bet for students, the Times further reported that the private loans, referred to as a “baited hook” by Sallie Mae, an entre for the company to grab more federally guaranteed loans, according to an internal strategy memo cited in the Illinois lawsuit.
The case could affect hundreds of thousands of borrowers involved in private subprime loans made from 2000 to 2009.