Tuesday, April 17, 2007

Sallie Mae, College Salivation Shotgun Style

They just announced that the GSE (Government Sponsored Entity) Sally Mae, the writer of a majority of student loans, is being taken private. The full article is in the San Diego Union Tribune April 16, 2007.

There is kind of a hidden money machine here.

“To start, nearly $69 billion of the current $86 billion in student loans is backed by the U. S. Treasury, meaning that even if the loans go into default, the lenders are protected. These loans are subsidized by the government in order to keep interest rates low for borrowers and guarantee profits for lenders.

Between 1992 and 2004, the cumulative subsidy cost was 39 billion . . . . .

….the Supreme Court ruled in 2005 that lenders have the right to garnish even Social Security income from those who are delinquent on their student loans.

In 1971 I graduated from college with a student loan of $3,500. I was just an innocent kid. I started making payments right away and was two months ahead on payments. Then I received a promissory note in the mail to sign, for my student loan.

I started reading the note. It had a phrase in there, “If the government fails, you are still liable for full payment.” There was another that stated, “Even if you file for bankruptcy, you will still pay this note in full.” And one other statement that eludes me. Anyways, I took a pen and crossed out the three offending items.

I went to the bank and turned in the note and they sat there for over an hour yelling at me saying you can’t do this! I pointed out to them that I had already spent the money and that, what I couldn’t do, I had done. End result, they defaulted my loan, even though I was not even close to being delinquent on the loan.

This company provides a seemingly legitimate service to students. What’s not realized is that this is more of a machine that supplies money to help Schools fill slots on their campus that would otherwise remain empty. Notice it’s the school and loan provider that have a symbiotic relationship. The victim is the borrower. High hopes, dreams, all of the stuff that every kid wants in their youth.

Advise your kids to be careful with student loans. These people will loan you enough to make you regret ever borrowing it. Just remember when that promissory note arrives, you might not want to sign it.

I still paid off my student loan, never filed bankruptcy, and the government didn’t fall. The company provides a valid service, but beware when you graduate with your degree in “whatever,” there may be no jobs available. The college didn’t mention that did they? So when it comes to blame, is it the loan company or the college or the student? We know who the winner is, do you?


Anonymous said...

I don't think that GSEs are backed the same as banks with the FDIC. When something is "sponsered" by the government, I think all that is affected is the tax status.
I've looked at the Fannie Mae website where they advertise the dates of auctions where they are selling bundles of debt in Europe(I wish I could cite the address, but I don't remember what it was, and the site states at the bottom, very clearly that the bonds are not backed by the U.S Treasury. However, many people think that GSEs are as good as bonds, but with a better yield--but I think this is a misconception.

Jim in San Marcos said...

You are right about the GSE's Fanny Mae and Freddie. The insurance is "implied." But the student loan program was brought on line with government guarantees. 69 billion is still backed by the Treasury. Anything written since 2005 when Sallie went private is no longer backed.

The real question "Are GSE's too big to fail?" has yet to be answered.

Abrey said...

Hmmm. Back in the day when I had a college loan, we didn't have a FICO score to screw up your credit rating; and I believed in paying off my debt to the borrower.

Now we have FICO scores, and lending institutions that have a vested interest in charging you fees rather than encouraging you to save, and people heavily indebted.

I often wonder what would happen should students nationwide balk at their onerous repayment terms and in a bloc simply refuse to repay? A silent protest so to speak.

BTW How can a loaning institution declare you in default without any proof other than you redlining three paragraphs on an IOU?


Jim in San Marcos said...

Hi Abrey

It was the promissory note that they sent me to sign. I crossed out three sentences, dealing with failure of the government, bankruptcy, and something to the fact if there was a debt moratorium it wouldn't apply to this loan. I was two or three months paid in advance.

The only thing I can figure is that the note you sign has to satisfy the bank or they have recourse to default the loan.

It certainly wasn't from failure to pay on the note. This was back in 1971.

Its truly amazing what some of these banks put in their boilerplate contracts and people still sign them.

Anonymous said...

I find you blog very interesting. Although, the company has a good profile, some of its clients are still dissatisfied either with the conditions offered by the company or the level of services. The representatives of the company also tend to come to people’s homes and demand the payment of the debt. Sometimes, they may even send police. On the www.pissedconsumer.com you may find even more customer feedbacks about the company.

Jim in San Marcos said...

Hi Den

Thank you for the link.

Hope you keep reading.

Thank you for your post.