Lawsuits say lender duped students to fuel growth
State AGs contend Sallie Mae engaged in predatory lending with ‘loans designed to fail’
Ashley Hardin dreamed of being a professional photographer — glamorous shoots, exotic travel. So in 2006, she enrolled in the Brooks Institute of Photography and borrowed more than $150,000 to pay for what the school described as a path into an industry clamoring for its graduates.
“Brooks was advertised as the most prestigious photography school on the West Coast,” Hardin said. “I wanted to learn from the best of the best.”
Hardin did not realize that she had taken out high-risk private loans in pursuit of a low-paying career. But her lender, SLM Corp., better known as Sallie Mae, knew all of that, government lawyers say — and made the loans anyway.
In recent months, the student loan giant Navient, which was spun off from Sallie Mae in 2014 and retained nearly all of the company’s loan portfolio, has come under fire for aggressive and sloppy loan collection practices, which led to a set of government lawsuits filed in January. But those accusations have overshadowed broader claims, detailed in two state lawsuits filed by the attorneys general in Illinois and Washington, that Sallie Mae engaged in predatory lending.
“These loans were designed to fail,” said Shannon Smith, chief of the consumer protection division at the Washington state attorney general’s office.
New details unsealed last month in the state lawsuits against Navient shed
light on how Sallie Mae used private subprime loans 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 these risky loans were a bad deal for students, they were a boon for Sallie Mae. The private loans were, as Sallie Mae itself put it, a “baited hook” that the lender used to reel in more federally guaranteed loans, according to an internal strategy memo cited in the Illinois lawsuit.
The attorneys general in Illinois and Washington — backed by a coalition of those in 27 other states — want those private loans forgiven.
In a pair of cases that could affect hundreds of thousands of borrowers, they have sued Navient. The lawsuits cover private subprime loans made from 2000-09.
Today, Hardin is a 33-year-old waitress in Seattle who still owes $149,000 in student loans and pays $1,395 a month, more than her monthly rent, to Navient.
Navient, which is based in Wilmington, Del., has denied any wrongdoing. It does not originate any loans, but when it split off from Sallie Mae, it kept most of Sallie Mae’s existing loans.
“We have a proven track record of helping millions of Americans access and achieve the benefits of higher education,” said Patricia Nash Christel, a Navient spokeswoman.
Sallie Mae said in a statement that Navient “has accepted responsibility for all costs, expenses, losses and remediation arising from this matter.”
Defaults and the aftermath
Private loans were often profitable for Sallie Mae, but a portion of them were not. The company made subprime loans to students who would not otherwise qualify.
Those subprime loans were a bargaining chip, government lawyers said, a tool Sallie Mae used to build relationships with schools so the company could make more federal loans to their students. The federal loans were the real prize, because if a borrower defaulted, the government would step in and reimburse the lender for most of its losses.
Sallie Mae could afford to absorb the losses from its private loan business as, essentially, a marketing cost of snagging more lucrative loans.
Defaults on one set of subprime loan products were 50 percent to 92 percent every year from 2000-07, according to Illinois’ lawsuit. Students did not know about the risk, the state said, but “this fact was no secret to Sallie Mae.” Those defaults did not discourage Sallie Mae, the lawsuits show. From 2000-06, Sallie Mae increased the number of borrowers with one kind of troubled loan to 43,000 from 165.
Under Education Department rules, no more than 90 percent of a school’s tuition payments can come from federal funding. That means at least 10 percent must come from private sources. At for-profit schools, which rely heavily on federal lending, private loans were crucial for staying under the threshold.
Some schools made deals with Sallie Mae to subsidize its losses, regulatory filings show. The owner of the Brooks Institute of Photography, Career Education Corp., once one of the largest for-profit chains in the country, had a typical arrangement: From 2002-06, it agreed to repay 20 percent of Sallie Mae’s losses. As defaults piled up, Sallie Mae abandoned its riskiest practices. In early 2008, the company ended its subprime lending and told at least seven major operators of for-profit schools, including Career Education, that it would stop making private loans to many of their students.
In 2014, Sallie Mae and Navient broke apart, and Navient retained the troubled loans originated years earlier.
Lenders can hound students for payments on their debt, or sell it to a collection firm, long after they have written the loan off as soured debt. Student loans cannot typically be wiped away through bankruptcy. Borrowers who take out federal loans to attend schools that misled them can apply to have their loans forgiven, but private loans lack that protection.
To Hardin, that is deeply frustrating. After eight years of payments, her balance has dropped by only $1,000. When her husband, a chef, saw that Washington’s attorney general had sued Navient, he asked Hardin what she would do if the case somehow led to her loans being wiped away.
Again, she teared up. Since graduating, she has never had any spare cash to travel, save or plan any further than the next loan bill.
“We want to open a sandwich shop,” Hardin said. “The money could be going toward that.”