Who’s Get­ting Rich Off Amer­ica’s $1.4 Tril­lion in Stu­dent Loans?



Some 44 mil­lion Amer­i­cans owe $1.4 tril­lion in col­lege loans. That’s cer­tainly bad news for the next gen­er­a­tion—and for some older folks too. So who’s get­ting rich while bor­row­ers strug­gle?

Saul New­ton was a 20-yearold ri­fle­man sta­tioned at a U.S. Army out­post in the re­mote, dan­ger­ous Arghandab River val­ley in Afghanistan.

It was a rad­i­cal change for a kid from sub­ur­ban Mil­wau­kee, who only months be­fore had been a stu­dent at the Univer­sity of Wis­con­sin–stevens Point. But af­ter two years of tu­ition hikes, New­ton found him­self with about


$10,000 in fed­eral stu­dent loans and the prospect of bor­row­ing still more if he stayed in school. “I couldn’t af­ford it any­more,” he says. He dropped out and en­listed, hop­ing to go back to school one day with fi­nan­cial help from the GI Bill. And then he went off to fight the Tal­iban.

But no mat­ter what he faced in Afghanistan, once a month, New­ton says, he went to the wooden shack on the out­post where the unit kept a lap­top com­puter. That’s where he made his monthly $100 stu­dent-loan pay­ment. He wor­ried that if he didn’t pay his loans on time, his credit would never re­cover. (The gov­ern­ment of­fers stu­dent-loan de­fer­ments to ac­tive sol­diers in wartime, but New­ton wasn’t aware of that.)

To­day, back home and the ex­ec­u­tive direc­tor of the Wis­con­sin Veter­ans Cham­ber of Com­merce, he has just made his last loan pay­ment. How­ever, reach­ing that mile­stone hasn’t made New­ton any more op­ti­mistic about the choices other young peo­ple face, es­pe­cially given the steadily ris­ing cost of col­lege com­bined with many states’ steep cuts to their ed­u­ca­tion pro­grams. “You shouldn’t have to go to war to get a col­lege ed­u­ca­tion,” he says.

AL­MOST EV­ERY­ONE KNOWS some­one like New­ton, some­one up to his or her neck in stu­dent-loan pay­ments. There are roughly 44 mil­lion Amer­i­cans in debt to their ed­u­ca­tions. Their av­er­age bill is $32,731. Do the math, and the coun­try’s to­tal school debt is a stag­ger­ing $1.4 tril­lion. That’s more than the an­nual salaries of ev­ery­one who lives in Aus­tralia com­bined. All of which raises some ob­vi­ous but of­ten un­ex­plored ques­tions: Who is get­ting rich off of stu­dent loans? Where does all that money go?

To the col­leges and uni­ver­si­ties and all the diplo­mas they is­sue, in part. But a gen­er­a­tion ago, Congress changed the stu­dent-aid sys­tem to give pri­vate com­pa­nies a piece of the ac­tion and shrink the gov­ern­ment’s role in the process. The re­sult has been an enor­mous fi­nan­cial wind­fall for Wall Street and be­yond. Now just about ev­ery­one in the in­dus­try makes money off stu­dents: the banks, pri­vate in­vestors, and even the one group Congress wanted to push out of the fi­nan­cial-aid busi­ness—the fed­eral gov­ern­ment. And the prof­its keep rolling in; stu­dent-loan debt gen­er­ally grows by some $80 bil­lion a year.

This is not what Pres­i­dent Lyn­don B. Johnson en­vi­sioned when he signed the Higher Ed­u­ca­tion Act of 1965. Be­fore the law, Amer­i­cans who wanted to go to col­lege had to fi­nance it them­selves. That meant pay­ing out of their own pock­ets, se­cur­ing schol­ar­ships, or tak­ing out ex­pen­sive pri­vate loans. Af­ter the bill, stu­dents could go to a bank for a less costly stu­dent loan guar­an­teed by the gov­ern­ment. “This na­tion could never rest,” Johnson stressed, “while the door to knowl­edge re­mained closed to any Amer­i­can.”

In 1972, Congress cre­ated the Stu­dent Loan Mar­ket­ing Association, or Sal­lie Mae, a quasi-govern­men­tal agency whose mis­sion was to in­crease the amount of money avail­able to bor­row for higher ed­u­ca­tion. Banks loaned money to stu­dents, and Sal­lie Mae bought the fed­er­ally backed loans from the banks, free­ing them up to lend more money. But when law­mak­ers turned Sal­lie Mae into a pri­vate com­pany in 1996, it gained the author­ity to make its own loans, both fed­eral ones guar­an­teed by the gov­ern­ment and more prof­itable pri­vate loans, which com­mand higher in­ter­est rates and come with­out govern­men­tal guar­an­tees or re­stric­tions.

Once only a fa­cil­i­ta­tor of loans, Sal­lie Mae be­came a prof­i­teer. And it did what it could to max­i­mize those prof­its. It paid a New Jer­sey agency some $14 mil­lion to mar­ket Sal­lie Mae to col­leges as their pre­ferred cam­pus loan provider. It paid col­lege loan of­fi­cers to serve as con­sul­tants on its ad­vi­sory boards. It placed its own em­ploy­ees in univer­sity call cen­ters to field ques­tions from stu­dents who thought they were get­ting ad­vice from col­lege loan of­fi­cers. Even­tu­ally, the busi­ness of col­lect­ing pre­mi­ums and penalty fees was also con­sol­i­dated un­der Sal­lie Mae’s very large um­brella.

Freed from govern­men­tal con­trol, the com­pany be­came a jug­ger­naut. In 2014, it spun off most of its stu­dent­loan busi­ness into a new com­pany, Navient, and to­day’s Sal­lie Mae han­dles only pri­vate loans. The most tell­tale sign of the com­pany’s suc­cess: CEO Al­bert Lord re­ceived pay and stock to­tal­ing hun­dreds of mil­lions of dol­lars be­fore he re­tired in 2013.

Mean­while, cash­starved states cut back fund­ing to pub­lic uni­ver­si­ties. In turn, schools had to charge more to make up the deficit. The av­er­age an­nual cost of tu­ition, fees, and room and board at Amer­i­can col­leges and uni­ver­si­ties rock­eted from $4,563 in 1985 to $21,728 in 2015—an in­crease of about 13 per­cent a year. Over the same 30-year pe­riod, wages rose 6 per­cent an­nu­ally at most.

If state gov­ern­ments had con­tin­ued to sup­port pub­lic higher ed­u­ca­tion at the rate they did in 1980, they would have in­vested at least an ad­di­tional $500 bil­lion in their univer­sity sys­tems, ac­cord­ing to an anal­y­sis of SAUL NEW­TON


data re­search from the U.S. Bureau of Eco­nomic Anal­y­sis. That’s roughly the amount of out­stand­ing stu­dent debt now held by those who en­rolled in pub­lic col­leges and uni­ver­si­ties.

THE FED­ERAL GOV­ERN­MENT holds more than 90 per­cent of the $1.4 tril­lion in out­stand­ing stu­dent loans, ei­ther as the orig­i­nal lender or the backer, mak­ing the De­part­ment of Ed­u­ca­tion (DOE) ef­fec­tively one of the world’s largest banks. Pri­vate lenders, in­clud­ing Wells Fargo, Suntrust, and other big banks, hold the rest. By the DOE’S own cal­cu­la­tions, the gov­ern­ment earns as much as 20 per­cent on each of its loans. The profit arises from the gov­ern­ment’s abil­ity to bor­row money at a low rate and then lend it to stu­dents at a higher rate.

The fed­eral loans is­sued be­tween 2007 and 2012 were pro­jected to gen­er­ate $66 bil­lion in in­come for the gov­ern­ment, ac­cord­ing to a 2014 re­port from the Gov­ern­ment Ac­count­abil­ity Of­fice (GAO). (In 2013, Congress low­ered the in­ter­est rate for in­com­ing stu­dent bor­row­ers yet re­fused to ex­tend the same ben­e­fit to the more than 40 mil­lion Amer­i­cans who had al­ready bor­rowed for their ed­u­ca­tions.)

“The United States gov­ern­ment turns young peo­ple who are try­ing to get an ed­u­ca­tion into profit cen­ters to bring in more rev­enue for the fed­eral gov­ern­ment,” Sen. El­iz­a­beth War­ren said on the Se­nate floor in Fe­bru­ary 2016. “This is ob­scene. The fed­eral gov­ern­ment should be help­ing stu­dents get an ed­u­ca­tion, not mak­ing a profit off their backs.”

JESSIE SUREN, an en­er­getic 29-yearold who wanted a ca­reer in law en­force­ment, at­tended a free board­ing school for un­der­priv­i­leged youth in Her­shey, Penn­syl­va­nia, and then en­rolled in La Salle Univer­sity in Philadel­phia. Schol­ar­ships didn’t cover the cost of the pri­vate col­lege, so she bor­rowed about $71,000 in fed­eral loans, much of it from Sal­lie Mae. A job with the U.S. Mar­shals Ser­vice fell through, and since grad­u­a­tion she has scram­bled to keep cur­rent on her pay­ments, some­times work­ing 16 hours a day at two low-pay­ing jobs. She has made no head­way on her loans. Just the op­po­site: To­day her bal­ance tops $90,000—and that fig­ure would be higher if she’d bor­rowed from a pri­vate lender.

“My loans are a black cloud hang­ing over me,” Suren says. “I’m a stu­dent­debt slave.”

Young adults aren’t the only ones sucked into the stu­dent-loan hur­ri­cane. In 2004, Richard Brown, 66, of Ossin­ing, New York, and his wife had good jobs in in­for­ma­tion tech­nol­ogy. He took out $50,000 in fed­eral stu­dent loans for his daugh­ter. They didn’t want her to go into debt and could af­ford to help. But then the re­ces­sion hit. Brown lost his job in 2009 and, at 58, couldn’t find an­other.


Three years later, his wife lost her job when her com­pany was ac­quired by a com­peti­tor. Their debts mounted, and by 2013, the loan bal­ances, with com­pound­ing in­ter­est and penal­ties, had risen to $135,000.

The cou­ple filed for bankruptcy, but the loans were still payable in full. Through ag­gres­sive lob­by­ing, the banks had helped en­act a law that makes stu­dent loans vir­tu­ally the only con­sumer debt that can­not be dis­charged in bankruptcy ex­cept in the rarest of cases. Brown was shocked when the fed­eral gov­ern­ment be­gan tak­ing $250 a month from his So­cial Se­cu­rity check of $1,700.

“This is money we need to live on,” he says. “We worked 35 or 40 years to be el­i­gi­ble. I had no idea they could do that.”

In fact, the gov­ern­ment can take as much as 15 per­cent of a debtor’s So­cial Se­cu­rity. In 2013, the gov­ern­ment gar­nished the ben­e­fits of 155,000 Amer­i­cans who were in de­fault on their fed­eral stu­dent loans, ac­cord­ing to a GAO re­port, up from 31,000 in 2002. This pol­icy of with­hold­ing fed­eral pay­ments to delin­quent bor­row­ers, known as ad­min­is­tra­tive off­set, can also ap­ply to tax re­funds and dis­abil­ity checks.

TO­DAY, ONE IN FOUR bor­row­ers is be­hind in his or her pay­ments or is

strug­gling to make them, ac­cord­ing to the Con­sumer Fi­nan­cial Pro­tec­tion Bureau, which es­ti­mates that nearly 8 mil­lion loans are in de­fault. The num­ber of fed­eral loans in de­fault jumped 14 per­cent from 2015 to 2016, ac­cord­ing to an anal­y­sis by the Con­sumer Fed­er­a­tion of Amer­ica.

For all it has in­vested in the stu­dent-loan pro­gram, the gov­ern­ment doesn’t have the re­sources to hunt down all the peo­ple who are be­hind on their pay­ments. Since 1981, the DOE has hired debt col­lec­tors to do the dirty work—on the tax­pay­ers’ dime. For fis­cal 2016, of­fi­cials es­ti­mated that these con­trac­tors would re­ceive $2.1 bil­lion in com­mis­sions on the money they’d re­cover from bor­row­ers in de­fault. IRON­I­CALLY, as Jessie Suren scram­bled to pay back her loans, one of her jobs was to try to get money out of peo­ple who were delin­quent on their stu­dent loans. She was paid $12 an hour at a call cen­ter in Harrisburg, Penn­syl­va­nia. Some of the calls were scary, she says; an­gry bor­row­ers would curse and threaten her, declar­ing they were job­less and broke. Other calls were heart­break­ing; bor­row­ers would claim they or their chil­dren were ter­mi­nally ill.

What­ever their story, Suren had to tell them what would hap­pen if they didn’t pay: The com­pany could gar­nish their wages and take their tax re­funds. Af­ter hang­ing up, Suren would some­times re­flect on her own stu­dent loans, think­ing, This is go­ing to be me in a cou­ple of years.




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