Sallie Mae's Success Too Costly?

It's May, the season when millions of college students are scrambling to find a way to pay next year's tuition. Most will borrow, and the odds are good those loans will come from a company called Sallie Mae.

When Sallie Mae was created in 1972 as a quasi-governmental agency, its purpose was to encourage private banks to loan to students who were considered to be a credit risk. It did not make the loans itself.

But nine years ago Sallie Mae severed its ties to the government and became a private lender, much like a bank. That transformation has proved lucrative for Sallie Mae, to say the least. Since 1995, the company's stock price has gone up almost 2,000 percent.

The question is: does Sallie Mae's success come at too steep a cost to students and taxpayers?

Correspondent Lesley Stahl reports.

"I graduated with degrees in aerospace engineering in 1999. I borrowed about $45,000 for school. Since that time, my student loan debt has exploded to where currently I owe about $103,000," Collinge explains.

In and out of work, Collinge has struggled since he got his undergraduate degree. Sallie Mae let him defer payment on his loans for a while, but that meant compounding interest. When he finally defaulted, his loan was turned over to a guarantor. Collinge knew that sometimes credit card companies will reduce the debt. He hoped the guarantor would do the same.

"And I was refused at every step in the way," Collinge says.

Asked why, Collinge says: "I don't know why. They just refused. They said no. They said you will pay the penalty you will pay the fees. You will pay the interest on the penalties and fees."

For some borrowers, the system is unforgiving. But it has worked well for lenders like Sallie Mae, which has 10,000 employees in 19 states and manages $123 billion in student loans. Sallie Mae declined to give 60 Minutes an on-camera interview, saying they didn't think they'd get a fair shake.

"If you just can't pay, why does it make sense to squeeze you if you can't do it?" Stahl asks Collinge.

"Well, the student lenders know that at the end of the day if they run out if they've exhausted their opportunities for you, the government's going to pay them," he says. "They're still going to make money. They're guaranteed."

"Guaranteed" because Congress, wanting to help students who otherwise would not qualify for a loan, created "the guaranteed loan program" for private lenders, under which the government covers most of the student loans made by Sallie Mae.

"It may be called 'private' by the people in the system. But it's not private at all," says Michael Dannenberg, who analyzes student loan policy at the New America Foundation, a non-partisan think tank.

"What do you call it?" Stahl asks.

"Frankly, it's a socialist-like system," he says. "It's not as if this private entity is assuming any risks. No, no, no. The law makes sure that this so-called private entity has virtually no risk."

On top of that, Sallie Mae also owns some of the biggest collection agencies in the country. Once a student borrower goes into default, the government pays Sallie Mae all the principle and compounded interest that have accrued.

The loan then passes into the collection phase. If Sallie Mae is the collector, it gets to keep up to 25 percent of whatever is recovered. In 2005, nearly a fifth of its revenue came from its collection business.

"Sallie Mae makes money if you pay back on time. And Sallie Mae makes money if you don't pay back on time," says Elizabeth Warren, a professor of bankruptcy law at Harvard Law School.

Warren says it's a mistake to allow Sallie Mae to be both a lender and a collector.

"It shouldn't be the case that Sallie Mae gets to play every hand at the poker table while the government is the one that keeps anteing up the money," Warren tells Stahl. "But let's be clear. That by itself isn't enough. We have to decide collectively as a country: do we want to encourage the young people who are trying to get college diplomas? And if the answer to that is yes, the way to encourage them is not to double and triple the amount that they owe when they get into financial troubles."

By law, private lenders must offer payment options, but that usually means the loans just balloon. So even though 95 percent do pay up over time, many are burdened with heavy debt. In a statement, Sallie Mae told 60 Minutes it makes far more money from those who pay on time, than from those who default, like Alan Collinge.

"If you can't afford the payments why don't you go out and just get a better-paying job? You have the education. You have the wherewithal," Stahl asks Collinge.

"I'm seeking a better-paying job. Believe me, I would love nothing more than to make enough money to be able to pay this debt. I would like nothing more," he replies.

Sallie Mae says Collinge could have tried a lot harder to pay. He works at a non-profit and recently got a second job as a technical writer.

"Are you depressed? Has that kind of stymied you from being more aggressive?" Stahl asks.

"Yeah, I mean, it really does affect — it does affect your self-esteem," says Collinge. "I mean, there's a certain shame involved. And when you have to dance around the question about creditworthiness, you know, everywhere you go, it really takes its toll,"

In a horrible Catch-22, he says his credit troubles with Sallie Mae mean he can't get a job as an aerospace engineer.

"It would be very tough for me to get anything but the lowest level of security clearance with my credit record destroyed, as it is," Collinge says.

Collinge simply stopped paying and has now started a Web site, studentloanjustice.org, for people like Brit Napoli, who was wiped out in the California earthquake of 1994.

"I lost everything. I lost my dwelling, I lost my automobile," says Brit.

"You went immediately from solvency to default?" Stahl asks.

"I received some assistance from FEMA; I received some assistance from [the] Red Cross, but I did not receive any sympathy from Sallie Mae," he says.

"Nobody said, 'This is a special case because this poor man is destitute and homeless because of the earthquake?' " Stahl asks.

"No one," Napoli replies.

On loans of $38,000 from Sallie Mae, he says he now owes $71,000. While these borrowers are suffering, former Sallie Mae CEO Al Lord told an audience in 2003 that he, at least, was making a bundle.

"It would be very hard for me to tell you that what I make is not a lot of money," Lord said.

Said to be worth a quarter of a billion dollars, Al Lord is building his own private golf course and made a bid to buy a professional baseball team.

During the past 13 years taxpayers have spent $40 billion on guaranteed student loans. Sallie Mae would not tell 60 Minutes how much of that went to them.

It is true that Sallie Mae performs an important service: it has helped 21 million students pay for college.

But there is a less costly way to make student loans, called "the direct loan program," run by the Department of Education. Sallie Mae disputes this, but studies by three different government agencies say it costs taxpayers about five times less per student loan.

Still, most universities guide their students to private lenders like Sallie Mae. One reason is because they offer incentives to some of the schools, which Michael Dannenberg calls "kickbacks."

"Kickbacks?" Stahl asks.

"Payments, cash payments to colleges," Dannenberg replies.

Asked if that's legal, Dannenberg said: "Yeah. It's done through a loophole called the school-as-lender program. But it's legal."

School-as-lender is a program Congress sanctioned that allows private lenders like Sallie Mae to pay universities money to help administer the Sallie Mae loans; in turn universities steer their students to Sallie Mae.

"Are you saying the colleges are fronting in a way, then, for the Sallie Mae types?" Stahl asks Dannenberg.

"A number of them are through the school-as-lender program. And they make a pretty penny on it," he says.

Universities are required to pass a small portion of that money along to students in the form of cheaper fees and student grants. Republican Congressman Thomas Petri sponsored legislation to permit the direct loan program to offer similar "incentives."

"All we were asking is that the lower-cost program be allowed to compete on a more equal basis," Rep. Petri explains. "And we think the result will be that we'll save money for the taxpayer. And it will provide exactly the same benefits and a few more to students."

But, he says, Sallie Mae lobbied to get his bill killed.

"Would you say that the Sallie Mae's lobby is one of the most effective up here?" Stahl asks.

"Well, there's no question about it in the education area," the congressman replies.

Since 2002, the company and its employees have doled out more than $2.7 million to congressmen and their political action committees, including more than $200,000 to House Majority Leader John Boehner and his PAC. Over the years, Congress has written laws that give the student loan industry special advantages.

"If you don't pay Sallie Mae, then Sallie Mae gets to come after you in ways that virtually no other creditors in America can do," says Elizabeth Warren.

Asked if he ever considered going into bankruptcy, Alan Collinge says he thought about it. "But in the case of student loans, it doesn't matter because bankruptcy is not an option for the vast majority of borrowers for student loans."

"The bankruptcy laws were written, once again, to give this extraordinary protection to the student loan agencies, to Sallie Mae. The idea behind …" Warren explains.

"A special law just for them on this?" Stahl asks.

"A special law just for those who make student loans," Warren continues. "Credit card companies don't get that kind of protection despite all tier lobbying. Home mortgage lenders don't get that kind of protection."

And Congress passed more laws that squeeze the student borrowers.

"Suppose you get hurt and you have to live on disability insurance from your Social Security," Warren says.

The government can attach that. Stahl asks if there are any other cases where Social Security funds are garnished.

"Only child support," Warren replies.

But all these special protections have produced results. The default rate, over 20 percent in the late 1980s is now down below 5 percent.

"Why wouldn't Sallie Mae say, 'Look, this is a law that worked?' " Stahl asks Alan Collinge.

"It has worked very well for Sallie Mae," he replies. "It's working very well for the federal government, but it hasn't worked well for the students."

It hasn't worked well for some students such as Lynnae Brown. She got loans from Sallie Mae starting in 1985 to go to college and then to film school.

"How much will you have paid them when you're finished?" Stahl asked.

"Over a quarter of a million dollars. $262,383 to be exact," Brown replied.

"For an original loan of what?" Stahl asked.

"$60,000," Brown said.

She started falling behind in her payments early on. "My sophomore year in undergraduate school, I was diagnosed with an illness. It does affect my daily existence, if you will, and it does affect the choices I make or can make," Brown says. "And, yet, there's no consideration for people's lives."

Lynnae Brown has never gone into default, but she may never catch up.

"I think the general idea of student loan program is excellent," she says. "I mean, I'm very fortunate that I was able to get an education. I think the problem with the system is it doesn't seem to keep in mind that people have human problems. Things happen."

It's a system that Congress created with good intentions, to help kids go to college, but it has ended up saddling hundreds of thousands with debt while guaranteeing that a lender like Sallie Mae can become what Fortune Magazine says is one of the most profitable companies in the world.

"How do you lose in a game like that? It's a great business model. I win from here; I win from there. It's the protected market," says Elizabeth Warren.

"It's not a free market?" Stahl asks.

"It's a market in which the protection goes to the lender," Warren replies. "And the students get served up like turkeys at the Thanksgiving dinner."
Produced By Janet Klein