We all know Sallie Mae as the face of student loans. That is the entity you make the payments to, that is the entity you generally schedule in a Bankruptcy filing; but who is Sallie Mae?
News articles breaking over the weekend have added some light to that question. Sallie Mae is a publicly traded corporation that is about to be taken private for $25 Billion. Oh, and it is a corporation that has paid its CEO over $200 Million during a five-year period.
Some of the news articles have touched on how parts of the student loan industry work. According to CNN’s story Bonfire of the Universities 85% of Sallie Mae’s portfolio is Federally insured. That means that 15% is not. Something that I found very intersting is that in the event of default on a federally insured loan, the Government pays the lender between 96 and 98% of the total principal and interest owed.
So, why the emphasis on interest in that last sentence?
I am starting to see student loans that have been in default for a long time, because since 1997 virtually all student loans have been non-dischargeable; and since 2005 that is expanded to include completely private student loans — i.e., that other 15% of Sallie Mae’s portfolio. One thing that I am noticing on these loans is a ballooning of the account balance that just doesn’t seem right for loans at 8 or 9% interest. Then, I learned about interest capitalization.
I didn’t know until recently that in the event of default or at the conclusion of an approved forbearance period, a student loan lender may capitalize the accrued interest. That means add that interest into the principal balance so that interest accrues from that point forward on a much larger principal balance. This effectively makes a simple interest note a partially compound interest note — all of which is effectively non-dischargeable.
No sweat, thought right? After all, deferments followed by default should be pretty early in the note history, the two tend to go together so there is only one incident of capitalization; it shouldn’t make that much difference right?
Tell that to the client of mine who is now being told she owes $22,000 on a note that was written for less than $7,000. Oh, and even though she never made a payment after the deferment period (not uncomon, by the way); she has two capitalization events on her loan history — several years apart. Can anybody explain that to me?
So, why are we, the taxpayers, guaranteeing a return on investment and insuring investment losses for a corporation worth $25 Billion, that is paying out hundreds of millions in executive compensation and charging and capitalizing interest at 9%?
Nice post! Rather than our government officials trying to sell us on the joys of student loans through the mass media efforts, they might consider eliminating the loan idea altogether and simply provide the education directly. I have considered this option as of late and now (especially after viewing your information posted)feel this is the way we should go. I think taxpayers will agree that paying interest fees to already enriched financial groups is is far less desirable than paying the universities and colleges directly for added and long term benefits of a more educated and prosperous general population!
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i’m not surprised. that’s the way it works.