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Privatize the Profits, Socialize the Costs

Sally Mae and the Student Loan Swindle

by RALPH NADER

Al Lord is thinking about building his own private golf course. Not bad for an ex-corporate socialist. The former CEO of Sallie Mae is worth about a quarter of a billion dollars, running a company that Uncle Sam virtually guarantees against any losses while it makes enormous profits in the college student loan business.

In 2003 Mr. Lord told a public audience that "it would be very hard for me to tell you that what I make is not a lot of money." But the company he ran has been making it very hard for tens of thousands of students and blocking any reforms in Congress that would make his company less hard on American taxpayers.

Last year, citing George W. Bush’s own budget office, Senator Ted Kennedy (D-Massachusetts) declared that, "We waste billions of dollars in corporate welfare every year on student loans, and we cannot afford it any longer."

Sallie Mae lobbyists have heard this before from Democrats and some Republicans, such as Representative Thomas Petri (R-Wisconsin). They are not worried. Sallie Mae executives own the majority leader in the House of Representatives, John Boehner (R-Indiana). He has been wined and dined with over $200,000 in campaign contributions to his PAC from individuals affiliated with the private student-loan industry in the 2003-2004 election cycle.

In December 2005, Mr. Boehner reassured a group of Sallie Mae types who wanted reassurance that their cushy deals would continue: "Know that I have all of you in my two trusted hands."

And what a cushy deal it is. Your federal government guarantees returns for these companies on student loans of at least 2.34 percent higher than the rates paid on commercial loans. At least. If the student borrower defaults, you the taxpayer picks up the tab for Sallie Mae and the banks.

If the student falls on very hard times after graduation and has to go bankrupt, federal law says bankruptcy does not affect collection of student loans. Even the powerful credit card industry can’t get past bankruptcy to garnish what’s left of the graduate’s assets. The student lending industry can even get to a debtor’s disability insurance payments under social security.

In February Congress did act on student loans in another way–backward. It cut $12 billion out of the student loan programs, mostly from students and parents. In a report just out, the California Public Interest Research Group (CALPIRG) found that in California, 17.9% of public college students and 28.8% of private college graduates have unmanageable student loan debt were they to take jobs as teachers or social workers. Yet these critical careers desperately need college graduates to replenish their ranks. (To download the full report, go to http://www.calpirg.org. See also http://www.studentloanjustice.org.)

Last Sunday, May 7th, I turned on CBS’ 60 Minutes which unloaded on Sallie Mae in a devastating segment about its power, greed and profits.

Originally a government-sponsored enterprise like Fannie Mae, Sallie Mae was privatized in 1997 and is now the largest private lender to students. But not entirely private. The federal government is its guarantor. Michael Dannenberg of the New America Foundation told Leslie Stahl:

"It may be called ‘private’but it’s not private at all. Frankly it’s a socialist-like system. 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."

It gets worse. Let’s say a graduated student defaults. The government pays Sallie Mae both the principal and the interest compounded. But the loan is still subject to collection. Guess who owns some of the largest collection agencies–you guessed it, Sallie Mae. When its collection agency collects, it gets 25% of the recovery. The profits go to Sallie Mae.

The corporate lawyers who conceived this self-enriching system ought to get the nation’s top prize for shameless perversity.

Corporate socialism–an Uncle Sam (meaning you) guarantee–has been very good for Sallie Mae’s stock, which has gone up twenty-fold since 1995, when it was already a mature, profitable company.

Ms. Stahl interviewed one graduate, Lynnae Brown, who borrowed $60,000 starting in college in 1985. She has been ill since her sophomore year. She keeps paying to avoid default, but by the time she is finished, she will have paid Sallie Mae $262,383. Now one can sense why Al Lord can build his private golf course.

The bright and compassionate Harvard Law School professor, Elizabeth Warren, told Ms. Stahl that "Sallie Mae makes money if you pay back on time. And Sallie Mae makes money if you don’t pay back on time. 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."

But the solution is plain. The government’s Department of Education offers student loans directly, bypassing the middleman. It gives the loan money to Ohio State University, for example, which then loans it to students. Direct lending by Uncle Sam is far cheaper. It will cost taxpayers less than 1 cent on the dollar, while Sallie Mae guaranteed loans will cost taxpayers 12 cents on the dollars. Who made these projections? Mr. Bush’s own budget analysts.

I have observed previously that our weakened, disorganized democracy is increasingly both exposé-proof and solution-proof. Nonetheless, the solution is for the government to stop allowing companies special advantages like Sallie Mae kickbacks to universities in order to get the student business, as 60 Minutes pointed out. Then more direct Department of Education lending can save taxpayers money and provide more loans for hardpressed students and parents.

Was there any uproar after the 60 Minutes criticism? If so, I didn’t hear it either from Congress or anywhere else. Well, at least Sallie Mae was affected; its stock went up the next day on Monday $1.70, to $53.85!