The Student Loan Scam

Education is a good thing. To some, this may seem painfully obvious and not the best way to start an article off. However, after we get done exposing the blatant financial raping of college students that is now taking place, you may think twice about spending one more penny on tuition.

The average student loan debt after graduation is $22,000 – that’s the average. Remember, there are a lot of rich kids whose parents pay the way, and a lot of poor kids with maximum Pell grants and scholarships skewing the results downwards. So as bad as $22,000 in debt sounds – the reality is even worse for the average middle class student with many students owing over $100k after graduation with a degree that will earn them less than half that on the job market.

In fact, over 70 million people in the US have student loan debt – roughly 1/4 of the population and the amount owed is a staggering $700 Billion. Many economists fear this is the next bubble to burst as the value of that education is no longer commensurate with the amount paid for it, causing debtors to default on the loans since their degrees no longer guarantee them a decent job to be able to pay their debts off. The skyrocketing costs of education are no longer sustainable, nor is the debt load carried by these graduates. Unfortunately, student loans are almost impossible to get rid of through bankruptcy. This financial burden then causes a further downward pressure on the economy since people have less disposable income.

The bigger problem is, people associate student loans with very low interest rates and forgiving terms. The reality is generally much different. Sally Mae, the company behind many of the worst student loan terms is an interesting case. Their registered corporate name is SLM Corporation, but they bought the legal right to use the name Sally Mae for $5 million. One would assume they did this so they can seem more legit – almost as if they are a branch of the Department of Education. However, Sally Mae is a private company with zero ties to the US Government. Their only purpose is to get rich off of college students desire to get a degree they can’t really afford.

Many of these loans have ridiculously high interest rates like 18% or higher – more in line with a credit card interest rate than a student loan. Then companies like Sallie Mae often trick people into agreeing to put their loan in “forbearance”. Forbearance essentially puts the loan on hold for a time and brings it current, but what they don’t tell people is that it puts the money owed on the back end of the loan thereby causing you people to pay interest on the interest they owed for years sometimes causing the amount of the loan to almost double. Since the people that work the phones with Sallie Mae are paid bonuses based on these types of actions, they have an incentive to put people into financial hardship, with some reports of them actually advising students to make student loan payments, rather than rent payments just so they can receive their bonus.

Most students have trouble understanding the reality of the job market vs. the amount of debt they take on. Many students assume a college degree means they will be making a 6-figure income in no time, and be able to pay off their loans without any trouble at all. Of course, the reality is much different. A large percentage of students soon realize that they can not, and will not be able to pay off their student loans, and are dismayed to discover that not even bankruptcy can save them. So even if you lose everything, Sally Mae will still be there until the day you die, ready to collect any scraps they can from your rotting corpse.

Very few students have any idea how the student loan scam works, and the colleges and universities are complicit in the deception. When applying for financial aid, many students assume they don’t have to pay back the money awarded. This is true for Pell Grants, but students are also pre-approved for these predatory student loans on the same form and many people are not able to differentiate between the two. When a student “accepts” grant money in the form of Pell grants, most students simply “accept” the other money awarded as well. Therein lies the scam. Most of these loans are at predatory interest rates on loans that are next to impossible to discharge unless through payment in full or death.

The colleges and universities are partners in crime – much like in the textbook pricing scam, allowing these sharks unfettered access to naive college students. These “Institutions of Higher Learning” give predatory lenders like Sally Mae a solid spot on thousands of campuses across the country giving them the ability to effectively target every single college student in America.

“It’s like shooting fish in a barrel”, quipped an anonymous former employee of Sally Mae. “I’ve had students call in complaining about the magnitude of their debt, with some of these people carrying 15 or more separate student loans.” How they got there in the first place was by accepting the advice of those giving the loans. The system is designed to allow a student to take out separate loans for tuition, books, living expense etc, and to do so every semester, often times resulting in a staggering number of student loans to deal with when they leave school.

The Obama Administration has introduced legislation to “cut out the middle man” and just do direct lending from the government at more reasonable interest rates, thereby lowering debt costs to students and allowing for the government to reap the profits. The Student Aid and Fiscal Responsibility Act – currently being considered by the Senate Health, Education, Labor, and Pensions (HELP) Committee – would eliminate the Federal Family Education Loan (FFEL) program. FFEL loans are federally subsidized and make up approximately 80 percent of the student lending industry. According to the Department of Education, 14.3 million of the 17.5 million student loans were federally subsidized for the 2009-2010 fiscal year. Under Obama’s plan, the government would consume the entirety of this industry – a total of $103 billion in 2009-2010. But even if the legislation passes, one of the four institutions that the government has named as administrators of the program is of course, Sallie Mae. Perhaps with more restrictions in place we can expect improvements, but only time will tell.

If you found the previous article informative, you should check out more goodies in our college life section, or read some of these articles below:

• Get College Textbooks Cheap
• Affording College
• College Degrees No Longer Worth Cost
• How Special Will Your College Experience Be?
• Indecisive About Your Future? Don’t Worry, It’s Just One Big Trip, Man
• College Essays
• How to Beat a Standardized Test
• Back to School Savings (The Underground Way)
• Life After College – Getting a Job
• Corruption in College Testing

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