Leading Lady: Sallie Mae and the Origins of Today's Student Loan Controversy

The $85-billion-a-year student loan industry has been beset by scandal since New York Attorney General Andrew Cuomo announced on March 15, 2007, that his office was investigating "unholy alliances" between lending companies and college financial aid officers. Revelations of college officials accepting consulting fees from and holding stock in companies on their school’s preferred-lender lists, lenders staffing college's financial information call centers, and close ties between U.S. Department of Education officials and lenders have been front-page news.

The largest and most influential player in the industry, SLM Corporation, better known as Sallie Mae, hasn't escaped the controversy: In the wake of Cuomo's investigation, the company agreed under the terms of a settlement with the New York prosecutor to abide by a new "code of conduct" and to put $2 million into a fund to educate students about financial aid. Yet days after the Sallie Mae settlement, the publicly traded company announced that it was being sold to private investors for $25 billion—a sum that suggests the enormity of the financial stakes in the student loan industry.

The story of Sallie Mae's rise from a government-sponsored agency created to help needy students to a private corporation with a $142 billion loan portfolio goes a long way toward explaining how and why the student loan industry has landed at the center of controversy. Created by Congress in 1972 to increase the supply of lendable funds under the then-decade-old federal student loan program, Sallie Mae for many years played a relatively narrow role in the industry as a "secondary lender," buying and managing loans from banks and other lenders that used their proceeds from Sallie Mae to make new loans.

But in the mid-1990s, skyrocketing demand for student loans prompted by escalating college tuitions, expanding eligibility for student loans, and a host of new types of lending combined to make the student loan industry infinitely more complex, larger, and more lucrative. And Sallie Mae emerged as the industry’s biggest player.

After shedding its government-sponsored status and becoming a fully private, for-profit corporation, Sallie Mae embarked on an aggressive expansion campaign. It bought, or formed partnerships with, companies working in every corner of the student lending industry, from lending and loan collection to enrollment management and even college-tuition savings plans for infants.

Sallie Mae has helped millions of students pay for college, students who would not have otherwise been able to cover the cost. But the relentless expansion of Sallie Mae and other lending giants into every part of the student-aid enterprise and into every region of the country combined with an outmatched and often unmotivated federal regulatory bureaucracy, industry political clout that reaches from the halls of Congress to college campuses, and lucrative regulatory loopholes that contribute to student lending’s immense profit potential have created a climate that’s ripe for the questionable marketing tactics and other industry wrongdoing that have emerged in recent months.

It is a climate that has empowered the lending industry to act aggressively at every turn, placing students at risk of paying inflated interest rates and fees on their federal loans and leaving taxpayers to pick up the tab for what members of Congress say are hundreds of millions of dollars in excessive subsidies for the student lending industry.

As the Sallie Mae story suggests, past is prologue in the student lending industry. Today's problems are the result of conditions in the industry that have been building for years.