As the deadline for student loan rates to double steadily approached last week, Sen. Elizabeth Warren (D-MA) was on the warpath against the nation’s largest student lender, doggedly pursuing information that would explain why Sallie Mae took cheap, taxpayer-backed loans from a federal bank and used it to fund extremely expensive, private loans to students.
The clash culminated over the weekend, when The Hill learned on Sunday that she also sent a letter to Sallie Mae’s CEO that accused the bank of taking advantage of taxpayers in order to rake in “big fees” from student borrowers.
“While Sallie Mae is finding unique ways to profit from government programs, its borrowers are paying interest rates that are far in excess of the low cost of funds supported by the U.S. taxpayers,” she reportedly wrote.
Her two earlier missives, sent to Sallie Mae and the Federal Housing Finance Authority (FHFA), were published on the senator’s official website. In her letter to the FHFA (PDF), she inquired why the student lender was borrowing from taxpayers at “0.23%-0.34%” interest when it has been charging students”25-40 times higher” on fixed-rate education loans.
The Federal Home Loan Banks were “intended to bolster the banks’ support for the housing market – not to be a backdoor way to subsidize highly-profitable private student lenders,” she wrote last Monday. “It is deeply worrisome that the Federal Home Loan Banks may be undermining their mission by extending billions of dollars in cheap credit to private student lenders.”
The next day, her office sent an inquiry to Sallie Mae CEO John F. Remondi (PDF) citing The Hill‘s report quoting a statement from the bank which claimed the FHFA’s funds were not used to finance new loans to students.
“By all appearances, the representation of that spokesperson directly contradicts language from recent corporate filings from Sallie Mae,” Warren wrote. “In those corporate filings, Sallie Mae indicated clearly that it views its line of credit with the Federal Home Loan Bank in Des Moines as a mechanism available to fund ongoing liquidity needs to original new private student loans.”
Then Warren cited that very entry on Sallie Mae’s filings, which calls out a line of credit provided by the FHFA bank in Des Moines by name. “How is it that the Federal Home Bank credit has ‘no bearing’ on your private student loans when your company’s 10-K disclosure acknowledges that the line of credit could be used to help fund the origination of private student loans?” she asked.
With those fireworks set to pop, Warren confidently sat in a Senate Banking Committee hearing Wednesday and lectured officials on the appropriateness of the government reaping billions in profits off the backs of students.
“The new loans will make a profit of $184 billion over the next 10 years, and it turns out that even the so-called subsidized loans make a profit of about 14 cents on the dollar,” she said. “The student interest rate is scheduled to double July 1, so the question I have is, why do we call these loans subsidized? I don’t get this.”
“This just seems wrong to me, Mr. Chairman,” Warren concluded.
Student loan rates doubled on Monday, up to 6.8 percent, due to inaction by Congress. President Obama and congressional Democrats tried to extend a rate of 3.4 percent for another two years across the board, but Republicans insisted upon tying the rate of service on the debt to market-based variables. Due to the uncertainty of variable-rate loans, the White House threatened to veto a bill produced by the Republican-led House, and Senate Democrats did not have enough votes to overcome a filibuster of their own version.
The Senate is expected to discuss the matter again on July 10.
This video is from the Senate Banking Committee, published to YouTube on June 25, 2013.