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I was sent an article by Catherine Austin Fitts, the author of the Solari Report, entitled William M. Diefenderfer: The Financial Hit Man of Student Loans. It contained some rather striking claims that I wanted to reproduce here.

She writes this as background information on William Diefenderfer:

A lawyer by training, he had served in a number of Congressional staff roles, including chief of staff and counsel to the Senate Finance Committee and as the Deputy Director of [White House Office of Management and Budget (OMB)].

She goes on to say that Bill joined the Sallie Mae board, and then makes these claims:

As described in the review, certain bankruptcy and debt collection regulation issues were added to the law after Bill joined the Sallie Mae board, presumably as the result of student loan industry lobbying of Congress. These provisions legally and operationally created a situation in which Sallie Mae could earn more money from students’ defaulting on their educational loans than from the loans being paid off according to their terms. The changes included tightening the provisions that ensure that student loans cannot be extinguished in a bankruptcy filing.

...

What has happened is that portions of the financial sector and academia have teamed up to target children with predatory lending. Rather than provide them with the knowledge and tools necessary for them to be successful in a rapidly changing world, they have loaded them up with expensive education that often is not economic or relevant and that, for all but the wealthiest among us, is being funded with debt. This is debt that many cannot afford.


Thus, the argument seems to imply that various parties actually want students to default on their loans because the new system enables Sallie Mae to profit more from failure than success, in terms of loan repayment.

Is there evidence to support this claim?

Perhaps one way to go about this question is simply to pick an arbitrary loan amount of $xx,xxx and an interest rate of x.x%, then calculate the following and compare:

  • How much money does Sallie Mae earn if repaid under normal circumstances?
  • How much money does Sallie Mae earn from the same loan if defaulted upon?
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    @sklivvz: point taken and that makes sense. I've overhauled the question a bit. Rather than predatory lending, I just focused on one of the assertions made: that SM profits more from default than proper repayment. Hopefully this is an improved question. – Hendy Dec 14 '11 at 15:12
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    @MikeDunlavey - that whole Wiki article is a mishmash of vaguely threatening sensationalism just like the entire field of placing the blame for poor financial decisions on anyone BUT people making those decisions. ... – user5341 Dec 14 '11 at 15:48
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    @MikeDunlavey - "Lenders may be accused of tricking a borrower into believing that an interest rate is lower than it actually is, or that the borrower's ability to pay is greater than it actually is." How can you trick someone into thinking you can pay more than you can afford??? Not being able to do basic budgeting that a 7 year old can do is not the fault of the lenders. Not bothering to research the loan terms isn't the fault of the lenders either. I;ve read plenty of student loan applications in my time and 100% were very clearly worded. – user5341 Dec 14 '11 at 15:49
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    @dtanders But why do you blame the lender for the borrower having unrealistic expectation about their own future ability to pay? This is a serious question. There are big problems with the student financing system in the USA---starting with government guarantees---but surely the borrower is responsible for seeing to their own interests. – dmckee Dec 14 '11 at 17:43
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    @dtanders In the case of student loans in the USA the lenders have done their due diligence and the investments are sound. Every time. Why? 'Cause the government guarantees the loans. What's that? You say that causes a problem for the government? Well, you're right, but the fault lies with the governmental policy. Oddly enough I notice that is was the government who bailed the banks out of the trap they built for themselves in the housing market, too. Had they been allowed to fail the survivors would have known better. Too bad that chance was thrown away, eh? – dmckee Dec 14 '11 at 18:44
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How much money does Sallie Mae earn if repaid under normal circumstances?

They would make the interest plus any fees that are associated with the student loan. These will vary by loan.

How much money does Sallie Mae earn from the same loan if defaulted upon?

They would earn much greater interest, and probably much greater amount in fees. These are all defined and spelled out when the student loan is signed.

Recovery Rates Charted FFELP (Federal Family Education Loan Program) Loans are where student loans are reported in government statistics.

Yes Sally Mae will collect much more money from a student loan that is defaulted on early and then paid off over time.

various parties actually want students to default on their loans because the new system enables Sallie Mae to profit more from failure than success, in terms of loan repayment.

Is that part of their business model? Yes.

Would anyone make most these loans if they were not guaranteed? Probably not, because the student loan default rate is more than double the regular bank loan default rate (8.8% vs ~4%)

Is it possible to get a non secured loan and use that money to pay for college? Yes. Looks like no since 2009 - Fortunately the government has seen to protect you by limiting your choices in how you pay for your college expenses.

Can you work until you have saved enough money to pay for tuition, and/or work while in school to pay for your tuition up front? Yes you can lots of people do it, and there are other options.

That said there is no evidence that they want YOU to default. And even though student loans are not able to be discharged the default rate is very high. So imagine what it would be like if you could discharge them.

  • Can you say for certain that it's part of their business model without some documentation that they encourage default? It's my understanding that there's a different interest rate for every type of loan - can you claim that there's a "regular" loan rate? Comparing an education loan to a loan to purchase property wouldn't make sense in any case, since property can be seized and sold. What about rates on loans for new construction, for instance? – dtanders Dec 19 '11 at 19:02
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    @dtanders - Can you say for certain that it's part of their business model? Yes. Quite frankly if they did not include collections in their business model then there would be a worse problem. This is backed up by the lobbing that went into the 2009 law that prevents loans other than federally backed student loans for college expenses. When I Started I almost didnt reference the Yes you can get a personal loan for college. I am glad I decided to reference it. But sadly the lobbying is not subject to FOIA. – Chad Dec 19 '11 at 19:17
  • @dtanders - As for the comparison... your right if it is slightly above. But the recovery rate for defaulted loans other than student loans is 60% Tops and some are under 10%. Student loan collection amount is over 120%. That doesn't happen by accident. – Chad Dec 19 '11 at 19:19
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    Your article proving that you can pay for college without loans advises... taking out loans. Your second article about "other options" argues the opposite: that paying your own way has become nigh impossible without financial aid, AKA student loans. Please remove your bad advice and stick to the facts. – Yamikuronue Dec 27 '11 at 20:20
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    @Hendy - Yes. An arguement could be made that the loan class itself is predatory but that same arguement is used against any sort of welfare. – Chad Feb 20 '12 at 16:56

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