News & Politics

Shady Sallie


The Department of Education’s Office of Federal Student Aid opened in 1998, a time of “reinventing government,” as President Clinton often reminded the nation.

“The intent of Congress in creating our office was to get politics out of the agency and focus on improving service for students,” says one former FSA insider, who agreed to talk only on condition of anonymity.
But during his tenure, he would see just the opposite— a program that might have saved taxpayers billions was instead buried by the Bush administration.

Bill Clinton campaigned in 1992 to end the federally guaranteed student loan program, in which banks lend the money and profit from government subsidies while insured against default. He proposed a simpler system: The Department of Education would get money from the U.S. Treasury at minimum cost and loan it to students. After meeting stiff resistance from the banking lobby, officials settled for phasing in the Direct Loan initiative alongside the guaranteed loan program, rather than replacing it, in 1993. Lower-income students especially liked the income-based repayment option that comes with Direct Loans, with its provision that the debt can be wiped away after 25 years instead of clinging on forever. By the 1997–98 school year, Direct Loans had grown to 33 percent of all student borrowing, or just over $10.9 billion.

Sallie Mae CEO Albert Lord vowed to win back the schools that had left for the Direct Loan program and to triple the company’s share price by moving into making, as opposed to just buying, loans. Lord also moved to diversify and privatize the company— a process completed in 2004, four years ahead of schedule. Sallie Mae began discounting its loans and stepped up its lobbying efforts.

Along with other student lenders, Sallie Mae sued Richard Riley, then secretary of education, in 2000, for offering discounts on interest rates and fees for Direct Loans in an attempt to keep the program competitive.

The case became moot, though, after the 2000 election. President George Bush appointed William Hansen, the CEO of the Education Finance Council, another plaintiff in the suit, to be the deputy secretary of education. Bush’s election, says the official, was the beginning of a war of attrition in the Office of Federal Student Aid, and by extension, the Direct Loan program. “The people Bush brought in told us we were no longer allowed to give speeches, talk to colleges, publish any brochures or reports, make any hires,” he says. “The annual Direct Loan conference was canceled. Our communications person wasn’t allowed to talk to the press without a [Bush] appointee in the room. You almost had to ask permission to go to the bathroom, and you never, ever got it.”

Gregory Woods, the head of the FSA, died of cancer in 2002, and half of Woods’s staff was dismissed. Woods’s replacement was Theresa Shaw, a former senior vice president and chief information officer for Sallie Mae. At least seven former employees, attorneys, or lobbyists for Sallie Mae have received high-ranking federal appointments to the Department of Education since 2000.

Ten years of government data now show that the guaranteed student loan program costs the government 10 times as much as Direct Loans, including administrative expenses. Yet since 1998, Direct Loans have dropped to just 23 percent of all student loans—a proportion that, in today’s larger student loan market, translates to not quite $14.8 billion.

Besides simply not promoting the Direct Loan program, the Bush-era Department of Education has taken concrete steps to dismantle it. In 2001, FSA officials saw a memo from Peter Fischer, assistant secretary of the treasury, to William Hansen. Hansen had proposed selling off the Direct Loan portfolio to Sallie Mae and other private lenders. Fischer called the idea illegal and compared it to the recent Enron scandal, because private companies stood to profit from the deal while taxpayers assumed the risk. FSA employees were threatened with firing if they made the memo public. In the most recent education legislation, a student’s right to consolidate her bank loans into the direct loan program, in order to take advantage of income-contingent repayment, was taken away. In 2004, Sallie Mae’s market share beat that of the Direct Loan program for the first time.

Most Popular