Sallie Mae is in danger of losing lucrative loan servicing contracts with the U.S. Department of Education and some of its high-level employees may face criminal penalties pending the outcome of a probe involving evidence that the student-loan behemoth has cheated active-duty soldiers who have taken out federal student loans.
The investigation into how Sallie Mae treats soldiers was initially revealed by the company in August, according to The Huffington Post. However, at that time the inquiry was focused on private loans, not the federal student loans that are guaranteed and subsidized by American taxpayers.
On Wednesday, a Sallie Mae news release about quarterly earnings addressed the probe.
The federal legislation at issue is the Servicemembers Civil Relief Act, a 2003 law that protects military members from the financial stress of debt collection while they are on active duty. The kind of debt which falls under the law is wide-ranging. In addition to student-loan debt, it includes credit card debt, mortgage payments and certain liens and taxes.
With regard to student loans, the servicemembers relief law compels all loan servicing organizations to reduce interest rates to a maximum of 6 percent at the request of any soldier who is on or entering active duty.
Education Department data shows that over half of all federal student loans carried interest rates exceeding 6 percent as recently as 2012.
The Consumer Financial Protection Bureau (CFPB), a watchdog government agency, has underscored mass and blatant noncompliance by Sallie Mae and other loan companies in violation of the Servicemembers Civil Relief Act.
U.S. soldiers have protested that the debt collectors have asserted a nonexistent right not to lower interest rates to 6 percent for loans which are not in deferment or forbearance. Other soldiers have complained that the loan collectors have illegally required additional forms and red tape in order to reduce interest rates.
“The contract is black and white,” Chris Hicks, an organizer who leads the Debt-Free Future campaign for a Washington-based outfit called Jobs With Justice told The Huffington Post. “If you violate federal law, you lose your contract.”
The left-wing group is calling for Education Department Secretary Arne Duncan to suspend the agency’s Sallie Mae contract.
“If the Education Department fails to enforce that clause of the contract, they are letting down borrowers, soldiers and taxpayers,” Hicks added.
As the Huffington Post notes, the situation can be seen as analogous to an investigation of recent vintage that resulted in Bank of America, JPMorgan Chase and other financial giants paying millions of dollars – and apologizing – to settle federal allegations that they cheated servicemembers on home mortgage loans.
Recent data shows that over 40 percent of all current American service men and women are paying off student loans. On average, borrowers who have graduated since 2008 owe about $26,000 each.
The 6-percent cap on loans for active-duty members of the military can mean a great deal of money. For example, an enlistee with 39,000 in debt could save something on the order of $12,000 over a 10-year period with the rate reduction.
Sallie Mae, founded in 1972, was originally a quasi-governmental enterprise. A privatization process that began in 1997 was completed in 2004, when Congress terminated Sallie Mae’s federal charter.
The now-publicly-traded company currently services federal student loans for 5.8 million borrowers on behalf of the Department of Education.
The contract between Sallie Mae and the Education Department requires the company to abide by federal laws when servicing federal student loans.
As recently as October 2013, department officials indicated that the department would renew the company’s extensive and lucrative contract to collect billions in payments on federal student loans.