Sallie Mae Flinches: How an Unemployed Student Graduate Wrestled Change from the Private Loan Giant

Stef Gray was on a mission.

Dressed in the purple cap-and-gown ensemble she donned years earlier for graduation, the unemployed activist marched up to private student loan giant Sallie Mae’s headquarters in Washington, DC, armed with more than 76,000 signatures from her peers.

Her petition included a simple request for the company: Drop the “forbearance fee” you charge those unable to make loan payments. Borrowers who couldn’t pay the monthly minimum—lost a job, maybe, or can’t find work—were forced to pay a hefty fee to delay payments. What the company called a “good faith deposit” didn’t go to the debt balance or back to the borrower.

In less than three hours, Gray was victorious.

Well, sort of.

Instead of dropping the fee, Sallie Mae tweaked it to allow the $50-per-loan charge to be credited to the borrowers’ principal balance—but only after the forbearance period ends and the borrower makes six consecutive on-time payments.

For young, cash-strapped but college-educated borrowers like Gray who are unemployed (or underemployed) thanks to a stubbornly high unemployment rate, paying any fee just isn’t feasible.

Talk of the recession in the media has largely focused on its impact on middle-class families, but the economy’s lasting impression on future generations can perhaps best be gleaned by looking at its effects on young Americans.

Nearly half of young adults have either gone back to school or, in lieu of employment, settled for an unpaid internship to gain experience and prevent unsightly lapses from splotching resumes, according to a Pew Research report. For some, getting by meant moving back in with their parents.

Gray calls the forbearance fee tweak “a partial victory,” but says the policy might not have much impact—especially for someone like her who owes Sallie Mae about $600 a month on four separate loans.

“If you’re unemployed, $150 every three months is still something you can’t do,” she told Campus Progress recently. “For me personally, I’ve been getting by with the help of friends and family…and it’s embarrassing.”

Others acknowledge the move by Sallie Mae as a positive effort.

“It’s step in the right direction, but it is a modest step,” said Lauren Asher of the Student Debt Project, who credits the Consumer Financial Protection Bureau’s attention to this issue for creating “a climate where consumers are more likely to speak up and be heard.”

Inspired by Molly Katchpole—the young, unemployed activist who successfully campaigned on Change.org against Bank of America’s debit card fee—Gray said she plans to be “heard” until something is done to drop the forbearance fees altogether. Then, she’ll focus her efforts on restoring consumer rights and bankruptcy protections “that were stripped away” by private lending interest groups over the last two decades.

* * *

A college education is wholly viewed by many Americans as the surest road to economic prosperity, and the rhetoric around paying for a degree has always used words like “investment” without mentioning its binary opposite: “debt.” Guidance counselors, principals, and educators use militant mantras like “by any means necessary” when encouraging parents to co-sign their child’s future away to debt—but on hopes of hastened upward mobility.

Unfortunately, some young Americans have yet to see the bountiful returns on their education investment and have found it increasingly harder than other debtors to start anew when they’ve exhausted all options.

Since taking office, President Obama has signed several executive orders in an attempt to stave off the rising tide of young Americans drowning in premature debt—from expediting the Income-Based Repayment program, to installing Richard Cordray as the head of the Consumer Financial Protection Bureau with a recess appointment.

But Obama’s efforts—and even his proposed fiscal 2013 budget, which would increase funding for grant and work study programs—tackle only the part of a problem and deal primarily with prevention. There are still the challenges facing 36 million Americans saddled with $1 trillion of already accrued debt, specifically those dealing with private lenders.

“When it comes to gambling debt, when it comes to any type of debt for various forms of civil crime, we allow people to file for bankruptcy,” said Michael Konczal, economist and fellow of the Roosevelt Institute who works on financial reform. “We have certain types of rules, like don’t tap into people’s social security. For student loans—for people who are trying to educate themselves—we have really harsh stuff.”

Federal educational lenders offer death and disability discharges and closed school debt discharges, but private lenders are not required by law to cancel debt for these reasons. Discharging student loan debt in bankruptcy, government or private, is near impossible.

But it wasn’t always this way.

For the past 20 years, protections for student borrowers have been whittled away to expand collection powers for both the government and private lending industry. (Konczal illustrates this in a simple graphic timeline.)

The most aggressive pieces of legislation were passed in 1998 when legislators revoked the ability to discharge government and non-profit loans within seven years, and in 2005, when creditors convinced Congress to extend the rule to private loan student debtors, despite no evidence of significant bankruptcy abuse by student loan borrowers.

 “Generation Y understands that bankruptcy is not a walk in the park,” Gray said, before adding sarcastically: “I would like to file for bankruptcy as much as a bear wants to gnaw its leg off to get out of a trap.”

* * *

For many young Americans, taking out a student loan is their first major financial contract, and they often aren’t well-equipped to vet out loans they aren’t suited for. Those without financially literate support systems are left to fend for themselves.

“Right now students are often left on their own, without anybody to teach them about money management, other than perhaps their parents, who sometimes might themselves benefit from financial literacy training,” said Michael Kantrowitz, the founder of FinancialAid.org.

Asher agreed.

“Borrowers are really at the mercy of their lenders,” she said. “Even if they read the fine print of their promissory note, they may or may not find that there is anything there that gives them reasonable options when they are having trouble making their payments.”

A Sallie Mae representative said that borrowers in forbearance receive written confirmation of the terms of the fee after the transaction, including information about the new fee policy. Cosigners also receive written confirmation of the forbearance terms.

The Consumer Financial Protection Bureau can help ensure that private lenders are treating young student loan borrowers fairly by flexing its oversight muscles and stepping in to regulate. The new bureau is analyzing data they collected over the last three months concerning the private student lending industry, and theconsumer watchdog recently announced desires to supervise the debt collecting industry, the Associated Press reported.

While most conversations on Capitol Hill about student loan industry regulation largely deals with prevention, Gray said she hopes President Obama’s  administration will tackle the ballooning debt facing this generation of young Americans.

“The focus of the Obama administration has been on the class of 2018, the class of 2019, all of these future generations that are going to school, which is great, but what about people who are drowning in debt now?” she asked. “What about the students who have already defaulted? Obama’s student loan reforms were great for those with federal loans, but let’s face it: It doesn’t help anyone who’s already defaulted.”

Naima Ramos-Chapman is an associate editor at Campus Progress. Tara Kutz is a video communications associate at Campus Progress.

Related Stories

• Why You Can’t Plan on Using Just Financial Aid to Pay For These Schools This Fall
• You Won’t Believe Which Government Policy Is More Profitable Than Exxon
• Senate Democrats Tackle Stafford Loan Rates With New Proposal
• Why Did 250,000 People Sign This Student Loan Petition?
• How Young People Can Bail Themselves Out