Among the big news from today’s announcement of Arnold’s May Revise is the proposal to sell off EdFund for $1 billion. EdFund is a public non-profit that manages $27 billion in student loans. Arnold plans to sell it off for the one-time windfall it might provide, even while his revised budget takes even more money from public transportation and social services.
Why is this such a catastrophically bad idea? Because even as people complain about screwing us young folks over with state bond debt, privatized student loans put us in a FAR worse financial situation, crippling young folks and young families right when their entrepreneurial and creative energies are at their peak.
Sallie Mae provides the cautionary tale. Originally a public non-profit, Sallie Mae was privatized between 1997 and 2004, and remains the nation’s largest holder of student loan debt (EdFund is #2).
The privatization has led to financial stress for millions of Americans. Sallie Mae execs, as described by the excellent Student Loan Justice site, gave themselves massive payouts and sought to improve profits. How? By screwing borrowers.
Sallie Mae makes more money from a defaulted loan than from a borrower who is paying as agreed. Such a borrower must begin making larger payments, with interest capitalized and tens of thousands of dollars in penalties added. Since they make so much money this way, they have little incentive to help borrowers return to solvency. Instead they seek to inflate the collection debt. And since student loans cannot be discharged in bankruptcy, and can only be refinanced once, Sallie Mae has you over a barrel.
Student Loan Justice has chilling stories from Californians who have been victimized by the privatized Sallie Mae:
I have been on top of my loan from the start and it just keeps growing.
I too borrowed money for student loans and when I graduated in 1994 Sallie Mae called me and convinced me to consolidate my guaranteed student loans. I had one small loan of $2500.00 that was unsubsidized the rest of $35000.00 was subsidized. They told me nothing about this. It took me four years to get them to tell me what happened to my loan. See, I was a single mother of two and didn’t get a job right from college. In order to keep my certification I had 5 years to complete 18 more credits. So my plan was to accrue 2 years or so of interest until I got a job and could go back to school and be in deferment. The deferment would have put my loans on hold and I would not accrue interest. This is what they told me. In the third year I didn’t have a full time job, but I did start back at school half time. So my loans should have become defered without interest acrruing. Well that didn’t happen. When I called (which was often) Sallie Mae they told me “My loans were none of my business and why don’t you just get a job.” After several years I started to record the comments and rude remarks. They told me I wasn’t allowed to record the conversation. After 8 years Sallie Mae sends me another notice. This time the note has a place called Ombudsman. Ombudsman was supposed to be a go between. She was all supportive and ready to go after Sallie Mae and a week later she called and said “That is the nature of your loan, so pay it.” I have been paying a small amount for 2 years. I pay $100.00 a month. Edfund has my loan now and are threatening to garnish my wages. When they do this I will have to quit my job. I have my grandson and when they garnish my wages I won’t be able to pay for daycare. Your right, they don’t care about the human element. All I want to do is pay back my loan. The original loan of $37,000.00. I am now ordered to pay $86,000.00. I thought the same thing you did. That they would make an offer and I could begin to manage my loan. The Edfund person told me why would we do that. We wouldn’t make any money. I have been on top of my loan from the start and it just keeps growing. I am a teacher that works in a low income school and will never be able to do what they are demanding. I truly believe in my soul that Sallie Mae is just as responsible for this getting out of hand. They can’t tell me about ignorance isn’t an excuse. I didn’t have the knowledge to ask the right questions. I had to take their word and they told me all my loans were subsidized. Now they have a form that separates subsidized and unsubsidized loans. They didn’t have this when I signed their promissary note.
The horror stories are truly frightening, of wrecked lives and dashed dreams. Some on other state pages talk of committing suicide to get rid of the debt burden. And as the current kickbacks scandal involving Nelnet and other private lenders widens, the true danger of privatized student loans becomes even clearer.
California’s foolish refusal to make hard choices about taxes, choosing instead to balance its budgets on the backs of students, forced millions of students and their families to take out loans. Arnold’s desire to privatize EdFund will cause a serious financial crisis for millions more Californians. It is an unconscionable and indefensible act, one that California Democrats have no other choice to oppose.
Privatizing the lottery would be merely foolish. Privatizing EdFund would be a catastrophe. Let’s make sure it doesn’t happen.