The Hidden Monster

August 11, 2008

Already burdened with mounting educational loan debts, students increasingly find themselves the targets of sordid marketing practices. Sometimes the perpetrators are caught, but what about the ogre lurking in the wings?

We’ve exposed the manner in which colleges have partnered with credit card giants to take advantage of their students for their own profit. In yet another example, companies who provide consolidation loans (combining several student loans into one large loan) entered into agreements with many colleges to market their consolidation loans to students, using the logos and mascots of the college to convince students that these consolidation loans carried the blessing of their college.

Student Financial Services (SFS), a Florida company, was forced last year by state prosecutors to cease its deceptive marketing practice and end its contractual arrangements with 63 colleges, including Florida Atlantic and the University of South Florida. SFS had been paying up front fees and kickbacks for each funded loan application at many of these colleges.

Did your college sell you out?

What did the Schools get out of the deals?

What did SFS get out of the deals?

But where did it find the money to fund its deceptive practices? Lurking in the background was Sallie Mae, the nation’s largest student loan company. When Sallie Mae found that it was losing money to these consolidation loans (lost fees and interest payments), it decided to get into the game itself. If you can’t beat ’em, join ’em. In 2006 it bought $3.6 billion worth of consolidation debts. In 2007, Sallie Mae gave SFS a $30 million line of credit designed to “encourage” further “lending activities” by SFS.

So SFS got spanked by state prosecutors for its deceptive practices, but Sallie Mae gets off scott free? Sound familiar? Unscrupulous lenders helped bring on the sub-prime mortgage crisis, but it was the big money players behind the curtain, like Fannie Mae and Bear Stearns, who fueled the crisis with bags of money, presumably never bothering to check into the lending practices that foretold doom. The hidden monster just sits back and waits for the next taxpayer bailout.