Loans ‘designed to fail’: States claim loan giant preyed on students

Ashley Hardin still owes most of the $150,000 she borrowed to attend Brooks Institute of Photography.
Ruth Fremson/New York Times
Ashley Hardin still owes most of the $150,000 she borrowed to attend Brooks Institute of Photography.

NEW YORK — Ashley Hardin dreamed of being a professional photographer. So in 2006, she enrolled in the Brooks Institute of Photography and borrowed more than $150,000 to pay for what the school described as a pathway into an industry clamoring for its graduates.

“Brooks was advertised as the most prestigious photography school on the West Coast,” Hardin said. “I wanted to learn from the best of the best.”

Hardin did not realize she had taken out high-risk private loans in pursuit of a low-paying career. But her lender, SLM Corp., better known as Sallie Mae, knew — and made the loans anyway, prosecutors say.


In recent months, the student loan giant Navient, which was spun off from Sallie Mae in 2014 and retained nearly all of the company’s loan portfolio, has come under fire for aggressive and sloppy loan collections, which led to government lawsuits filed in January. But two state lawsuits, filed by Illinois and Washington, allege Sallie Mae engaged in predatory lending, extending billions of dollars in private loans that never should have been made.

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“These loans were designed to fail,” said Shannon Smith, chief of consumer protection at the Washington state attorney general’s office.

Details unsealed last month in the state lawsuits shed light on how Sallie Mae used private subprime loans — some of which it expected to default at rates as high as 92 percent — to build its business relationships with colleges and universities. From the outset, the lender knew that many borrowers would be unable to repay, prosecutors say, but ensnared students in debt traps.

The private loans were — as Sallie Mae itself put it — a “baited hook” to reel in more federally guaranteed loans, according to an internal strategy memo that the Illinois lawsuit cited.

Attorneys general in Illinois and Washington want those private loans forgiven. Their lawsuits cover private subprime loans made from 2000 to 2009.


Navient denies any wrongdoing. It does not originate any loans, but when it split from Sallie Mae, it kept most of Sallie Mae’s loans. It collects payments from some 12 million people — about 1 in 4 student loan borrowers.

“We have a proven track record of helping millions of Americans access and achieve the benefits of higher education,” said Patricia Nash Christel, a spokeswoman.

Sallie Mae made subprime loans to students who would not otherwise qualify, including borrowers with poor credit who took out loans to attend schools with high dropout rates. They were a bargaining chip, prosecutors said, a tool Sallie Mae used to build relationships with schools so the company could make more federal loans to their students. The federal loans were the real prize, because they came with a safety net: If a borrower defaulted, the government would reimburse the lender for most of its losses.

Sallie Mae could afford to absorb losses from its private loan business as, essentially, a marketing cost of snagging more lucrative loans. In a 2007 internal note, quoted in Illinois’ lawsuit, Sallie Mae described its strategy of using subprime loans to “win school deals and secure FFELP and standard private volume,” a reference to the Federal Family Education Loan Program that generated most of the company’s profits.

The schools themselves often had a reason to push private loans. Under Education Department rules, no more than 90 percent of a school’s tuition payments can come from federal funding. That means at least 10 percent must come from private sources. At for-profit schools, which rely heavily on federal lending, private loans — even to borrowers likely to default — were crucial for staying under the threshold.


Sallie Mae in 2008 ended its subprime lending and told at least seven major operators of for-profit schools it would stop making private loans to many of their students. In 2014, Sallie Mae and Navient broke apart, and Navient retained the troubled loans.

But for students, containing the damage was not so easy.

Lenders can hound students for payments on their debt, or sell it to a collection firm. And because student loans cannot typically be wiped away through bankruptcy, many borrowers have no choice but to continue chipping away at their balance.