Sen. Warren spars with student lender Sallie Mae over loan rates

Sen. Elizabeth Warren (D-Mass.) has picked a fight with the nation’s largest private student loan provider. [WATCH VIDEO]

The liberal favorite and staunch consumer advocate spent much of the past week sparring with Sallie Mae, contending the lender enjoys sizeable government perks while sticking it to students with high interest rates.

{mosads}On Friday, Warren sent a letter to the CEO of the student lender, accusing Sallie Mae of “piling on” government supported benefits while reaping “big fees” from students.

“While Sallie Mae is finding unique ways to profit from government programs, its borrowers are paying interest rates that are far in excess of the low cost of funds supported by the U.S. taxpayers,” she wrote.

The latest letter marks the newest round in a lengthy back and forth between the freshman senator and the student lender. What began as an inquiry into a low-interest line of credit Sallie Mae received from a government-created bank that primarily exists to support housing, has broadened into a critique of high student loan interest rates in general.

“If we are serious about investing in our future, we should help our students pay for their education — not find ways to squeeze more profits from them. I believe it is time to align priorities in Washington with those of the American people,” she added in her Friday letter.

On Monday, Warren set off the debate, sending a letter to the Federal Housing Finance Agency, which oversees the nation’s housing enterprises. In it, she asked why Sallie Mae, a private student loan provider, had received a low interest, $8.5 billion line of credit from the Federal Home Loan Bank of Des Moines. The nation’s 12 Federal Home Loan Banks were created in the wake of the Great Depression, with the primary goal of ensuring access to low-cost funding for banks, which in turn could use them to offer affordable mortgages. The banks are owned by the nation’s financial institutions, which buy into the banks in exchange for access to the low-cost funds, but are sponsored by the government.

Noting that Sallie Mae made $2.5 billion on student loan interest in 2012, Warren asked the regulator why it should get a 0.23 percent line of credit, while it was charging 25 to 40 times that amount on its own private student loans.

In a statement provided to The Hill, a Sallie Mae spokesperson said the line of credit was intended to service a leftover amount of federally guaranteed student loans it still had in its portfolio, although the lender stopped offering such loans in 2010 when Congress killed that program. The spokesperson added that the FHLB credit had “no bearing” on Sallie Mae’s private lending activities.

That claim resulted in Warren firing off a letter Tuesday to Sallie Mae itself, arguing that such a statement was contradicted by the lender’s own corporate filings. She cited corporate documents that stated the lender planned to fund its ongoing operations, including the creation of new private student loans, through cash, investments, the repayment of existing loans, as well as drawing down on its arrangement with the home loan bank.

Sallie Mae CEO John Remondi responded that same day, defending his company’s action. He said Sallie Mae received the FHLB line of credit in 2008, when Congress wanted to ensure easy access to federal education loans and regulators gave the go-ahead to accepting such student loans as FHLB collateral. And he maintained that that credit line is devoted solely to servicing those leftover government-backed loans.

But Friday’s letter made clear Warren was not convinced. Citing her previous stint as an official government watchdog of the bailout program, Warren maintained that Sallie Mae could not honestly claim that receiving potentially billions in credit at extremely low borrowing rates, even if set aside to address one category of loans, carries no impact on their ability to conduct the private lending side of their business.

“Government cash infusions into private companies, along with direct and indirect subsidies, raise complex questions about which activities are being supported and which aren’t and whether the company receiving the assistance is being entirely forthright in its description of the impact of such support,” she wrote.

Sallie Mae has yet to respond to her follow-up.

This is not Warren’s first go-round with the lender, but it is a timely one as lawmakers are looking to strike a compromise on student loan interest rates. In 2006, the then-Harvard Law professor appeared on a “60 Minutes” segment exploring the lender, airing similar critiques, along with the fact that Sallie Mae serves as both loan originator and collector.

As Congress breaks for the July 4 recess, they will have done so without striking a deal to avoid the doubling of interest rates on subsidized Stafford student loans, which are government loans relied on by millions with a demonstrated need for low-cost assistance.

On July 1, rates for those loans will double to 6.8 percent, as a temporary deal to lower the rates expired. Both parties had been working to avoid the hike, as House Republicans passed a measure that would tie the rate to the interest on 10-year Treasury bonds. President Obama floated a similar proposal in his budget request, although the White House threatened to veto that measure, citing several differences.

For one, the House GOP proposal would allow rates on the loans to change year to year, while the president’s plan would lock in the rate when a student took out the loan. Obama’s plan would also cap the amount of income a borrower would have to devote to paying back his or her loans.

Meanwhile, the Senate has failed to coalesce around a plan, as Democrats put forward a one-year freeze of current rates while Senate Republicans pushed a similar plan to the House bill. A bipartisan group of senators claimed to have struck a compromise late in the week, but Senate Majority Leader Harry Reid (D-Nev.) did not sign off on it.

Meanwhile, Warren has been pushing her own student loan measure in her first piece of legislation since joining the Senate. Her bill would require the Federal Reserve to subsidize student loans for one year so they fall to the same low rate banks can borrow form the central bank, which is roughly 0.75 percent.

“If the Federal Reserve can float trillions of dollars to large financial institutions at low interest rates to grow the economy, surely they can float the Department of Education the money to fund our students, keep us competitive, and grow our middle class,” she said when she unveiled the bill.