In a 2009 NOW PBS segment called “Student Loan Sinkhole, David Brancaccio interviews a former Sallie Mae employee named Mike Zahara, who worked for the company collecting student loan debts.  Zahara claims that Sallie Mae’s practice is to load government guaranteed student loans up with fees so that when they go into default, they can collect the money from taxpayers — which students will ultimately have to repay:

BRANCACCIO: Sallie Mae is the largest FFELP lender. It’s the company many of us think as the old government sponsored lender, but in fact, it was reorganized as a private company in 1997 and it purchased the name “Sallie Mae” for $5 million. Most Sallie Mae employees are bound by confidentiality agreements, and don’t talk to the media, but we found one man willing to break ranks. Mike Zahara, a former Sallie Mae debt collector, was so angered by what he saw happen at his branch in 2005 that he decided to speak with us.

ZAHARA: I heard people say, “Well, why—don’t pay your rent this month? Why don’t you pay your student loan instead?”

BRANCACCIO: You heard debt collectors for Sally May tell people who owed money that they should pay the student loan first, instead of the rent?

ZAHARA: Instead of the rent. Instead of the car payment. First things first, according to them.

BRANCACCIO: First things first? Listen, we all owe what we owe. And we all have an obligation to pay things back. But clearly if you don’t pay your student loan, this is bad personal finance. If you don’t pay your rent, you could be homeless.

ZAHARA: Well, exactly. And that was all because these kids who were making these calls all—had a bonus to chase. They didn’t really care about the borrower. They cared about their end of the month numbers, is what they cared about.

BRANCACCIO: Zahara says he wasn’t given enough time to help debtors understand their options.

ZAHARA: They wanted that collections effort done in two minutes. You were—audited by your supervisors. And if you were over a two minute average over that month, you got either written up, yelled at, or terminated.

BRANCACCIO: And you’re aware that there are some better options for some people who find themselves in a bind. Were you allowed to share all those good options with the people you’re talking to?

ZAHARA: No, we were not. We were not allowed to—to discuss and inform them. We were there, simply, to collect.

BRANCACCIO: The practice that troubled him the most was what happened when borrowers put their loans officially on hold—putting them into “forbearance” is the lingo, as he saw it, the borrowers didn’t understand what they were getting into.

ZAHARA: So, I could go on the phone and say, “Well, you can’t pay your bill right now. Let me offer you some verbal forbearance. What that’s going to do is bring your loan current. And it’s going to take everything that you owe us, and put it on the back of the loan.” And then we had a little spiel to read to them. But they didn’t quite understand that they were paying interest on their interest by that.

BRANCACCIO: Zahara argues that Sallie Mae had an incentive to let loans balloon that way because if the borrower couldn’t pay back, the taxpayer would cover the bill, and since Sallie Mae allows “FFELP” loans to stay suspended for years, he says he’s seen some loans double in size.

ZAHARA: Sallie May never loses. They—they—they win if the borrower pays. They win if the borrower doesn’t pay. They win if the borrower defaults. They win any possible way that you look at it.

BRANCACCIO: Zahara claims that Sallie Mae sometimes even put loans into forbearance without borrower permission. After he complained to the government about the practice, he was fired. The termination letter stated Zahara had violated the company policy that “we expect our employees to safeguard confidential information.”

Why should anyone believe a debt collector fired by Sallie Mae? His allegations are supported both by a lawsuit filed last year by Sallie Mae’s own shareholders and in company emails and documents from a lawsuit Zahara once filed against the company. We requested an interview with Sallie Mae… and the company responded with an email denying Mike Zahara’s allegations. A faxed statement from Sallie Mae said Zahara “demonstrated a pattern of accusing others of wrongdoing, regardless of merit.

Another suit, Batiste v. SLM Corp et al, makes similar allegations about Sallie Mae’s forbearance practices.  Sallie Mae makes note of the complaint in their 2009 10K filing:

On July 15, 2009, the U.S. District Court for the District of Columbia unsealed the qui tam False Claims Act complaint of relator Sheldon Batiste, a former employee of SLM Financial Corporation (U.S. ex rel. Batiste v. SLM Corporation, et al.). The First Amended Complaint alleges that the Company violated the False Claims Act by its “systemic failure to service loans and abide by forbearance regulations” and “its receipt of U.S. subsidies to which it was not entitled” through the federally guaranteed student loan program, FFELP. No amount in controversy is specified, but the relator seeks treble actual damages, as well as civil monetary penalties on each of its claims. The U.S. Department of Justice declined intervention. The Company filed its Motion to Dismiss on September 21, 2009. The Motion remains pending.


Michael Zahara Termination Letter, 2005 (PDF)
Michael Zahara Lawsuit, 2005  (PDF)
Sallie Mae Shareholder Suit, 2009 (PDF)
Sallie Mae’s Motion to Dismiss, 2009 (PDF)
Batiste Complaint, 2008 (PDF)
Batiste Response to Motion to Dismiss, 2009 (PDF)


Student Lending Analytics: Loans in Forbearance Did Drop, But…