By Nicole Mayer:
President Obama shocked the student loan industry last month, by proposing a plan that would cost private, student lenders big bucks. For student lending giant Sallie Mae alone, this could mean a reduction of 75% in loan originations and a significant blow to its business model. The company’s stock price dropped 53% after the announcement and is down 92% since its high in 2007.
President Obama’s proposal calls for an end to federal subsidies for private student loan lenders and would strip those private lenders of the ability to originate federal loans. Instead, the federal loans would come from the private lenders’ biggest market competition-the government’s Direct Loans program. Direct Loans go straight from the government to students and cut out the middle man, saving taxpayers a lot of money.
Sallie Mae Opposition
As expected Sallie Mae opposes the proposal, as do several members of Congress who’ve received political contributions from Sallie Mae. The executive proposal still has to be passed by Congress, where Sallie Mae has cultivated a lot of friends over the years.
A recent Sallie Mae news release indicates that even if it can’t originate federal loans, it will be looking to snag the lion’s share of servicing and collecting on the federal student loans. Sallie Mae might face problems with that plan, because the company has a tarnished reputation. It’s been accused of harassing debt collection efforts and cozy financial relationships with schools, which may prevent it from making the government’s list of approved servicers.
Tarnished Reputation
Sallie Mae earned its reputation during the student loan scandal in 2007, which revealed “unholy alliances” between schools and lenders and shed light on who actually benefits from student loan lending.
In the years leading up to the scandal, regulation and legislation largely favored private student loan lenders. Congress helped out in 2005 by making private student loans not dischargeable in bankruptcy. Prior to that, this protection had only been established for federal student loans, which are guaranteed by the government.
Government Program to the Rescue
The silver lining, which Sallie Mae repeatedly shared with investors over the past few months, was a government program in development, called TALF, which is estimated to reach up to $1 Trillion. Under TALF, Sallie Mae would sell its student loans to the government.
Although there was some initial discussion over whether student loans would still be included in the TALF program, it appears that they will be included and that they will get some pretty favorable treatment under the program.
Sallie Mae Background
Sallie Mae is the country’s largest student loan lender, servicer, and collector. Originally formed in 1972 as a government sponsored entity, Sallie Mae created a securitization market for student loans. The company abandoned its government sponsored entity status between 1997 and 2004. Despite its private lender status, executives at Sallie Mae can still boast that almost 80% of Sallie Mae’s loans have federal guaranties.
At recent investor conferences, Sallie Mae proudly pledged that it would provide a federal student loan to every eligible applicant. Such a goal does not seem that difficult since Sallie Mae is set up to receive unlimited funding from the Treasury and a guaranteed profit on federal lending as a result of legislation passed in 2008.
If Sallie Mae loses the ability to make federal loans, it will have to rethink its business model, since economy of scale has allowed it to profit from private loans in the past. If both origination AND servicing are no longer available, something will have to give.
