Education Loans

Why Sallie Mae Is Splitting in Two


Sallie Mae headquarters in Reston, Va.

Photograph by Carol T. Powers/Bloomberg

Sallie Mae headquarters in Reston, Va.

Sallie Mae (SLM), the largest private student lender, is turning itself in two companies: a large legacy business and a small-but-growing new enterprise. The move is a response to the changing legal landscape that in recent years has rocked the student loan business.

Sallie Mae hasn’t yet given a name to the company that will house its old loans and services. For years, the government paid private companies such as Sallie Mae to lend to students, and it also guaranteed the loans to protect the lenders from losses. It was generally a good business to be in: From 2000 to 2009, the volume of these loans, known as the Federal Family Education Loan (FFEL) program, quadrupled from about $149 billion to about $630 billion, according (PDF) to the Congressional Budget Office. The new company will own $118.1 billion of these older FFEL loans; its bread and butter will be collecting payment on those debts from millions of students and graduates.

During the financial crisis, private lenders couldn’t raise money to issue new loans, leaving some students in the lurch and prompting the government to increase its lending directly to students. At the same time, lawmakers were questioning the wisdom of the government’s previous subsidy to private lenders that indulged in some less-than-savory business practices. In 2010, the U.S. government ended the guarantee program altogether and began exclusively making loans directly to students, offering lower rates and better borrower protections. Private lenders could still make loans, but they had do so without public support. That’s just what Sallie Mae Bank, one of the new companies, plans to do. Sallie Mae already makes private loans that focus on more creditworthy borrowers, such as those with parental co-signers. It also want to use its relationship with students to offer traditional banking products such as savings accounts. It hopes to boost its current $7.8 billion in bank deposits.

Both companies will initially be owned by existing shareholders; over time, they could attract varying investors. The legacy business, which will initially control about 95 percent of Sallie Mae’s current assets, has a steadier cash flow, which it expects will let it pay dividends to investors; Sallie Mae Bank will be riskier, but will have greater potential to grow. After all, student debt has passed $1 trillion and shows no sign of subsiding.

Weise_190
Weise is a reporter for Bloomberg Businessweek in New York. Follow her on Twitter @kyweise.

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Companies Mentioned

  • SLM
    (SLM Corp)
    • $8.47 USD
    • -0.09
    • -1.06%
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