Sallie Mae's Deal Looks Pretty Sweet
Sallie Mae's deal with the federal government, which allows the company to provide subsidized student loans with better margins, has big implications for the student-loan market.
What does it mean for you, the student or parent? Not a whole lot, at least in the short term.
Sallie Mae, officially known as
SLM Corp.
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, is the largest student lender in the country by dollar amount. Though much of its loan origination is tied to the Federal Family Education Loan Program (FFELP), it had threatened to stop providing such subsidized loans, following the lead of dozens of other private lenders.
The mass exit ensued as the tight credit markets pushed the cost of lending so high that subsidized loans were no longer profitable, since lenders could not push off those costs to consumers.
Under new regulations, the government not only insures the loans and sets the subsidy rate, but also offers lenders the opportunity to re-sell the loans to the government to raise capital or use the loans as collateral for a below-market line of credit. All of those moves make it less expensive to borrow and lend, pushing profits into positive territory.
There were plenty of fears that students wouldn't get access to billions of dollars worth of subsidized loans for the fall semester, says Brett Lief, president of the National Council of Higher Education Loan Programs.
"Parents and students had that concern - they were anxious," says Lief. "They're starting to get their tuition bills right now and ... reading in the newspaper that the availability of student loans has diminished."
If the government hadn't come in with some kind of rescue plan, Lief says there would have been "severe restrictions" on student loans, comparing it to restrictions on water use during a drought.
However, Luke Swarthout, who oversees higher education at the U.S. Public Interest Research Group, says that wouldn't have occurred and attributes much of the anxiety to fearmongering by Sallie Mae, as well as a campaign by the lender for a rescue from its dire straits.
The government would never let the biggest subsidized lender exit the business without a bailout, he says. Students and their parents will still have the subsidized loans available and won't be paying higher rates. In fact, some will be paying lower rates because of another government initiative passed last year that increased subsidies for low-income families.
"The student loan market isn't like the mortgage market," Swarthout says. "There are lots of tools in the government arsenal to make sure students get loans this fall...politicians are aware of the political power of student lending and are loath to allow any kind of disruption."
Things have been undoubtedly tough for Sallie Mae, which has suffered losses, a failed buyout and other financial strains over the past year as the credit markets froze. It begged the government for aid, and some of its statements stoked public fears, resulting in a relatively favorable deal.
(Still, CEO Albert Lord called some of the terms of the deal "barely OK" in a teleconference with college administrators. The lender is dissatisfied that the government did not ensure that loans would be serviced by the same company that originated them. That could make the loan process more confusing for students and less profitable for Sallie Mae, which receives servicing fees.)
But students shouldn't worry too much about not getting access to subsidized education funding. Sallie Mae exiting the federally-backed student-loan business would be the equivalent of
Con Edison
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exiting the electricity business. If that happened, it's unlikely that no one would step in to turn on the lights.