Mark your calendars, SLM Corporation (NYSE: SLM), or Sallie Mae as you probably know it, is no longer a government-sponsored entity. Wayne Abernathy, an assistant secretary at the U.S. Treasury, signed the papers on Wednesday to make it official. The plan has been known for a while, but CEO Al Lord and his team pulled off the effort four years ahead of schedule.
But why would SLM want to be a completely private company and lose the advantages of access to extremely low-cost capital that its cousins Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) enjoy? Perhaps the benefit of access to that capital wasn't so great.
CEO Lord said it was time to "suck it up" and live with the reduced margins that will presumably come from having to pay higher rates for capital. OK, that seems admirable. But it doesn't make sense. You would make a move to reduce margins? I don't believe that for a second. He also talked about how "mission creep" was needed in order to create value for shareholders and spoke about increasing its fee-for-service segment, its collections segment, and going after more acquisitions. Is that what the student loan market really needs?
Under President Clinton, the government began charging SLM a 3% fee for the capital raised by the Treasury. Unfortunately, the plan to try to rein in SLM seems to have backfired and will likely make it an even stronger animal. Since that time, SLM's portfolio has shifted. Forty percent of its revenue comes from private loans, which are loans outside of the Federal Family Education Loan Program, and the aforementioned, other services. SLM can market private loans differently and charge higher rates because SLM accepts the underwriting risk and puts up the capital to do so. This is the business that SLM wants to be in because it has more control over its pricing and its cost structure.
As far as the other services, they bring even more money to the shareholders at the expense of borrowers. There have been many reported accounts of aggressive collection and fee assessment practices at SLM. In addition, SLM has been acquiring businesses with the student loan industry to solidify its position as the strongest in the field, something it could not do under its government-sponsored charter. With the trend moving to more private loans (look no further that the recent success of First Marblehead (NYSE: FMD), which provides outsourcing support to the private student loan industry), and lots of opportunities to generate additional income and make acquisitions, it makes good business sense to get out from under the current restrictions and go its own way.
But with the cost of education skyrocketing and the wealth gap widening, why should the less fortunate American public be charged higher fees to pursue higher education? This seems pretty perverse, especially when SLM was created for the same reason Fannie Mae and Freddie Mac were created: to make a market and keep interest rates low. I am sure that shareholders are going to be rewarded now that SLM will have even more power to wield. But it just seems like the priorities got turned around, creating a potentially devastating disincentive for those less fortunate to achieve the American dream of higher education.
Fool contributor David Meier does not own shares in any of the companies mentioned. He wishes all of you a happy and safe New Year.
Terms & Conditions
RSS Headlines
Fool UK