Yesterday, in a move that didn't make a lot of news, Sallie Mae
Ask a family that is saving up to fund little Johnny's college tuition what Upromise does and you'll get a fairly simple answer. Upromise allows them to save a little bit here and there on everyday purchases of products from companies like ExxonMobil
But there is a bit more to it than that. Most students, despite plenty of effort saving, will need extra funds for college and will ultimately end up taking out student loans. If you look at the long-term spending in that area, tuition keeps going up, and the loans the government makes haven't been keeping pace. In fact, the government is cutting back on Federal student loans, which is where Sallie Mae makes its bread and butter.
Students still need loans to cover their costs, so banks have stepped in to fill the void by providing private student loans. Many banks turn to companies such as Student Loan
The value of Upromise to Sallie Mae lies not just in the new revenue streams and products that Upromise already offers, but in the potential to service Upromise customers with student loans through Sallie Mae's existing business -- and to keep those same customers away from First Marblehead and Student Loan.
This is important, because in February of this year, First Marblehead announced that it had added Upromise to its client ranks and had signed a three-year deal to provide a direct-to-consumer private loan product to Upromise customers. I have no reason to assume that this arrangement will come to end because of the acquisition, but I fully expect Sallie Mae to keep its thumb on the relationship between Upromise and First Marblehead in order maximize the value of its acquisition. Upromise customers may also end up as First Marblehead customers in the future, but once these three years are up, it doesn't seem likely that it will be because of any relationship between First Marblehead and Upromise.
For First Marblehead shareholders, such as myself, this is a mild negative; Upromise was an obvious avenue to mine for customers and future growth that will now be limited. First Marblehead still has relationships with banks and other institutions that it can build out, and it is still operating in an industry that should see strong growth for years to come. In short, there's not much reason to be down on First Marblehead's prospects, but I am going to give credit where credit is due. Nice move, Sallie Mae.
Nathan Parmelee owns shares in First Marblehead, and he also grew up in the town the company is named after. He has no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy .