Sallie Mae to Push Private Lending

 
Embattled student lender Sallie Mae reported yesterday it would expand in the private loan market, a sector that has grown in recent years along with the price of college tuition.

Sallie Mae, known formally as SLM Corp., reported its plans in filings with the U.S. Securities and Exchange Commission. Reston, Va.-based Sallie Mae also reported it recently garnered $3 billion from selling common and preferred shares.

Private loans make up about 17 percent of Sallie Mae’s $160 billion in loans. These loans are not backed by the federal government and are generally riskier and more profitable than the government-backed loans that make up the bulk of Sallie Mae’s portfolio.

“This move suggests that other private student loan vendors like JPMorgan Chase, Bank of America, and Citibank may move in this general direction as well,” said Dimitri Michaud, consumer finance analyst with Kaulkin Media. “Private student loans now make up 19 percent of the student loan market and it’s the fastest growing segment of the market. This trend should continue with the recent cut in subsidies for federally-backed loans.”

The College Cost Reduction and Access Act of 2007 (CCRA) cuts certain payments and fees to lenders over the next five years. Sallie Mae reported in its filing it expects the CCRA “will significantly reduce … (and) possibly eliminate the profitability of new (federally-backed) loan originations, while increasing our risk.”

Investors, including J.C. Flowers & Co., Chase and BofA, withdrew a $25 billion, or $60 a share, bid for Sallie Mae in September after the CCRA was passed ("Sallie Mae Says Buyers Will Not Close Deal," Sept. 27, 2007). Sallie Mae stock has plunged since then, closing at $19.65 yesterday.

For further analysis on Sallie Mae’s push into private student lending, please see: "Sallie Mae’s Shift in Focus," Jan 4).