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WIKI ANALYSIS
SLM Corporation (SLM), commonly known as "Sallie Mae," is the largest education finance company in the U.S., with total managed loans of $156 billion as of September 30, 2007. SLM originates, purchases, and manages higher education student loans principally through its participation in the Department of Education's (DOE) Federal Family Education Loan Program (FFELP). These loans were earlier guaranteed by the U.S. government, as SLM had received the DOE s "Exceptional Performance" designation since 2004 (the guarantee fell from 100% for claims filed after July 1, 2006). It is however, worth noting that all provisions relating to Exceptional Performer status, and the monetary benefits associated with it have been eliminated effective October 1, 2007, per new legislation.
In addition to FFELP loans, SLM originates and purchases private education loans (PELs), whereby SLM assumes the credit risk. SLM's other businesses include guarantor administrative services and default management / collection services for large federal agencies, credit card clients, and other holders of consumer debt. Following its recent acquisition of Upromise, SLM is also the largest administrator of direct-to-consumer 529 college savings plans.
Operations are funded with asset-backed securities (accounting for about three-fourths of funding needs) and SLM debt securities. In 2005, SLM obtained an industrial bank charter, which over time may allow SLM to fund a significant portion of its assets with deposits. SLM's status as a government-sponsored enterprise (GSE) was terminated with the completion of its privatization process in late 2004 (refinancing $100 billion of GSE debt since 1997). Managed-basis net interest income accounted for 69% of core cash net revenue in 2006, with debt management and other revenues accounting for the balance.
Legislative Developments
On September 27, 2007, the President signed into law the College Cost Reduction and Access Act of 2007 (the "Act"). This legislation contains provisions with significant implications for participants in the Federal Family Education Loan Program ("FFEL Program or "FFELP") by cutting funding to the FFEL Program by $20 billion over the next five years as estimated by the Congressional Budget Office. Among other things, the Act:
Reduces special allowance payments to for-profit lenders and not-for-profit lenders by 0.55 percentage points and 0.40 percentage points, respectively, for both Stafford and Consolidation Loans disbursed on or after October 1, 2007
Reduces special allowance payments to for-profit lenders and not-for-profit lenders by 0.85 percentage points and 0.70 percentage points, respectively, for PLUS loans disbursed on or after October 1, 2007
Increases origination fees paid by lenders on all FFELP loan types, from 0.5 percent to 1.0 percent, for all loans first disbursed on or after October 1, 2007
Eliminates all provisions relating to Exceptional Performer status, and the monetary benefit associated with it, effective October 1, 2007 and
For loans disbursed on or after October 1, 2012, reduces default insurance to 95 percent of the unpaid principal of such loans
On June 20, 2007, the Senate Education Committee approved a bill that would slash lenders' subsidies by $18.3 billion over the next five years, and subsequently on July 11, 2007, the U.S. House of Representatives voted to cut $19 billion in federal subsidies to student lenders, increase the value of Pell Grants and cut interest rates on Stafford and other federally subsidized student loans in half from 6.8% to 3.4% over the next five years.
On July 11, 2007, the House of Representatives passed the College Cost Reduction Act and on July 19, 2007, the Senate passed Higher Education Access Act. Some of the provisions in these Acts would reduce the subsidy to the student lenders (50 55 bps), increase origination fees (50 100 bps), and reduce government guarantee from FFELP loans.
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