Sallie Mae sale may yield better deals for students
Borrowers could see private loan rates fall and improved service
The proposed $25 billion sale of student lending giant Sallie Mae yesterday to a group including two private-equity firms, Bank of America Corp. and JPMorgan Chase & Co., caps a period of upheaval in the $85 billion college-loan market.
Formally known as SLM Corp., of Reston, Va., Sallie Mae of Reston, Va., is the largest of a group of companies that offers student loans and packages them into securities that are traded on Wall Street. Set up in 1972 as an arm of the federal government, Sallie Mae transformed itself into a publicly traded company in 2004 and now owns or manages nearly 10 million student loans.
But Sallie Mae's shares had fallen this year as it faced growing competition, a settlement with the New York attorney general over its practices, and a proposed reduction of the federal subsidies that threatens its core business model. Here's how the deal and the turmoil in the college-loan business could affect your student loan.
Q. If I am applying for a college loan now, will this deal affect me? Should I do anything different?
A. The deal won't lead to major changes this year, partly since it wouldn't get approvals from shareholders and regulators before the end of 2007 at the earliest and because many students have already received financial-aid and loan packages from colleges they plan to attend in the fall.
Q. Will this have an impact on Stafford Loans and other products Sallie Mae manages?
A. Few people expect much change for Sallie Mae's traditional products like Stafford Loans. The terms of these loans are set by the government, which also insures them for lenders if the borrower defaults.
But these loans made up just 40 percent of Sallie Mae's revenue of $3.6 billion last year, partly since their limits -- around $4,000 a year -- mean they can cover just a small fraction of modern college costs that can run to $30,000 or more a year.
Q. Could this deal lead to lower interest rates on student loans in the long term?
A. Yes, lower rates could come in the new area known as "private loans" that aren't government-insured and are based on factors like a family's credit worthiness. Competition in this space has ballooned in recent years; one website, SimpleTuition.com of Newton, lists more than 30 companies pitching terms for student loans.
A vice president for the firm, David Cumberbatch, said one reason is that the decline in housing prices makes less home equity available for parents to tap to pay for college.
Q. What do the experts think?
A. Michael Dannenberg, who runs a student-loan industry watchdog group for the New America Foundation in Washington, said it remains to be seen whether the deal will improve the lending terms for the average student and worries that as a privately held company Sallie Mae would be exempt from disclosure requirements.
But James Boyle, a former Sallie Mae executive who now runs College Parents of America, an aid counseling group, said the deal could help Sallie Mae improve its customer service by taking away the worries of supporting a share price on Wall Street.
Keeping many customers happy is more important in the industry than making high-priced loans, he said. "The way to profits is volume in the student loan industry," Boyle said.
Q. Isn't Sallie Mae in trouble with regulators?
A. College lenders in general are on the defensive as regulators scrutinize their close ties to the university officials who often provide extra access to student customers.
Yesterday, a spokesman for New York Attorney General Andrew M. Cuomo said he had requested or demanded information from 13 banks and financial institutions.
Also, on April 11 Cuomo unveiled a settlement with Sallie Mae under which it agreed to pay $2 million, to stop paying financial aid officers for appearing on its advisory boards or for trips, and to stop running call centers on behalf of schools. The company did not admit wrongdoing.
Q. Will this hurt Sallie Mae and have a negative impact on my student loan?
A. For Sallie Mae, the biggest worry now is that the attention from regulators will fuel support for a severe reduction in the subsidies that it and other lenders receive from Washington.
Traditionally aligned with Republicans, the lenders are on the hot seat in the current budget season after President Bush proposed cuts that would save taxpayers more than $15 billion over 5 years, according to budget estimates provided by the office of Senator Edward M. Kennedy.
In a statement on the deal yesterday, Kennedy said, "Clearly banks and investors see student loans as a very profitable business.
It's more urgent than ever to enact reforms to our student loan system to ensure that students, not profits, are the top priority."
Q. What does this deal mean for Sallie Mae's 750 employees in Massachusetts?
A. A Sallie Mae spokesman, Tom Joyce, said the company has "no plans at all to change the employee count" in the wake of the deal, and that Sallie Mae chief executive Tim Fitzpatrick will remain in place.
In Massachusetts, Sallie Mae has about 500 employees at two loan units it acquired, Nellie Mae in Braintree and Academic Management Services in Swansea. Sallie Mae also bought closely held Upromise of Needham last year for undisclosed terms, adding 250 employees.
Ross Kerber can be reached at kerber@globe.com. 