Sallie Mae Doubles Down on Private Student Loans

Michael Teague  |

Sallie Mae is taking sides by spinning off a separate entity devoted entirely to private loans which are currently the subject of greater scrutiny with efforts in Washington D.C. to get rates down.

With interest rates for student loans set to automatically double to 6.8 percent on the 1st of July, the Obama administration has been using its bully-pulpit to push a plan that would for the second year in a row freeze rates on federally subsidized Stafford loans at 3.4 percent.

At the White House on Friday president Obama cautioned that higher education is not the privilege of the few. Stafford loans are designed to help lower-income students pay for college, but a bill the House of Representatives that was approved in late May would reset rates for the loans, tethering them to yields on the 10-year Treasury note.

The Obama administration opposes the deal by a 221-198 vote in the House on May 23rd, based on concern that it does not provide low enough rates for students. Instead, the White House has been pushing for a plan that would guarantee a low interest rate for the entire lifetime of the loan.

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The student loan debate is almost certain to become the latest serious national issue to be left to the mercy of partisan politics in the U.S. But the country’s largest education-financing company Sallie Mae (SLM) placed its wager on the increasingly controversial private loan industry, when it announced last Thursday that it would be splitting in to two companies; one to continue its work in federally subsidized loans, and a new entity that would be devoted entirely to offering private loans.

Aside from mortgage loans, student debt in the U.S. is the nation’s second largest category of debt, of which private loans currently make up about 15 percent of the total. Private loans have become an increasingly popular option to for students across the nation seeking help with rising tuition costs across, as they often provide more money than would be available from a government loan.

Much like what occurred in the recent subprime mortgage crisis, however, many students are simply unable to pay the incredibly high interest rates, upwards of ten percent in many cases, that are attached to private loans.

The $10.55 billion market cap Sallie Mae has a $118 billion dollar portfolio of federal loans it made before the government blocked private companies from the federally subsidized student loan business. But the company plans to make $4 billion in private loans for the full year of 2013, giving it just over half of the industry’s market share.

The doubling-down on the private loan industry may be a smart business move from the standpoint of profiting from a seemingly ever expanding market.  At the same time, the spin-off puts Sallie Mae squarely at odds with the White House’s efforts to deal with the problem, even while it continues to service federally subsidized student loans.

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