This week Sallie Mae announced that they are splitting into two separate companies. One company will handle the federal student loan assets; the other will deal with their private loans and function as a bank. Two immediate questions about this news come to mind, why would Sallie Mae do this and what does it mean for the average borrower?
Why the split?
According to the CEO who will be overseeing the federal student loan assets company, “We see ourselves as having two distinct businesses… These entities can better succeed as distinct and separate entities.” Translating this statement from CEO-speak into basic English, Sallie Mae thinks they will be more profitable as two corporations instead of just one.
Articles about the split in the New York Times and the Wall Street Journal do not shed any light into the fiscal benefits of the move. Based on the limited amount of public information about this transaction, we can only speculate about the reasoning behind the move.
Speculation #1: Different Regulations
One possible reason would be based upon regulations. With one company working as a federal student loan lender and the other as a bank, they will fall under different rules and be supervised by different federal regulators. It will be very interesting to see if and how these differences manifest themselves.
Speculation #2: The Firewall
With these two companies functioning as entirely separate corporations, the losses of one will not have any bearing on the other. This means that if one company goes bankrupt, their creditors cannot go after the assets of the remaining company. Sallie Mae could be reading the tealeaves, seeing a student loan default epidemic on the horizon, and protecting the good assets from the bad. Again, this is just speculation, and at this point there is no indication that any of these assets are good or bad. However, if this is the basis, it could be a sign of trouble around the corner.
Speculation #3: Making the numbers look more impressive
In 2010, the federal government began eliminating the middle man when it comes to federal student loans. Prior to that time, federal loans would be given out by companies like Sallie Mae and guaranteed by the federal government (meaning if the student didn’t pay Sallie Mae, the government would). In 2010, the government decided to eliminate the middle man and just give the money directly to students. This move was not popular with lenders like Sallie Mae, but it still went into effect. Sallie Mae currently holds over $100 billion of these federal loan that are no longer being created. It’s a valuable asset, but they will not be getting any more.
On the other hand, the price of college continues to grow and the federal undergraduate loan limits remain the same. The demand for private loans continues to grow as a result. The private student loan lending branch of Sallie Mae, which will be part of the second company, the bank, will be a growing asset. Currently they do not have nearly as many private loans as they do federal loans. As the number of these private loans grow, the numbers will look much more impressive if they are not weighed down by the stagnant federal loans.
What does this mean for the average borrower?
Initially, it does not mean anything. The split is not scheduled to take place for 12 months. However, once these companies split, things will change for people who have both federal and private loans with Sallie Mae. Instead of paying just one company, and dealing with that company’s phone support, they will now have twice the hassle. Sallie Mae has said nothing about this split improving customer service. At best, it will remain the same quality that we have all struggled to deal with. In reality, things could get worse.
Another possible outcome for the average borrower is closely related to speculation number one. If the same rules do not apply to both companies, borrower’s rights could be affected, and in this case, limited. Again, Sallie Mae is becoming two companies in order to make more money, not less. For Sallie Mae to make more money, they must collect more from you the borrower. The exact way that this split will allow Sallie Mae to get more money remains a mystery. Until then, we are left to speculate.
Why do you think this split is happening and how do you think it will affect you? Leave your answers in the comments section.