Shut out of its main business, the company targets private loans
The student loan company SLM (SLM), better known as Sallie Mae, has taken a thrashing in recent years. In 2007, Sallie Mae's stock fell from $58 to $19.65 a share in the wake of a failed buyout attempt led by private equity firm J.C. Flowers. Shares sank as low as $3.19 in March 2009 amid the financial crisis, which froze the debt markets it relies on for funding. Last year, Congress passed legislation that knocked private lenders out of the business of making government-backed student loans, which had accounted for 80 percent of Sallie Mae's lending.
Such blows would seem to add up to a dreary outlook for Sallie Mae and its chief executive officer and vice-chairman, Albert L. Lord. Yet investors are wagering the company will prosper on a combination of old loans and private lending. Sallie Mae's shares have jumped 29 percent in 2011, closing at $16.22 on May 16, compared with a 5.7 percent gain for the Standard & Poor's 500-stock index. On Apr. 21 the company raised its earnings estimates for the year and declared its first dividend since 2007.
Created in 1972 as a government-sponsored enterprise, Sallie Mae was fully privatized in 2004 and, until recently, made most of its money by issuing government-backed student loans. Competing with banks and other lenders, it dominated the market: In 2009 it accounted for more than one-third of the loans made through the Federal Family Education Loan Program. Under a law that took effect in March 2010, the government has stopped making loans through private companies and now issues them directly to students.
Sallie Mae still has $146 billion of federal college loans on its books. The cash it gets from those will keep the lights on while it seeks to make headway in the private student loan market, according to analyst Michael Taiano of Sandler O'Neill & Partners. "They have this cash cow, which is the legacy portfolio," Taiano says. "The market was not appreciating the underlying cash generation of that portfolio." The loans will throw off about $14 billion in pretax cash over the next 20 years, estimates analyst Brian Charles of R.W. Pressprich in New York.
After a surge in late payments, the company tightened credit standards and stopped lending to nontraditional students such as those who attend for-profit and vocational colleges. As a result, its volume of private loans fell to $2 billion in the school year starting in 2009, from $8 billion during the 2007 year.
Now Sallie Mae is poised to increase private lending, says Charles. It has started a program that allows students to make payments while still in school, shortening the life of the loan and reducing interest costs. On May 16 the lender lowered interest rates as much as one percentage point for the upcoming academic year. Sallie Mae originated $940 million in private student loans during the first quarter of this year, up 12 percent from last year's first quarter. Tuition increases mean students have to borrow more, and they haven't stopped the pool of potential Sallie Mae customers from growing. The company says that in the first quarter of this year, applications were up 8 percent over last year's first quarter.
The bottom line: Supported by cash from its $146 billion government loan portfolio, Sallie Mae aims to build its private student lending business.