Commentary: Why Sallie Mae Doesn't Need A Makeover

Even if you think you've never heard of it, the Student Loan Marketing Assn.--better known as Sallie Mae--probably helped put you through college. Created by Congress to provide liquidity to the student-loan market, the Washington-based company buys nearly half of all student loans made by banks. While Sallie's ties to Uncle Sam help keep borrowing costs low, it nonetheless wants to trade in its government charter for the flexibility that comes with being a wholly private company.

But Sallie Mae's push for privatization has stirred up a food fight that would be the envy of any campus dining hall. While Sallie's CEO, Lawrence A. Hough, wants largely to provide more financing and back-office services to colleges, a vocal band of dissidents is pushing a more radical agenda: Sallie Mae should compete head-on with banks in making student loans, a move they claim would sharply boost profits. The dissidents are offering their own privatization plan--and slate of directors--in hopes of wresting control of Sallie's board at shareholder meetings in May.

Albert L. Lord, the former chief operating officer who leads the dissidents, argues that as a secondary market maker, Sallie Mae is foolishly ceding 25% to 40% of the income stream from each loan to banks. After cutting checks to students, he notes, banks later flip the loans to Sallie Mae--which earns its share the hard way, by collecting payments for years to come.

Lord contends that with $46 billion in assets supported by state-of-the-art servicing centers, the company could underprice most banks. Sallie Mae "is giving up way too much margin to bankers," he says. "Why go private if you don't want to originate loans?"

The reason: Sallie Mae has little, if any, name recognition with students, and building a consumer brand name would be prohibitively expensive. More serious is the age-tested maxim that companies cannot serve two masters. For all its clout, even Intel Corp. scaled back its PC manufacturing after customers such as Compaq Computer Corp. threatened to throw more business to rival chipmakers. And PepsiCo Inc.'s plans to spin off its restaurant division later this year is an admission that its fast-food foray hurt its soft-drink sales. "On paper, the moves look promising. But the fact is, you can't compete with your customers," notes University of Louisville professor Jeffrey Bracker.

If Sallie tried to originate and make a secondary market in student loans, banks would desert it in droves--selling their loans to other secondary lenders, securitizing them, or simply holding them. "If you're going to compete with me, how can you call yourself a partner?" asks a senior exec of a large bank. "There would be an exodus of banks from Sallie Mae."

Lord's strategy may sound sexier, but Hough's is more sensible: By partnering with the likes of Chase Manhattan Corp. and Citibank, Sallie Mae benefits from their hefty advertising budgets. And Sallie Mae has boosted its share of loans not made by the government to 42%, from 39% since 1994. Why? Because banks have the comfort of knowing that Sallie Mae is a supporting player--not a protagonist.

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