Taking The Politics Out Of Sallie Mae

Diversification has made the student loan king less vulnerable to ideological shifts

It's no secret which way investors in student loan titan Sallie Mae (SLM ) want the election to go. The company's stock often slips when Senator John F. Kerry, who pledges to overhaul student loan financing, gains momentum. It usually climbs as George W. Bush's star rises. So far this year, Sallie's price has edged up about $7, to $45, after doubling in Bush's first three years in office. "People are treating this as a political stock," says Friedman, Billings, Ramsey & Co. (FBR ) analyst Matthew J. Snowling. "It's a proxy for the election."

Politics have always played a major role in Sallie's fortunes, and that won't change after the long process of privatizing the company is finished in January. Washington created Sallie in 1972 to buy government-backed college loans from banks, a Fannie Mae (FNM ) for the campus set. More recently, it began making student loans itself. And as it has become more market-oriented, Sallie has ventured even farther afield of its original mission, offering credit cards to car-loan refinancing.

Albert L. Lord, chief executive of the Reston (Va.) lender, isn't fazed by all the politics. A Republican who has raised money for Bush, he contends that a Kerry victory would actually help Sallie. True, the Democrat wants to auction the right to issue federally backed student loans, which could drive down margins. Kerry also rails against what he calls lenders' "excess profits"; he's eager to bar them from pocketing interest beyond the current 3.4% guaranteed rate. But these changes, Lord says, "would frighten away a lot of our competitors."

Who wins may matter less now that the company is more diversified, Lord argues. The transformation started in 1997, when he mounted a proxy fight to take charge of the company. He began deploying Sallie's secret weapon -- the data it collects from student borrowers. Lord has signed deals with MBNA (KRB ), GEICO (BRK ), the Experian credit reporting agency, and others to pitch Sallie's 7 million borrowers everything from car insurance to Internet access. Including private, nonguaranteed student loans, the new businesses will account for 30% of revenue this year. "It has evolved much more successfully than I had expected," says Lord, a 59-year-old former Philadelphia banker.

Indeed, Sallie is becoming an extremely profitable financial player. Analyst Snowling figures that many of the new businesses boast huge profit margins, well north of 20% on debt collection, for instance. In 1997, Sallie earned $308 million on revenue of about $1 billion. This year, Snowling figures Sallie will earn $830 million on $2.26 billion in revenue.


Lord has made mistakes during Sallie's march to the private sector. He lost $20 million on a software firm and did business with dubious computer training schools. He also ran afoul of some members of Congress by withholding loan repayment information from most credit agencies. The move stymied competitors, but also hurt students trying to build credit records. Sallie officials are working on ways to report the information.

No matter how much its new business lines grow, Sallie will remain vulnerable to Beltway policy shifts. Its core business involves some $87 billion in government-guaranteed student loans. Far less -- just $11.6 billion -- of Sallie's assets are in private student loans, which are more lucrative because they carry higher interest rates.

Ultimately, Lord figures that Congress won't harm student borrowers, who depend on the likes of Sallie. To keep congressional critics at bay, Sallie's $770,000 political action committee has given more this year to Democrats dealing with education policy than to Republicans, though Lord expects the balance to tilt toward the GOP by Election Day. Either way, Lord hopes to be celebrating a Bush win.

By Joseph Weber in Chicago

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