Student loan originations have more than doubled nationwide, to $52 billion last year from $24 billion in 1994. Loans rose to 54 percent of all student aid in 2002-03, from 47 percent in 1992-93. As a private company, Sallie Mae has participated directly in that growth, rather than being limited to buying loans written by other lenders.
Last year it originated $12 billion in guaranteed student loans, 23 percent of the market.
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One-Stop Lending Shop SLM Corp., parent company of Sallie Mae, has branched out from its origins as a government-sponsored enterprise that bought and sold student loans. Now, Sallie Mae lends money directly to borrowers, collects bad debts and engages in a variety of related businesses.
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Metro Business: Coverage of Washington area businesses and the local economy.
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Money Machine
The original purpose of the Student Loan Marketing Association in the early 1970s was to provide liquidity to the government-guaranteed student loan market, in which banks were paid subsidies by the government to make loans to young people without credit records.
Sallie Mae, as the company was soon nicknamed, was meant to create a secondary market for the loans, like Fannie Mae and Freddie Mac provide for the home-mortgage market. As a government-sponsored enterprise (GSE), Sallie Mae could borrow at close to government rates and buy loans that were themselves guaranteed by the government -- a recipe for a money machine, which the company quickly became. At the same time, the company was owned by private stockholders, an arrangement that was supposed to bring private capital and free-enterprise incentives to the business.
There was for many years "a sense that privatization was the ultimate goal" at some point, Sallie Mae General Counsel Marianne M. Keler said in an interview last week. But it was only when the company "hit a crisis that we could really convince all of our constituencies, including the federal government, including our investors, our employees, etcetera, that parting company made sense."
The crisis had two parts. First, Congress in the mid-1990s levied a 0.3 percent fee -- Sallie Mae officials call it a tax -- on the company's borrowing. "That took away our borrowing advantage," Keler said.
Then President Bill Clinton denounced the company and other participants in the guaranteed-loan program as, essentially, part of the problem of high college costs. Clinton proposed and pushed through Congress the Direct Loan Program, under which the government itself would make student loans. Clinton's idea was to eliminate "middlemen" such as Sallie Mae, which he said were driving up the cost of college loans.
In 1997, Lord, who wanted to cut the company's ties with the government, won a proxy fight against a management that was content to continue with government support.
Lord had at his disposal a new development in the financial markets: debt "securitization."
Into the Loan Pool
In systems pioneered by Freddie Mac, lenders of various sorts were increasingly able to pool loans they owned and sell securities based on those pools. The effect was to enable the lender to recover a large portion of its loan, allowing it to make more loans while shifting some risks, particularly interest-rate changes, to the buyers of the securities.
