Around Washington they are sometimes referred to as the Government Girls: Fannie Mae, Ginnie Mae and Sallie Mae.
To the general public these sound-alike sisters are largely unknown. Fannie Mae--the Federal National Mortgage Association, which has been making a secondary market in government-insured housing since 1938, is occasionally confused with the Fannie May candy shops.
Few people can sort out the difference between Ginnie Mae--Government National Mortgage Association--and her cousin Freddie Mac--the Federal Home Loan Mortgage Corp.
And after a decade of marketing government-guaranteed student loans, Sallie Mae is still on mailing lists for feminine hygiene product samples.
But that mistaken image of Sallie Mae--the Student Loan Marketing Association--may fade in the not too distant future.
The company is planning to make its first public offering of nonvoting common stock within a year, says Edward A. Fox, its president and chief executive officer.
Until now, only financial and educational institutions that participate in Sallie Mae's student loan programs have been eligible to buy common stock. The stock, originally issued at $25, is now worth $40 a share.
Last week, Sallie Mae made its first public sale of preferred stock, raising $250 million by selling 5 million shares of $50 variable dividend preferred. Dividends on the shares are pegged to U.S. Treasury interest rates and will pay an initial rate of 9 percent per year.
Sallie Mae's financial results for the past year are impressive: 45 percent growth in assets to $7.5 billion, net income up 109 percent to $37.8 million, dividends increased by 40 percent to $2.13 per share, and a 45 percent return on average equity. Although Fox has more modest expectations for 1983, the company is riding on a reputation of five years of spectacular growth, starting with $500 million in assets in 1977.
Like Fannie--but unlike Ginnie, which is a government agency--Sallie is a government-chartered, profit-making, stockholder-owned private corporation. It was created by Congress in 1972 to provide a national secondary market to buy student loans made by banks, universities and state agencies under the federally sponsored Guaranteed Student Loan Program. In the past 17 years, the GSLP has provided more than $35 billion in loans to students, approximately $6 billion of that last year alone.
Now about $25 billion, the student loan market is expected to reach $40 billion in three years because of the skyrocketing costs of higher education. Sallie Mae is the country's largest single source of student credit, equal to about 30 percent of the total amount outstanding of student loans, commitments and advances for loans.
The secondary market for student loans is a recycling process that begins when Sallie Mae borrows funds from investors or, in the past, the Federal Financing Bank. These dollars are lent by Sallie Mae to banks, savings and loans, credit unions, state financing authorities, colleges and universities, which in turn make loans to students.
The lenders then turn around, and, after some time, sell these GSLP loans (as well as government-guaranteed loans they have made with funds from other sources) back to Sallie Mae. The company continues to collect these loans from students until they are paid off.
Profits are built into the process. Sallie Mae has a $5 billion, 15-year loan maturing in 1996 from the Federal Financing Bank, the Treasury's bank for agencies' whose obligations are guaranteed. The loan carries a variable rate, as a fraction of a percentage point above the quarterly average on 91-day Treasury bill, currently 8.35 percent. In addition to FFB funds, Sallie Mae also borrows in the open market. (Since 1981 it has raised $2 billion.) Fox said borrowing costs currently range about 30 to 35 basis points over the Treasury bill rate, or about 8.6 percent. (A basis point is one one-hundredth of a percentage point.)
Sallie Mae then lends money to institutions at between 1 and 1.75 percentage points over the T-bill rate, so it has a spread of about 70 to 140 basis points--0.7 to 1.4 percentage points.
The lenders then add on their spread and re-lend the Sallie Mae money to students at the T-bill rate plus 3 1/2 percent, currently 11 3/4 percent. That gives them a spread of 175 to 250 basis points, building in a nice profit for the lenders. The institutions collect interest on the loans for a while, but then usually re-sell them to Sallie Mae rather than bother with trying to collect when the student should begin to repay.
If the student defaults--and defaults on student loans now total more than $1 billion--the government pays off the lenders.
So the institutions, including Sallie Mae, operate in a virtually risk-free environment, with their borrowing costs subsidized by the treasury, profit margins guaranteed and loan losses insured by the government.
Fannie Mae got into serious trouble when the yields on the fixed-rate mortgages it bought were not sufficient to cover its rapidly rising cost of funds when interest rates were hopping a few years ago.
Sallie Mae never has to worry about getting what financiers call "a mismatched portfolio" because its variable lending rate and many of its variable borrowing rates run in tandem.
Critics claim this arrangement unduly enriches the banks and Sallie Mae at the expense of the taxpayer. When Joseph Califano was secretary of Health, Education and Welfare, he rapped Sallie Mae for not achieving its goals of encouraging private lenders to stay in the student loan market.
The Califano-Sallie Mae confrontation pales in comparison to the Patricia Harris-Fannie Mae fracas in which the HUD secretary tried to reassert control over the secondary housing market maker. Under Fox, Sallie Mae has sought to avoid the activist political role that Fannie Mae has pursued on housing issues, and as a result, its relations with Congress and the Department of Education have been smoother.
Under the Carter administration, the student loan program was expanded to allow large numbers of middle-income students to get federally guaranteed loans, and Sallie Mae grew exponentially.
So did its profits and its employes' compensation and perquisites, critics charge, who said private gains were put ahead of public goals. Profits were retained instead of being used, for example, to set up scholarship funds or to buy riskier and cheaper loans. (Due to high fixed-collection costs, Sallie Mae prefers to buy longer-term, larger loans over smaller shorter-term loans.) Directors' meetings were held in resorts like Palm Springs and Puerto Rico. Educators and others connected with Sallie Mae voiced concern over this conflict in philosophy and one company official resigned.
Fox makes no apology for profits. "Since day one we have run this corporation as a business; we're not educators and don't pretend to be," Fox said in an interview. "We know there are people out there primarily interested in education who have no notion of what the banking business is. Somebody once suggested at a congressional hearing that people would be willing to put money into Sallie Mae stocks and bonds at a lower return to themselves or buy even if we were losing money, because they would know in their gut we were doing something good. That is the most naive, simplistic pap I have heard in my life.
"I'm competing with some of the largest, most highly successful capitalized companies in the country to obtain capital. I've got to get it where I can. Only if our balance sheets and profits stand that scrutiny will sophisticated portfolio managers invest their money in this program," Fox continued, recalling the days when student loans were considered pariahs. "And only if I get that money can I turn around and do what has to be done in support of social programs."
Fox maintains that despite Sallie Mae's glowing year-end results, it is seriously undercapitalized. It has a debt ratio of 70-1, compared with about 25-1 for its closest competitor in the secondary student loan market, Citicorp. Sallie Mae has assets of $7.5 billion and stockholder equity of $103 million.
He asserted it was a mistake to assume that banks were getting rich off student loans, contending that consumer loans now paying 16 to 18 percent are actually more profitable.
As for salaries and perks, Fox responded, "How can you compete for the best people with Chase Manhattan and the Bank of America by telling them it's public service and paying them at a GS-12 level ($29,000-$38,000 a year)?" As for his own salary, which is in the low six figures, Fox said he could be earning three times that amount at a major bank. And as for his "fancy" office in "trendy" Georgetown, it costs $14 a square foot, about half what he would pay downtown.
Other critics of Sallie Mae--and they do not seem numerous--voice "ambivalence" over the potential for abuse of new powers the company was granted by Congress in 1981. Congress authorized the company to deal in student loan revenue bonds issued by states, to deal in non-insured loans and to undertake "other activities deemed necessary by the board to support the needs of students generally."
So far, Sallie Mae has not exercised any of the new powers. Fox conceded the acquisition of a bank might be one option in its move towards total privatization.
In the same year that Sallie Mae's net income increased by 109 percent, the amount it made available for student loans decreased by 20 percent to $2 billion from $2.5 billion the previous year. The demand for loans declined due to the recession and, Fox said, confusion over the government's plan to cut back loans. Total volume of guaranteed student loans dropped to $6.1 billion last year from $7.8 billion in 1981, according to the Department of Education.
Fox believes funding will continue on that level for several years. He does not think proposals like the "independent education accounts," which would allow families to make tax-deductible contributions to individual savings plans, would affect the need for Sallie Mae's credit because the amounts involved are small in comparison to the cost of a college education, now above $13,000 a year at some private colleges.
In addition to its headquarters on Thomas Jefferson Street NW in Georgetown, Sallie Mae runs a repayment center in Fairfax. The rest of its loan collection is contracted out to agents around the country. The company has over 500 employes in the area. Its chairman is Edward A. McCabe.
Fox, whom even his critics characterize as "a brilliant administrator" and "one of the cleverest financial wizards in Washington," has run Sallie Mae since its inception. He has an MBA in finance from New York University and served with the Federal Home Loan Bank Board and the Treasury before being chosen from among 70 candidates to take over Sallie Mae.
Fox was never a recipient of a government guaranteed student loan. The 46-year-old graduated from college one year before the programs went into effect. Ironically, the year before the first of his three children would have been eligible, the government placed an earnings cap on student loans. "They managed to go 25 years, missing me by one year on either side," mused Fox who put himself through school the old-fashioned way: washing dishes and tending bar.