The Student Loan Marketing Association (Sallie Mae), the company chartered by Congress to finance education loans, yesterday began a new program of lending money to banks to make home equity and personal loans.
Unlike other Sallie Mae programs, which channel funds directly to student loans, the new program will not require the Sallie Mae money be used for education loans. Instead, it is meant to provide cash for home equity and personal loans on the assumption that many such loans are used for education.
The first use of the Sallie Mae program will be a $500 million loan to Chase Manhattan Corp. of New York. Chase is one of the nation's largest educational lenders, originating between $400 million and $500 million in guaranteed student loans last year, according to a company spokesman.
Sallie Mae said it is launching the program because of "growing consumer demand" for home equity and education financing.
Sallie Mae, the largest single source of funds for education, already serves as a wholesale source of federally insured student loans, financing one-third of all student loans. It also purchases student loans from banks, schools and other lenders.
The stockholder-owned corporation provided $4.3 billion for educational loans in 1986, according to spokesman Ross Kleinman.
Unlike guaranteed student loans, home equity loans made with Sallie Mae funds will not be federally insured. The guaranteed student loans carry lower interest rates than those commercially available to consumers, with repayment deferred until after the student graduates.
Chase Vice President Anton Nissen said the rate paid by the bank on the loan will be tied to six-month Treasury bills and the six-month London Inter-Bank Offered Rate. "This is clearly less expensive than raising money on the open market," Nissen said. Chase officials said the Sallie Mae program probably won't mean lower rates for borrowers.
The loan will be secured with first mortgages written by Chase, Nissen said.
"Basically we're still providing funding for student loans," Kleinman said. "We're in no way getting into the mortgage lending business."
Chase gets the money up front and has seven years to make the loans. Nissen estimates that goal will be reached in three years. "It frees up lots of funds that can be used for other things," he said.
The amount of the Chase loan was calculated as the proportion of home equity debt that historically has been used to finance postsecondary education, according to Kleinman.
Sallie Mae will not require any documentation of educational use for loans made with the $500 million. "We have no enforcement responsibility at all," Nissen said.
Richard T. Jerue, vice president of the American Association of State Colleges and Universities, said he was concerned that the loan to Chase would drain funds that might otherwise be used for direct student loans and would not make educational financing available in an equitable way.
"First, you have to have a home to get it," Jerue said. "There are a lot of students and families out there that don't have a home to put up for equity." The loan to Chase will probably help many who need supplemental financing for their children's higher education -- mainly "middle-age, middle-income homeowners," he said.
Hal F. Higginbotham, executive director of the College Scholarship Service, part of the College Board, said the Chase loan heralds a new product line for Sallie Mae. He said the loan is a natural extension of a recent trend toward increased borrowing on home equity, which the College Board calculates accounts for 80 percent of families' net worth.
In a separate announcement, Sallie Mae reported second-quarter net income of $44.6 million ($1.01 a share), up 24 percent from the same quarter in 1986.
The company had $20.7 billion in total assets as of June 30, up 25 percent from one year earlier. Second-quarter results brought Sallie Mae's net income for the six months ending June 30 to $87.1 million ($1.96) compared to $70.5 million ($1.45) for the same period of 1986.