Sallie Mae to split into two companies

Carol T. Powers/Bloomberg News - A sign for SLM Corp., also known as Sallie Mae, hangs outside company headquarters in Reston, Va. The nation’s largest student loan provider said Wednesday it plans to split into two publicly traded companies.

By Danielle Douglas,

Danielle Douglas May 30, 2013 01:05 AM EDT
The Washington Post
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Sallie Mae, the nation’s largest student loan provider, said Wednesday that it plans to split into two publicly traded companies — one servicing government-backed loans and the other making private loans.
The restructuring follows a period of turmoil in education finance sparked by the overhaul of the federal student loan program in 2010. Prominent players in the industry, including Sallie Mae, suffered when Congress eliminated a $60 billion program to support private student loans with federal subsidies. The government captured a majority of the market by choosing to lend directly to students, leaving a limited role for private lenders.

Since then, Sallie Mae has focused on making private loans to students through its consumer bank, which was founded in 2005 to give the firm more flexibility to fund loans. Sallie Mae now originates 51 percent of all private student loans, according to its own estimates.
“We see ourselves as having two distinct businesses,” said John Remondi, Sallie Mae’s chief operating officer, who has been named to succeed the retiring Albert Lord as chief executive. “These entities can better succeed as distinct and separate entities.”
Under the separation plan, the bank will house $9.9 billion in assets made up of private education loans and related origination and servicing systems. Joseph DePaulo, executive vice president of banking and finance, will lead the bank. Sallie Mae wants to build out the operation to including savings accounts and other types of consumer loans.
The legacy business will hold about 95 percent of Sallie Mae’s existing assets, including about $118.1 billion in federally guaranteed loans, $31.6 billion in private education loans and a loan servicing business with about 10 million customer accounts. The portfolio of federally backed loans continues to generate cash flow and income.
Shareholders will initially own both companies. The split, which Sallie Mae anticipates could take 12 months, is subject to board and regulatory approval.
Sallie Mae has toyed with the idea of breaking up or creating a bank holding company since the end of the Federal Family Education Loans Program. The firm has struggled to get an appropriate valuation for the combined entity because the FFELP portfolio overshadowed the growth in private lending, said Sanjay Sakhrani, an analyst at Keefe Bruyette & Woods.
“Breaking [the company] apart allows investors to appropriately value the growth piece of the business and then ascribe a valuation to the legacy business, which probably won’t grow as fast anymore,” Sakhrani said.
Shares of the company rose 2.2 percent Wednesday, to $23.48 a share.
Private student loans, which account for $150 billion of the $1 trillion in outstanding student loan debt, have come under increased scrutiny. They generally carry higher interest rates and fewer protections than federal loans, and borrowers are rarely afforded wiggle room when they can’t afford minimum payments.
This month, the Consumer Financial Protection Bureau issued a series of proposals to create more flexible repayment plans. There also is a growing movement on Capitol Hill to allow borrowers to discharge student loan debt in bankruptcy.
Remondi said that Sallie Mae is watching the moves being made in Washington but that he is not too worried about the impact of the regulatory environment on the company.
　
　
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