Back in 2010, the government made a significant and lasting change to its Federal Family Education Loan Program, or FFELP. The program traces its roots back to at least 1965 and the change officially ended the origination of student loans by outside third parties. SLM Corporation, also known as Sallie Mae, was one of the largest originators in the student loan market. Today, it still influences the private education loan market and spun out its FFELP capabilities into a new company. Below is an overview of both of those services.
Sallie Mae Today
SLM Corporation (SLM), as it is officially called in its incorporation charter, is better known as Sallie Mae. The firm dates back more than four decades and to the early stages of the FFELP program. In fact, from its founding in 1972 until 2004, it was a federally chartered government sponsored enterprise (GSE), which meant very close ties to the government. The termination of the charter and governmental changes in 2010 forced Sallie Mae to shift its business to private education loans. These are referred to as non-federal loans that are not insured or guaranteed by the FFELP.
Sallie Mae offers a three-pronged approach to college students these days. First, it helps them to explore using scholarships and existing savings to fund education costs. It then helps them investigate government-backed loans, even though it doesn't help originate them. Finally, it then helps them bridge any remaining needs with the private education loans it offers. Currently, Sallie Mae estimates it services around 13 million customers.
Meet Navient Corporation
Because the government ended the FFELP origination program, Sallie Mae correctly concluded this business had limited growth prospects. Its existing FFELP loans will continue to amortize over the next 20 years, but the company felt it would be better to spin off this loan book into its own company. On May 1, 2014, it spun off Navient to shareholders.
Navient bills itself as a provider of loan management, servicing, and asset recovery services. It started off with $148 billion in assets with FFELP loans accounting for $103 billion of this total, which it believes makes it the largest holder. Going forward, it plans to service its loan portfolio, work with other holders of FFELP loans, and pursue relationships with the Department of Education, universities, and related groups that need help with the servicing of student loans.
Bottom Line
Private firms are no longer allowed to originate loans under the FFELP program, but Sallie Mae plans to survive in the private loan market. Navient is its former FFELP business and has a tougher future to grapple with, but will likely evolve as a general servicer of student loans. With any luck, the government will hire it for servicing, but firms like Sallie Mae will likely turn to it for help servicing their private loans.
At the time of writing Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.
