On July 7, 2009, SLM Corporation (NYSE: ), commonly known as Sallie Mae, announced its support for the Student Loan Community's proposal to reform the student loan program.
The alternative proposal, put forth by a diverse group that includes non-profit, for-profit and state-based service providers and guaranty agencies seeks to enhance the Administration’s plan to better serve students, families, schools, and taxpayers. The plan also aims at retaining a significant role for private lenders in the student loan market.
The Administration’s plan is framed to provide certainty that funding will be available to students and save nearly $90 billion over the next decade by ending unnecessary public subsidies paid to banks. It would use the freed up resources to partially cover the cost of a permanent increase in grants for students from lower-income families.
Consequently, this would end all private originations of student loans and use only a small panel of financial firms to service all student loans in the future.
The alternative proposal, however aims to allow individual colleges to maintain panels of private sector and not-for-profit lenders that would originate and service loans. Firms would be paid an annual fee by the Treasury for servicing the loans. An existing default fee of 3% that servicing firms must pay to the federal government in the event of a student defaulting on a loan would continue, which would raise revenue for the Treasury.
The Obama plan would end the private players’ role in loan origination. There is much doubt that this will generate any significant savings. However, it would needlessly end an income stream for banks at a time when they are suffering through a severe economic downturn.
Student lenders do not make significant earnings off these loans, but do get the opportunity to strike up relationships with students to cross-sell other financial products longer term, especially when they start earning later on.
The supporters of the plan argue that the Student Loan Community’s plan will help generate the same or greater budget savings as the President’s plan; and at the same time avoid significant transition risks from switching loan origination systems on more than $50 billion of private-sector-originated loans at some 5,000 schools. The proposal will ensure sufficient choice and competition in the marketplace, leading to innovation, superior customer service and lower defaults.
The proposal is being supported by Sallie Mae, Citigroup’s (NYSE: ) subsidiary Student Loan Corp. (NYSE: ), PNC Financial Corp. (NYSE: ) and SunTrust Banks Inc. (NYSE: ), along with a large group of not-for-profit lenders, regional banks and guaranty agencies.
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