On Wednesday, Sallie Mae, the nation’s largest student-loan provider, announced that the company will be splitting into two separate, publicly traded companies. Additionally, the current president and chief operating officer, Jack Remondi, has been appointed as the CEO, effective immediately. He will be replacing Albert Lord, the former CEO and vice president. Students that have loans with Sallie Mae will be minimally impacted by the split, and the company intends to ensure that borrowers experience a smooth transition. By Sallie Mae’s estimate, the split will take 12 months to complete, pending reviews from the IRS and SEC.
Sallie Mae will break its services into two companies, one of which will be in the consumer banking business and will be named Sallie Mae bank. This company will hold $9.9 billion in assets, mainly consisting of private education loans and related services. The second company will consist of the education loan-management business, which accounts for 95% of the company's existing assets, including approximately $118.1 billion in Federal Family Education Loan program (FFELP) loans.
Under the FFELP program, students could receive federal loans directly from the federal government, or from private lenders such as Sallie Mae while the government provides a subsidy and a guarantee in the event of default. Sallie Mae derives most of its income from these loans, but this is expected to dramatically shift in coming years because the 2010 Health Care and Education Reconciliation Act ended the FFELP program. It was replaced by the William D. Ford Federal Direct Loan Program, which only provides loans directly from the federal government. As a result, Sallie Mae and other private lenders were cut out of the steady business of federally subsidized and guaranteed loans.
Remondi described the split as a “natural business evolution since FFELP originations ended in 2010”. As a result of the legislation, the educational loans are ceasing to be lucrative because they have been shut out of that business. Meanwhile, the consumer banking business continues to grow and is expected to become increasingly profitable, as the cost of higher education continues to rise disproportionately to household incomes. Thus, the split can be seen as an attempt to separate the growing sector of the company from a part that is running off. As a result, investors will be able to value the different pieces of the company separately, and Sallie Mae can focus its efforts on enhancing the services associated with its private loans.
This split comes at a time when student debt has become an increasing source of anxiety for society as a whole. Thirty-seven million Americans hold approximately $1 trillion in student loans, which averages out to $27,000 per student. Additionally, student debt is the greatest form of consumer debt, aside from mortgages, and it is also the only form of consumer debt that has grown since 2008, when we saw the peak of consumer debt. Earlier this month, U.S. Secretary of Education Arne Duncan vocally expressed his concern about the debt levels. His sentiments have been mirrored by other agencies, who have pointed to the economic problems that arise when families dedicate their incomes to college debt instead of spurring economic growth through consumer spending. Furthermore, delinquency rates on student loans are increasing, especially amongst the under-30 cohort, in large part due to the difficulty recent graduates face in finding employment in the sluggish economy. Sallie Mae’s split indicates that it sees a business opportunity and a source of revenue that it can capitalize on, but for students, parents, policymakers, and educators, the picture is drastically different. Just as Sallie Mae has reacted to the changes that it has seen, it is also more than time for these stakeholders to take action and react as well.