Gov't Student Loan Takeover May Help Sallie Mae

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Tucked away in the 2,000-page health care bill is legislation that moves 100% of all U.S. student loans through the federal government as the point of origin. On the surface, that would appear to knock Sallie Mae (Stock Quote: SLM), the nation’s largest lender (it services student loans for 10 million students and manages $188 billion in student loans), for a loop. But early evidence shows the exact opposite.

Here’s the new landscape for college loans, and why Sallie Mae might not be in as much trouble as the experts think. The final piece of the health care reform puzzle, approved in late March, was legislation called the Healthcare and Education Reconciliation Bill. Under the bill, the federal government is the sole U.S. dispenser of student loans and grants, via the U.S. Department of Education.

That cuts private lenders, lime banks and quasi-private corporations (like Sallie Mae) out of the student loan direct lending market. Previously, Uncle Sam had subsidized student loan aid to private institutions through the Federal Family Educational Loan Program (FFELP).

According to the White House Web site, the new student loan bill also:

  • Invests more than $40 billion in Pell Grants, more than doubling the funding available a year ago. By the 2020-2021 academic school year, more than 820,000 additional Pell Grants will be made. There are currently nearly 8 million.
  • Expands the existing income-based student-loan repayment program. New borrowers who assume loans after July 1, 2014, will be able to cap their student-loan repayments at 10% of their discretionary income and, if they keep up with their payments over time, will have the balance forgiven after 20 years. Public-service workers — such as teachers, nurses and those in military service — will see any remaining debt forgiven after just 10 years.
  • Includes $2 billion over four years for community colleges.
  • Provides $2.55 billion in mandatory funding for Minority Serving Institutions, such as historically black colleges.

So where does that leave Sallie Mae? Initial reports from the lending giant weren’t exactly positive. Right off the bat, Sallie Mae had announced plans to slash one-third of its workforce of 8,500. Company execs also announced plans for a company “restructuring” in coming months.

Sallie Mae’s stock certainly hasn’t suffered. Trading at about $11.80 a share on March 31, when the reconciliation bill was cleared by Congress, the stock has climbed to $13.20 today. That doesn’t look like the performance of a company that just had its legs cut out from under it by the federal government.

Wall Street analysts expect that Sallie Mae’s stock will rise further. FBR Capital Markets has hiked Sallie Mae’s price target to $16-$18 per share. It notes in a recent analyst report: “Existing expertise and competitive advantage in the private student loan industry in addition to growing opportunities in the servicing and collection of Direct Loans" could help the stock despite the latest student loan overhaul.

Certainly, the proposed cut in workforce numbers (which will put thousands of employees out of work) has helped Sallie Mae’s stock price.

The company also sees itself as a major manager, if not originator, of student loans, especially in the area of loan default prevention.

Sallie Mae has gone on record supporting student loan reform. In a Feb. 17 press statement, the company says “Sallie Mae’s position on loan reform has been clear and consistent with the key elements of the Obama Administration’s plan, specifically, government ownership of all federal student loans and elimination of lender subsidies. We recognize that the federal government can finance these loans least expensively and generate taxpayer savings by owning these assets to term.”

Even though the federal government is calling the shots, Sallie Mae still sees a big role for itself in the post student loan reform era. So far, Wall Street seems to agree.

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