Sallie Mae recently announced that it will split into two companies: one to handle the servicing of federal student loans and the other to handle the origination of private student loans. Each company will be publicly traded and the split is expected to be complete within 12 months.
Currently, the company that will service federal student loans will control the majority of Sallie Mae’s pre-split assets. However, Sallie Mae’s split sends strong signals that the lending giant is most interested in the future market for private student loans.
In 2010, Congress altered the Federal student loan program by slashing $60 billion in Federal subsidies that had underpinned much of the private market for student loans. This move reflected Congress’ desire to begin lending directly to students. However, rising tuition costs and limited availability of federal loans has created a renewed demand for private student loan lending. This burgeoning market is the catalyst for the Sallie Mae split.
Much of the success of Sallie Mae’s “bet” will hinge on how the Obama administration and Congress address student lending. Increased availability of Federal student aid will hamstring demand for loans in the private market as federal loans offer lower interest rates, interest rates that are fixed, and other protections that allow borrowers to peg their payment to income level. However, if the cost of tuition continues to rise faster than amount of available federal aid, the private market for student loans will likely continue to grow to pre-recession levels.