By: Gaurav Bhola, MSM, Managing EditorIn a surprising move Sallie Mae announced that it is cutting back its core business of college student loans. The shares of Sallie Mae have fallen sharply since the disclosures about school loans.
Sallie Mae, the nation’s largest college loan lender has been deflated recently due to rising scrutiny from the student loan scandal of last year, higher borrowing costs, and the collapse of a $25 billion buyout.
The recent decision by Congress to cut subsidies to lenders for providing higher education student loans has also played into Sallie Mae’s recent decision. The subsidies of $19 billion will instead be used to provide financial aid Pell Grants to students from low-income families.
Before the Congressional action took effect in October 2007, Sallie Mae predicted that the action would only hurt its profit by less than 10%. The company stated in its recent Securities and Exchange Commission regulatory filing that the student loan law hurt its business more than anticipated. Herein, the company is reformulating its traditional business model. Also, it seems that Congress’s actions hurt the company much more in that it also led to the loss of a multi-billion dollar buyout deal; a deal Sallie Mae was counting on. The student loan lender plans to be more selective in approving loans in the future, including private loans and government-backed loan.
In December, Sallie Mae readjusted its 2008 profit forecast by more than 13 percent. The lender blamed the credit market crunch for further driving costs of borrowing billions of dollars in funds needed to make student loans. Sallie Mae has been unable to cope with the loss of subsidy funds that the federal government had been doling out for years. Henceforth, as that source of free income has stopped, the company has been unable to recover.
Meanwhile, the increasing mortgage crisis, credit crunch, and student loan defaults have shaken the $85 billion student-loan market to the core. Many small student loan lenders are leaving the industry mainly due to the new law, as well as the current market conditions. However, this is not the end of the exodus by certain student loan lenders, many more are to come. Some lenders will follow Sallie Mae’s example in cutting back their operations. The deteriorating financial outlook is not going to improve for Sallie Mae any time soon, which lost $344 million in the third quarter of last year.
Also, the company is facing a discrimination lawsuit, filed in federal court by two women who allege that Sallie Mae charged higher interest rates to college students at schools with predominately Hispanic and African American populations. Sallie Mae strenuously denies the allegation.
