Sallie Mae to Offer Fixed Rate Loan - Analyst Blog

In an effort to capture a greater market share in the student loan lending business, SLM Corp. (SLM), popularly known as Sallie Mae, will start offering fixed-rate private student loans. The product offering will start on May 21 and will help families to meet supplemental funding needs for undergraduate and graduate students at degree-granting institutions. The fixed interest rates will range between 5.75% and 12.875% and the actual rate for a customer will depend on the credit history and other factors. The loans will have no origination fees. However, the company will carry on offering private education loans at variable rates ranging between 2.25% and 10.125%.

A number of players in the student lending market such as Wells Fargo & Co. (WFC) and Citizens Financial Group, owned by The Royal Bank of Scotland Group plc. (RBS) and SunTrust Banks Inc. (STI), have already introduced fixed-rate student loans. In fact, Sallie Mae's foray into this business is quite delayed considering the fact that it is a leading student lender.

Following the legislation stopping the private student lenders from originating federal student loans, Sallie Mae is actively seeking to diversify its business and originate more private education loans. Notably, the company has a $37 billion portfolio of private education loans in the first quarter of 2012 and private education loans origination was $1.2 billion, up 23% year over year. Moreover, the company anticipates private education loan originations of $3.2 billion for full year 2012.

Though the legislative actions challenged the company's business model, we expect Sallie Mae to benefit from the Department of Education's servicing contract, under which it services and collect government guaranteed loans. Given its low-cost business structure, we believe this new role will support Sallie Mae's profitability and help produce an acceptable risk-adjusted return.

While such efforts are encouraging, we believe it would take some more time for the company to reap the benefits of transition to its business model. But despite challenges, we anticipate that the company's cost containment efforts would help it navigate through the current cycle.

Sallie Mae retains a Zacks #3 Rank, which translates into a short-term Hold recommendation. Considering the fundamentals, we have a Neutral recommendation on the stock.


 
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