SLM Corporation (SLM), more commonly known as Sallie Mae, is a public corporation and a private-sector lender, so its direct loans are not federal loans. Basically, federal student loans consist of funds that are provided by the U.S. government, while private student loans come from entities such as banks and other financial institutions. However, private entities often work as loan servicers for certain federal loans on behalf of the government. Sallie Mae once provided such a function for federal student loans, and via a spin-off, it continues to do so.

What is Sallie Mae?

The public/private confusion lies deep in Sallie Mae's history. At its beginnings in 1972, Sallie Mae operated as the Student Loan Marketing Association – and it was federally chartered, government-sponsored enterprise.  Although that charter was terminated in 2004 and the company was privatized and incorporated, its “quasi-government status” image persisted, because it offered and serviced the William D. Ford Federal Direct Loan Program and Federal Family Education Loan Program (FFELP). The former is the program offering the government's familiar Stafford Loans and Perkins Loans; FFELP loans were education loans offered by private companies that were guaranteed by the U.S. government. Sallie Mae was the largest originator of these loans, which it and other banks would then often resell to investors to make additional revenue

That all ended with the Health Care and Education Reconciliation Act of 2010. This legislation ended the public-private partnership FFELP; from then on, all government or government-backed student financing would originate with the U.S. Department of Education, through the Federal Direct Loan Program. 

This forced Sallie Mae to shift its business to private education loans (not insured or guaranteed by the government), transforming into just another private financial company – one derives the bulk of its revenues from the education-loan banking and management business.

Enter Navient Corporation 

The loss of the government-backed student loan business prompted Sallie Mae to review its operations. In May 2013, it announced  it was separating into two distinct entities, both of which would be public. Sallie Mae itself had begun trading on Nasdaq as SLM in 2011; on May 1, 2014, it spun off Navient Corporation to shareholders.

Navient bills itself as a provider of loan management, servicing, and asset recovery services.  It started off with $148 billion in assets with FFELP loans accounting for $103 billion of this total, which it believes makes it the largest holder.  Going forward, it plans to service its loan portfolio, work with other holders of FFELP loans, and pursue relationships with the Department of Education, universities, and related groups that need help with the servicing of student loans.  

The other company (which includes the old Sallie Mae Bank, renamed SLM Bank) handles all the private loan origination and servicing businesses.  Although this second entity is starting out with a substantially smaller asset base (about 8% of the original company's total assets), it is expected to grow while the other company is expected to shrink in line with the dwindling of the FFELP, as loans get repaid, over the next 20 years. 

The Bottom Line

Sallie Mae offers a three-pronged approach to college students these days. First, it helps them to explore using scholarships and existing savings to fund education costs. It then helps them investigate government-backed loans, even though it doesn’t help originate them.  Finally, it then helps them bridge any remaining needs with the private education loans it offers. It also offers info on loan repayment programs, both federal and private. Currently, Sallie Mae estimates it services around 13 million customers. 

While no longer allowed to originate federal student loans, Sallie Mae plans to survive in the private loan market. Navient, its former FFELP business, has a tougher future to grapple with, but will likely evolve as a general servicer of student loans.  With any luck, the government will hire it for servicing, and firms like Sallie Mae will likely turn to it for help servicing their private loans.

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