Thursday, May 30, 2013

NYT: Sallie Mae WIll Split Loan Manager From Bank


The nation’s largest private student lender, Sallie Mae, is cleaving itself into two companies — a move that will create a new home for more than $100 billion of student loans amid broad concerns from federal authorities and consumer advocates that graduates hobbled by debt are increasingly falling behind on their payments.

The overhaul by Sallie Mae is playing out as college students, facing persistent unemployment and a sluggish economy, are defaulting on their loan payments at a rate of 13.4 percent, a level not seen for more than a decade, according to the latest statistics from the Department of Education. As student loan debt grows — it has outpaced total credit card debt, reaching more than $1 trillion — more loans are going to the riskiest borrowers, according to a January report by TransUnion Corporation, which provides credit information to lenders.

Federal authorities, including the Consumer Financial Protection Bureau, are worried that lenders have rekindled their dangerous infatuation with subprime borrowers, leading some to ignore lending standards and to court borrowers who cannot repay the loans.

Earlier this month, Richard Cordray, director of the consumer bureau, compared the student loan market to the market for subprime mortgages that collapsed, leading to a precipitous drop in housing prices, during the financial crisis.

“We learned a hard lesson in the wake of the mortgage meltdown,” Mr. Cordray said. “We cannot just sit by and watch this happen to people again.”

Sallie Mae, which is formally the SLM Corporation, announced the split on Wednesday. It will create dual companies and hasten the retirement of the lender’s longtime chief executive, Al Lord. One company, the education-loan management business, headed by John F. Remondi, Sallie Mae’s chief operating officer, will contain about 95 percent of the student loan giant’s assets, including $118.1 billion in federal loans and $31.6 billion of private loans. The other, fashioned as a consumer-banking business, will make student loans to fill a seemingly insatiable demand from borrowers, stoked by skyrocketing college costs.

At four-year public schools, the average net tuition and fees that in-state undergraduates pay — that is, after taking grant aid, tax benefits and inflation into consideration — climbed to $2,910 in the 2012-13 school year from $1,490 a decade earlier, according to the College Board’s annual survey of colleges. Room and board costs have also risen, to $9,200 from $7,090. Altogether, costs have risen 41 percent. At private, four-year nonprofit schools, average net tuition rose to $13,880 in the latest school year from $13,150 a decade earlier, and room and board increased to $10,460 from $8,660.

Alongside the private loans, Sallie Mae will try to bolster its banking business by offering students more traditional products like savings accounts, the company said on Wednesday. The banking company is expected to house about $9.9 billion in assets, made up of private loans, and other assets including its servicing platforms.

Until 2010, Sallie Mae occupied a plum position: it was paid by the federal government to act as a kind of middleman, making federal loans to students that were backstopped against losses. The loans, called Federal Family Education Loans, grew drastically during the heady days of the economy, swelling to $630 billion from $149 billion between 2000 and 2009.

Then in 2010, the government opted to cut out the private lenders like Sallie Mae and increase its own lending to students, effectively removing Sallie Mae’s federal subsidy. By creating a separate bank, Sallie Mae can finance new streams of loans, analysts said. The banking company will be headed by Joseph A. DePaulo, a Sallie Mae executive.

Last month, Sallie Mae reported that its first-quarter earnings had more than tripled. On a conference call with investors on Wednesday, Mr. Remondi outlined the split’s potential benefits, saying, “We see ourselves as having two distinct businesses.”

“These entities can better succeed as distinct and separate entities,” he added.

Still, Sallie Mae is at the center of a market that is roiled by trouble. More than half of outstanding student loans are in deferment because borrowers cannot afford to pay them back, according to the January report by TransUnion. Student loan balances surged by 75 percent between 2007 and 2012, the report showed.

While the housing market is showing signs of a resurgence, with the Standard & Poor’s Case-Shiller home price index on Tuesday posting its largest gains in seven years, student loan debt could dampen the recovery. Authorities from organizations like the Federal Reserve Bank of New York and the Treasury Department have warned that graduates saddled with debt will put off big purchases like houses.

Timothy Reeder and his wife, Christine, say they never imagined that after racking up almost $100,000 in student loan debt they would be struggling with low-paying jobs. The couple, who live in St. Louis, fell behind on their loan payments more than a year ago because Mr. Reeder, an Iraq veteran, and his wife, a social worker, could not cobble together enough money for nearly $400 a month in loan payments. Amplifying their distress, Mr. Reeder lost his job as a security guard in January. Struggling with the debt, the couple said they have delayed buying a home.

“I just had no idea what this debt would do to me,” Mr. Reeder said.

Whittling down student loan debt could become even more difficult. Interest rates on subsidized Stafford loans, which are currently at 3.4 percent, are poised to double to 6.8 percent on July 1 unless Congress passes legislation to stop the increase, said Mark Kantrowitz, who publishes a financial-aid information Web site called FinAid.org.

Student loans can dog borrowers for their lifetimes, consumer advocates say. Herman De Jesus, a senior program associate with the Neighborhood Economic Development Advocacy Project, works with several people 65 and older who are still burdened with debt, particularly from for-profit schools.

Josephine Soto, 65, was haunted by roughly $8,000 in federal student loan debt after enrolling in a for-profit nursing school in 1982. After she graduated, Ms. Soto, who lives in New York, was unable to find a job that paid enough to cover her loans. Ms. Soto ultimately won a disability discharge of the loan last year but says she still remembers the harassing calls from collectors.

“I just felt lost and confused as they were threatening me,” she said.

Copyright 2013 The New York Times Company.  All rights reserved.

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