SLM Corp (SLM)

The Case for Sallie Mae

Over the past two years, Sallie Mae (aka SLM Corp) has fallen from nearly $50 a share to about $10 a share. The reasons for the decline are two-fold. First, the recent credit crisis called into question if the highly leveraged business model of borrowing money to make student loans and then selling those loans to institutional investors would remain viable. Second, many have wondered if the administration’s plans for student loan lending would put an end to Sallie.

With the credit ice jam finally beginning to thaw and break, the question of access to reasonable credit to fund the business model appears to have been answered. Thus the remaining question is how the administration’s policies might affect the business in the future.

I am optimistic about Sallie’s future. Sallie Mae has had close connections to Washington politics since it was first created in the 60’s. Though the original GSE was wound down nearly five years ago, Sallie’s influence in Washington remains strong such that I believe that though there may be tweaks to the model, Sallie will still come out with a profitable method to leverage federally sponsored student loan programs.

For those in doubt, consider this: Sallie Mae employs approximately 8,000 people, the majority of whom are concentrated in Virginia, Pennsylvania, New York, and Indiana. Of the eight senators representing those states, seven are democrats, including such influence wielding power brokers as Arlen Specter, Chuck Schumer, and George Allen. It seems unlikely to me that these lawmakers would issue a death sentence for a business so important to their states. Furthermore, the administration is quickly spending its political capital on higher profile issues such as healthcare reform, the war in Afghanistan, green policies, etc., such that the attention on student loan lending will be much subdued in the future. If republicans increase their numbers in congress in the next election cycle (which I think is quite likely), this will favor Sallie even more.

As far as the current business model, Sallie Mae could not be in a better position. People out of work are going back to school and funding their education (and living costs) through student loans. May I remind you that federally sponsored student loans are guaranteed by the government up to 98% of the loan value, so the question of if lending to unemployed students makes sense is a mute point. If a federal student loan goes bad, Sallie Mae sells it at nearly full price back to the federal government, and the federal government pays Sallie to continue servicing the loan! If the borrower begins to make payments on the loan and becomes profitable again, Sallie buys the loan back from the government.

In the end, I think Sallie will be around for a long while, and at $11/share, it still looks like a bargain to me.