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Sallie Mae

Overview
Sallie Mae was established in 1972 as a federally chartered stockholder-owned GSE to provide liquidity for federally insured student loans made by lenders (including educational institutions) under the Guaranteed Student Loan Program, (now known as the Federal Family Education Loan Program or FFELP).

Sallie Mae provides financial and related operational and technological services to participants in the nation's education market. Sallie Mae makes a secondary market in education loans and provides secured advances, as well as operational support, to originators of such loans. It is the largest single source of financing for loans originated under the FFELP. Sallie Mae is also the largest servicer of education loans, administering loans for its own account, as well as for many of its client loan-selling institutions. In addition, Sallie Mae provides other educational-related financial services such as financing for colleges and universities for academic plant and equipment.

Sallie Mae's secondary market activities generally involve the direct purchase of guaranteed student loans by the corporation as well as issuance by the corporation of commitments to purchase student loans in the future. Warehousing operations involve the making of loans, called "warehousing advances," to lenders, collateralized at 100 percent by student loans, U.S. Treasury or agency securities, or other acceptable collateral. Sallie Mae also offers credit support to state agencies that make or buy educational loans, providing, for example, letters of credit which lend the highest investment grade rating to the agencies' student loan revenue bond issues. Sallie Mae competes directly with the federal government's direct lending program (resurrected in 1993) for a share of the federally-backed student loan market.

Background
Congress approved the first federal aid to higher education in 1867 by creating land grant colleges. Until 1950, programs of federal aid to higher education remained targeted on vocational education and aid to veterans. During the 1950s and 1960s, Congress enacted a variety of higher education aid programs to assist the large number of World War II and Korean War veterans, and later, the post-World War II "baby boom" generation that entered college in the mid-1960s. The federal government began making direct education loans to students in 1958. The most important of the higher education programs, popular among veterans and middle-income families, who aspired to higher education for their children in ever increasing numbers, were authorized by the National Defense Education Act, the Higher Education Facilities Act, and the Higher Education Act of 1965.

While public desire for a college education was expanding dramatically, colleges and universities were attempting to accommodate greater numbers of students through increased admissions. However, these institutions were finding it difficult to provide the same level of financial aid to deserving students than had been possible when fewer students were seeking college admission. As a result, many colleges and universities were experiencing significant financial troubles and sought the expansion of federal higher education assistance programs. Sallie Mae was thus created.

Sallie Mae's enabling legislation provided for a 21-member Board of Directors, 14 of whom were elected by shareholders. The remaining seven were appointed by the President of the United States, who also designates the Chairman of the Board from among the 21 directors. Sallie Mae voting stock was issued to qualified Guaranteed Student Loan Program lenders and educational institutions. The legislation also provided initial financial support for Sallie Mae by authorizing appropriations of up to $5 million for start-up operations through the Department of Health, Education and Welfare. The government also gave Sallie Mae debt a full faith and credit guarantee until 1984. Sallie Mae never received the direct appropriations but did issue government guaranteed debt securities in the capital market until 1975. From 1975 to 1982, Sallie Mae issued debt through the Federal Financing bank under a Department of Education guarantee. In 1981, Sallie Mae began issuing nonguaranteed debt and stopped issuance of explicitly guaranteed debt altogether in 1982. In 1992, amendments to the Higher Education Act converted all outstanding Sallie Mae equity classes to unrestricted voting common stock.

Although like other GSEs, Sallie Mae enjoyed an implicit government guarantee that allowed it to borrow at lower rates than private sector entities, Congress singled out Sallie Mae in trying to mitigate the value of the GSE funding advantage. In the Student Loan Act of 1993, Congress imposed on Sallie Mae an "offset fee" equal to 30 basis points of the "principal amount of each loan made, insured or guaranteed".

Privatization Legislation
On September 30, 1996, President Clinton signed The Student Loan Marketing Association Reorganization Act of 1996 (20 U.S.C. 1087-3) authorizing Sallie Mae to restructure itself as a fully private, state-chartered corporation.

Privatization Process
Pursuant to the privatization legislation, Sallie Mae's board of directors developed a plan for full privatization that was submitted to and approved by Sallie Mae shareholders. The common shares of the Student Loan Marketing Association (the GSE) automatically were converted, on August 7, 1997, on a one-for-one basis to shares of SLM Holding Corp., a Delaware-chartered corporation, with a 15-member shareholder-elected Board of Directors. Simultaneously, the GSE became a wholly owned subsidiary of SLM Holding Corp. SLM Holding Corp. was renamed USA Education, Inc. on July 31, 2000. The 1996 Act requires the GSE to wind down its operations and be liquidated no later than September 30, 2008. Under legislation passed in 1998, if USA Education, Inc. affiliates with a depository institution, the GSE must wind down within two years (unless extended by the Secretary of Treasury). Sallie Mae recently announced that it will wind down the GSE two years ahead of the 2008 deadline.

Lessons
Sallie Mae's establishment as a GSE and its privatization 24 years later showed that legislation can be structured to provide a transition to GSE status as well as a complete separation from the government. Sallie Mae's charter provided direct financial support in the form of appropriations authority and a full faith and credit guarantee on its debt for up to 10 years after its creation. The 1996 privatization legislation provided a 10-year phase out of its GSE status.

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