SLM Corporation (SLM), also known as Sallie Mae, declared that it has sold its remaining interest in its SLM Student Loan Trust 2007-4 securitization to a third party. However, under the existing contract, Sallie Mae will continue servicing the student loans in the trust.
The sale will result in the removal of student loans of $3.8 billion and associated liabilities worth $3.7 billion from Sallie Mae’s balance sheet. Further, the gain from the deal will result in an addition of 8 cents per share to Sallie Mae’s full-year 2013 GAAP as well as core earnings.
In March 2012, both the House and the Senate passed a bill to overhaul the student loan program, ending the Federal Family Education Loan Program (:FFELP) that provided federal subsidies to private lenders.
As a result of this, federally guaranteed student loans would be originated under the Direct Loan Program run by the U.S. Department of Education. It would eliminate the role of private lenders. Therefore, Sallie Mae stopped originating new federally guaranteed student loans after June 30 to comply with the legislation.
Despite challenges, we believe that its leading position in the student lending market, diversifying efforts and increasing private student loan originations would help the company navigate the current cycle.
Suspension of the new federal student loan origination, in order to comply with the legislation, will continue to impact revenue generation capabilities of student lenders like Sallie Mae. However, we believe that the company’s efforts, coupled with the sluggishly improving economy, would bolster its earnings by expanding its private education loan business and reduce its loan loss provision expenses.
Sallie Mae retains a Zacks Rank #4 (Sell). Financial firms that are performing well include BankUnited, Inc. ( BKU), Fifth Third Bancorp ( FITB) and Regions Financial Corp. ( RF). BankUnited carries a Zacks Rank #1 (Strong Buy) and the other two hold a Zacks Rank #2 (Buy).
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