SLM Corporation (SLM), also known as Sallie Mae, declared that it has completed the sale of its remaining interest in its SLM Student Loan Trust 2006-2 securitization to a third party. However, under the existing contract, Sallie Mae will continue servicing student loans in the trust.
The sale will result in the elimination of student loans worth $2.03 billion and associated liabilities worth $1.99 billion from Sallie Mae’s balance sheet. Further, the gain from the deal will result in additional 13 cents per share to Sallie Mae’s second-quarter 2013 GAAP as well as core earnings.
In Mar 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 and the role of private lenders will be eliminated. Therefore, Sallie Mae stopped originating new federally guaranteed student loans after Jun 30, 2012 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 gradually improving economy, will bolster its earnings by expanding its private education loan business and reduce its loan loss provision expenses.
Sallie Mae retains a Zacks Rank #3 (Hold). Financial stocks that are performing better than Sallie Mae include Flagstar Bancorp Inc. (FBC), First Defiance Financial Corp. (FDEF) and CU Bancorp (CUNB). All these stocks carry a Zacks Rank #1 (Strong Buy).
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