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Sallie Mae Suspends Credit Facility

Zacks Equity Research

SLM Corporation (SLM), also known as Sallie Mae, declared the closure of a $6.8 billion credit facility, which used to aid term securitization of its federally guaranteed (:FFELP) loans. The credit facility was over-subscribed by a group of 8 international financial organizations.

The facility is secured entirely by FFELP loans and amortization will take place over a one-year period. Sallie Mae intends to end participation in the Straight A federally sponsored financing program before Jan 2014 limit, as the amount outstanding in the credit facility exceeds the residual balance in Straight A program.

During the financial crisis, Straight A actively granted the public access to federal student loans.  Notably, from Dec 2010 till Mar 31, 2013, Sallie Mae’s assets in the Straight A facility have recorded a steep fall – from a maximum of $24.1 billion to a low of $6.9 billion.

The company’s suspension of the credit facility reflects its efforts to boost its revenues by focusing on its consumer segment comprising retail products and services that directly help students and families plan and to reduce costs of higher education.

In Mar 2012, the U.S. 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.

Subsequent to this, federally guaranteed student loans will originate under the Direct Loan Program run by the U.S. Department of Education and the role of private lenders will be eliminated. Hence, in compliance to the above legislation, Sallie Mae stopped originating new federally guaranteed student loans after Jun 30, 2012.

Despite challenges, we believe that its leading position in the student lending market, diversifying efforts and increasing private student loan originations will help the company navigate the current cycle.

Notably, in an effort to align with the regulatory changes, Sallie Mae announced a plan to split its present business into 2 parts in May. One will be an education loan management business while the other will function as a consumer banking business. The company expects the division to be completed within a year.

Sallie Mae currently carries a Zacks Rank #3 (Hold). Better performing financial stocks in the same sector includes Preferred Bank (PFBC), TriCo Bancshares (TCBK) and Central Pacific Financial Corp. (CPF), all of which carry a Zacks Rank #1 (Strong Buy).

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