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Sallie Mae Goes Private

The Student Loan Marketing Association, Sallie Mae, is the nation's leading provider of education funding.  They provide federally guaranteed student loans originated under the Federal Family Education Loan Program (FFELP).  Government sponsored enterprises (GSE) are different from federal agencies because GSEs are privately owned corporations created by Congress to serve a public purpose.  Sallie Mae was started over 30 years ago and currently owns or manages student loans for more than 7 million borrowers and employs more than 7,000 individuals nationwide.

All outstanding debt with Sallie Mae is held under a GSE subsidiary, without affecting the status of the debt obligations, and is generally exempt from state and local taxation.  A risk with GSEs is the implicit guarantee that the federal government is protecting enterprises such as Sallie Mae from defaulting on their obligations.  These implicit government guarantees cause investors to look to the government backing rather than financial strength of the enterprise as the foundation for repayment.  Sallie Mae managers are afforded the luxury of taking more risks with their loans, anticipating the Department of the Treasury will intervene rather than let the company fail.  Here are opinions of GSEs and implicit government guarantees from Ralph Nader and Washington Lawyer Thomas H. Stanton.

In response to the implicit government guarantees and subsequent risks, the government started the divestiture of Sallie Mae in 1997 that will be complete 2006.  Privatization would remove Sallie Mae's federal charter and all government support and implicit guarantees, thus changing Sallie Mae into an ordinary company.  If a corporation is genuinely privatized, it may acquire, merge, sell, or otherwise dispose of its assets in any manner deemed advantageous to the shareholders (Moe 2000) resulting in decisions by the board of directors that do not correspond with the original intentions of the government.  These negative implications of privatization are countered by ideas such as The Macroeconomic Impact of Privatization, stating that assets are redeployed in the economy, where they are assumed to be used more efficiently.  These actions should lead to an increase in the level of aggregate growth, rate of growth, and a source of budgetary revenue for the private company.  Privatization also implies that managers will be taking less risk without the support of explicit or implicit government guarantees.  The larger, brother companies Fannie Mae and Freddie Mac are resisting privatization and remain GSEs.