SLM Corporation, more commonly known as Sallie Mae, is the market leader in education
finance. We were formed 30'years ago as a federally chartered government-sponsored
enterprise with the goal of furthering access to higher education by acting as
a secondary market for student loans. Today, Sallie Mae is nearing the completion
of a historic privatization process that began in 1997. We now provide a comprehensive
array of credit products and related services to the higher education community.
These include:
FFELP and Private Credit Student Loans,
student loan and guarantor servicing, and
debt management and collection services.
We participate in all phases of the student loan process by holding and servicing
the loan'from origination and guarantee, through collection, and in some cases,
post-default collection. We believe that what distinguishes us from our competition
is the breadth and sophistication of the products and services we offer to colleges,
universities and students. These include the streamlining of the financial aid
process through university-branded web sites, call centers and other solutions
that permit financial aid officers to spend more time working with students.
Our products and services provide significant cost savings for schools, create
time-saving efficiencies for financial aid offices and, in some cases, generate
revenues for schools.
Our earnings growth is fueled largely by the growth in the Managed student
loan portfolio and in our fee-based business lines, coupled with cost-effective
financing and operating expense control.
We generate the majority of our earnings from the spread between the yield
we receive on our managed portfolio of student loans, and the cost of funding
these loans. This spread income is reported on our income statement as "net
interest income" for on-balance sheet loans, and "gains on student
loan securitizations" and "servicing and securitization revenue"
for off-balance sheet loans. We also earn fees from student loan servicing,
guarantee processing, and default management and collections services, and incur
servicing, selling and administrative expenses in providing these products and
services.
The student loan marketplace consists of federally guaranteed student loans
administered by the DOE and Private Credit Student Loans issued by various private
sector lenders. There are two competing programs that provide student loans
where the ultimate credit risk lies with the federal government: the FFELP and
the FDLP. FFELP loans are provided by private sector institutions and are ultimately
guaranteed by the DOE. FDLP loans are funded by the taxpayer and provided to
borrowers directly by the DOE on terms similar to student loans in the FFELP.
In addition to these government guaranteed programs, Private Credit Student
Loans are made by financial institutions where the lender assumes the credit
risk.
The HEA includes regulations that cover every aspect of the servicing of a
student loan, including communications with borrowers, loan originations and
default aversion. Failure to service a student loan properly could jeopardize
the 98'percent guarantee on these federal student loans.
FFELP student loans must be guaranteed by state or non-profit agencies called
guarantors. Guarantors are responsible for performing certain functions necessary
to ensure the programs soundness and accountability. These functions include
reviewing loan application data to detect and prevent fraud and abuse and to
assist lenders in preventing default by providing counseling to borrowers. Generally,
the guarantor is responsible for ensuring that loans are being serviced in compliance
with the requirements of the HEA. When a borrower defaults on a FFELP loan,
we submit a claim form to the guarantor who pays us, in most cases, 98'percent
of the principal and accrued interest.
Our primary marketing point-of-contact is the schools financial aid office
where we focus on delivering flexible and cost-effective products to the school
and its students. Our sales force, which works with financial aid administrators
every day, is the largest in the industry and currently markets the following
lender brands: Academic Management Services Corp. ("AMS"), Bank One,
JP Morgan Chase, Nellie Mae, Sallie Mae Educational Trust, SLM Financial, and
Student Loan Funding Resources ("SLFR"). We also actively market the
loan guarantee of United Student Aid Funds,'Inc. ("USA Funds") through
a separate sales force.
We acquire student loans from three sources:
our Preferred Channel,
forward purchase commitments, in which we purchase student loans that are originated
on other platforms from various lenders and that are committed by contract to
be sold to us, and
spot market purchases, which are made by competitive bid.
Over the past several years we have successfully changed our business model
from a wholesale purchaser of loans on the secondary market, to a retail model
where we control the front-end origination process.
Private Credit Student Loan Programs
In addition to federal loan programs, which have statutory limits on annual
and total borrowing, we offer a variety of Private Credit Student Loan programs
to bridge the gap between the cost of education and a students resources. Over
the last several years, tuition has increased faster than federal student aid,
resulting in the accelerated growth of Private Credit Student Loans. We offer
a number of higher education Private Credit Student Loans that are used by borrowers
to bridge the gap between the cost of higher education and the amount financed
through capped FFELP loans and the borrowers resources.
We believe that our success in growing our loan origination volume is due to
our full service suite of products and services, our high-quality sales team,
and the campus relationships we have established. We provide college financial
aid offices and students with comprehensive financing solutions that streamline
the financial aid process. Our products enable the loan delivery process to
be completed on-line within 24'hours. Our goal is to help the financial aid
office implement office automation tools and web-based solutions to help them
reduce operating costs and focus on counseling students.
We were the first to provide schools with an Internet-based loan delivery system.
We are continuing that technological leadership with the introduction of OpenNetSM,
our newest web-based origination platform, which gives our customers the flexibility
to work with multiple lenders yet do all of their processing on one system.
OpenNet allows the student to apply for a loan on-line, access private and FFELP
applications in one place, and complete the process using E-signature. The system
also receives updates from the guarantor in real time and sends automatic certification
e-mails to the borrower. The financial aid office can use OpenNet to manage
its student loan files, run queries, update and edit records, and take advantage
of many other features.
We are in the process of transitioning our existing web loan delivery platforms,
Laureate' and NetWizardSM, to OpenNet. Over 250 schools are currently using
OpenNet.
Financing
We currently fund our operations primarily through the sale of SLM Corporation
("SLM") debt securities, SLM student loan asset-backed securities
and GSE debt securities. We issue all of these in both the domestic and overseas
capital markets using both public offerings and private placements. The major
objective when financing our business is to minimize interest rate risk through
match funding of our assets and liabilities. Generally, on a pooled basis to
the extent practicable, we match the interest rate and reset characteristics
of our managed assets and liabilities. In this process, we use derivative financial
instruments extensively to reduce our interest rate and foreign currency exposure.
Interest rate risk management helps us to achieve a stable student loan spread
irrespective of the interest rate environment and to offset pressure from adverse
legislative changes, changes in asset mix and other interest exposures. We continuously
look for ways to minimize funding costs to maintain our student loan spread.
We are expanding and diversifying our pool of investors by establishing debt
programs in multiple markets that appeal to varied investor bases and by educating
potential investors about our business. Finally, we take appropriate steps to
ensure sufficient liquidity by financing in multiple markets, which include
the institutional, retail, floating rate, fixed rate, unsecured, asset-backed,
domestic and international markets.
Competition'
The rising cost of education has led students and their parents to seek additional
private credit sources to finance their education. Private Credit Student Loans
are often packaged as supplemental or companion products to FFELP loans and
priced competitively to provide additional value for our school relationships.
2.25% 