May 30 2013

NYTimes: Sallie Mae Will Split Old Loans From New

The nation’s largest private student lender, Sallie Mae, is cleaving itself into two companies — a move that will create a new home for more than $100 billion of student loans amid broad concerns from federal authorities and consumer advocates that graduates hobbled by debt are increasingly falling behind on their payments.

The overhaul by Sallie Mae is playing out as college students, facing persistent unemployment and a sluggish economy, are defaulting on their loan payments at a rate of 13.4 percent, a level not seen for more than a decade, according to the latest statistics from the Department of Education. As student loan debt grows — it has outpaced total credit card debt, reaching more than $1 trillion — more loans are going to the riskiest borrowers, according to a January report by TransUnion Corporation, which provides credit information to lenders.

Federal authorities, including the Consumer Financial Protection Bureau, are worried that lenders have rekindled their dangerous infatuation with subprime borrowers, leading some to ignore lending standards and to court borrowers who cannot repay the loans.

Earlier this month, Richard Cordray, director of the consumer bureau, compared the student loan market to the market for subprime mortgages that collapsed, leading to a precipitous drop in housing prices, during the financial crisis.

“We learned a hard lesson in the wake of the mortgage meltdown,” Mr. Cordray said. “We cannot just sit by and watch this happen to people again.”

Sallie Mae, which is formally the SLM Corporation, announced the split on Wednesday. It will create dual companies and hasten the retirement of the lender’s longtime chief executive, Al Lord. One company, the education-loan management business, headed by John F. Remondi, Sallie Mae’s chief operating officer, will contain about 95 percent of the student loan giant’s assets, including $118.1 billion in federal loans and $31.6 billion of private loans. The other, fashioned as a consumer-banking business, will make student loans to fill a seemingly insatiable demand from borrowers, stoked by skyrocketing college costs.

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