Sallie Mae to Split into Two to Take Advantage of Private Student Loan Market

SLM Corp SLM, better known as Sallie Mae, is splitting into two companies. If the largest financier of student loans in the United States is splitting, either something is really wrong or something is really right. In fact, both are true.

The split will create companies serving different markets. One will service federal student loans while the other will make further inroads into the private student loan market.

The sub-prime mortgage crisis left the banks with their reputations on life support but it wasn’t just sub-prime mortgages that handed consumers bills they couldn’t pay. Private student loans had the same effect. When federal students loans weren’t enough to pay their full college bill, students and their parents turned to private student loans.

Just like mortgages, just about anybody could qualify and the interest rates were high with none of the consolidation options that come with federal loans.

When the financial crisis hit, private loans became tougher to get but now, much like a real estate market that is growing fast, private student loans are back and Sallie Mae wants a bigger piece of that market.

But the split is far from a sure-thing. The demand may be growing but if Washington continues to try and save borrowers from themselves, the government may take a larger, direct role in issuing student loans.

In 2010, private lenders were cut off from originating federal student loans but as more students pay off their loans, Sallie Mae’s share of the federal market is diminishing. According to Bloomberg, a College Board report found that in 2007-2008, private student loans equaled about $25 billion. Last year, only $8.1 billion as more money was available to students through federal student aid programs. Sallie Mae expects to make $4 billion in private loans representing 51 percent market share this year.

The Consumer Financial Protection Bureau has received enough complaints to scrutinize the private loan market and if the Obama administration has its way, the interest rate for some Stafford federal loans will remain at 3.4 percent making private loans less attractive.

What does that mean for Sallie Mae? It’s likely to do quite well in the private market despite Washington’s attempt to curb the amount of jobless graduate that have loan payments as high as some people’s mortgage payments.

What does that mean for students? Just because a loan is available doesn’t mean you should sign on the line. Just like any loan, remember that you have to pay it back and in this economy, a high paying job is far from certain.

Disclosure: At the time of this writing, Tim Parker had no position in the equities mentioned.