Sallie Mae buyout seen as questionable
Sallie Mae, the nation’s largest student lender, will become a private company owned by Bank of America, JPMorgan Chase & Co. and two private equity firms under a $25-billion deal announced Monday.
The buyout comes at a tense time for student lenders, who are grappling with federal funding cuts and a widening investigation into deceptive lending practices. Last week, Sallie Mae agreed to pay $2 million and follow a code of conduct as part of a settlement with New York’s attorney general.
Consumer advocates and legislators said they planned to closely scrutinize the deal to ensure it would not harm student borrowers.
“At a time when the integrity of our nation’s student-loan system has been called into question for many reasons, and given the checkered past of Sallie Mae, I will be interested -- and Congress will be interested -- in learning more about how this new ownership will change their operations and whether this is truly in the best interests of student borrowers and families who are working extremely hard to pay these loans back,” Rep. George Miller (D-Martinez) said in a statement.
Shareholders of Reston, Va.-based SLM Corp., Sallie Mae’s parent company, will get $60 a share in the deal, which has been approved by the SLM board. Assuming the agreement passes muster with shareholders and regulators, the acquisition will be completed this year.
The two private equity firms, J.C. Flowers & Co. of New York and San Francisco-based Friedman Fleischer & Lowe, will become majority owners, taking control of 50.2% of the company with an investment of $4.4 billion. Bank of America and JPMorgan each will invest $2.2 billion and control 24.9% of the company.
Bank of America and JPMorgan Chase also “agreed to support the company with short- and long-term financing,” said J. Christopher Flowers, managing director of J.C. Flowers. The remaining $16 billion will be financed, with the partners taking commensurate shares of the debt.
SLM stock shot up nearly 18% on the news, gaining $8.29 to $55.05. Share prices of Bank of America and JPMorgan also climbed. BofA rose 81 cents to $51.23, while JPMorgan closed at $49.97, up 88 cents.
Some critics questioned whether the deal would be as good for the company’s 10 million borrowers as it would be for shareholders. “There is a danger that a new Sallie Mae will be less transparent and have less public accountability, which presents a risk to students,” said Michael Dannenberg, director of education policy at the New America Foundation, a Washington-based think tank focused on higher education.
Sallie Mae spokesman Tom Joyce countered that student borrowers would not be affected by the deal. The terms of their loans are governed by federal law and contracts, which would not change.
Although the company no longer will get financing through the stock market, it will continue to issue bonds, which will require the company to continue filing regular financial statements with the Securities and Exchange Commission, the Department of Education and other regulators.
“In terms of today’s borrower, there will be no impact,” Joyce said. “If anything, when the deal closes, our new investors -- particularly JPMorgan Chase and Bank of America -- will give us the increased resources to look at new products and new distribution channels for our 529 college savings plans.”
Sallie Mae was founded in 1973 through an act of Congress aimed at making student loans more readily available. The company was privatized in 1990 and went public in 2004.
A decade ago, the company’s profit was almost solely generated from interest and fees charged on federally guaranteed student loans. Today, Sallie Mae also markets private loans, loan servicing and offers 529 college savings plans through a subsidiary called Upromise.
Recently, the lender was targeted in a sweeping investigation of student loan practices. New York Atty. Gen. Andrew Cuomo alleges that a number of companies have engaged in deceptive practices, including giving kickbacks to schools for directing students to lenders.
Sallie Mae officials denied breaking the law, and the firm settled charges by agreeing to pay $2 million to a fund that would educate student borrowers and by agreeing to change its lending practices.
