I must say when I read the headline “Sallie Mae, CFPB to Back Student-Loan Changes at Senate Hearing” I was a little surprised to hear both Sallie Mae and Consumer Finance Protection Bureau (CFPB) in the same sentence. Without a doubt reform is needed, but having Sallie Mae and the CFPB on the same page?

My interest continued to be piqued:

Jack Remondi, president and chief operating officer of Newark, Delaware-based SLM Corp. (SLM) (SLM), the education lender known as Sallie Mae, will conditionally support the government’s recommendations, according to his prepared testimony.

And then again, maybe not completely surprised by the next sentence:

“Sallie Mae supports bankruptcy reform that would require a period of good-faith payments, that is prospective so as not to rewrite existing contracts, and that applies to federal and non-federal education loans alike,” Remondi said.

I guess the conditionally did mean something in the first sentence in the context of the second sentance. Nevertheless, there is certain logic to having Sallie Mae, the largest student loan lender in the United States on board with student loan reform.

The first explanation and the most obvious, is being on the inside is better then the outside. By having Sallie Mae as part of the conversation from the start, they will have more influence over the process, the policy tracks and the agenda. Sallie Mae will have a great deal more power being part of the process and conversation then being on the outside having regulations pushed upon them. Sallie Mae seems to have learned some lessons from the year or two after the start of the economic crisis that resulted in private lenders being completely pushed out of the federal student loan programs.[1]

Not to mention having the largest student loan lender in the same headline with the CFPB in a positive, non-agonistic manner, is a good PR move.

This still left me thinking of the question. Could student loan reform, even highly pro-consumer reform, be even better for Sallie Mae then current standards? A few of the pro-consumer reforms:

Increased disclosure
Reduce predatory lending practices (probably already elimiated due to strick lending standards currently)
Allow loans to be discharged through bankruptcy

The first two have already happened either through regulations or the current credit lending market place. The last is the big sticking point. The arguments for making it extremely difficult to discharge student loans (prviate or federal) is that if loans could be discharged, most students after leaving college or university who did not have a job would declare bankruptcy, rid themselves of their loans and wait the seven years for their credit to clear. Lenders have argued that interest rates on both private and federal loans would have to increase for this factor and might even become unsustainable.

The thought that occured to me while reading this article was would this type of reform actually help Sallie Mae by increasing the barrier to entry and the cost of doing business in the market. While both of these might increase the cost of doing business for Sallie Mae, it might also keep other lenders with small student loan programs compared to the rest of their business operations from entering the market or even to exit. Both Chase and US Bank have all but exited the private student loan market as of July 1 or earlier. Citibank left last year with the sale to Discover and Sallie Mae.

Sallie Mae currently makes up the largest portion of the private loan market followed at a distance by Discover/Citi as well as some regional strong holds like Wells Fargo in the West. A small, but decent chunck of the market also comes from small regional credit unions that have gone together under umbralla groups like Credit Union Studnet Choice or the Student Loan Market Place.

I am still left with the question of the reason why Salllie Mae is on board with these changes (yet still tentative) is that the increase in market share for them (due to decreased profit margins for other lenders) might outweigh the increase cost associated with discharges and additional regulator requirements?

Sallie Mae was quick to learn their lessons and ended up being one of the Big Five Fed Loan Servicers ↩