Sallie Mae draws private-equity interest

Alisa Roth Apr 13, 2007

Sallie Mae draws private-equity interest

Alisa Roth Apr 13, 2007

KAI RYSSDAL: Earlier this week, the biggest student loan company in the country, Sallie Mae, said it would pay the state of New York a $2 million fine to settle allegations of improper conduct. Some in Congress are calling for a federal investigation into the student loan mess, not to mention changes to regulations.

None of which has left Sallie Mae the worse for wear. The New York Times reports today private equity groups might be interested in buying up the lender, despite all the troubles. We asked Marketplace’s Alisa Roth to find out what the appeal might be.

ALISA ROTH: The New York Times is reporting that a private equity firm — possibly Blackstone — is interested in buying Sallie Mae. The company is said to be offering more than $20 billion.

So what would they get for that kind of money?

SAMEER GOKHALE: First of all, you get the largest student lender in the country.

Sameer Gokhale is an analyst with Keefe, Bruyette & Woods.

Sallie Mae has a market value of $16.7 billion. It has federally subsidized loans and private ones, a debt collection business and a loan servicing department.

GOKHALE: What that means is they have the greatest economies of scale, because they have the largest loan portfolio.

He says Sallie Mae’s one of the few private lenders that’s allowed to back its own loans. Most lenders pay hefty fees to a third party to do that.

And, with the cost of college rising as fast as it is, the student loan business is decidedly a growth industry.

But it’s a risky industry right now, too. There are several investigations going in Congress looking into lending practices. The House passed a bill earlier this year that would cut the interest rates on federally subsidized student loans. And that was all before this month’s news of improper ties between lenders and financial-aid offices.

Prudential’s Charles Gabriel says the real question is:

CHARLES GABRIEL: Whether the legislative debate itself begins to reduce the interest of the financial players and the private equity players, because that legislative debate looks like it might portend a changed business model.

But analyst Gokhale says that doesn’t matter. He thinks Sallie Mae’s assets are so valuable — and so underpriced — that the company could even end up starting a bidding war.

In New York, I’m Alisa Roth for Marketplace.

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