Privatizing Federal Credit Programs: Why Sallie Mae?

Abstract

The federal government subsidizes lending to a number of borrowers—notably students, farmers, and homeowners. Government‐sponsored enterprises issue the securities that channel capital to many of these privileged borrowers. One of the largest of these enterprises, the Student Loan Marketing Association (Sallie Mae), is scheduled to be wholly privatized by September 30, 2008. What explains the privatization of this enterprise? To identify distinctive features of Sallie Mae that permitted or abetted privatization, we investigate the structure, related capital market innovations, and growth of three government‐sponsored enterprises. We conclude that a unique structural feature of Sallie Mae may explain the pace of privatization. The core asset of Sallie Mae, the student loan, is guaranteed and subsidized by the government. The case of Sallie Mae is an instructive yet poorly understood example of how the federal government can leverage private‐sector assets and incentives to achieve public policy missions.

Student Loans, Debtfare and the Commodification of Debt: The Politics of Securitization and the Displacement of Risk

“…Guaranteed FFELP loans place the full faith and credit of the government behind a private bank loan to each student. With the exception of the unsubsidized Stafford loans, the state pays interest on the loan during periods of grace (six months after graduation) and deferment, in addition to paying the difference between a set low interest rate and the market rate after graduation (known as the ‘special allowance’) (Corder and Hoffman, 2001). Aside from subsidizing interest rates, the state guaranteed a large portion (97 to 100 percent) of the FFELP loan if a parent (typical co-signer) or student defaulted (Fried and Breheny, 2005).…”

“…Against this backdrop, Sallie Mae was a state-led attempt to influence the flow of capital and credit to the student loan industry by absorbing the financial risks (defaults and bankruptcies) involved in lending to students (Corder and Hoffman, 2001). Like other GSEs such as Freddie Mac and Fannie Mae, Sallie Mae was a special type of government-backed, shareholder-owned, for-profit corporation.…”

“…Like other GSEs such as Freddie Mac and Fannie Mae, Sallie Mae was a special type of government-backed, shareholder-owned, for-profit corporation. Unlike other GSEs, however, Sallie Mae was legally permitted to purchase, service, sell, or otherwise deal in government-issued student loans, which were, in turn, fully guaranteed and directly subsidized by the state (Corder and Hoffman, 2001). The official justification for this state guarantee was the high-risk nature of student loans.…”

“…bonds) on secondary markets. Second, after the passage of the Education Amendments in 1980, it was permitted to securitize its financial assets (student loans) (Corder and Hoffman, 2001). This second method of subsidizing lenders pursued by Sallie Mae coincides with the notion of the commodification of debt discussed earlier and the rise of the neoliberal state and its underlying neoclassical economic assumption that private consumption is superior to public consumption (Peck and Tickell, 2002).…”

A Public Administration Moment: Forging an Agenda for Financial Regulatory Reform

“…The Bernstein challenge is once again center stage, with a focus on financial regulation. A growing literature with roots in public administration is engaged in questions of governance of the financial markets by focusing on institutional design and the politics of regulatory choice, leadership, accountability and oversight of government regulators, the reach of governmental authority, and the ever‐changing relationship between the public and private sectors (Boster 2007; Cassell 2002; Corder 1998; Corder and Hoffmann 2004; Hoffmann 2001; Hoffmann and Cassell 2005; Kettl 1986; Khademian 1992, 1996; Phaup 1996; Rom 1996; Schroedel 1994; Stanton 1991, 2002). Many of these authors have brought their research to bear on the current financial crisis for this symposium in order to begin assessing the more intricate dimensions of design, method, and management of financial regulation.…”