Sallie Mae, the student loan marketing giant, will be sold to a group of investors, according to Reuters and other news sources. Currently under attack by several states’ attorneys general for alleged kickbacks, the company is also facing increased Congressional scrutiny.
The investors’ group for the purchase is led by J.C. Flowers and Friedman Fleischer & Lowe and includes the financial institutions Bank of America and JPMorgan Chase.
Sallie Mae was formed in 1972 as a government-sponsored entity or GSE like its sister and brother GSEs, Fannie Mae and Freddie Mac. Congress in 1996 passed legislation allowing Sallie Mae to go private, and the GSE cut its government ties by 2004.
In the early 2000s, CEI had testified and commented on the “moral hazard” problem of GSEs’ “explicit and implicit taxpayer guarantees . . . which arise from their partially private/partially political nature.” Tax advantages and implied guarantees give GSEs a significant advantage over their private competitors, and those advantages can crowd out competition.
Even though Sallie Mae was privatized three years ago, let’s hope its sale spurs more competition among student loan providers — and some longer-term possibility of getting the federal government out of the student loan business.