Student Loan - Loans and Debt Consolidation

EASY MONEY FOR SALLIE MAE CURRENT STUDENT LOAN POLICY HAS PUBLIC FUNDS FIREDOGLAKE BLOG

Every lender tries to borrow low and lend high. The best lenders lend into no-lose situations. By this standard, either Sallie Mae is a genius, or the federal government is a sap.

Sallie Mae specializes in student loans. Many of its loans are guaranteed by the government at 98% of face value. On top of that, at least through September 30, 2010, the government will purchase the loans for an amount equal to the sum of a the face value of the loan, b accrued interest, and c $75 per loan. 2010 10-K, p. F-53.

Between the low interest rate and the government s purchase program, Sallie Mae is guaranteed to get a gross profit to SLM equal to the difference between the face interest rate of the loan and .23% plus $75, whether or not the borrower ever makes a payment.

Here s an example. Suppose Sallie Mae makes a subsidized loan of $10,000 to your kid for second semester at Private U. The loan bears interest at 5.6%. Sallie Mae borrows $10,000 from the FHLB, and advances the money to Private U. on January 1. It has until September 30, 2010 to sell the loan to the Department of Education. Even though you didn t make a payment that s the way subsidized loans work Sallie Mae can sell the loan to the Department of Education for $10,492.31. If the interest rates charged by the FHLB don t change, total interest due to FHLB is $15.88. Sallie Mae repays the FHLB loan with interest, and picks up a gross profit of $476.43. The government gets the money back only when you pay...[more]