Lessons Learned From

The Privatization of Sallie Mae

DRAFT

U.S. Department of the Treasury Office of Sallie Mae Oversight MARCH 2006

FOREWORD In 2004, after Sallie Mae accelerated its actions to fully privatize, then-Assistant Secretary Wayne Abernathy directed the undertaking of this study. He strongly believed that a careful examination and analysis of the history of Sallie Mae’s successful privatization would provide Treasury information and lessons learned that would be helpful to Treasury and others as we look forward. This study was prepared by the staff of the Office of Sallie Mae Oversight, who monitored the safety and soundness of Sallie Mae during the privatization process. Every effort was made to ensure the accuracy of the information it contains and to provide an impartial assessment of what occurred. As is the case with any history, the interpretations made by the authors are important to the structure and conclusions, and these interpretations are not necessarily those of Treasury or the Administration. Philip Quinn Larry Stauffer Suzanne McQueen Office of Sallie Mae Oversight March 2006

SLMA Timeline 1972-2005 External Events

Highlights of Key Sallie Mae’s History 1972 - Sallie Mae (SLMA) created by Congress

1979 Legislation expands availability of student loans

1973 - Federal Financing Bank (FFB) finances SLMA 1980 – Legislation strengthens SLMA, FFB arrangement 1981- SLMA enters GSE debt market

1989 - S&L crisis/GSE safety & soundness scrutiny

1983 – Non-voting common shares listed for trading

1989 – SLMA’s assets exceed $40 billion

1992 - Treasury oversight, Shareholders get voting rights 1992- Federal Direct Student Loan Program begins

1993 - Offset fee imposed, SLMA’s market value drops

1994-1995 - Negotiations to privatize SLMA, 1st ABS 1996 - Privatization legislation passes

’98 Russian bond crisis. GSE wind down is side tracked

1997 – Proxy fight, Reorganization of company

2000 - Acquires USA Group, Issues non-GSE debt

2004 - SLMA is dissolved on December 29th 2005 - SLM Corp is a fully private-sector company

v

Lessons Learned from The Privatization of Sallie Mae Table of Contents Timeline ...............................................................................................................................v Introduction..........................................................................................................................1 Executive Summary .............................................................................................................7 I.

THE DECISION TO PRIVATIZE Chapter 1 – Why Did Sallie Mae Want to Privatize................................................ 17 Chapter 2 – Policy Arguments................................................................................. 27 Chapter 3 – Privatization Act Negotiations ............................................................. 35 Chapter 4 – Final Legislation................................................................................... 49 Chapter 5 – Proxy Fight........................................................................................... 53

II.

BUSINESS SUMMARY Chapter 1 - Overview of the Student Loan Market ................................................. 61 Chapter 2 - Overview of Key Sallie Mae Business History .................................... 67

III. THE WIND DOWN, 1997-2004 Chapter 1 - Privatization Successes and Problems .................................................. 75 Chapter 2 - Planning and Implementing the Wind Down ....................................... 79 Chapter 3 - The Defeasance Trust ........................................................................... 93 Chapter 4 - Impact of Privatization on Sallie Mae’s Cost of Funds ...................... 101 Chap