The primary lesson is that GSE privatization can be done. The process and structure was
a win – win for the government and the shareholders of Sallie Mae. The government
reduced its contingent liability inherent in the GSE charter. It ensured stability in the
student loan market and revenue through a transition period. The legislation facilitated an
orderly transition from the GSE to non-GSE business over a nine year time period. The increase
in financing costs for Sallie Mae was small and did not materially reduce the profitability of the
student loan business. Bondholders were unaffected and the execution costs to change the charter
were small. Privatization reduced the political risk and external treats to the viability of the
company.
The second lesson is that it takes motivated parties. Sallie Mae shareholders and management
were motivated by the threat of government competition in its core business along with the
reduction in its funding advantage through imposition of the offset fee. The Congress had an
ideological interest in reducing the role of government in the economy and found an ideal
candidate in Sallie Mae. The Administration wanted an example for its Reinventing Government
initiative.
The third lesson is that the sky does not fall when the government involvement is removed. The
student loan market remained competitive and liquid. Lenders continued to have access to ample
funds and student lending (and the FFELP) continued to grow.
There are some major differences between the privatization of Sallie Mae and the housing GSEs,
however.
• Size and complexity: At the time of privatization, Sallie Mae was a $50 billion company
with a simple business model purchasing government guaranteed, variable-rate assets
match funded with variable-rate debt. By way of contrast, Fannie Mae and Freddie Mac
are huge – with over $1.8 trillion in assets and an additional $2 trillion in securities
guarantees [2003, OHFEO]. They are highly complex financial institutions managing
mortgage credit, interest rate and prepayment risk with huge counterparty risk exposure
from their portfolio hedging activities.
• Mortgage end-user rates that are market determined as opposed to administratively set14.
The federal government effectively sets the rates on student loans – thus the value of
agency status is not reflected in costs to the end user. By contrast, a portion of the GSE
benefits accruing to Fannie Mae and Freddie Mac result in lower mortgage rates – an
outcome heavily publicized by the GSEs and housing related interest groups.15
• Looser regulation: The Departments of Treasury (safety and soundness) and Education
were more assertive in their oversight of Sallie Mae than HUD and OFHEO have been
for Housing GSEs (until recently).
