Home Markets Sallie Mae eyes market-share gains after Discover exits student lending

Sallie Mae eyes market-share gains after Discover exits student lending

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Sallie Mae reported a 7% increase in loans last year, as students returned to higher education after taking a break during the pandemic.

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The student loan heavyweight Sallie Mae is gearing up to expand its already heavy presence in the market now that a key competitor, Discover Financial Services, is leaving.

Sallie Mae executives said Wednesday they’re hoping to capitalize on Discover’s exit from the private student loan market, much as they did when Wells Fargo stopped offering the product in 2020.

“We would expect that there will be jump-ball market share for us to compete for,” Sallie Mae CEO Jonathan Witter said Wednesday on the company’s fourth-quarter earnings call.

The Newark, Delaware-based company, which has $29.2 billion in assets, has about a 55% share of the private student loan business, according to Witter, who cited an industry report. While Sallie Mae anticipates its position will grow “a little bit,” analysts shouldn’t expect it to reach 70% or 80%, he said.

Many banks have retreated from private student lending in recent years, though PNC Financial Services Group and Citizens Financial Group are still in the business, as is the fintech-turned-bank SoFi Technologies. 

Sallie Mae also competes against “very formidable smaller” lenders, Witter said. One such company, Monogram, got a boost yesterday when the private equity giant Carlyle Group announced an investment in the firm. Carlyle said that it sees an opportunity in the private student loan business.

Asked about the Carlyle announcement, Witter said it’s a sign of a “another really smart and savvy investor” that “sees the incredible value in this asset class.”

The market has been in some flux since November, when Discover, which long offered student loans, said that it would leave the sector and sell its $10 billion loan portfolio. The Riverwoods, Illinois-based company had long struggled with regulatory headaches in connection with the student loan business. 

Charlotte, North Carolina-based Truist Financial also said last year that it would sell $5 billion in student loans, part of a broader restructuring at the super-regional bank.

Witter said Wednesday that he expects Sallie Mae to “compete for a good piece” of Discover’s business.

“I don’t know that we’ll necessarily compete for all of it. It’s just too early to sort of tell,” Witter  said, explaining that any decisions would be based on the price of the business and the credit quality of underlying loans.

Students have been returning to higher education after taking a break during the pandemic, which has helped boost Sallie Mae’s business. The company made some $6.4 billion in loans in 2023, up 7% from a year earlier.

Borrowers haven’t yet had too much trouble repaying the loans, according to the metrics that Sallie Mae reported on Wednesday.

The company charged off some $93 million of private student loans during the fourth quarter, or 2.43% of all its loans in that category. Both figures were down from a year earlier, when the firm charged off $116 million, or 3.15%, of its private student loans. 

But Stephens analyst Vincent Caintic argued that loan modification programs that Sallie Mae has rolled out to help struggling borrowers “may be masking underlying credit issues.” 

Sallie Mae’s stock price rose 2.71% the day after the company released its earnings report. Caintic is neutral on the bank’s stock, telling investors that the trajectory of its share price this year depends highly on both its credit quality and loan-sale trends.

On the latter front, Sallie Mae has seen “strong demand for student loans” from pension funds, insurers and other companies that are looking for higher-yielding assets, said Chief Financial Officer Pete Graham. More demand from buyers helps boost the prices that Sallie Mae’s loans fetch on the market.

Graham doesn’t foresee a big impact on loan-sale prices, even as Discover’s $10 billion loan portfolio goes on sale.

“The demand for various asset classes, including our asset class, is pretty deep,” he said. “And our discussions with various parties in the market, we don’t feel like that’s going to impact demand for our loans or for that matter, for asset-backed funding in general, as we move into this year.”

Sallie Mae sold some $1.1 billion of private student loans during the fourth quarter and recorded a $36 million gain on the sale.

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