EconomindZ Question of the Day: Should Sallie Mae be allowed to go private?

I agree with Ted Kennedy!

To my many friends and acquantances that know me too well, that's a shocking statement. We card-carrying conservatives are supposed to revile, sneer and generally ignore anything that Ted Kennedy says. But, I gotta give credit where it's due, I believe ol' Ted's right this time. Ted said recently regarding Sallie Mae's proposed buyout, "The key question is not what this deal means for investors on Wall Street, but what it means for the millions of students and families on Main Street who rely on student loans to get through college."

About 10 years ago, Sallie Mae went public, denying its implied government guarantee and causing its credit ratings to fall from Triple-A to Single-A. Gone were the protections afforded bond investors, who until that time, relied on Sallie's access to the US Treasury if things went awry. At the same time, Sallie Mae decided to reduce its exposure to the government-guaranteed student loan market. So, their asset mix went from 100% government-guaranteed student loans to the current mix of 40% gov-gtd loans and 23% private student loans, with the remainder filled out by college-savings (529) plans, debt management services and other business and technical products to colleges, universities and loan guarantors.

Sallie Mae was started by the US government to develop a secondary market for student loans. Even as a die-hard capitalist, that was a good use of our tax dollars. As Sallie Mae went public, the student loan market saw a resource of funding wither (as Sallie's exposure to government-guaranteed loans fell). Gone also was the federal government's ability to do anything about it. So, the investment of our tax dollars was now benefitting private investors. Now with a $60/share buyout proposal on the table, this source of funding to the student loan market will likely get even smaller and even more expensive. The reason is that yesterday, all major credit rating agencies placed Sallie Mae's debt on watch for a downgrade. With a current Single-A rating, Sallie Mae's credit rating is expected to be slashed up to 5 notches, to below-investment-grade. That's junk folks! At 12/31/06, Sallie Mae had over $108 billion of bonds outstanding, providing funding to over $142 billion of student loans. With its debt possibly going to junk, to pay the increased funding costs, student loan rates will likely have to increase, possibly causing more harm to the student loan market than good. And, according to the College Board, students at US colleges borrow an estimated $85 billion a year to finance school costs. As a parent of a high school junior going to college in 2008, Sallie Mae's buyout offer is a potential increased cost that myself as a parent and a taxpayer would rather avoid.

So, while Wall Street looks to line its pockets with fat fees and increased access to students to sell them other services, such as credit cards and mortgages, ol' Ted's got it right this time, trying to measure this buyout proposal against what matters most - access to a college education.