SLM Corp., the private student lender better known as Sallie Mae, is taking a different approach to how it handles the growing threat from refinace lenders who cherry pick the best borrowers.

While firms like Navient attempt to tackle the problem by offering their own consolidation loans, Sallie is developing loan products with extended terms that reduce borrowers' monthly payments in an effort to discourage borrowers from refinancing in the first place.

“At end of day that’s what really drives demand,” said Steven McGarry, the company’s chief financial officer, on a conference call to discuss third quarter financial results Thursday.

Sallie Mae expects to roll the new products out sometime in the first half of next year.

Ray Quinlan, CEO of Sallie Mae
Not worried
"We always thought Navient, once the non-compete expired, would attempt to compete with us," said Sallie Mae CEO Raymond Quinlan.

Unlike Navient, Sallie Mae is not interested in offering refinance loans, said McGarry, who argued the margins on the business are thin and likely to be eroded as interest rates rise.

“One year ago, three-year swaps, which is the [benchmark] for funding consolidated loans in the securitization market, was at 110 basis points; a month ago it was 175, and today it’s at 191,” he said. "This obviously diminishes the returns on a consolidation loan portfolio.”

That means “the SoFis of the world” will likely have to start raising interest rates on their loan products in order to stay profitable, McGarry said, referring to Social Finance. “That will diminish the size of the addressable market.”

Sallie CEO Raymond Quinlan, who was also on the conference call, downplayed concerns about competition from Navient, which said yesterday it was planning a big push into consolidation lending through its acquisition of fintech firm Earnest. The student loan servicer has suspended a share buyback program in order to invest capital in Earnest as well as some other recent acquisitions.

Navient was already planning to offer refinance loans before it agreed to acquire Earnest this month. “It’s a difference in degree, but not kind,” Quinlan said.

The CEO said that Navient is precluded from refinancing any Sallie Mae loans until the end of 2019 under a non-compete agreement. “We always thought Navient, once the non-compete expired, would attempt to compete with us; whether they choose to go through Earnest versus on their own, it doesn’t change [how] we think of them as a competitor.”

Sallie Mae is also making a big push into graduate school lending, which has been growing even as undergraduate borrowing appears to plateau. The company is planning to roll out a suite of six loan products next year tailored to graduate students in various degree programs, including business school, law school, medical school, dental and other health professionals and a general graduate school loan.

On the conference call, Quinlan said that Sallie Mae has talked to dozens of graduate schools about the products and expects the business to grow slowly over time. “We’re not looking to change our credit standards,” he said. “It will not start with a big bang.”

Quinlan said that the company developed the new products in part because it was anticipating a pullback in graduate student lending by the federal government under the Trump administration. This no longer appears as likely, but graduate schools are concerned enough that they are giving the company a welcome reception.

“We’ve already done the investing, and we do have extra capacity, but we’re certainly not counting” on an increase in graduate school lending as a result of cutbacks in lending by the Department of Education, he said in response to a question from an analyst.

Sallie Mae is also gearing up to start offer unsecured consumer loans next year, Quinlan said.

Asked about Sallie Mae’s funding mix, McGarry, the CFO. said the company plans to rely primarily on deposits, and be less reliant on bundling loans into collateral for bonds than it has in the past.

“We do like [securitization], it enables us to extend the duration of our overall liabilities book, and we will continue to access [that market],” he said, “but we are a bank and we will continue to take advantage of the benefits. The deposit markets are deep and offer efficient pricing and that’s where we draw the majority of our funding.”

Sallie Mae was once primarily dependent on brokered deposits, but has made a significant push into retail deposits, which now account for roughly half of the total. “We’re comfortable with that remaining right around 50%,” McGarry said.

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