Sallie Mae is using some of its windfall from the federal tax cut to accelerate its move into personal loans and credit cards.
The nation’s largest private student lender, formally known as SLM Corp., says it will invest $30 million of its anticipated tax savings in three areas: $10 million each on consumer lending and credit cards, and the other $10 million on several technology projects, including the transfer of certain tech infrastructure to the cloud.
How financial firms will spend their tax-reform bonus has been perhaps the hottest topic this earnings season. Some lenders have earmarked funds for technology upgrades, while other lenders are vowing to pad the paychecks of the rank and file, increase buybacks and dividends or make charitable contributions.
What makes Sallie Mae's announcement even more interesting is that it's another example of nontraditional lenders widening their push into online consumer lending. Goldman Sachs, which in short order has lent out more than $2 billion through a digital platform called Marcus, said this week that it was expanding into home improvement loans.
Chief Executive Raymond J. Quinlan said that personal loans were a good fit for Sallie Mae, which will be targeting the same kinds of borrowers it already serves with another type of unsecured loan. Sallie Mae has nearly $18 billion of assets, primarily private undergraduate student loans. Personal loans do not require a big investment in infrastructure nor substantially different credit models, he said.
“We meet customers when they are 18 or 19, and zero percent have a personal loan; five years later [when they are 23 or 24], 30% of them do,” he said on a conference call after the company announced its fourth-quarter results.
Sallie Mae has taken what Quinlan described as a cautious approach to personal loans: It recently began purchasing, rather than originating, consumer loans that it is keeping on balance sheet to monitor their performance.
Speaking on the same call, Chief Financial Officer Steven J. McGarry elaborated that purchases are running at around $100 million a month and the total balance is just under $400 million. He described the loans as “high quality,” with a weighted average FICO of 722. Roughly 60% of the personal loans acquired to date have three-year terms; the remainder have five-year terms.
The bank is about to kick things into gear: The first “market drop” of 300,000 letters with personal loan offers will go out in the next 10 days, Quinlan said.
“A reasonable portion of our volume will be two years old by the time we have any [significant] volume,” he said. “2018 is a year of experimentation; going into 2019, the program will be refined [in terms of] market acquisition costs and credit loss expectations.”
Credit cards will follow more slowly. Sallie Mae is in the process of working through relationships with a couple of partners — it does not want to build its own infrastructure. The bank plans to make its first offering in the first quarter of 2019.
The bank has also been expanding the range of offerings in its core private student loan business. It recently launched six products aimed at graduate students working on specific degree programs, including medical doctors, dentists and MBAs. The response has been tepid, although company executive said this was to be expected given the need to educate the financial aid offices of graduate schools.
Sallie Mae developed the grad school loan products in the expectation of reduced competition from the federal government’s Grad PLUS program. However, Quinlan and McGarry downplayed prospects for passage of a bill currently in the House that would impose limits on the federal program.
“Reauthorization [of the Higher Education Act] has been kicked down the road five or six times in the past; there’s no reason to think this year is different,” McGarry said.
“That’s true,” Quinlan said, "but obviously the poor performance of the federal portfolio … will over time cause people to look at that program’s underwriting and borrowing limits, and whether the federal government should subsidize parent and PLUS [lending]. It’s a constant drumbeat associated with the $1.4 billion portfolio that will drive them to act.”
Both executives reiterated that the Prosper Act, if passed as is, would expand Sallie Mae’s addressable market by 30% to 50%, representing a $3 billion to $5 billion opportunity.
Quinlan noted that Sallie Mae already has the capacity to handle the additional business. “While we are sitting here, we can accommodate it,” he said. “We [already] spend the $7 million [on development] the expense is covered and the opportunity is in front of us.”