Economic Downturn Bad For Upromise Owner Sallie Mae

Upromise (aff), one of the biggest online shopping rewards programs, is owned by college loan processor (if that’s the right term for them), Sallie Mae. Sallie Mae, as you can imagine, is being negatively impacted by the economy and there have been a flurry of recent news stories that give me reason to be concerned about Sallie Mae’s, thus Upromise’s, stability.
Starting a few weeks ago — Washington Post, September 20th: “Sallie Mae President Leaving.” C.E. Andrews, the company’s president and former CEO, announced he was leaving at the end of September after 5 years with the company. Hmm, interesting.
October 3rd, the Washington Post: “In Light of Crisis, Common Trading Practice Looks Risky.” This notes that the price of Sallie Mae’s “credit default swaps” (like an insurance policy against loans defaulting) had more than doubled recently, “apparently signaling that swap traders think the firm is more likely to collapse.”
Then, “With no way out of trouble, more students likely to default,” said the Seattle Times on October 6th. The story blamed short-sighted decisions made by immature young adults and aggressive marketing by student lenders, leaving graduates often with substandard educations to deal with high fees and rate hikes for late payments and no ability to discharge the debt by bankruptcy. The article tells the story of a young woman whose Sallie Mae student loan was originally for $20,000 but went up to $35,000 due to interest and penalties.
Same date, same paper, another article. “Students feeling economy’s crunch” includes comments by Sallie Mae spokesman Tom Joyce, saying that he hoped the markets calmed down before the next batch of private loan apps came through, implying that the rates would be higher and the loans harder to come by.
October 12th, Investment News: “Hard times are forcing parents to cut back on college saving.” The byline: “529 sales drop; further decline expected.” This article talks about how parents are saving less for their kids’ education because of a tighter economy. Net sales for section 529 plans (college savings investment plans, of which Sallie Mae handles $19 billion worth through its Upromise affiliates) dropped by a third in the first half of the year and was expected to drop even more through year-end due to the financial crisis.
In an October 15th Bloomberg article, “Citigroup Curbs Foreign-Student Loans at Harvard, MIT,” Joyce is interviewed again, saying that it’ll be tougher for all students to get student loans now. “People are going to have to have very good credit or have a co-signer who has excellent credit.”
From the October 15th Fairfax (Va.) Times: “Rules changing in student loan game“: “The nation’s largest student lender, Sallie Mae, has reported losses of more than $2 billion in the last year alone. Although the U.S. government guarantees lenders will be reimbursed for federal student loans, the bulk of Sallie Mae’s losses were from private student loans, which aren’t guaranteed.”
October 16th, in the Fayetteville Observer: “Sallie Mae closing 20 offices worldwide.”
Also on October 16th, Sallie Mae sends out a press release, “Sallie Mae Offers Tips, Tools for Successful Student Loan Repayment.” Reminding May graduates that their six month grace period will end soon and they’ll have to start repaying their loans, Sallie Mae advised graduates to, among other things, consider direct drafting their payments and using Upromise earnings to help pay down their bill. They quoted a borrower who emphasized the importance of having good credit if you want to buy a house.
Sallie Mae will release its third quarter financials today and will discuss them tomorrow in a con call with analysts. I’ll link to the transcript as soon as it’s available. It’ll be interesting to see if or how this mess will impact the Upromise rewards program.

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