This just happened to one of our employees – Sallie Mae (ticker: SLM) called her (at work, so we all got to listen in) to tell her that they are releasing her consolidation loan (she consolidated in 2002) and she is free to consolidate elsewhere; recommending the Department of Education.

Sallie Mae appears to be asking her to be someone else’s customer.

We looked in her National Student Loan Data System (NSLDS) record, and she’s got very little accrued interest and a very low fixed rate, so chances are she’s not a “profitable” customer.

When she called the Department of Education, they confirmed that yes, they would be processing and accepting other lenders’ customers as of July 1, 2008.

Have you or anyone you know received calls or letters from Sallie Mae or other lenders, asking to part ways with you as a customer? Please let me know! FinancialAidPodcast at gmail dot com or 206-350-1208!

Updated:

I have an opinion and a theory about this. This is my opinion only (see update2 below to see why I’m wrong).

Under the new legislation recently passed, a lender could sell their loans to the Department of Education. However, this will come at a penalty. The rumor is that the Department of Education will buy loans from lenders at 97 cents on the dollar, the federal loan guarantee. This is so that the new legislation is effectively cost and risk neutral to the government. Thus, any loan sold under HR 5715 is effectively a 3% loss to the lender.

Unless…

… a lender can convince the borrower to consolidate with the Department of Education themselves.

If a borrower chooses to consolidate with the Department of Education, the lender receives 100% of the face value of the loan. Not 97%, but 100%. The lender loses the loan permanently.

Sallie Mae might be sending some of their less profitable borrowers, like my coworker, to the Department, to effectively sell the loans to the Department, but at 100% value instead of 97% value – if the borrower voluntarily consolidates their loans.

Again, just opinion and theory – I have absolutely no hard proof that this is the case or reason behind what is otherwise a very unusual communication from Sallie Mae.

If this is the case, here’s the answer to the question of what it means for you:

• If you are a student who is very recently graduated, and you don’t want to be a customer of Sallie Mae, this is more or less a win. Most student loan consolidation companies are offering no benefits or few benefits, so wait until July 1, 2008 to consolidate (especially if you graduate in May/June 2008) and you’ll do okay.
• If you are a student who has been repaying your loans already for several years, consolidating with the Department of Education could cause you to lose borrower benefits you have already earned. This is especially true if you consolidated with Sallie Mae in 2004 or 2005 – chances are, you have some borrower benefits and reconsolidating would terminate those.
• If you are a student who is more than halfway through your loan repayment term, reconsolidating will reset the clock. Your payments would be lower afterwards, but if you were, say, 8 years into a 15 year consolidation, the clock would be reset to 15 years again.

Hat tip to Norm Huelsman for asking “which is better for students?”.

Update2: Larry Zaglaniczny of NASFAA wrote to say that HR 5715 doesn’t pan out in this case because the Department of Education doesn’t have the authority to purchase consolidation loans:

Upon a determination by the Secretary that there is an inadequate availability of loan capital to meet the demand for loans under sections 428, 428B, or 428H, whether as a result of inadequate liquidity for such loans or for other reasons, the Secretary, in consultation with the Secretary of the Treasury, is authorized to purchase, or enter into forward commitments to purchase, from any eligible lender, as defined by section 435(d)(1), loans first disbursed under sections 428, 428B, or 428H on or after October 1, 2003, and before July 1, 2009, on such terms as the Secretary, the Secretary of the Treasury, and the Director of the Office of Management and Budget jointly determine are in the best interest of the United States, except that any purchase under this section shall not result in any net cost to the Federal Government (including the cost of servicing the loans purchased), as determined jointly by the Secretary, the Secretary of the Treasury, and the Director of the Office of Management and Budget.

ONLY 428, 428B, 428H loans can be sold (subsidized Stafford, PLUS and unsub Stafford. No authority to sell 428C loans (consolidation loans).

So in this case, it’s Sallie Mae clearing up their balance sheet, not related to HR 5715. Thanks, Larry, for the assistance!