I bet this headline might surprise some people. On Thursday after the market close, the House passed the reconciliation bill, moving the federal student loan program to 100% direct lending, thereby eliminating private banks from the origination of these loans. On Friday, Sallie Mae's share price climbed over $13.00 (a 52-week high) in the morning before settling at $12.58 at the close.
Why would the share price rise in light of the revenue loss that Sallie Mae will experience with the elimination of the FFELP program? Here are a few explanations:
- An analyst at FBR Capital Markets raised the price target on the stock from $16 to $18 and had these positive comments:
"[Sallie Mae's] existing expertise and competitive advantage in the private student loan industry in addition to growing opportunities in the servicing and collection of Direct Loans" could help the stock despite the latest student loan overhaul which passed the Senate last night."
- Investors are anticipating a major restructuring at Sallie Mae which will significantly streamline their operations and set them up for future earnings growth
- I am reminded of the old adage that what is good news for shareholders is not always good news for employees
- Inside Indiana Business reported that the announcements should come sometime over the next few weeks:"Sallie Mae Senior Vice President Jon Kroehler says nearly 30 percent of the company's work force may have to be released. He says Sallie Mae plans to make a decision on where the cuts will be made within the next few weeks."
- Investors hate uncertainty and now that student loan reform has become the law of the land....(from the Scranton Times-Tribune):
"The House and Senate passage of the overhaul of the nation's student-loan program removed a cloud of doubt from SLM Corp. to increase shares 11 percent for the week to a Friday close of $12.58.
The Virginia-based financial company, better known as Sallie Mae, fought against ending the Federal Family Education Loan Program, which supported private student loans with federal subsidies to lenders. Essentially, privately held banks will no longer be able to grant these loans using federal dollars.The law eliminates legislative uncertainty and the overhang from legislative risk, said analysts Sameer Gokhale and Brendan Sheehy at Keefe, Bruyette and Woods."