SLM Corporation (Sallie Mae)

SLM Corporation (Sallie Mae) Anna Serna MBA-502 Economics for Business Southern New Hampshire University

SLM Corporation (Sallie Mae)

Abstract The SLM Corporation (formerly known as Sallie Mae) has been the leader of servicing student loans for decades. The company is known for processing numerous applications in a short amount of time thanks the number of years they have been in operation and their savvy investments in technology. In addition to this, they have also taken advantage of the rise in education costs by offering private student loans. Touryalai (2013) mentioned that SLM should continue to experience a large market share in this sector due to student loans now outnumbering credit card debt and thanks to large companies like JPMorgan Chase exiting the private student loan sector. This paper explores the background of the company and the demand factors that allows it to succeed against competitors. SLM has demonstrated a clear understanding of their consumers and applies it in every decision they make for the company. Consumer needs drives the company to be the best institution to service student education loans.

SLM Corporation (Sallie Mae)

About SLM Corporation Originally known as the Student Loan Marketing Association, Sallie Mae began as a Government-Sponsored Enterprise (GSE) that was designed to help support the Guaranteed Student Loan Program. SLM underwent restructuring in 2004 and is now a publicly traded company whose primary market is domestic households. SLMs specific demographics are families with college-bound members. In addition to this, the market is also American. All persons wishing to acquire student loans must have a social security number or a Resident Alien card in order to be eligible for the Federal Family Education Loan Program (FFELP). Other markets include the provision of financial services to college campuses, as well as federal and state governments. The principal products and services offered by SLM include the following:

student loans for undergraduate and graduate degrees as well as K-12 private schools 529 College Savings Plans at the national level or thirteen individual states Loan servicing as part of a select Department of Education group Insurance services for students and young adults such as auto, renters, tuition, and health

Banking products such as CDs, savings accounts, money-market accounts Collection services that focuses on the recovery of outstanding student loans Upromise--a rewards points program where qualifying purchase have up to 8% cashback where one can then exercise any of the following options:
o o o o

A 10%-matched savings account on cash-back services 2% pay-down on a Sallie Mae loan 529 Savings Account Plan Reimbursement by check

SLM Corporation (Sallie Mae)

Coupons and discount information for partnering retailers

Sallie Mae also contributes to communities primarily through its Sallie Mae Fund in an attempt to make higher education accessible and affordable to all. Non-Price Demand Factors Non-price factors that affect the demand for principal products or services are listed as, but not limited, to the following, according to the Economics for Business textbook (p. 84):

Consumer income Prices of related goods or services Tastes or preference of consumers Expected price of the product in future periods The numbers of consumers in the market

These factors make up the generalized demand function (GDF), Qd = f(P, M, Pr, T, Pe, N) and allow business managers to see how products and services are measuring up to industry standards and competitors. Consumer Income For income, M, to determine which way the shift occurs, it depends on the situation. A great example is illustrated on page 93 of the textbook. (Thomas, 2013) As income increases, the quantity demanded increases. When an increase in demand occurs, the demand curve shifts to the right. When a decrease in demand occurs, the demand curve will shift to the left. Influences on income can include family size, geographical location, and urban vs. rural, etc. For SLM, repayment terms can be unfavorable causing loans to go into default, and resulting in students finding their debt to be unmanageable. Parents struggling with home mortgages may be unable to help their children as they once did, especially if a home was refinanced in order to acquire additional capital to fund their childs education.

SLM Corporation (Sallie Mae)

Price of Related Goods With the prices of related goods and services, Pr, it depends on whether the other product is a substitute or a complement. A substitute good (if the price increases) causes consumers to demand more of the other good and vice versa, and a complement good, if its price increases causes consumers to demand less of the other good. (SUNY, 2013) While the rate for government loans are set, students can shop around for the loan they want. As a result, most private loans would be substitutes of one another. Sallie Mae also offers a variety of financial products with varied rates that give customers many options of related goods within the same company. Consumer Tastes Taste of customer preferences is a movement in consumer tastes toward a good or service that will increase demand. Student loans are typically set a low interest rate and are available by need as opposed to credit ratings like most loans. A large factory laying off their entire employees could result in a demand for more student loans. Displaced workers often ponder going back to school and pursuing a bachelors degree. They will most likely apply for grants and loans to help fund their investment in education. A movement in consumer taste from goods or services will decrease demand for the good. If a citys employment rate is incredibly high, there is a good chance that the majority is not in need of federal funds for school. They may find it to be more financially sound to continue working instead of quitting their jobs to return to school. Some additional factors are opting to not borrow and instead apply for numerous scholarships as well company tuition payment programs. Expected Price If consumers expect the price of school to be higher in the future, the demand for student loans will probably rise in the current period. However, the price going down some time from now will cause some purchases to be postponed. Besides interest rates, this demand

SLM Corporation (Sallie Mae)

factor can be linked to school tuition as well, for the cost of tuition dictates the amount of the loan. With the rising cost of tuition, students would own less lifetime debt if all of their schooling were completed in the shortest amount of time possible. Something that may decrease demand is a pending legal issue or bill that would permanently change borrowing or interest rates to the benefit of the borrower. Consumers would hold off until that issue was resolved. Number of Consumers An increase in the number of consumers in the market will increase the demand for a good, and a decrease in the number of consumers will decrease the demand for a good. SNHU rose to a peak of accepting 175 students a day, so, the demand for loans must have grown accordingly since most students require financial assistance to pay for their programs of interest. Non-Price Supply Factors The generalized supply function (GSF) demonstrates common factors in the supply side of a market, and is described as Qs = g(P, Pi, Pr, T, Pe, F). Excluding the factor for price (P), they are as follows:

Price of inputs Price of related production goods Technology Price expectations in the future Number of firms/amount of productive capacity in the industry

Since Sallie Mae provides mostly services, most goods and inputs have to do with properties of money and payment towards the student loans.

SLM Corporation (Sallie Mae)

Price of Inputs Sallie Mae is in the business of doing business. The large-scale organization uses multiple inputs to fund the transaction of loaning money to students. Some of the ways that Sallie Mae obtains money to loan is by using collected funding from payments made on existing loans, delinquent loans, government subsidiaries, loans from other banks and investors, and servicing fees provided on loans made by other companies. It is these collections that fund the organization. For the class of 2013, the average accumulative debt to include student loans was over $35,000 (2013, Fidelity). Maintaining a flow of cash to ensure the ability to business continues to rely on all these various inputs. In terms of the GSF, an increase in the price of inputs (or amount of money granted, collections, cost-per-dollar, etc.) will increase the cost of providing a loan, and Sallie Mae will provide a smaller quantity of each of their loans. Conversely, a decrease in the price of these inputs caused more loans provided. In detail, a change in policy on government subsidiaries lowering the amounts granted or increasing the cost per dollar will directly affect Sallie Mae and their ability to loan money at a given rate. There is also the difference between inputs gathered in the form of loan repayments by Sallie Mae vs. by a collection agency. Funds and fees attached are distributed in a different fashion once a loan is in collections. Sallie Mae owns a great deal of collection agencies and therefore the money collected from delinquent loans all goes back into the business as a whole. There is no third party to split the difference with, and by not cutting into these profits, the cost of the inputs goes down. Another advantage to gathering inputs is that student loans cannot be discharged in bankruptcy. Price of Related Production Goods Sallie Mae, with its range of financial products, can react accordingly to related loan products. If an aspect of a competitors loan changes, one of SMC's products will react as a

SLM Corporation (Sallie Mae)

substitute in production while another product can compensate by being a compliment in the same situation. This is related to the same category in the GDF, and the range of interest rates alone makes Sallie Mae very competitive. For example a Federal Unsubsidized Loan is locked in at 5.41%, but Sallie Mae's rates vary from 2.25% to 11.85%. Technology Thomas & Maurice (2012) stated that technology is the state of knowledge concerning how to combine resources to produce goods and services (p. 97). Sallie Mae is no stranger to technology. In accordance with the GSF, by using superior financial technologies and relationships, Sallie Mae is able to lower the cost of production and increase their provision of loans. With the rise of college students each year, they accomplish this by finding ways to make loan processing and issues as quick and accurate as possible in order to remain profitable and reliable. The use of current and available technology has allowed them to stay at the top of the federal student loan market. Adapting to changes in consumer tastes and getting familiar with the latest trends in technology allows Sallie Mae to remain productive without being wasteful of time and resources. In 2004, Collections & Risk Magazine (C & R) reported that Sallie Mae launched their Open Net 2.0 software, which was designed to save time and give college financial aid administrators more control over the financial aid process. With Open Net, a financial aid counselor can log in to the system to not only get information about their students loans, but they can also process private education loans and get an immediate response as to whether the loan was approved or denied. Students are also able to log-in and see the total amount of loans outstanding they have in addition to seeing if the loan has been processed and disbursed to their student account at school. C & R also mentioned that a key feature with Open Net is the ability to share data among a wide variety of lenders, servicers, and guarantors. Promissory notes can be printed out immediately and information that is missing can easily

SLM Corporation (Sallie Mae)

be submitted via Open Net. This was a huge change for traditional loan servicing that primarily relied on postal mail; the new system expedites the amount of time loans can be processed by simply submitting all documents electronically. Gerardi (2005) stated that Sallie Mae implemented accounts receivables conversion (ARC) to convert consumer checks into automatic clearing house (ACH) debits for settlement. The goal for implementing this, according to Gerardi, was to eliminate as much administrative work as possible associated with check returns and allowing them to speed up return notification and reducing return items. As a result, the company experienced lower deposit fees and were able to cut hardware/encoding costs associated with clearing checks manually. In addition to low fees, the company was able to process a larger amount of payments. According to Gerardi, six months after the initial pilot was implemented, about 80% of the 2.2 million eligible payments were handled. This enabled Sallie Mae the capacity to process more payments in a shorter amount of time. The popularity of their Upromise coupled with the rise of smart-phone ownership once again allowed Sallie Mae to take advantage of available technology. Wolfe (2011) announced that Sallie Mae is using Endeca Technologies Inc.s Endeca Mobile Commerce system for their Upromise mobile awards. Students (or parents) can use the app to find participating merchants in their area and track their points. The app is free and encourages users to take advantage of the program on the go. Technology is a major force in Sallie Maes daily operations. Having access to the most recent applications and processes allows the company to manage large numbers of loans in a timely manner, resulting in a more efficient use of labor. This is a major benefit as it reduces costs and allows them to produce more loans while the number of college students increases. Their customers, in turn, are able to access information easily and on almost any

SLM Corporation (Sallie Mae)

10

electronic device. Overall they have proven to be an innovative company that consumers can rely on, which helps them retain a large share of the market. Price Expectations in the Future If firms expect the price of a good they produce to rise in the future, they may withhold some of the good, thereby reducing supply of the good in the current period (Thomas, 2013). This factor is also related to its counterpart in the GDF, and Sallie Mae in influenced by it on the production. New legislation, regulations, federal interest rate, loan repayment laws, loan forgiveness, etc., can all play a part in Sallie Mae's construction and modification of its financial products. They make adjustments to the current demands of the market. Firms or Productive Capacity If the number of firms in the industry increases or if the production capacity of each firm increases, more of the good or service at each price will be supplied at each price (Thomas, 2013). This factor is pretty straightforward: the more firms that enter this market or the more productive capacity Sallie Mae can increase (i.e. the more money it has to loan out), then each of their products and the similar products of other firm will have an increase in demand at every price level. Conclusion By closely monitoring legislation and trends, SLM Corporation will continue to hold the market share of student loans. Their dedication to quality customer service is what fuels them to remain competitive and innovative in todays market. Education costs are known to rise each year and because of this, SLM will not have any issues finding borrows for their loans. Because many occupations require education beyond high school, many families save up for their childrens college. Upromise has been rewarding these families by offering free membership and rewards for purchases made in an effort to help give to the familys savings

SLM Corporation (Sallie Mae)

11

plan. School is now a need and is rarely seen as a want. SLM Corporation has survived decades of numerous changes. It is safe to say they are here to stay.

References Author Unknown. (May 16th, 2013). Student Debt Levels - Now Averaging More Than $35,000 - Surprise to Half of 2013 College Grads. Fidelity.com. Retrieved from http://www.fidelity.com/inside-fidelity/individual-investing/college-grads-surprised-bystudent-debt-level-exceeds-35000 Author Unknown. (March 2004). Sallie Mae Launches Open Net. Collections & Credit Risk Magazine. Retrieved from: http://search.proquest.com.ezproxy.snhu.edu/docview/ 198185976/fulltextPDF?accountid=3783. Ellis, B. (May 17th, 2013). Class of 2013 Grads Average $35,200 in total debt. CNN Money. Retrieved from http://money.cnn.com/2013/05/17/pf/college/studentdebt/index.html Gerardi., L. (February 2005). Sallie Mae Implements ARC. Today: The Journal of Work Process Improvement. Volume 27, pg. 22. Sallie Mae. (1995-2013). FAQs. Retrieved from https://www.salliemae.com/banking/terms/rd/faq/ Sallie Mae. (1995-2013). History, Meet Sallie Mae, Philanthropy at Sallie Mae, and Services. Retrieved from https://www.salliemae.com/about/who-we-are/ Sallie Mae. (1995-2013). Upromise by Sallie Mae. Retrieved from https://www.salliemae.com/upromise-rewards/

SLM Corporation (Sallie Mae)

12

Smith, F. (March 12, 2013). Sallie Mae: Helping Them Pay Less So You Pay More. The Billfold. Retrieved from http://thebillfold.com/2013/03/sallie-mae-helping-you-payless-so-youowe-them-more SUNY-Oswego Department of Economics. (2013) from Chapter 3. Retrieved from http://www.oswego.edu/~economic/eco101/chap3/chap3.htm Thomas, M. (2013). Economics for Business. McGraw Create. (Managers, Profits and Markets From Managerial Economics, 8th ed., Chapter 2) Touryalei, H. (October 16, 2013). Salle Mae Reports A Pop In Private Student Loans, Bets College Costs Will Rise. Forbes. Retrieved from: http://www.forbes.com/sites/halahtouryalai/2013/10/16/sallie-mae-reports-a-pop-inprivate-student-loans-bets-college-costs-will-rise/. Wolfe, D. (Apr 29, 2011). Sallie Mae Using Endeca Mobile Apps. American Banker. Retrieved from: http://search.proquest.com.ezproxy.snhu.edu/docview/865009620.