Congress created the Student Loan Marketing Association as a government-sponsored enterprise in 1972 because policy makers at the time feared that banks alone would not have enough money to meet student demand for loans. Sallie Mae, as the entity soon became known, was directed to use U.S. Treasury funds to purchase government-backed loans from banks, providing the banks with money to make more loans.
By the 1980s, Sallie Mae was doing so well that it no longer needed direct federal financing to purchase loans; instead it turned to Wall Street. Because of its implicit backing from the government — lowering the risk of defaults because the government would cover nearly any losses — it was able to raise enormous amounts of capital at low interest rates to buy and service student loans. In the process, it racked up tremendous profits.
Sallie Mae's assets multiplied eightfold during the early 1980s and early 90s, as federal student-loan volume soared.
But the financial success also attracted more scrutiny. Reports that the top officers of the Congressionally chartered corporation were pulling in seven-figure salaries led to charges in Congress that Sallie Mae and other loan providers were getting fat off the loan program, at the expense of students and the government.
The Clinton administration and Democrats in Congress pushed to remove banks and other lenders from the federal loan program altogether. Congress approved legislation in 1993 to gradually replace the guaranteed-loan program with direct lending, in which the Education Department provides loans directly to students through their colleges.
Sallie Mae's livelihood was suddenly threatened, and the company's leaders knew that its future depended on cutting ties with the government, so that it could diversify the products it offered. In 1996 the Clinton administration and Congress granted Sallie Mae its wish, allowing it to gradually become completely private.
Some of those who were involved in the Clinton administration's deliberations, however, believe that the government seriously misplayed its hand.
Thomas R. Wolanin, a longtime Democratic aide in Congress who served on a government committee that examined the possible sale, says he felt throughout the discussions that the administration was "giving the store away."
"My basic feeling," he says, "was that we were allowing Sallie Mae to privatize with very little financial return to taxpayers for the benefits they had received as a government entity, and without harnessing them to some public purpose."