STUDENT LOAN MARKETING ASSOCIATION

A STATEMENT OF ITS PURPOSE,

MAY 1979

Established by act of Congress on July 1, 1972, the Student Loan Marketing Association ("SLMA") is a Federally chartered, privately owned corporation. In assessing the purpose and performance of SLMA, one must look to its enabling legislation, the Education Amendments of 1972, which amends the Higher Education Act of 1965. Congress states its purpose in creating SLMA as follows:

"The Congress hereby declares that it is the purpose of this section to establish a Governmentsponsored, private corporation which will be financed by private capital and which will serve as a secondary market and warehousing facility for insured student loans, insured by the Commissioner (of Education) *** or by a State or nonprofit private institution or organization with which the Commissioner has an agreement*** and which will provide liquidity for student loan investments." 20 U.S.C. Sec. 1087-2(a)

Shareholder owned and controlled, SLMA was established to support the Federal government's Guaranteed Student Loan Program (GSLP) created by the Higher Education Act of 1965. The GSLP is a program of Federal insurance or reinsurance for loans obtained by students from state or private sources. Under this program, students obtain credit primarily from private lenders with the government providing insurance against defaults as well as interest subsidies to the borrower, and an additional amount known as a "special allowance" to assure an adequate rate of return to the lender. In FY 1980, the Federal government estimates that $2.5 billion of loans will be made to eligible students through this program. In addition, lenders continue to hold in excess of $7 billion of outstanding GSLP loans.

In 1976, the Health Professions Education Act established a program of Federally insured loans to graduate health professions students, the Health Education Assistance Loan Program ("HEAL"). The first HEAL loans were made in 1978. SLMA is authorized to provide a secondary market for loans made under this program.

Congress created Sallie Mae in a manner similar to many other quasi-government corporations. The purpose of creating a secondary market was to enhance the attractiveness of student loans to banks and other primary lenders, thereby generating more funds for the student loan market. SLMA was intended to provide lenders with a source of liquidity national, accessible secondary market where lenders could sell their student loans or borrow (warehouse) on the collateral of those loans. Program users were expected to provide the equity

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capital. Additional capital was to be obtained through the sale of government guaranteed debt obligations. The corporation was to use these funds to purchase or warehouse student loans. In this way, SLMA would support the Congress' objective of maximizing private capital participation in student loan financing consistent with the assurance of equitable levels of loan access by borrowers.

SLMA's status as a Government-sponsored, privatesector oriented corporation reflects two fundamental and complementary realizations by the Congress: first, that the public interest requires a viable system of student credit whose major delivery vehicle, the GSLP, would operate more effectively with the support of a national secondary market; second, that a secondary market motivated by private sector objectives represented the least expensive means of providing this support.

SLMA's corporate organization represents a careful and deliberately framed statutory structure sensitive to the intertwined goals to be achieved by the corporation. While SLMA has never requested nor received any appropriated funds from the Federal government, Congress did enable the corporation to borrow with the full faith and credit of the United States supporting its debt through 1982. As with other Governmentsponsored corporations which have gone through a similar process, SLMA anticipates a timely legislative review of this Federal guarantee and a subsequent decision by Congress as to how the public interest could best be served.

Utilizing this full faith and credit, SLMA obtains borrowed funds in support of its program operations. Guided by private sector motives, SLMA measures the success of its programs by the level of services provided and efficiencies achieved as well as their effect on helping to maintain continued private sector confidence in the GSLP.

By statute, SLMA's common stock can only be owned by eligible financial and educational institutions, and the majority of its directors are elected by these shareholders. The President of the United States appoints one-third of SLMA's twenty-one member Board of Directors and designates SLMA's Chairman from among the membership of the full Board. SLMA'S enabling legislation also provides for involvement of the Department of Health, Education, and Welfare and the Department of Treasury in the corporation's financing activities. In addition, the Treasury Department is required by statute to provide the President of the United States and the Congress with a report on SLMA's operations. SLMA also is required to transmit to the President and Congress an annual report of its activities and operations.

SLMA's enabling legislation requires the corporation to balance its public and private interests to assure corporate financial objectives as well as program objectives in support of the GSLP. SLMA, as a privately owned, profit making corporation, is not expected to assume risks which would have a materially adverse effect on the corporation's continued financial stability and ability to operate as a viable secondary market. SLMA also is a public purpose institution sponsored by the government to support vital national goals in the area of student credit. As such, SLMA is expected to play a leadership role, within the bounds of sound financial practice, in encouraging and supporting lenders in the continuation and expansion of sound GLSP lending activity.

A major goal in the area of student credit in recent years has been to encourage broad availability of student loans through the private sector. The Educationa Amendments of 1976 encouraged the continued development and expansion of state level administration of the GSLP in the belief that states are in a better position to control program costs and provide services to lenders. This legislation also continued the role of SLMA as a secondary market designed to support the national policy of encouraging lenders to participate in the GSLP by reducing the risks of financial illiquidity through the operation of an active and responsive secondary market.

The expansion of lending under the GSLP requires leadership from government and the private financial community. SLMA, which spans both the governmental and private lending worlds, provides part of this leadership directly through its program activities and, indirectly, by setting standards which are widely acknowledged as supporting sound loan origination and administrative policies. Concern has been raised that SLMA has not played its role effectively, that its policies and practices are not sufficiently supportive of the lending community, that its standards are restrictive and its market penetration limited.

An examination of SLMA's program activities under its Warehousing Advance and Loan Purchase Programs reveals the extent of SLMA's support of the GSLP and the national objectives set forth by Congress in this area. SLMA is authorized to make advances on the security of and to purchase, sell, and otherwise deal in Federally insured student loans or student loans that are insured by state or private bodies that participate in the GSLP. Under the Warehousing Advance Program, borrowing against the security of student loans is, by law, limited to 80% of the face value of the student loan collateral. Proceeds of such advances must be reinvested by the borrower in additional student loans. Also, SLMA's enabling

legislation prohibits it from dealing with any financial or educational institution that engages in certain practices, including requiring a student or his family to maintain a business relationship with that institution. These same provisions apply to SLMA's secondary market activities in support of the HEAL program.

In assessing the success of SLMA, the difficulties in establishing a national market undoubtedly encountered in any undertaking of this nature must be acknowledged. The implementation of a new, commercially viable financial intermediary such as SLMA, where no national secondary market in student loans had heretofore existed, requires a great deal of work with primary lenders and program administrators. Likewise, the GSLP itself has had several problems which have been widely publicized.

The changing statutory and regulatory environment in which the GSLP operates has added several layers of complexity to a program which is already burdened with administrative and regulatory confusion. The GSLP has suffered high defaults and continues to suffer from administrative inefficiencies which, despite adequate financial incentives and the existence of a government guarantee of principal and interest, diminish the enthusiasm of the private lending community for this program.

In the past two years, the provisions of the Education Amendments of 1976 have been in the process of implementation. The most apparent effect of these Amendments is the accelerated establishment of state guarantee agencies as the primary administrative intermediaries for this program. During this time, the Department of Health, Education, and Welfare has also begun to reduce the amounts of loans in default, thereby decreasing related program costs. However, there remain several problems with the GSLP which from time to time diminish program participation and the consequent ability of students to obtain loans. SLMA, as the national secondary market for the GSLP, is committed to providing a level of services to lenders which is intended to encourage lender participation in the GSLP. In this, the corporation recognizes that the assurance to lenders of financial services through the secondary market provides an important foundation in support of the government's objectives of an effective, accessible GSLP.

In more than five years of operation, SLMA has worked with nearly 500 lenders in over 40 states and expects to increase that number by an additional 150 in 1979. These institutions include commercial banks, savings institutions, credit unions, educational institutions, state agencies and state secondary markets. Statewide programs are financed with