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Sallie Mae credit card a long time coming


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Investment Banking Essentials Newsletter April Edition - 2022


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Investment Banking Newsletter April 2022

Sallie Mae credit card a long time coming

The potential for Sallie Mae to offer its own credit card to a segment of its student loan customers is closer to becoming reality.

Eight years after the company in its previous form rolled out a short-lived credit card pilot program seeking to leverage existing relationships with college students and their parents, it recently introduced a suite of cards as part of a broader brand-refresh initiative timed to coincide with the fifth anniversary of its split with Navient Corp.

Each of the three new cards — branded as Sallie Mae Ignite, Sallie Mae Accelerate and Sallie Mae Evolve — will offer cash back to customers for purchases, zero percent annual rates for introductory periods and up to $600 per claim in cell phone protection. The Ignite card seeks to help students establish credit and earn bonus rewards for responsible financial behaviors. The Accelerate card offers bonuses on any cash-back rewards used to pay down student loans. The Evolve card promises an enhanced level of cash-back rewards.

Although the cards are not yet available for issuance, Sallie Mae is already pitching them on its website with an eye toward a summer launch. But their introduction may be more symbolic of Sallie Mae's aspirations to diversify than material to its future financial results.

"It is not going to really change the complexion of the company," CFO Steven McGarry said in remarks during a recent investor conference.

"Today, 95% of our portfolio is private student loans," he added. "If you look forward three years ... that number is going to drop to 93%."

The decline reflects internal projections of the impact of Sallie Mae's forthcoming introduction of credit cards and its 2018 launch of personal lending capabilities. Sallie Mae held a net amount of $1.09 billion in personal loans as of March 31, reflecting its own production and loans acquired from third parties.

Approximately 66% of the personal loan book included loans extended to borrowers with credit scores of 700 or higher. McGarry said he expects the card portfolio to have "very solid credit" as well.

"We're going to be targeting borrowers very much like our students today," he said, noting that in-school customers would need a co-signer.

The thesis behind the introduction of the card suite is that the percentage of existing Sallie Mae student loan customers with a credit card increases to 95% at age 27 from 50% at age 21.

"We think it makes good sense that we can add some value if we can continue our relationship with that sort of high-quality credit individual," McGarry said.

The associated line of thinking is not new for the company: The earlier iteration of Sallie Mae targeted college students, graduates and parents with strong credit profiles, leveraging a customer base that exceeded 20 million at the time.

An archived copy of the Sallie Mae website from July 2011 shows a pitch for the Sallie Mae Cash Back Visa card. Issued and administered by Sallie Mae Bank, the card offered varying cash-back bonuses and an introductory zero percent APR on balance transfers.

During a history that dates to 2005, Sallie Mae Bank reported holding credit card loans for eight quarters: the fourth quarter of 2010 through the third quarter of 2012. Its holdings peaked at $21.1 million as of Sept. 30, 2012, then dropped to zero three months later.

It was around that time that Upromise, a Sallie Mae subsidiary that operates programs to encourage consumers to save for the cost of college education, shifted its separate, co-branded credit card program partnership to Barclays Bank Delaware from Bank of America Corp. The card, which Barclays continues to issue, offers cash back on purchases and a bonus to customers who link their Upromise accounts to a 529 college savings plan. Sallie Mae said in its most recent Form 10-K that more than 300,000 members use Upromise credit cards, and Barclays included the partnership among its three largest U.S. co-brand programs.

While the Upromise program is geared more to families saving for college than individuals and parents gearing up to repay student loans, the market Sallie Mae is targeting has no shortage of competition.

McGarry mentioned Discover Financial Services and Wells Fargo & Co. among Sallie Mae's "key competitors" in the student loan space. Discover, arguably best known for its credit card offerings, markets two cash-back card products specifically to college students. Wells Fargo pitches the Cash Back College Card as a way for students to build their credit histories.

The CFO defended the initiative as being "very connected" to Sallie Mae's core business. And, he added, "We have pretty modest goals for the next couple of years."