Executive Summary / Key Takeaways

• Pivotal Market Opportunity: The recently enacted federal student loan reforms (H.R.1.) are poised to generate an additional \$4.5 billion to \$5 billion in annual private education loan origination volume for Sallie Mae, primarily from Grad PLUS and Parent PLUS programs, starting July 2026.
• Disciplined Growth & Capital Return: Sallie Mae is executing an evolved investment thesis focused on predictable mid-to-high single-digit balance sheet growth, supported by strategic loan sales and new private credit partnerships, enabling consistent EPS growth and robust capital returns.
• Strengthening Credit Performance: Enhanced loan modification programs and refined underwriting standards are yielding positive results, with net charge-offs trending favorably and late-stage delinquencies remaining flat despite portfolio growth.
• Operational Efficiency & Technological Edge: The company's investments in digital capabilities, organic marketing, and advanced loan-level credit models are driving operational leverage and enhancing risk management, contributing to its competitive moat.
• Resilient Financial Health: Despite macroeconomic uncertainties and NIM compression from funding costs catching up to asset yields, Sallie Mae maintains strong liquidity and capital ratios, underpinning its ability to fund growth and manage risk.

The Evolving Landscape of Education Finance

SLM Corporation, widely known as Sallie Mae, has been a foundational pillar in U.S. education finance since its founding in 1972. The company's journey has seen it transition from a significant participant in the federal FFELP program, which it fully divested in late 2024, to a focused leader in the private education loan market. This strategic pivot underscores Sallie Mae's commitment to its core mission: bridging the funding gap between the cost of higher education and available financial aid for students and families.

In the competitive landscape, Sallie Mae operates as the leading private student lender, holding an estimated 64% market share. Its primary direct competitors include Navient (NAVI), a major loan servicer, and newer digital-first players like SoFi Technologies (SOFI), alongside diversified financial services firms such as Discover Financial Services (DFS) and education loan servicer Nelnet (NNI). While traditional rivals like Navient leverage extensive servicing infrastructure, Sallie Mae distinguishes itself through its customer-centric digital platforms and a unique content-led marketing strategy. This approach, which aims for more efficient customer acquisition, contrasts with newer fintech players like SoFi that boast rapid digital onboarding and AI-driven automation, often achieving 15% lower operating costs per loan. However, Sallie Mae's established brand and deep school relationships foster higher customer retention in its core segments, a critical moat against agile rivals.

Sallie Mae's competitive edge is increasingly underpinned by its sophisticated operational and analytical technologies. The company has made significant investments in its digital capabilities and adopted an organic search and content-driven marketing strategy. This strategic shift, supported by MarTech investments, has been a significant differentiator, allowing the company to acquire customers more efficiently and engage them throughout their academic journey. Furthermore, in the second quarter of 2024, Sallie Mae implemented advanced loan-level future default rate and prepayment speeds models. These models, which incorporate macroeconomic factors like real GDP, college graduate unemployment, SOFR, and the U.S. 10-year Treasury rate, have enhanced the precision of credit loss estimates by reducing reliance on qualitative overlays. This analytical sophistication directly contributes to more accurate risk assessment and improved financial predictability.

Financial Performance and Operational Strength

Sallie Mae delivered solid results in the first half of 2025, building on a strong 2024. For the six months ended June 30, 2025, net income attributable to common stock was \$368 million, or \$1.72 diluted earnings per common share. This compares to \$533 million, or \$2.39 diluted EPS, in the prior-year period, primarily impacted by larger loan sale gains in 2024. The company's Private Education Loan portfolio grew to \$21.16 billion as of June 30, 2025, up from \$20.90 billion at the end of 2024, reflecting a 5.7% portfolio growth for the full year 2024.

Net interest income for the six months ended June 30, 2025, was \$751.8 million, a slight decrease from \$759.2 million in the prior-year period. The net interest margin (NIM) for Q2 2025 was 5.31%, an expansion of 4 basis points from Q1 2025, but a 5 basis point decrease from Q2 2024. This compression is primarily due to the cost of funds increasing faster than asset yields, a dynamic expected to normalize as lower-rate term deposits reprice in early 2026. Management maintains a long-term NIM target in the low to mid-5% range.

Credit quality remains a focal point and a source of strength. The provision for credit losses for the six months ended June 30, 2025, was \$172 million, significantly higher than \$29 million in the prior-year period. This increase is largely attributed to a smaller negative provision from loan sales in 2025 compared to 2024, coupled with new loan commitments and a more cautious macroeconomic outlook. Despite this, the allowance for credit losses as a percentage of private education loan exposure remained stable at 5.95% in Q2 2025. Net private education loan charge-offs for Q2 2025 were 2.36% of average loans in repayment, an increase from 2.19% in Q2 2024, primarily due to a timing shift caused by disaster forbearance related to California wildfires. However, year-to-date NCOs are 2.11%, below the prior year. The company's enhanced loan modification programs are proving effective, with over 80% of borrowers in these programs consistently making payments after a year, contributing to late-stage delinquencies remaining flat year-over-year despite portfolio growth.

Operational efficiency continues to improve. Non-interest expenses for the six months ended June 30, 2025, were \$321.8 million, largely flat compared to \$320.2 million in the prior-year period, despite increased origination volumes. This reflects the company's ongoing focus on driving operating leverage through its digital and marketing investments. Third-party servicing fees also increased by \$2 million in Q2 2025 due to additional loans sold and continued to be serviced, demonstrating a valuable revenue stream from its operational expertise.

A New Era: Capitalizing on Federal Reforms

A pivotal development for Sallie Mae's future is the enactment of H.R.1. in July 2025, which introduces significant reforms to the federal student loan program. Effective July 1, 2026, for new borrowers, the legislation caps Parent PLUS loans and eliminates Graduate PLUS loans, setting new borrowing limits for graduate students through the Unsubsidized Stafford loan program. This policy shift, aimed at curbing overborrowing and addressing unsustainable debt levels, is expected to fundamentally reshape the higher education funding landscape.

Sallie Mae anticipates these changes will generate an additional \$4.5 billion to \$5 billion in annual private education loan origination volume. This incremental opportunity is approximately two-thirds from Grad PLUS and one-third from Parent PLUS. While the impact in 2026 will be muted due to the mid-year implementation and grandfathering of existing borrowers, the volume will build over time, with the biggest impacts expected in 2027 and beyond as undergraduate (4-year cycle) and graduate (3-year cycle) cohorts transition. As the leading private student lender, Sallie Mae is uniquely positioned to capture this demand, leveraging its established brand, deep school relationships, and robust underwriting capabilities. The company's current credit profile for graduate loans is already strong, characterized by lower loss rates and higher returns, suggesting a favorable mix shift with this new opportunity.

Strategic Funding and Shareholder Returns

Sallie Mae's strategic response to this growth opportunity is rooted in its evolved investment thesis, which balances predictable balance sheet growth with robust capital returns. The company aims for mid-to-high single-digit private student loan portfolio growth, using strategic loan sales as a key governor to manage the size of its bank balance sheet and optimize capital consumption. In July 2025, Sallie Mae agreed to indicative pricing for a \$1.8 billion private education loan sale, consistent with its expectations for the year.

To support anticipated growth and enhance funding efficiency, Sallie Mae is actively exploring new alternative funding partnerships in the private credit space. This initiative seeks a scalable and efficient structure that can support increased origination volumes while preserving balance sheet capacity and delivering more predictable returns. These partnerships could potentially enable the company to originate and fund loans beyond its traditional balance sheet credit box, further expanding its addressable market.

Capital return remains a core tenet of Sallie Mae's strategy. The company has significantly reduced its outstanding shares by over 53% since 2020, with repurchases continuing programmatically. The common dividend was also increased in Q4 2024, reflecting confidence in sustained earnings and cash flow generation. This disciplined capital allocation, coupled with organic earnings growth from its loan portfolio, is designed to drive long-term shareholder value.

Risks and Outlook

While the outlook is promising, Sallie Mae faces inherent risks. The subjective nature of its allowance for credit losses, heavily reliant on macroeconomic forecasts and management overlays, introduces estimation uncertainty. However, the company's continuous refinement of its loan-level models aims to mitigate this. Interest rate sensitivity remains a factor, as a higher mix of fixed-rate loan disbursements means liabilities may reprice more quickly than assets, potentially impacting NIM. Management actively monitors this trend and uses derivatives to manage interest rate risk.

Macroeconomic uncertainties, including potential shifts in the job market for graduating seniors, are closely monitored. However, Sallie Mae's customer base has historically demonstrated resilience, with joint federal and private loan customers showing strong payment behavior on Sallie Mae loans even when delinquent on federal obligations. Regulatory compliance is an ongoing focus, with the company committed to maintaining strong capital levels (Q2 2025 Common Equity Tier 1 capital at 11.5%, Total risk-based capital at 12.8%) that exceed regulatory minimums.

Sallie Mae has reaffirmed its full-year 2025 guidance, projecting private education loan origination growth of 6% to 8%, total loan portfolio net charge-offs between 2.0% and 2.2% of average loans in repayment, non-interest expenses between \$655 million and \$675 million, and GAAP diluted earnings per common share between \$3.00 and \$3.10. This guidance reflects confidence in the strength of its core business, the effectiveness of its strategic initiatives, and its ability to capitalize on the evolving higher education finance landscape.

Conclusion

Sallie Mae stands at a pivotal juncture, poised to transform the federal student loan reforms into a significant growth catalyst. Its disciplined execution of an evolved investment thesis, marked by strategic loan sales, a focus on operational efficiency, and the exploration of innovative funding partnerships, positions the company for a new era of predictable balance sheet expansion and robust shareholder returns. The company's commitment to enhancing credit quality through advanced analytics and proactive borrower support further underpins its resilient financial profile.

As the private education loan market expands, Sallie Mae's established brand, deep institutional relationships, and technologically driven operational advantages provide a formidable competitive moat. Investors should recognize SLM not merely as a lender, but as a strategically agile financial services firm ready to leverage industry shifts, ensuring its continued leadership and value creation in the evolving landscape of higher education finance.