Just a month after JPMorgan Chase & Co. went to court to get out of its student loan joint venture with SLM Corp., better known as Sallie Mae, the two companies have agreed to dissolve the partnership.
JPMorgan Chase said in a press release Tuesday that the agreement will give it "sole control of its student lending business."
Spokesman Tom Kelly said the company had sued to bring the origination business in-house rather than have it managed by employees of the joint venture. JPM said it will drop the suit.
At the same time, Sallie Mae extended its loan origination and servicing agreement with JPMorgan Chase's Bank One Education Finance unit for two years, to August 2010. (That agreement had been renegotiated last year.)
Now, Bank One Education Finance, which has marketed loans under the Bank One name only, will offer both Chase- and Bank One-branded student loans. In the past only the joint venture was allowed to use the Chase name, and it sold all the loans it originated to Sallie Mae.
Scott Powell, JPM's chief executive of auto and student lending, said in the press release that the agreement "allows us to provide even greater flexibility and choice to schools and their students by providing the products and services they find most desirable to finance higher education." It "also gives us control over this very important business and creates a strong platform for growth."
Bank One Education Finance will continue to use Sallie's platform through August 2010 for schools that want it to do so. Mr. Kelly said he did not know how many schools or loans fell into this category. He said the idea was to allow student counselors to choose the system they were most familiar with.
Bank One Education Finance also markets loans using the origination and servicing platforms of five other companies: ACS Inc., the American Education Services division of the Pennsylvania Higher Education Assistance Agency, Great Lakes Higher Education Guaranty Corp., Edfinancial Services, and Nelnet Inc.
The problem with the joint venture was that it locked JPMorgan Chase into an exclusive arrangement with Sallie Mae, while Sallie was free to compete with the venture by offering loans directly, Mr. Kelly said.
In its February lawsuit, filed in Delaware Chancery Court, JPMorgan Chase complained that over the past three years Sallie Mae's originations grew at an average of around 50% a year, while "the Chase student loan brand's growth has all but ceased and its origination volume ranking has fallen from No. 1 to No. 4."
A Sallie Mae press release put a positive spin on the new agreement. It pointed out that the deal provides for most Chase-branded loans issued in the upcoming academic year, and future loans made to these borrowers, to be sold to Sallie Mae.
Sallie's share price, which plunged last month because of fears that the company would lose a crucial source of volume in JPMorgan Chase, surged as much as 2.6% Tuesday before retracing most of the gains and closing up 0.7%.
But Michael D. Cohen, an analyst with Susquehanna Financial Group LLP, said such concerns were still valid. "In the short term people are breathing a sigh of relief, because at least the volume won't go away," he said. "But it doesn't prevent JPMorgan from diverting volume away from Sallie Mae in the longer term."
