Longenecher says that in Minnesota and other states local banks are much less reluctant to take loans than Sallie Mae.

"We found that we could get a better deal from banks here in the Twin Cities area and they will provide us with better secondary market activities. We found we could get a better deal from the banks than from Sallie Mae and the reason for this and this is kind of perverse is that their profit requirements were fairly lower than Sallie Mae's."

He adds that Sallie Mae has been "tremendously risk averse in a business that is built on risk. They were quite willing to purchase the high balance loans, on which they made a lot of money but they were very uninterested in being involved in any of the low balance loans, which were unlikely to make any profit for them and the ones which were most likely to go into default."

The students hurt most by Sallie Mae's reluctance to buy the small loans are those in small loans are those in small colleges and vocational schools, where tuition and thus the size and profitability of small loans are relatively lower. Banks are unwilling to make these loans both because of the low profit margin and because Sallie Mae will be reluctant to buy it or will only pay less than face value for the debt.

"I don't think it would be fair for you to criticize that as a discrimination on their part but just a characteristic of the loans they participate in," says David B. Laird of Springston, Inc... a St. Paul firm that advises several state loan authorities, "Sallie Mae has historically said to the small banker. "We'll take your high balance loans where the student is still in school, but for all the rest of them we're going to give you a discounted price."

Strange Beast

But Longenescher says he blames part of Sallie Mae's reluctance to buy the small loan on the way Congress set up the company. "They structured a strange beast there one that has got a profit motive while serving a public purpose. When you create a profit seeking organization it would be unrealistic tie not to expect it to make a profit. I think that if they had created a non profit organization with the same goals it might have been different. I don't blame Sallie Mae I just don't like it."

Edward A Fox, Sallie Mae's president since the company was formed agrees that the firm was very risk averse during its early years, but with good reason. "When we first started out in 1973, we had no capital no net worth no funds to speak of. We were sort of held together by wax and tobacco juice," Fox says.

When Sallie Mae tried to hold a stock offering in 1973 and got no takers the 46 years old Fox says "the board reached an absolute consensus that in order for this corporation to attract capital, which is important for its social mission we had to have a balance sheet that could encourage investors to want to participate in the corporation. If we couldn't attract capital all the social goals that we had could not be satisfied."

Sallie Mae tried in 1974 to sell a $25 million stock issue and found buyers including Harvard in the educational and financial communities.

Putnam says he was very active in this stage of getting Sallie Mae off the ground personally persuading Harvard and other universities to buy stock in the early days. "I was just acting as a public citizen," Putnam recalls adding, "I said it's is a good thing. Let's make it go."

Putnam convinced Yale, Princeton, MIT, Notre Dame, Stanford, Wellesley (where he served as chairman of the college's finance committee), and other colleges to invest in the fledgling company at costs ranging from a minimum $5000 to $400,000 the size of Harvard's initial stake. Those who bought the most did the best.

Persuasive

With the help of Assistant Treasurer George Siguler (now on leave as chief of staff of the Department of Health and Human Services), Putnam had little trouble selling others on the concept. "If Harvard thinks it's a good investment as well as a good thing to do that was a very persuasive thing," he says. "I just gave them the sales pitch and that's all they wanted to know."

Thus the fledgling Sallie Mae moved into 1974 with $25 million of capital backing on the $1 billion worth of student loans that it already had purchased. Then as now most of the loans Sallie Mae owns were Guranteed Student Loans made by the Department of Education to college students. Depending on when students took out the loan they pay 7,8 or 9 percent interest after they get out of college and the government pays the interest while the student is in school.