Sallie Mae Plans Life Without College Loans Obama Wants Gone

Sallie Mae, the biggest U.S. provider of college loans, says it doesn’t oppose President Barack Obama’s plan to wipe out much of that business. The company just has a few suggestions.

“What we’ve thought about here is how to make the president’s proposal better,” Jack Remondi, chief financial officer of the company, known formally as SLM Corp., said in an interview.

Obama has proposed saving $94 billion over 10 years by issuing all federal college loans directly instead of using private lenders led by Sallie Mae. The company is pushing a counterproposal that wouldn’t reduce its lending as much. It’s also mounting a public relations effort, pledging to bring jobs home from abroad and deploying lobbyists with Democratic connections.

“They’re not expending political capital to block something that’s going to be very hard to block,” said Charles Gabriel, an industry analyst at Washington-based Capital Alpha Partners. The company is “trying to build a new future.”

The company’s version of Obama’s proposal would let the private lenders continue to market federal student loans. They would sell the loans to the Education Department instead of financing them through capital markets, and collect a fee from the government for each loan purchased.

Sallie Mae’s plan would prevent disruptions in the student- loan system, minimize defaults and give students a continued choice among lenders, Remondi said in the interview.

Pell Grants

Obama and Democratic leaders in Congress say they want to put taxpayer dollars to better use and help more students get a college education. The administration plans to use the money saved by cutting out the private lenders to increase Pell Grants, which help low-income families afford college. Its plan would restrict lenders to less profitable tasks such as processing payments and collecting on defaulted loans.

Reston, Virginia-based Sallie Mae is the biggest of more than 2,000 student-loan providers, followed by Citigroup Inc.’s Student Loan Corp., and Lincoln, Nebraska-based Nelnet Inc. Sallie Mae made $24.2 billion in student loans last year, 74 percent of them federally guaranteed.

Under either Obama’s plan or the company’s version, “Sallie Mae would earn significantly less” on federal student loans than it has in the past, said Martha Holler, a company spokeswoman. Current market conditions make specific estimates difficult, she said.

Shares Plunge

Sallie Mae may lose as much as 40 percent of its revenue if Congress passes Obama’s plan without modifications, said Matt Snowling, an analyst with Friedman Billings Ramsay Group Inc. in Arlington, Virginia. Sallie Mae’s revenue totaled $1.78 billion last year, and most of the rest came from private loans and from services such as collecting on defaulted loans.
The projection of $94 billion in savings over 10 years comes from the nonpartisan Congressional Budget Office. The savings stem partly from the government’s ability to finance loans at lower interest rates than private lenders. The CBO plans to analyze the lender’s counterproposal.

SLM rose 28 cents, or 4.8 percent, to $6.11 in New York Stock Exchange composite trading yesterday and is down 31 percent this year. The shares tumbled 31 percent on Feb. 26, the day Obama released his budget outline calling for an end to loan subsidies.
Five of 10 analysists surveyed by Bloomberg recommend holding SLM shares, one rates the company a “sell” and four recommend buying.

‘Not Fighting’

Obama seeks to end a 16-year-old arrangement under which the government runs competing college loan programs. The 43- year-old Federal Family Education Loan Program subsidizes and guarantees loans made by private lenders. In 1993, the Clinton administration got Congress to create a second program at the Education Department that extends loans directly to students.

This year, the guarantee program will make $59 billion in loans, and the government’s direct loan program will provide about $15 billion, according to the Congressional Research Service.
“We are not fighting anybody,” Sallie Mae Chief Executive Officer Albert Lord said on an April 23 conference call with investors. “We want to be a major part of achieving the president’s goal.”

Sallie Mae can adapt to whatever changes Congress ultimately makes, said Andrew Parmentier, a policy analyst with Washington-based Height Analytics LLC.

“The nature of their business may look different, but they will find a way to survive,” Parmentier said.

While Nelnet hasn’t decided whether to endorse Sallie Mae’s plan, President Jeff Noordhoek said in an interview that it is “intriguing and creative.”

Nebraska, Pennsylvania Jobs

In a setback for the student-loan companies, Democrats voted April 29 to put Obama’s plans on the fast track for approval by using a parliamentary procedure known as reconciliation. It would leave Republicans without enough votes to block the plan unless they win over some Democrats.

The private lenders have some Democratic support, especially among lawmakers from states that may lose jobs under the Obama plan. “I don’t like the idea of outsourcing 1,000 private- sector jobs in Nebraska to government jobs in Washington , D.C.,” Senator Ben Nelson, a Nebraska Democrat, said in an interview. “There’s a place for government to be involved in providing some loans to college students, but that doesn’t mean there isn’t a place for private enterprise.”

Sallie Mae CEO Lord joined Senator Bob Casey, a Pennsylvania Democrat, at a press conference in Wilkes-Barre, Pennsylvania, on April 6 to announce plans to bring as many as 2,000 back-office jobs from India, Mexico and the Philippines to the U.S. About 600 of the jobs will go to Wilkes-Barre. Casey says he’s open to a compromise on student loans.

Lobbyists Podesta, Gorelick

The company has also hired lobbyists Tony Podesta, whose brother headed Obama’s transition team, and Jamie Gorelick, who was deputy attorney general during the Clinton Administration.
Democratic Senator Tom Harkin of Iowa says he wants nothing to do with Sallie Mae’s proposed compromise.

“No, no, no, no — no way,” said Harkin when asked about the plan. “We make the direct loans. They can be the ones who do all the paperwork.”


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