Obama urges axing subsidies for student lenders

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By Jonathan D. Salant BLOOMBERG NEWS

President Obama is urging an end to government subsidies for student-loan providers such as Sallie Mae and Citigroup Inc., with the government becoming the sole provider of federally backed college lending.

The government now offers direct loans through colleges and guarantees for loans made by private lenders such as New York-based Citigroup and Reston-based Sallie Mae, officially SLM Corp. Mr. Obama proposed the change in the budget he submitted to Congress on Thursday.

Education Secretary Arne Duncan said switching to government-funded loans would save more than $4 billion a year. "We want to actively invest that money in our students," he told reporters.

The proposal, which needs congressional approval, had an immediate impact on Wall Street. SLM shares fell $2.59, or nearly 31 percent, to close at $5.80 on the New York Stock Exchange.

"The market is shaken by this," said David Long, an analyst with William Blair & Co. in Chicago. Federally backed loans are Sallie Mae's "core business," he said.

The Obama administration wants to use the savings from cutting student-loan subsidies to increase spending on Pell grants, which help low-income families send children to college. The budget proposes spending an additional $116 billion over the next decade to increase the size of the awards and index them to inflation.

In 2007, then-President Bush signed legislation cutting subsidies to providers by $20.9 billion over five years.

Mr. Duncan said private companies would be asked to compete for government contracts to service the loans.

"The budget is a broad statement of purpose and does not address specifics or timing," Sallie Mae spokesman Tom Joyce said. "In the months ahead, we will continue to work with the administration and Congress to implement the best solution for students, schools and taxpayers."

"Confidence in the company is significantly diminished," said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pa. "The future has a larger cloud over it. Historically, students have had difficulty meeting their obligations and this just adds to the overall pressure on Sallie Mae."

The Consumer Bankers Association, whose members include Citigroup, criticized the proposal and called on Congress to reject it.

"We don't believe that this proposal, which will increase the federal debt, is in the best interests of students, schools or taxpayers," said Marcia Sullivan, director of government relations.