- The Washington Times - Friday, April 18, 2008

ASSOCIATED PRESS

Sallie Mae says it cannot write money-losing student loans indefinitely.

Top executives are holding “daily deliberations” about just how long the nation’s largest student lender can afford to sacrifice its bottom line for the sake of college-bound Americans, Sallie Mae Chief Executive Officer Albert J. Lord said yesterday.

Unless the government intervenes or market conditions rapidly improve, Sallie Mae could have no choice but to stop writing new federally backed loans.

House lawmakers yesterday approved a measure to boost the availability of credit for Sallie Mae and other student lenders, and analysts believe the Treasury Department could act as soon as next week.

Sallie Mae lost $104 million in the first quarter as it grappled with higher borrowing costs, restructuring charges and other factors, although Mr. Lord said in a conference call with analysts that the company would not lower its full-year earnings target.

Shares of the Reston company formally known as SLM Corp. climbed almost 6 percent yesterday, gaining 93 cents to close at $17.19, but remained 70 percent lower than last summer’s high of $58.

Even though most student loans are highly rated and carry a federal guarantee, investor demand for securities backed by these assets has plummeted — a sign of just how nervous investors are about securities backed by mortgages, student loans and other debt.

Bank of America Corp. said yesterday that it would stop making private student loans but will continue offering government-backed loans. On Wednesday, Citigroup Inc. said its Student Loan Corp. subsidiary will temporarily stop issuing loans to students at schools where profits have not been satisfactory.

These market conditions come just months after a new law reduced government subsidies for federally guaranteed student loans, whose interest rates are capped at 6.8 percent.

That situation has forced Sallie Mae to lose money on every federally backed loan that it makes, testing Wall Street’s patience as about 60 other companies have exited the market for those loans, either permanently or temporarily.

More than 75 percent of federal student loans are issued by those lenders, which primarily raise money by bundling loans into securities sold to institutional investors.

If the appetite for such securities doesn’t grow, Sallie Mae could be forced to halt new student loans, said Mark Kantrowitz, an expert on student loans who publishes the Web site finaid.org. “If they have no liquidity, then they can’t make new loans,” he said.

Sallie Mae would still be able to operate, Mr. Kantrowitz said, because the company would still receive fees for collecting loan payments. But the company would have to shrink considerably.

Sallie Mae has already been reducing jobs. The company disclosed in its first-quarter earnings report Wednesday night that it had eliminated 1,000 jobs — 9 percent of its staff — in recent months.

Analysts are wondering how long the situation will last.

Sallie Mae has been pushing for the Treasury Department to aid the stricken student-loan market by purchasing securities backed by student loans.

Company executives said such assistance is urgently needed, particularly as students rush to file loan applications early, given concern about the availability of funding.

“We don’t have weeks or months to resolve the solution,” said Jack Remondi, Sallie Mae’s chief financial officer.

With large competitors to Sallie Mae scaling back, the government is likely to intervene within the next two weeks to prevent further distress as colleges across the country kick off the financial aid process for next fall, said Matt Snowling, an analyst with Friedman, Billings, Ramsey & Co.

Asking lenders to operate at a loss for a sustained period “is a pipe dream,” he said.

The bipartisan bill approved by the House would give the Education Department temporary authority to buy loans from student lenders to ensure their access to capital and would let the government advance federal money to companies that would operate as “lenders of last resort” if they run out of cash.

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