Student Loans Rattle Sallie Mae

WASHINGTON - Sallie Mae cannot write money-losing student loans indefinitely.

Its 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, Chief Executive Officer Albert J. Lord said Thursday.

Experts said that 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 were prepared Thursday to vote on a measure that would boost funding for Sallie Mae and other student lenders, and analysts think the Treasury department could act as soon as next week.

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

Even though the majority of 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.

On Wednesday, Citigroup 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, formally SLM Corp., to lose money on every federally backed loan 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 does not 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.

Without a "thawing of the capital markets and no government intervention, ... they will run out of liquidity," Kantrowitz said. "If they have no liquidity, then they can't make new loans."

However, Sallie Mae would still be able to operate, 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 - or 9 percent of total staff - in recent months.

And Wall Street analysts are wondering how long the situation will last.

"How willing are you to continue making loans that are unprofitable with the uncertainty that's facing us in Washington?" asked Bradley Ball, an analyst with Citigroup, in a conference call Thursday morning.

Lord said "we feel a special obligation to make sure that this program operates without a serious hiccup," but added that "we are literally in daily deliberations about how much further we can go."

He urged investors to "give us a little breathing space in the coming days to try to sort this through."

Despite the bad news, Lord said the company would not reduce its full-year earnings forecast of $1.70 to $1.80 per share, excluding one-time charges and the impact of derivatives, though he said earnings are likely to be on the low end of that range.

To bring stability back to the student loan market, Sallie Mae has been pushing for the Treasury Department to aid the stricken market by purchasing securities backed by student loans.

In Thursday's conference call, 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, the company's chief financial officer.

With large competitors of 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.