Obama swings axe at private student lenders

WASHINGTON Thu Feb 26, 2009 6:44pm EST

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WASHINGTON (Reuters) - The U.S. college student loan business was reeling on Thursday from an unexpected proposal in President Barack Obama's 2010 federal budget to axe the giant federally guaranteed student loan program.

In a major shift that undercut shares in top student lender Sallie Mae, Obama's budget called for moving most of the nation's roughly $90 billion in student lending into the direct-loan program run by the U.S. Education Department.

The proposal is subject to review by Congress and possible changes. If adopted, the White House said it would save taxpayers more than $4 billion a year and end "entitlements for financial institutions that lend to students."

The president's plan sets up a clash between congressional Democrats, who praised it, and private-sector student lenders, once a powerful Washington, D.C., lobbying force brought low in recent years by scandal and the financial crisis.

Sallie Mae Chief Executive Al Lord said in a statement the company would "work with the administration and Congress."

Shares in Sallie Mae, known formally as SLM Corp, closed down 30.9 percent at $5.80 on the New York Stock Exchange, while Student Loan Corp, a major lender tied to Citigroup, finished down 21.9 percent at $41.51.

Stocks of for-profit education providers were also down. ITT Education closed off 5.6 percent at $110.69, DeVry Inc ended off 3.9 percent at $51.30, while Apollo Group finished down 2.6 percent at $73.77.

"This announcement essentially blindsided the industry," said Matt Snowling, senior analyst at FBR Capital Markets.

"Budget proposals do not necessarily become law. Nevertheless, we view this proposal as meaning that lenders such as Sallie Mae will face continuous threats during the current administration's tenure."

STAY TUNED

The student loan proposal does not set a clear timetable for phasing out the Federal Family Education Loan Program, or FFELP, the foundation of student lending for decades. More details may be forthcoming in late March or April.

But the proposal brings to a head years of criticism that the FFELP is too expensive, enriches lenders and ties higher education funding too closely to Wall Street's ups and downs.

"We need a system that benefits students, rather than banks," said Rich Williams, spokesman for U.S. PIRG, a public interest advocacy group.

Lenders have replied to such critics for years that the FFELP has provided affordable loans to millions of students and offered them other services unavailable elsewhere.

"We respectfully disagree with the president's proposal to eliminate" FFELP, said Kevin Bruns, spokesman for America's Student Loan Providers, a lender lobbying group. "This is the beginning of a lengthy process. The administration has made a proposal and the Congress will now consider it."

Student lenders will be hard-pressed to push back against Obama's proposal if the Congressional Budget Office backs the multiyear budget savings that the administration claims could be achieved by killing the FFELP, said Charles Gabriel, a managing director at consultancy Capital Alpha Partners.

California Democratic Rep. George Miller, chairman of the House education committee, praised the president's proposal, calling it "a solid plan to make federal student loans more reliable, while saving taxpayers billions of dollars."

Besides Sallie Mae and Citigroup, other big student lenders have been JPMorgan Chase and Bank of America.

Some lenders have pulled back from student loans, where profits have thinned due to cuts in federal lender subsidies.

Meanwhile, a stubborn global credit crunch has led to massive taxpayers bailouts for major banks, including government intervention in the student loan market.

Student lenders were embarrassed by a scandal in 2007 that revealed some had given money and gifts to college financial aid officers to drum up business, as well as other allegations of misconduct throughout the student loan industry.

(Additional reporting by Al Yoon, Juan Lagorio in New York; Editing by Tim Dobbyn)

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