UPDATE 1-Sallie Mae sees earnings improving in 2nd half

* Sees better loan delinquency rate

* Expects credit losses to decline

* Shares rise 3.8 percent

NEW YORK, Sept 16 (Reuters) - Earnings at Sallie Mae SLM.N, the largest U.S. student loan provider, will improve in the second half of the year following losses in the first half as credit markets and bad loans stabilize, the company's chief executive said on Wednesday.

The company suffered in the first half because its assets generate interest based on commercial paper rates, while its liabilities are linked to the London Interbank Offered Rate, or Libor. The shrinking gap between those rates trimmed its net interest margins.

It has also been hit by securities and loan write-downs, disruptions to credit markets and higher loan losses amid the worst recession in decades.

"Some people called it the perfect storm," Chief Executive Albert Lord said at a Barclays Capital conference. He said he expects earnings to improve in coming quarters.

Sallie Mae, whose formal name is SLM Corp, said the rate of early-stage loan delinquencies -- an indicator of future defaults -- is improving.

The Reston, Virginia-based company forecast defaults will peak this year but will decline in the next three years, as it has been tightening its underwriting criteria in recent quarters.

"Charge-offs will remain high but will be better," Lord said.

Still, Sallie Mae faces a tough road ahead, as a proposed law would shift much student lending into a direct loan program and by July 2010 end the Federal Family Education Loan Program, once a big source of profits for Sallie Mae, Student Loan Corp STU.N and other rivals.

Sallie Mae shares were up 33 cents to $9.00 in morning trading on the New York Stock Exchange. (Reporting by Juan Lagorio; editing by John Wallace)