Sallie Mae quarterly earnings fall 72 pct

By Dan Wilchins

NEW YORK (Reuters) - Sallie Mae (SLM.N), the largest U.S. student loan company, posted a smaller-than-expected drop in earnings, and said its funding costs are improving after government efforts to prevent education loan shortages.

The company's difficulties are not over, but the results were better than the first quarter, when Sallie Mae posted a net loss and said it could not lend profitably amid the credit crunch.

In May, President George W. Bush signed a law that would temporarily allow the U.S. Education Department to buy certain student loans and take other steps to support education finance.

The specifics of how the law will be implemented have not yet been worked out, but the government's show of extra support for education finance helped Sallie Mae sell more than $7 billion of bonds backed by student loans during the second quarter, compared with $4.7 billion in the first quarter.

Sallie Mae also managed to sell corporate bonds, which are not secured by any assets, for the first time since March 2007.

Cheaper funding is a positive for Sallie Mae, but slowing economic growth could still result in higher losses on some loans, analysts said.

"That's going to be a challenge, as it is for all lenders," said Blake Howells, director of equity research at Becker Capital Management, which owns Sallie Mae shares.

Sallie Mae, legally known as SLM Corp, posted second-quarter net income of $266 million, or 50 cents a share, compared with net income of $966 million, or $1.03 a share, in the same quarter last year.

On an adjusted basis, the company earned 55 cents a share, beating analysts' average forecast of 40 cents a share, according to Reuters Estimates.

The adjusted results are based on "core earnings" of 27 cents a share, adding back on a per share basis 8 cents of restructuring charges, purchased paper business losses of 5 cents, and asset-backed facilities fees of 15 cents.

In the first quarter, Sallie Mae posted a net loss to common shareholders of $132.8 million.

The company has suffered as the credit crunch has made packaging assets like student loans into bonds and selling them to investors much more expensive. Changes to U.S. laws regarding subsidies to lenders have also reduced the potential returns to Sallie Mae on many loans.

Sallie Mae's difficulties amid the credit crunch ended up cratering its efforts to sell itself to a buyout group led by private equity firm JC Flowers last year.

The company's shares have fallen about 5 percent this year, compared with a nearly 13 percent decline in the Standard & Poor's 500 index. .SPX

(Reporting by Dan Wilchins; Editing by Tim Dobbyn, Gary Hill)