UPDATE 1-Sallie Mae sees funding costs falling, shares rise

(Adds additional comments, market reaction)

NEW YORK, June 5 (Reuters) - SLM Corp's (SLM.N) vice chairman Jack Remondi said on Thursday the student lender's funding costs are falling and it is returning to the securitization markets, sending its shares up more than 6 percent.

Speaking at an investor conference Remondi said the company expects to pay investors less on its latest $2 billion package of government-backed loans than at any time since the credit crunch began last summer.

He estimated that Sallie Mae, as the company is better known, will pay a lower interest rate of around one percent over London interbank offered rates (Libor), a benchmark rate.

Sallie Mae was the target of a private equity takeover bid that collapsed in part due to regulatory changes that were expected to negatively affect the student lender's growth.

But Remondi expects to see its loan business grow this year because other competitors have scaled down or withdrawn from the market.

"This is an opportunity for us," Remondi said.

The U.S. Education Department agreed to buy up federally- backed student loans last month, allowing Sallie Mae to continue offering government-guaranteed loans.

"The agreement allows us to make loans to all students at all schools," Remondi said.

As a result of the agreement, the company expects to issue more than the $18 billion in loans it originally forecast for the year.

"We expect to see a significant increase in demand for student loans," he said.

Sallie Mae was among the top performers on the New York Stock Exchange on Thursday. Its shares were up as much as 6 percent and it was one of the top performers in the Dow Jones U.S. financials index, which was up around 4 percent.

Sallie Mae's latest securitization was given provisional ratings by Moody's Investors Service on Thursday.

Remondi said the deal is the same structurally as two previous transactions that, in the past year, saw funding rates at around 150 basis points and 120 basis points over Libor, respectively.

The tightening in spreads, which indicates that investors perceive less risk in the deal, is due to investors beginning to differentiate between credit instruments and appreciating that these securities come with an explicit government guarantee, he said.

"We need it to get tighter," Remondi said. "I would like to see these spreads get down to numbers in the 50s.