UPDATE 3-Bush admin targets student loans, rules out FFB

(Adds Dodd comment)

By Kevin Drawbaugh

WASHINGTON, April 23 (Reuters) - The Bush administration on Wednesday endorsed federal intervention to stabilize the U.S. student loan market, but ruled out a course of action sought by Sallie Mae (SLM.N), the largest student loan provider, drawing criticism from a senior Democratic lawmaker.

Treasury Secretary Henry Paulson and other administration officials expressed support, in a letter to Sen. Christopher Dodd, for steps like those outlined in legislation passed overwhelmingly last week by the House of Representatives.

But the officials dismissed the possibility of the Federal Financing Bank (FFB), a Treasury unit, playing a role in any intervention in the $85-billion market. Sallie Mae executives had been calling for the FFB to step in.

The letter -- also addressed to Sen. Edward Kennedy -- was signed by Paulson, Education Secretary Margaret Spellings and Jim Nussle, director of the Office of Management and Budget.

Dodd called the letter "disappointing" and accused the administration of doing "less than it could, and should, do to ensure that every student has options to finance a higher education." He said the administration's position on using the FFB was inconsistent with the views of industry experts.

Turmoil in the student loan market -- brought on largely by a capital crunch stemming from the subprime mortgage crisis -- has raised concerns about loan availability this summer as students lock in their financing before going to school.

Dozens of lenders have left the federally guaranteed student loan program. Remaining lenders are having trouble selling securitized student loan debt on the secondary market. However, there have been few signs of students being unable to get loans, academic leaders told a Senate hearing last week.

At the same hearing, Sallie Mae Chief Financial Officer John Remondi called FFB intervention in the student loan market "the simplest and fastest solution to this problem."

But in their letter, the Bush administration officials said "the FFB does not have the authority" to play such role.

Jaret Seiberg, financial services policy analyst at the financial firm Stanford Group Co, said, "This has to be a disappointment to the non-bank student lenders who hoped to use Federal Financing Bank loans to provide the liquidity needed to originate new loans."

Shares of Reston, Virginia-based Sallie Mae, formally known as SLM Corp, closed down 6.8 percent at $16.44 on the New York Stock Exchange.

The company could not immediately be reached for comment.

White House spokeswoman Dana Perino on Wednesday said, "We do not want to see any students unable to attend universities this year because of the credit crunch."

She urged the Senate to move quickly. "Implementing this authority will take time, so it is imperative to move this legislation without delay," she said.