NEW YORK Sallie Mae SLM.N and Nelnet Inc (NNI.N) shares soared on Thursday after the U.S. Department of Education awarded them and two other companies a contract to service $550 billion of federal student loans.
The contract, announced on Wednesday, should help the lenders offset potential revenue losses if the government adopts President Barack Obama's proposal to stop subsidizing private lenders, and instead make the loans directly to students.
It was not immediately clear how much business and fees each company will get, but the Education Department said it plans to acquire a "large volume" of federally guaranteed loans in the coming months. The five-year contract is expected to begin in August and may be renewed for another five years.
"This will prove to be a meaningful source of growth for both Sallie Mae and Nelnet over the years to come," wrote Matt Snowling, an analyst at FBR Capital Markets who rates both companies "outperform."
Shares of Sallie Mae, whose formal name is SLM Corp, closed Thursday up 42 cents, or 5.5 percent, at $8.11, while Nelnet surged $2.62, or 32.2 percent, to $10.76.
The Education Department said it also awarded the contract to two private companies, American Education Services/PHEAA and Great Lakes Education Loan Services Inc.
Secretary Arne Duncan said the contract would help ensure that "all eligible students" have access to loans to help them pay for college.
Some analysts expressed surprise that Affiliated Computer Services Inc (ACS.N), a large servicer for the government's Direct Student Loan program, was not chosen for the contract. ACS shares closed down $1.68, or 3.7 percent, at $44.01.
In a statement, ACS spokesman Ken Ericson said the company is assessing the government's decision, and will continue providing services under its existing direct loan contract, which it said may last another four years.
Obama in February proposed to shift most of the country's $90 billion of student lending into a direct loan program, and shut the Federal Family Education Loan Program by July 2010.
The president estimated the changes could save taxpayers more than $4 billion a year.
Snowling said Sallie Mae services nearly $150 billion of FFELP loans, four times as much as Nelnet, AES/PHEAA and Great Lakes combined. This "scale advantage should favor Sallie Mae," but Nelnet could enjoy a "significant win," he said.
Sallie Mae is based in Reston, Virginia; Nelnet in Lincoln, Nebraska; AES/PHEAA in Harrisburg, Pennsylvania; Great Lakes in Madison, Wisconsin; and ACS in Dallas.
(Reporting by Jonathan Stempel; editing by John Wallace, Bernard Orr)