Obama budget calls for major U.S. student loan shift

WASHINGTON (Reuters) - The private-sector student loan industry would be dealt a major blow under the federal 2010 budget proposed by President Barack Obama on Thursday.

Shares in Sallie Mae, the nation’s largest student loan group, fell sharply on Obama’s proposal to shift all federal student loans into the so-called direct-loan program administered by the U.S. Department of Education.

The budget for fiscal 2010, which begins on October 1, said it would save more than $4 billion annually by ending “entitlements” for financial institutions that lend to students.

“Right now, the subsidies in the government-guaranteed student loan program are set by the Congress through the political process. That program has not only needlessly cost taxpayers billions of dollars, but has also subjected students to uncertainty because of turmoil in the financial markets,” the budget document said.

The change, subject to review by Congress, could spell the end of the Federal Family Education Loan Program, a source of revenues for years for many student loan groups.

“President Obama proposes that, beginning in 2010-2011, all new student loans would be originated through the direct student loan program,” said California Democratic Rep. George Miller, chairman of the House education committee, in a statement praising the president’s proposal.

Shares in Sallie Mae, known formally as SLM Corp, were down $3.29 or 39 percent at $5.10 each in midday New York Stock Exchange trading after dipping as low as $4.72 earlier.

Reporting by Kevin Drawbaugh, editing by Gerald E. McCormick