Federal intervention boosts Sallie Mae

WASHINGTON (AP) -- Shares of industry leader Sallie Mae jumped Wednesday after it became known that the Bush administration is preparing to help struggling lenders in the student lending market by buying up their loans.

Because of the government's decision to step in, the nation's largest student lender will continue to make federally backed loans, Sallie Mae's chief executive, Albert Lord, said in a conference call with officials from colleges and universities.

"We have reached a conclusion that we will stay in the program," Lord said, noting that the steps being taken by the government will be sufficient to keep the company lending through the 2008-09 academic year. "Our commitment is virtually unbounded under this current [government] proposal," he said.

Shares of Sallie Mae, formally known as SLM Corp. (SLM, Fortune 500), rose $1.22, or nearly 6%, to close at $22.

The gain came in a market gutted by economic gloom and concern over record-high oil prices, with the Dow Jones industrial average marking a 2-day slide of more than 425 points.

Corporate fallout: Reston, Va.-based Sallie Mae has suffered since last year from financial losses, a failed buyout and reshuffling of top management. In January, the company announced it was cutting back on its core business of making student loans, becoming more selective and stressing the importance of graduation as a predictor of a person's higher earnings potential and likelihood to repay loans.

And, as it pushed aggressively for federal help in recent weeks, Sallie warned that it could not lose money indefinitely on federally guaranteed student loans.

During these weeks, the distress call over student loan access has been sounded by lenders, Wall Street investors and college administrators. They have gotten a sympathetic hearing - and helpful legislation - on Capitol Hill.

Distress in the $330 billion market for auction-rate securities in recent months - itself an offshoot of the subprime mortgage crisis - has caused more than 60 student lenders, including some state agencies, to stop making federally guaranteed student loans either temporarily or permanently.

Access to capital: On Tuesday, Bush administration officials told lenders that the government would buy up their student loans to ensure the companies have access to capital. Congress recently gave the Education Department the authority to do so.

The administration also has agreed to have the government invest in securities made of student loans bundled together, traditionally the exclusive province of private investing companies in a market that has become stressed. The move is expected to make capital available to student lenders at cheaper rates than what they can get by issuing student loan securities on the market. Borrowing costs for lenders rose dramatically as a result of the disruption in the credit markets.

"It changes the economics of new [federal student] loans in the near term," said David J. Long, an analyst at William Blair & Co. in Chicago.

Lingering concerns: Still, Sallie Mae was unhappy with an aspect of the government plan. It doesn't ensure that student loans are serviced by the same company that originally made them, a situation that could make it harder for students to keep track of their loans and possibly lead to more defaults, company President C.E. Andrews said during the call.

Fees associated with the servicing of student loans can be a lucrative business stream.

Education Secretary Margaret Spellings told the lenders in a letter Wednesday that the government will purchase some of the loans.

"Many lenders today do not have access to funds at a cost that justifies originating new loans," Spellings wrote. "Our plan is designed to provide viability in the marketplace for lenders who step up and make loans in this difficult environment."

Federal intervention boosts Sallie Mae

By CNN