Sallie Mae comes under pressure from both sides

The stock market staged a modest rally the day after President Bush’s reelection victory in 2004. But the share price of one company shot up 10 percent, climbing more than any other stock in the S&P 500.

SLM Corp., the parent of student-loan giant Sallie Mae, had dodged a bullet with the defeat of John Kerry, or so Wall Street investors thought.

But today the outlook for Sallie Mae and other student lenders isn’t so bright. They have lost their Republican protectors in Congress, and Sen. Edward Kennedy (D-Mass.), the chairman of the Senate education committee, is pushing legislation that would cut into their profits. Bush himself has not been a reliable friend to the industry, which rakes in billions in federal subsidies in exchange for providing government-backed loans to students.

On Feb. 5, he proposed slashing those subsidies by $12.4 billion and scaling back the government guarantee on student loans in his 2008 budget. The move, which came close on the heels of a House vote to cut the loan subsidies by $7.9 billion, stunned Wall Street, Congress and just about every student-loan lobbyist in town.

“I have not talked to a single person who saw it coming. Not a single person,” said John Dean, who lobbies on behalf of the Consumer Bankers Association.

The shift in the political environment has sent student lenders scrambling for cover, and perhaps no lender is more worried than Sallie Mae.

The Reston, Va.-based company controls roughly 40 percent of the $47 billion market for Federal Family Education Loans (FFEL). And unlike its rivals, it has stretched its tentacles to every corner of the industry — from originating, securitizing and servicing its own loans to buying them up from other lenders. If a student loan goes into default, chances are that a debt-collection company owned by Sallie Mae will collect it.

“They’re the big dog,” said one industry lobbyist. “If you take a big swing at the student-loan business and you hit really hard, you’re going to hit Sallie Mae in nine places.”

Yet Sallie Mae may be hampered by its own success as it tries to fend off multiple threats this year, several student lender lobbyists said. The one-time quasi-federal agency, which began the process of spinning off from the government in 1997, has become the poster child for an industry that many Democrats believe lines the pockets of corporate bigwigs at the expense of taxpayers and students.

Sallie Mae’s chairman, Al Lord, raked in total compensation of $225 million from 1999 to 2004, when he was serving as the company’s chief executive. The current CEO, Thomas “Tim” Fitzpatrick, took home $39.6 million in 2005, topping The Washington Post’s list of the highest-paid local executives.

Lord is known for displaying a disdain for government that some lobbyists have found ironic and even reckless, given Sallie Mae’s reliance on federal subsidies.

“He made life difficult for his government-relations people because of his attitude toward government,” said Jim Newell, a member of Sallie Mae’s original in-house lobbying team in the 1990s.

Now, Lord is under investigation by the House, the Senate and the Securities and Exchange Commission (SEC) for unloading more than $18 million in Sallie Mae stock just days before the release of the 2008 Bush budget, which sent the share price into a tailspin.

Although Sallie Mae has spread its political action committee contributions fairly evenly between the two parties over the years, it is seen as cozy with the GOP. That’s partly due to Lord, an unabashed Republican who raised money for Bush in 2004 and is a golf partner of Rep. John Boehner (R-Ohio). But it’s also a consequence of the ideological split over student loans.

The Direct Loan program, which President Bill Clinton signed into law in 1994, drew scrutiny to the large federal subsidies flowing to private lenders. It wasn’t long before Sallie Mae became a political football on Capitol Hill, recalled Rose DiNapoli, a former Republican staffer who headed up of Sallie Mae’s in-house lobbying team.

She summed up the attitude of many congressional Democrats: “Here’s a great whipping post. Here’s someone we can beat up on all the time.”

Democrats have traditionally supported direct lending because it is cheaper to the taxpayer.

Republicans counter that a large role for the private sector ensures better service and lower costs to students. They point out that competition from private lenders has driven down the direct-loan share of the market to 20 percent today from a high of 37 percent in the 1990s.

Yet the longstanding Republican support for the student-loan business is fraying amid fiscal pressures and spiraling tuition costs. Last year, the Republican-controlled Congress trimmed $12 billion in loan subsidies. This year’s House-passed cuts attracted the support of 124 Republicans, while only 71 opposed the measure. And then there were the sharp cuts proposed by Bush.

Said one student lender lobbyist of Sallie Mae: “I think they are starting to feel somewhat isolated and alone.”

Sallie Mae and other lenders fear that the proposed cuts in the Bush budget will embolden Kennedy to go further than the House-passed cuts when he unveils a sweeping reauthorization of the Higher Education Act later this year.

The senator has introduced three other related bills: a measure that would trim fees to student lenders so that Congress can pay for increases in Pell Grants and rate cuts on student loans; a bill that would pay schools that had soured on direct lending to return to the program; and another bill that would shine light on lenders’ marketing practices to student-aid officers.

Kennedy is also mulling legislation to set up a loan auction designed to whittle down the federal subsidies by forcing FFEL lenders to bid against each other. Senate staffers said they are working on draft language for that bill, which would be proposed in lieu of cuts to the subsidies.

Sallie Mae is fighting back, arguing that it cannot absorb the deep cuts proposed in the Bush budget. Taken together, the reductions in the loan guarantee and the subsidies will force the company to cut back on services and special breaks to students, company spokesman Tom Joyce said.

These measures will also force Sallie Mae to think twice about lending at schools with higher default rates, Joyce said. He called it a “congressionally forced red-lining of the program.”

Skeptics point out that Sallie Mae has made similar claims in the past and still found a way to be extraordinarily profitable. “These threats are just not credible,” one Senate staffer said.

Meanwhile, some financial analysts doubt the drastic cuts proposed by Bush would drive Sallie Mae out of the business. According to Matt Snowling, an analyst for Friedman, Billings, Ramsey & Co., the student-loan giant would still earn a 0.37 percent after-tax return on a FFEL loan.

However, the problem with slashing subsidies is that it may squeeze smaller lenders.

“It will drive some out of the program. It’s hard to tell whom,” Newell predicted.