April 18, 2008 in Business

Sallie Mae losing money on student loans

Alan Zibel Associated Press

Paying for college

Borrowing for college can be complicated, with direct loans, subsidized loans, parent loans, private loans. Now, the entire student-aid system is in the midst of a massive shake-up. Lenders are fleeing the federal loan program by the dozens, and the federal government is scrambling to prop up the system. What does it all mean for students and parents? Based on interviews with experts, here are some answers to common questions.

Q: I’m starting, or returning to, college this fall. Will I be able to get a loan?

A: Probably yes, though many students will have fewer lender choices. But some students will face more serious obstacles – particularly those who need private loans and already have problems like too much credit card debt.

Q: What is happening to the student loan system?

A: If you need to borrow for college, the first place to look is the federal government. Depending on your school, you may end up borrowing from the feds directly. Or you may take out a loan from a private company or nonprofit that is backed indirectly by the federal government. It’s that second category – federally backed loans made by other lenders – where there are problems. More than 50 lenders, including for-profit companies and state loan authorities, have stopped making new loans.

Q: What should students do?

A: Your college’s financial aid office can tell you which lenders are sill making loans. If your school participates in the federal direct lending program, you should have ready access to a direct loan from the government. Some schools that weren’t in the direct lending program are joining, to make sure students have that option.

Q: I’m a parent hoping to borrow on behalf of my child. How am I affected?

A: Parents of dependent undergraduates also have a federal loan option – they can borrow up to the cost of their children’s attendance to pay for college. But, unlike federal loans students take out themselves, these fixed-rate PLUS loans can be denied for bad credit.

Q: I’ve maxed out on federal loans, and still need to borrow more. Will it be harder to get a private loan?

A: Almost certainly. Lenders are insisting borrowers have higher credit scores, and cutting back on loans at schools with low graduation rates.

Q: I am still paying back some variable-rate loans and would like to consolidate. Does the turmoil in the student loan market affect me?

A: You will definitely find fewer lenders willing to consolidate your variable loans to a fixed-rate loan. However, you can always consolidate through the federal direct lending program. Just be sure to wait until July, when the rate will almost certainly drop.

Associated Press

WASHINGTON – Sallie Mae says it cannot write money-losing student loans indefinitely.

Top executives are holding “daily deliberations” about just how long the nation’s largest student lender can afford to sacrifice its bottom line for the sake of college-bound Americans, Sallie Mae CEO Albert J. Lord said Thursday.

Experts said that, unless the government intervenes or market conditions rapidly improve, Sallie Mae could have no choice but to stop writing new federally backed loans.

House lawmakers on Thursday approved a measure to boost the availability of credit for Sallie Mae and other student lenders, and analysts believe the Treasury department could act as soon as next week.

Sallie Mae lost $104 million in the first quarter as it grappled with higher borrowing costs, restructuring charges and other factors, though Lord said in a conference call with analysts that the company would not lower its full-year earnings target.

Shares of the Reston, Va.-based company climbed almost 6 percent Thursday but are still down 70 percent from last summer.

Even though the majority of student loans are highly rated and carry a federal guarantee, investor demand for securities backed by these assets has plummeted – a sign of just how nervous investors are about securities backed by mortgages, student loans and other debt.

Bank of America Corp. said Thursday it would stop private student loans, but continue offering government-backed loans. On Wednesday, Citigroup Inc. said its Student Loan Corp. subsidiary will temporarily stop issuing loans to students at schools where profits have not been satisfactory.

These market conditions come just months after a new law reduced government subsidies for federally guaranteed student loans, whose interest rates are capped at 6.8 percent.

That situation has forced Sallie Mae, formally SLM Corp., to lose money on every federally backed loan it makes, testing Wall Street’s patience as around 60 other companies have exited the market for those loans, either permanently or temporarily.

More than 75 percent of federal student loans are issued by those lenders, which primarily raise money by bundling loans into securities sold to institutional investors.

If the appetite for such securities doesn’t grow, Sallie Mae could be forced to halt new student loans, said Mark Kantrowitz, an expert on student loans who publishes the Web site finaid.org. “If they have no liquidity, then they can’t make new loans,” he said.

However, Sallie Mae would still be able to operate, Kantrowitz said, because the company would still receive fees for collecting loan payments. But the company would have to shrink considerably.

To bring stability back to the student loan market, Sallie Mae has been pushing for the Treasury Department to aid the stricken market by purchasing securities backed by student loans.

Company executives said such assistance is urgently needed, particularly as students rush to file loan applications early, given concern about the availability of funding. “We don’t have weeks or months to resolve the solution,” said Jack Remondi, Sallie Mae’s chief financial officer.

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