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.