Sallie Mae, Student Lenders Face Further Federal Cuts (Update3)
By Paul Basken
Feb. 5 (Bloomberg) -- Shares of SLM Corp., the biggest provider of college-student loans in the U.S., dropped the most in 14 years after President George W. Bush proposed further cuts in federal payments to education lenders.
The administration proposal, released today for the fiscal year starting Oct. 1, slashes the federal fees and other subsidies that make student loans more profitable for lenders such as SLM, known as Sallie Mae. The cuts go beyond Democratic proposals that bankers already had said might force some of them to stop making college loans.
The depth of the cuts is a ``shocker,'' analysts Charles Gabriel and Courtney Oldham of Prudential Equity Group Inc. wrote today in a note to investors as they cut their rating on Sallie Mae stock. The administration ``may be doing the equivalent of throwing the student loan industry under the bus.''
Shares of Reston, Virginia-based Sallie Mae, which completed a privatization process in 2004 that started in 1996, fell $4.09, or 8.8 percent, to $42.37 at 4 p.m. New York time in New York Stock Exchange composite trading. It was the biggest one-day percentage decline since February 1993.
``No doubt there will be lenders who choose not to participate'' if the subsidies are cut as proposed, said Tom Joyce, a spokesman for Sallie Mae, originally formed in 1972 under a federal charter to increase access to higher education by creating a secondary market for student loans. That will mean ``less choice and higher costs for students,'' Joyce said.
Spending Cuts
Bush's 2008 budget plan would reduce education spending in entitlement areas including student lending to $6.6 billion from $9.7 billion this year and $41.6 billion in fiscal 2006. Most of the decline this year was due to recalculations of actual expenditures, which vary based on factors such as interest rates and student decisions about consolidating loans, according to a government summary.
The Democrat-controlled U.S. House of Representatives last month approved a cut of 0.1 percent in lender-subsidy payments to fund their proposed reduction in student interest rates. Bush's plan today includes an additional 0.5 percent reduction in that rate.
``Obviously when you have Bush and the Democrats moving in the same direction it's a bad sign,'' said John Dean, special counsel to the Consumer Bankers Association, which represents lenders including Bank of America Corp. and Wells Fargo & Co. ``I expect that the industry will basically come up and walk people through this and say, `Are you sure you want to do this.'''
Sallie Mae owns or manages $142 billion in loans to almost 10 million student and parent customers. The federal government guarantees that Sallie Mae and other lenders earn a minimum return and reimburses them in the event a borrower defaults.
Industry Profit
The reduction in those subsidies is warranted because of strong profit levels in the lending industry as the federal government is trying to help more students attend college, U.S. Education Secretary Margaret Spellings said today in a conference call with reporters.
``We all have seen the lending industry continue to be highly profitable,'' Spellings said. ``We're strongly supportive of private sector lending, but I think it's important for us to not compromise access for students in this process as resources are scarce.''
The lenders currently are guaranteed a return of 7.7 percent on student loans under a rate system that hasn't changed since 1992, said Thomas Skelly, the department's budget director. Even with the 0.5 percent cut proposed by Bush, lenders will still get ``a pretty good return when there isn't a whole lot of risk,'' Skelly said.
Rating Cuts
Analysts at Prudential cut their rating on Sallie Mae shares to ``neutral'' from ``overweight,'' while Lehman Brothers Inc. lowered its rating to ``equal weight'' from ``overweight'' and Bank of America downgraded its rating to ``sell'' from ``buy.''
Bush's support, backing similar calls from the new Democrat- led Congress, reflects a political uncertainty for Sallie Mae and other lenders that ``will have a long-term negative impact on the company, and the state of the student lending industry in general,'' analyst John Guarnera of Bank of America wrote in a note to investors.
Senator Edward Kennedy, the new chairman of the Senate's education committee, promised after the November elections that he would stop Sallie Mae from profiting excessively from students. SLM shares have risen from $3.17 in 1995, Kennedy said.
Sallie Mae's 4.5 percent notes maturing July 2010 rose 0.23 cents to 97.31 cents on the dollar, according to Trace, the bond- price reporting service of the NASD. The yield fell to 5.36 percent from 5.43 percent.
Shares of Nelnet Inc., which services college-student loans in North America, decreased $2.65, or 9.6 percent, to $25.05. The shares of the Lincoln, Nebraska-based company earlier dropped to $24.91.
Shares of San Francisco-based Wells Fargo slipped 17 cents to $35.69, while Charlotte, North Carolina-based Bank of America rose 14 cents to $52.88 and New York-based Citigroup Inc. increased 9 cents to $54.75.
To contact the reporter on this story: Paul Basken in Washington at pbasken@bloomberg.net |
