President Bush is trying to “right-size” the student loan industry with a proposed budget that would cut subsidies and drive out many private lenders by reducing their profits, the head of student loan giant Sallie Mae said yesterday.
“He put together something that would more than likely eliminate many of the players in the FFELP [Federal Family Education Loan Program student loan] industry,” Tom Fitzpatrick, chief executive officer of SLM Corp., known as Sallie Mae, said during a meeting with editors and reporters at The Washington Times.
The Bush administration’s proposed fiscal 2008 budget would reduce education subsidies for special programs, such as student loans, to $6.6 billion, from $9.7 billion this year. Lender subsidies would fall by 0.5 percentage points.
The White House said the $12.4 billion saved over five years by cutting subsidies would be used to increase the number of Pell Grants, which are given to the poorest college students. The grants do not need to be repaid.
Mr. Fitzpatrick’s warnings about the Bush administration proposals were echoed by Prudential Equity Group financial analyst Charles Gabriel, who called the budget cuts a “shocker” in a research note to investors. The administration “may be doing the equivalent of throwing the student loan industry under the bus,” the note said.
Meanwhile, the Senate is considering three bills on student loans. The proposals would create financial incentives for schools to participate in the government loan program by returning fees to them that otherwise would be paid to private lending institutions.
About 80 percent of student loans are given out by private lenders, while 20 percent are through the federal government, according to Sallie Mae, the nation’s biggest provider of student loans.
The Reston company was formed as a government-sponsored enterprise in 1972 but completed a privatization in 2004.
Sallie Mae says giving the government more control over student loans would create a bloated bureaucracy and reduce competition among lenders to serve students and their families.
“The indicators are that the program actually costs the taxpayers money” by reducing competition among lenders, Mr. Fitzpatrick said.
A House bill approved Jan. 17 would cut interest rates on student loans in half, from 6.8 percent to 3.4 percent, over five years.
An estimated 5.5 million students who take out need-based federal loans would benefit from the lower interest rate.
Mr. Fitzpatrick said the 5.5 million students are about 27 percent of borrowers, but cutting rates would do little to reduce their college expenses. He called the idea of reducing interest rates “frivolous” and said it creates nothing more than a “headline sensation.”
Mr. Fitzpatrick said he expects increases in Pell Grants to be approved, but that reduced interest rates on loans face a struggle in Congress.
The government pays interest on subsidized loans while students are in college. Afterward, the students pick up the payments.
The House proposal would cost the taxpayers nearly $6 billion, according to the Congressional Budget Office.
The costs would be offset by reducing the yield lenders can receive from the loans and cutting the guaranteed return banks receive when students default. Banks also would have to pay higher fees.
Mr. Fitzpatrick said just a small reduction in the money banks earn from student lending would mean “no one makes enough money to even service these loans.”
He also said, “The margin on these loans have been, and are, razor thin.”
Sallie Mae Chairman Albert Lord faces an investigation after he sold 400,000 shares of Sallie Mae stock on Feb. 2, three days before President Bush announced his budget proposal. The company’s stock fell nearly 9 percent the day the budget was announced.
Mr. Lord saved about $1.4 million by selling the stock, which prompted calls by Sen. Edward M. Kennedy, Massachusetts Democrat, and other members of Congress for a Securities and Exchange Commission investigation.
“I would say it’s unfortunate timing,” Mr. Fitzpatrick said. He added that Mr. Lord notified the board of directors Jan. 25 that he would sell some of his shares.
SLM Corp.’s stock, SLM on the New York Stock Exchange, closed yesterday at $44.04 a share, down 7 cents, or less than 1 percent, from Wednesday’s closing price.
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