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Student loan companies' shares plunge on Obama proposal

The president's budget plan calls for direct government funding of student loans, cutting out private industry.

February 27, 2009|Tiffany Hsu

President Obama's proposal for direct government funding of student loans -- cutting out private industry -- sent shares of Sallie Mae, Student Loan Corp., Nelnet Inc. and other college loan companies plunging Thursday.

For-profit vocational schools, such as Corinthian Colleges Inc., DeVry Inc. and ITT Educational Services Inc., also saw their stock prices drop. Their students often rely on government-backed loans from private lenders.

Currently, students needing funds typically borrow money directly from the government or from banks and other lenders such as Sallie Mae that issue loans subsidized or backed by the government.

Obama's budget proposal for the 2010 fiscal year, which begins Oct. 1, calls for cutting out the middlemen by eliminating subsidies to lenders. The administration believes that the move to the Department of Education's Direct Loan Program could save more than $4 billion a year.

Analysts said the proposal was another blow to the nearly $90-billion student loan market. Lenders have struggled recently with a credit crisis and accusations of manipulative policies, spotty disclosure and deceptive practices. In some cases, for example, lenders have pretended to represent schools' financial aid offices.

Although some analysts said the proposal might not survive its trip through Congress, it seems to indicate that private student lenders are facing an uphill battle with the new administration.

Still, the cost and risk to the government of converting thousands of colleges to the direct-loan program could be enormous, said FBR Capital Markets analyst Matt Snowling. The government might find that it doesn't have the capacity to handle an additional $60 billion a year in student loans.

The Obama plan recognizes the need for help. Under the proposal, the Department of Education may use some of the private lenders as loan servicers.

The special allowance subsidy paid by the government is the main incentive for lenders to allow students to borrow at all, since the high rate of default makes those loans otherwise unprofitable.

Sallie Mae, known officially as SLM Corp., saw shares dive $2.59, or 31%, on Thursday to $5.80. Nelnet Inc.'s stock plummeted $5.83, or 54%, to $4.91. Student Loan Corp., a unit of Citigroup Inc., dropped $11.63, or 22%, to $41.51.

Sallie Mae worked closely last year with the government to ensure that students had access to federally backed loans without putting the burden on taxpayers, said Al Lord, SLM's chief executive. The company manages a $169-billion student loan portfolio and services more than 10 million borrowers.

"We are committed to delivering and servicing federal student loans, regardless of their funding sources," he said.

Student Loan Corp. argued against the Obama proposal, saying that "healthy competition leads to choice, innovation and high standards of service."

Nelnet contended that student loan programs should "maintain the benefits of choice and competition, and should not contribute significantly to the national debt."

Private companies lent $78 billion to students in the 2007-08 school year, said Mark Rodgers, a Citigroup spokesman.

Shares of several owners of private colleges also dropped Thursday, although experts said they were unsure whether Obama's proposal was to blame.

Corinthian Colleges Inc. in Santa Ana fell $1.35, or 6.7%, to $18.86. DeVry Inc., which runs DeVry University and DeVry Institute of Technology, was down $2.10, or 3.9%, to $51.30. ITT, which runs ITT Tech institutions around the country, dropped $6.60, or 5.6% to $110.69.

But the suggested shift away from government-backed private loans isn't a crippling move, said Lorena Valencia, who runs the financial aid program for ITT Tech in Torrance. Most of the students get loans from Sallie Mae or its competitors, she said, but the school also provides information on direct government loans.

"Since we present all the options to students and leave the choice to their discretion, there wouldn't be either a positive or negative impact on the school," Valencia said.

The timing is not good for some private lenders who have been hobbled by loan defaults after graduating students fail to find jobs in the worsening economy, said Emily Peters, a personal finance expert for consumer website Credit.com.

"Financing for student loans has fallen through the cracks in the last few months, with higher default rates and struggling companies," Peters said.

"This is definitely changing the landscape for a whole industry already in flux, though there's still a potentially strong market for private loans."

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tiffany.hsu@latimes.com

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