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.
