Sallie Mae Discloses Probe Into Marketing

Profit Fell 96% In Fourth Quarter

SLM Corp., the dominant college-student loan provider commonly known as Sallie Mae, yesterday reported a 96 percent drop in fourth-quarter profit and disclosed a federal probe into the company's marketing practices.

The news came the same week that the House of Representatives voted to cut federal loan interest rates by half over the next five years, a move that, if upheld by the Senate, could significantly erode Sallie Mae's future earnings.

Shares closed yesterday at $45.47, down 5.27 percent on the New York Stock Exchange. In the past year Sallie Mae shares have fallen 20 percent.

Sallie Mae, of Reston, manages $142 billion in loans to almost 10 million college students and their parents. It is the parent company of a number of college savings, education-lending, debt-collection and other subsidiaries.

In a filing with the Securities and Exchange Commission, the company said yesterday that on Dec. 23 it received an "informal request" from New York state's Office of the Attorney General seeking information and documents regarding the means by which the company gets on schools' preferred lending lists.

Analysts said that allegations of financial kickbacks to loan counselors have prompted the Education Department to consider whether to require more than one preferred lender on the lists.

Because of its size and dominance in the student loan market, "Sallie Mae has to be particularly careful with handling those school relationships," said Sameer Gokhale, an analyst with Keefe, Bruyette & Woods in New York.

The company said it was cooperating with the request.

Sallie Mae reported that fourth-quarter profit fell to $18 million, or 2 cents per share, from $431 million, or 96 cents per share, in the comparable quarter a year earlier. The company said it lost $245 million in the quarter related to derivatives, financial instruments based on the values of stocks, bonds and other assets used to hedge risk. In the same quarter a year ago, Sallie Mae's derivative-driven income was $70 million.

Sallie Mae's so-called core earnings, which exclude certain financial measurements used by standard accounting practices, rose 16 percent to $326 million, or 74 cents per share -- a penny short of analysts' initial estimates. Net revenue, including total net interest and other income, plummeted to $575 million from $1 billion.

Losses on derivatives have affected other lenders as well, including Freddie Mac. Such losses at Sallie Mae were $339 million for the year, compared with derivative-related gains of $247 million in 2005.

Although the demand for student loans has risen along with college enrollment, the lenders' earnings have been curbed as students consolidate existing loans to take advantage of falling interest rates.

"As the mix of consolidated loans has increased over the past few years, the profit margins have decreased dramatically," Gokhale said. "On the other hand, consolidation increases the life of the loan, so the net result is fairly comparable."

If Congress votes to reduce the interest rate on the widely used subsidized federal Stafford loans to 3.4 percent from 6.8 percent, Sallie Mae and other lenders may be forced to curtail some benefits to students, such as reduced rates in exchange for consecutive on-time payments, he said.

"If they cut interest rates, [Sallie Mae] couldn't recover that in the market," said Eric Fitzwater, senior analyst with SNL Financial in Charlottesville.

The company also failed to sell as many loans to third-party lenders during the fourth quarter as it did in the third, wiping out about $200 million in revenue.

But Matthew Park, an analyst with Prudential Equity in New York, said, "The underlying earning power is still quite robust, despite the loss."