Fighting on Two Fronts

Private Student Loan Industry, Led by Sallie Mae, Battles Democrats, Bush Over Federal Benefits

Investigators are examining Sallie Mae Chairman Albert L. Lord's sale of $18.3 million worth of company stock days before President Bush proposed subsidy cuts that caused company shares to drop. (By Susan Biddle -- The Washington Post)

Of all the industries under attack on Capitol Hill -- and there are plenty of them -- the business of providing student loans is perhaps the most threatened.

The private student loan industry and its leading company, Reston-based Sallie Mae, are battling against congressional Democrats and President Bush, both of whom would like to pare back the lenders' sizable federal benefits.

"We're caught in a crossfire," said Shelly Repp, general counsel of the National Council of Higher Education Loan Programs, which has Sallie Mae as a member. "It's very serious. We are having to work hard to defend the program."

"It's definitely a year of challenge for us," agreed Tom Joyce, spokesman for Sallie Mae, one of the Washington area's largest companies.

As a result, Sallie Mae and its allies have gone into crisis mode, lobbying intensively to hold back a potential flood of legislation that could squeeze the industry's profits. Loan officials and paid lobbyists are swarming Capitol Hill as Sallie Mae tries to portray itself as more appealing to a Democratic-controlled Congress.

SLM Corp., known as Sallie Mae, started in 1972 as a federally chartered entity, but Congress began to privatize it in 1997 and severed the company's ties to the federal government in 2004. The company is the largest private-sector originator of student loans insured by the federal government; it owns or manages more than $142 billion in student loans for nearly 10 million customers.

But the private student loan industry in general, and Sallie Mae in particular, has never been popular with Democrats. For years, Democratic policymakers have said they would prefer to take for-profit entities out of the market and encourage student lending directly from the federal government.

But this year, in a surprise, Bush broke with the GOP's usually unwavering support for private lending to students and sided with the Democrats. His budget proposal to Congress in February recommended reducing federal subsidies to private lenders, and increasing some of their fees, for a total savings of $19 billion over five years. Disclosure of the plan on Feb. 5 caused Sallie Mae's stock to tumble about 9 percent to its lowest closing price in more than two years.

That shock came soon after the Democratic-controlled House voted to cut federal loan interest rates by half over five years, a move that, if echoed by the Senate, would also erode future earnings of Sallie Mae and other firms. In addition, Democratic leaders are preparing other limitations, including one proposal in the Senate that would expand direct lending by the Education Department and constrict loans from elsewhere.

"It's very tough going; the administration budget was a shocker," said Joe Belew, president of the Consumer Bankers Association, a Sallie Mae ally. "But we are doing our best getting our message out."

That will not be easy. Shortly after Democrats won control of Congress last year, the Senate's leading Democratic lawmaker on education issues, Sen. Edward M. Kennedy (D-Mass.), lambasted Sallie Mae and its industry for profiting excessively and at the expense of low-cost education. "The student loan program works brilliantly for the banks, but not for the students," he said. "We ought to take the money-changers out of the temple in terms of student loans."

The White House tilted in the same direction in part because it needed to find revenue to pay for popular improvements in education. As a result, said Sameer Gokhale, a securities analyst with Keefe, Bruyette & Woods in New York, "Republicans, who are traditionally considered the friends of the industry, ended up proposing larger cuts than the Democrats."