Fighting on Two Fronts
Private Student Loan Industry, Led by Sallie Mae, Battles Democrats, Bush Over Federal Benefits

By Jeffrey H. Birnbaum
Washington Post Staff Writer
Monday, April 2, 2007

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."

"I have to keep reminding myself that he [Bush] was a Republican," said Matthew Park, a securities analyst for Prudential Equity Group in New York.

The student lending industry became a tempting target for cutbacks for philosophical and political reasons. Democrats tend to prefer government solutions -- and eschew for-profit answers -- to societal concerns. Moreover, Sallie Mae and others in the industry had showered mostly Republican lawmakers with campaign contributions, increasing the partisan antipathy.

On top of that, the industry has suffered public gaffes that have made both parties leery of backing it.

Congressional investigators are looking into Sallie Mae Chairman Albert L. Lord's sale of $18.3 million worth of company stock just days before Bush proposed the subsidy cuts that caused Sallie Mae shares to drop. The chairmen of the House Financial Services and Education committees have requested detailed information on all contact between the lending giant and the Bush administration over the previous three months.

Even the senior Republican on the Senate's education committee, Sen. Mike Enzi (R-Wyo.), criticized Lord's transaction. "Regrettably, Sallie Mae officials' recent stock transactions do not reflect the commitment to accountability and corporate governance that we want our children to learn from and follow," Enzi said in a statement.

Joyce, the Sallie Mae spokesman, said that Lord had no knowledge that the administration would propose such cuts and called the timing of the sale "completely coincidental."

The industry also has been bruised by media accounts that some of its lending institutions gave favors to student loan officers to get onto the list of lenders that the colleges recommend, called preferred-lending lists. The New York attorney general's office has made an informal request for information on Sallie Mae's marketing practices related to these lists.

Whatever the cause, Sallie Mae is being forced to push back hard on Capitol Hill, including boosting its campaign giving to Democrats. In the 2004 election, GOP candidates got nearly 60 percent of its donations. But last year, the company divided its political action committee's $589,500 in contributions evenly between Democrats and Republicans.

Sallie Mae recently hired a Democratic lobbyist, Mark Schuermann, a former top aide to ex-Rep. Harold E. Ford Jr. (D-Tenn.), and has widely distributed glowing quotations about the current system from college loan officials from California to Connecticut -- a group that tends to have the sympathy of Democrats.

And it is not lobbying alone. The industry's umbrella organization, America's Student Loan Providers, is considering an advertising campaign and, in the meantime, has been producing a steady stream of news releases and op-eds that extol the private lending program's long history, low costs and relative efficiency. Kevin T. Bruns, the group's executive director, said he has been spending lots of time talking to college newspapers in hopes of producing articles that might incite student support for the program's continuation.

Individual student loan associations have been flying its members into Washington to lobby their elected representatives. Last week, the Education Finance Council, which represents nonprofit student loan providers, brought 25 executives for a day of visits in Congress. The first event: a fundraiser for Rep. Peter Hoekstra (R-Mich.), a member of the House Education and Labor Committee.

James W. Parks II, president of the Louisiana Public Facilities Authority, was one of those lobbyists-for-a-day. He visited his state's congressional delegation and gave them a single message: Tampering with the private loan program "could be disastrous down the line" and that students, not banks, would be harmed in the long run.

The National Council of Higher Education Loan Programs has been encouraging its members to write letters and e-mails to lawmakers and to visit them when they travel back home. The group is planning a session in Washington next month that will include multiple meetings on Capitol Hill. "We definitely have a lot of work to do," said Repp, the group's general counsel.