Private Investors to Buy Sallie Mae for $25 Billion

Sallie Mae, the nation's largest student loan company, announced yesterday that it would be bought by a group of private investors in a $25 billion deal that could reduce public scrutiny of the lender at a time when the student loan industry is under siege.

The enormous deal underscores the potential for profit that Wall Street sees in the $85 billion-a-year student loan industry, even as Congress considers slashing billions of dollars in federal loan subsidies and an expanding nationwide probe reveals fresh conflicts of interest in the student lending world.

The buyers of the Reston company include J.P. Morgan Chase, the third-largest originator of federal student loans, and Bank of America, the fourth-largest. Together with Sallie Mae, they control up to 40 percent of the market, analysts said.

The sale -- which could triple the value of the chief executive's stock options, to more than $120 million -- is the latest transformation for a 35-year-old company that began as a congressionally chartered quasi-governmental entity. Sallie Mae has capitalized on rising tuition costs and increased enrollments at colleges and universities to become a financial powerhouse and one of the largest public companies in the Washington area.

Sallie Mae's bread and butter has been issuing loans that carry federal interest rate subsidies and government guarantees, which minimize the potential losses if borrowers default.

Tom Joyce, a spokesman for Sallie Mae, said the deal would not affect the company's nearly 10 million student loan customers, who owe a total of $142 billion. He also said Sallie Mae, Bank of America and J.P. Morgan Chase would continue to compete with one another in the student loan business.

But some analysts said the buyout could reduce options for consumers. "This deal is going to hurt students because there aren't going to be as many competitive rates out there," said Stuart Plesser, an analyst at Standard & Poor's.

News of the deal prompted concern from Democratic lawmakers who have opened investigations into the financial relationships and conflicts of interest among private lenders, universities and government officials. Government probes have already resulted in the suspension of financial aid directors at six universities, a senior official at the Department of Education and three top lending company executives.

"Clearly, banks and investors see student loans as a very profitable business," Edward M. Kennedy (D-Mass.), chairman of the Senate Education Committee, said in a statement. "It's more urgent than ever to enact reforms to our student loan system to ensure that students, not profits, are our top priority."

Critics of Sallie Mae have for years pored over the lender's Securities and Exchange Commission filings to discover details about compensation packages for top executives and the company's profit margins. Some of those disclosures have galvanized efforts to overhaul the student loan industry.

Much of that information could became secret once the company goes private.

"They are trying to turn student loans into a black box," said Luke Swarthout, an advocate for the U.S. Public Interest Research Group Higher Education Project. "That will further stymie and undermine appropriate regulations and appropriate protection of taxpayer subsidies."