Administration Unveils Plan To Protect Student Lenders

The government yesterday outlined a financial rescue plan for student loan companies, offering to buy federally subsidized loans that lenders such as industry giant Sallie Mae said had become unprofitable.

The action is intended to protect lenders from losses over the next year and make sure that students have uninterrupted access to loans, Secretary of Education Margaret Spellings said in a letter yesterday that detailed the plan.

Under the plan, lenders will have the option of selling the government securities backed by student loans on terms markedly more favorable than the rates now available in the financial markets.

Sallie Mae chief executive Albert L. Lord, whose company had said it might stop making federal loans, hailed the announcement as "practical, workable and maybe most of all quite helpful."

Sallie Mae, based in Reston, had heightened the drama by scheduling an afternoon conference call with college officials. On the call, Lord said he did not know until he read Spellings's letter at 1:08 p.m. what direction the call would take, implying that the company had been on the verge of withdrawing from the federal loan business.

Government officials drove a hard bargain, Lord said, but under the administration's plan, Sallie Mae's commitment to the program "is virtually unbounded."

An executive at the American Association of Collegiate Registrars and Admissions Officers, Barmak Nassirian, called the plan a bailout.

"Certainly the scale of this intervention may well exceed any emergency, any theoretical emergency we may face," Nassirian said. "Sallie Mae exiting federal student lending, threatening to exit federal student lending, is as credible as Starbucks threatening to leave the coffee business," Nassirian added.

In taking this initiative, the government was responding to a threat that has the potential to become a political issue in an election year.

Last year, Congress and President Bush enacted legislation cutting subsidies on government-backed loans. Some politicians argued that federal programs had showered excess profits on private lenders. Meanwhile, the credit crunch that began in the mortgage market spread to other sectors, making it costlier for lenders to sell student loans to investors and thereby replenish the funds needed to make more loans.

Dozens of lenders exited the federally backed student loan business, including many of the largest, and the industry pleaded for relief. Congress recently passed legislation paving the way for the administration to intervene.

"These offers of temporary federal support ensure lenders have the incentives, and, if necessary, the liquidity needed to continue serving students and families for the 2008-2009 academic year," Spellings said in the letter.

Lenders will have the option of selling the Education Department loans for the coming academic year. The payment would include $75 per loan to reimburse lenders for administrative costs.

"We believe this plan is a significant positive for the industry and Sallie Mae in particular as it should allow the company to gain considerable market share and ensures a healthy level of profitability on new loans," investment analyst Bruce W. Harting of Lehman Brothers wrote in a report to clients.

The administration was still refining the details of its offer to ensure they comply with a legislative requirement that they result in no net cost to the federal government, Spellings wrote.

In case the offer fails to keep enough private lenders in the system, the Education Department is increasing its ability to issue and service loans directly, Spellings wrote. She added that the department is also prepared to advance money to agencies that would act as lenders of last resort.

The department's plan and the legislation that preceded it "will prevent students from becoming the next victims of our failing economy," said Melissa Wagoner, a spokeswoman for Sen. Edward M. Kennedy (D-Mass.), chairman of the Health, Education, Labor and Pensions Committee.

But, in her written statement, Wagoner reiterated Kennedy's dim view of private lenders.

"In the long term, Senator Kennedy believes that the best and most reliable option for students is for colleges to remove banks and lenders from the equation and use the Education Department's Direct Loan program instead," Wagoner said.

Whether students and their families faced a looming crisis has been debated.

"Absent any relief, we expect a major shortfall in access to student loans this year," Sallie Mae vice chairman and chief financial officer John F. Remondi said in written testimony to the Senate Banking Committee last month.

Sallie Mae shares rose 5.9 percent, closing at $22.

While many lenders stopped issuing government-backed loans, one of the largest, Bank of America, last month reaffirmed its commitment to issuing federally backed loans. It said it would no longer issue strictly private student loans.