Sallie Mae's Profit Plunges 72 Percent

Sallie Mae, the nation's largest student lender, yesterday reported that second-quarter profit fell 72 percent, but indicated that business was improving from a dismal start of 2008.

The company, based in Reston, said in a statement that it experienced "strong growth" and "solid performance" in its student loan businesses in the three months ending June 30. It added that it had started to obtain financing to make loans at more favorable rates, aided by a new Department of Education program to buy securities composed of student loans.

In a statement, Albert L. Lord, vice chairman and chief executive, called the results "encouraging."

Sallie Mae makes both private student loans and loans that are guaranteed by the government. It raises money by pooling student loans into securities and then selling them to investors. It sold $7 billion in securities during the quarter, "clearly a good sign for Sallie Mae and a good sign for the continued availability of student lending," said Luke Swarthout, higher education advocate for U.S. Public Interest Research Group.

Despite the improved outlook, SLM Corp., as it is officially called, is not without challenges given the tight credit markets. Rates to borrow have come down from their heights, but "our funding costs" have been "extraordinarily high," Lord said.

Investors have grown extremely cautious about buying these securities, as part of the market downturn that has made investors wary of all kinds of debt-backed securities.

Still, the tone of the company's earnings release was markedly different from April, when Sallie Mae reported big losses for the first three months of the year. At the time, Lord said the company was facing its most difficult period in 35 years. Sallie Mae tightened its credit requirements for borrowers and stopped originating some loans to students attending certain schools. The company's stock lost half its value, and the firm slashed 1,000 jobs.

Yesterday, the firm said it had cut an additional 1,500 jobs in the past three months as part of a previously announced restructuring.

Sallie Mae's profit in the second quarter was $266 million (50 cents per share), compared to $966 million ($1.03) in the same period in 2007. The company was helped by $447 million in unrealized gains on derivatives, which are financial contracts used to hedge against risk.

The number of Sallie Mae-branded loans increased year-over-year, while total student loan originations, which include those done through third-parties, decreased.

Sallie Mae set aside $143 million for expected loan defaults, down from $148 million last year. Delinquencies on private student loans -- those not guaranteed by the government -- increased to 7.7 percent from 7.4 percent at the end of the first quarter. But those in forbearance -- meaning borrowers have paused making payments on their loans, even as interest accrues -- declined to 13 percent from 16.4 percent at the end of March.

The company suffered heavy declines in its debt-collection unit, struggling to collect on a portfolio of mortgages and other debts.

"Declines in real estate values, as well as lengthening the assumed lifetime collection period due to the weakening U.S. economy, have resulted in write-downs related to the mortgage purchased paper portfolios," it said in its earning statement.

The earnings announcement came after market closed. Sallie Mae's shares rose 51 cents (2.7 percent) to close at $19.09 yesterday.