Sallie Mae Reports Narrower Quarterly Loss

Sallie Mae reported a $159 million loss in the third quarter as the ongoing credit crisis pushed up costs for the nation's largest student lender and it wrote down the value of certain contracts it uses to hedge against risk.

The Reston-based company said its core business of making student loans remained profitable despite the turmoil in financial markets. It credited a move by the Bush administration in May to buy up federally subsidized student loans as a key reason it was able to continue lending money.

The company's third-quarter loss of $159 million, or 40 cents per share, compared to a loss of $344 million, or 85 cents per share, in the third quarter of 2007.

The company attributed much of the loss to writing down by $201 million the value of some of its derivatives. Derivatives are contracts the company uses to protect itself from volatile swings in interest rates and currency fluctuations.

Sallie Mae, formally known as SLM Corp., makes both private student loans and those backed by the government. It takes the loans and pools them into securities, which it then sells to investors. That model has been complicated by the freeze-up in credit markets, as the cost of selling those securities, even for the government-backed loans, has become increasingly expensive.

While Sallie Mae said it was able to sell $6.7 billion in federal student loans by packaging them into securities, it has not completed a similar such deal for private loans since last year. However, it has been able to sell $3.6 billion of the federally backed loans to the U.S. Department of Education under the government purchase program.

Overall, student loan originations made by Sallie Mae declined in the third quarter, to $7.7 billion from $8.9 billion in the same period of 2007. The company said the decrease was driven, in part, by tightening underwriting criteria for private loans.

Some signs that the economic downturn was making it harder for students to pay back private loans also emerged in the third quarter. The delinquency rate on the company's private loans increased to 9.4 percent from 8.5 percent in the third quarter of 2007.

Earlier this month the company strongly defended its financial health in a letter to investors, citing the new government purchase program and saying that it had enough cash to meet its debts.

Concerning some analysts, however, are three lines of credit Sallie Mae is carrying on its books that it uses to make its loans. Sallie Mae will have to refinance the credit lines by February, or face the prospect of selling the loans it has made with that credit at a loss, analysts said.

The company reduced these three lines of credit to $28 billion from $34 billion during the third quarter. The company said it was "confident" in its ability to extend that credit beyond February.