White House Plan Would End Subsidies to Student Lenders

The proposal to do away with the Federal Family Education Loan Program stunned investors and Wall Street analysts who follow Sallie Mae, the nation's largest student lender. Loans originated through that program made up about 80 percent of the company's total student loan portfolio at the end of 2008, with the rest being private loans.

"We believe this announcement essentially blindsided the industry -- ourselves included," Matt Snowling, an analyst with FBR Capital Markets, wrote in a note to investors. "We view this proposal as meaning that lenders such as Sallie Mae will face continuous threats during the current Administration's tenure, which will likely cause significant risk and turnover of the shareholder base."

"It could precipitate a collapse of the . . . industry because a lot of the lenders were holding on and hoping to survive until the end of the credit crisis," said Mark Kantrowitz, publisher of the Web site FinAid.org. "But they could pull out completely because if there is no future, then there is no reason to stay."

Sallie Mae stock fell $2.59 yesterday to close at $5.80. Shares traded as high as $25.05 in the past year.

Under the administration's proposal, the private sector wouldn't be completely cut out of the equation. The Education Department would contract with companies to service loans and collect payments.

Officials yesterday said they expected some companies that now participate in the loan program to take part in a competitive process to service the loans.

Sallie Mae made clear yesterday that it intended to bid for such contracts.

"We also note that the budget proposal looks to obtain 'high-quality services for students by using competitive, private providers to service loans,' " the company said in a statement. "Sallie Mae is the largest and lowest-cost provider of student loan services, and we deliver the highest quality for students, schools and families."