Sallie Mae's About-Face on Loan Subsidies

Lender's Proposal Similar to Obama's

For the past two decades, every attempt to overhaul the $85-billion-a-year student loan industry by eliminating subsidies to lenders has faced insurmountable opposition from one of the most powerful institutions in the business: Sallie Mae, the world's largest student loan company.

But in a dramatic reversal, the lending behemoth now supports President Obama's efforts to kill the subsidies it has tried to protect for so long. Instead, the company has offered a proposal that calls for the government to hold on to the loans and pay private companies for originating and servicing them.

Sallie's plan is still slightly different from the one advanced by the administration, which entails the government originating loans itself. But the company's turnaround, which surprised many in the industry, could make it more likely that the administration will succeed in transforming the way that millions of students pay to attend college.

The story of how Sallie Mae came to jettison its 20-year support of federal subsidies provides a look at how an industry powerhouse worked to navigate the changing political tides of Washington, overcome a financial crisis that devastates its business model and break with its traditional allies to craft legislation that could ultimately leave it more powerful than ever.

The battle over student lending has pitted rival camps supporting the two government programs that provide federal loans to schools. One program awards subsidies to private companies that provide loans to students, while the other program, known as direct lending, entails the government lending money directly to students.

Sallie Mae has been lobbying against the direct-lending program since it was launched in 1994. With the support of congressional Republicans and some Democrats representing districts where the lender employs thousands of workers, the company beat back repeated efforts to eliminate the subsidies under the alternative government plan, known as the Federal Family Education Loan Program. Sallie Mae has spent millions of dollars to lobby about the issue, opposing student advocates and congressional Democrats who argued that the subsidies were a waste of money.

But in July 2007, after Democrats regained control of Congress and a series of conflict-of-interest scandals tarnished the student lending industry, lawmakers reduced the subsidies. Lenders said the lower subsidies would make it difficult raise the capital to provide the loans and still turn a profit.

"As soon as the government passed the legislation in 2007, I said, 'Okay, after 25 years of cuts, we have finally got to the point where there is not enough money left in this program to provide the capital,' " Sallie Mae chief executive Albert L. Lord said during an interview at the firm's Reston headquarters. "And I didn't stand on the tallest mountain and say that, but I knew it."

When Obama unveiled a plan this year to eliminate the subsidies altogether, many thought that the lending giant would once again try to defeat the move. The major student loan industry groups were apoplectic about the plan because many of them -- especially the banks -- make most of their profits on student loans by holding the loans.

But Sallie Mae quietly circulated legislation last month that is not substantially different than the administration's proposal.

"I was frankly shocked, myself, to see that Sallie Mae was so willing to roll over and back away from this fight," said Alan M. Collinge, a longtime critic of Sallie Mae and the founder of StudentLoanJustice.org, a Web site that advocates for consumer protections in the student loan industry. "It's almost hard to believe that a company that played such a huge role trying to kill the direct-loan program is now supporting it."

On Capitol Hill, the company's 12-page legislative proposal is being carefully reviewed. Rep. George Miller (D-Calif.), the chairman of the House education committee, has asked the Congressional Budget Office to determine how much money the proposal would save the government.