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Sallie Mae's About-Face on Loan Subsidies

The cost of the new lending proposals is perhaps the most important issue under review. The nonpartisan Congressional Budget Office has estimated that Obama's plan to eliminate the subsidies would save up to $94 billion, which the administration would then direct to Pell grants for low-income students. Sallie Mae and outside analysts have estimated that the company's plan would save 80 to 90 percent as much as the president's proposal.

Administration officials said it would make no sense to support Sallie Mae's legislation if it costs more than Obama's plan.

"It definitely does not save as much money as the administration's proposal, and we need every penny to invest in the Pell grant program," said Education Department Deputy Undersecretary Robert Shireman, who is leading the agency's efforts to overhaul the federal student loan systems. "We know it falls short in terms of the dollars that it makes available to put toward financial aid for students."

Another senior administration official acknowledged, however, that the Sallie Mae proposal would build support for eliminating the subsidies and remains a possible compromise that would still result in a dramatic increase in grants for college students.

"Why fight a war if we don't have to?" said the official, who spoke on condition of anonymity to discuss internal strategy. "Our plan may be better from a public policy perspective, but we live in the real world. And in the real world, Sallie Mae's proposal looks pretty good right now."

Other lending companies have been infuriated by Sallie's proposal. John Dean, special counsel to the Consumer Bankers Association, a powerful student loan lobbying group, said the company's plan, which he called "pornography," would drive most banks out of the industry and strengthen Sallie Mae's market share.

"Sallie Mae threw in the towel on the opportunity to defeat the Obama proposal," Dean wrote in an e-mail to association members. "Since then it has dedicated its efforts to doing what it does best: Watching out for itself. When that entails throwing industry colleagues under a bus, Sallie Mae's leadership does not hesitate."

But traditional enemies of the company are coming around. Jamie S. Gorelick, a senior Justice Department official in the Clinton administration, was hired by Sallie Mae last year to help increase the firm's stable of Democratic lobbyists and strategists. Gorelick recalled that she was skeptical of working with Sallie Mae because of lingering animosity toward the company for trying to defeat Clinton's proposal to create the direct-lending program.

"Those scars are deep, and Al Lord came to personify for me all the ugliest parts of that debate," she said. "My feeling was if someone wanted to hire me to defend the old model, I was not going to do it." She eventually signed off after she realized that Lord was willing to change the company's business model.

Lord exudes confidence about the company's new strategy. Asked whether his proposal would increase Sallie Mae's control of the market, he responded: "Of course. That's the goal."

He said he had little interest in debating the politics of different student lending policies.

"This is a company, and our job is to make money, not fight about political ideologies," Lord said. "We just want to be in the business of student loans and be paid fairly for it."

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