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Sallie Mae's About-Face on Loan Subsidies
Lender's Proposal Similar to Obama's

By Amit R. Paley
Washington Post Staff Writer
Monday, May 11, 2009

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.

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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