Lobbying Showdown Over The Future Of Student Loans

When Sallie Mae, the nation's largest provider of student loans, saw the possibility of its own extinction in a plan advanced by the Obama administration, it did what just about any big corporation would do: It hired the best lobbyists money can buy.

That was standard procedure for Sallie Mae, which for two decades has almost single-handedly stymied attempts to reduce or eliminate federal subsidies to the multibillion-dollar private student loan industry.

This time, however, Sallie Mae has elected not to fight to preserve the current system. Rather, it is trying to leverage its lobbying muscle and years of showering money on lawmakers to push an alternative plan that would position itself not only as a survivor, but a clear winner -- with an even larger share of the market.

Even so, despite ramping up its spending on lobbying -- nearly $2 million in the first half of the year according to disclosure reports released this month -- Sallie Mae faces an uphill struggle in Congress. Legislation that would radically reshape the financial aid landscape along the lines proposed by President Obama cleared a key House panel last week. Credit rater Standard & Poor's immediately warned investors that it might downgrade the company's debt to junk level because "we believe the likelihood has increased" that within a year Sallie Mae will no longer be able to originate loans.

Rep. George Miller (D-Calif.), chair of the House Education and Labor Committee, said at a committee meeting that the bill would stop "wasteful taxpayer subsidies that are keeping a broken system afloat."

The plan would end lending by private firms by giving the Department of Education a monopoly over federally backed student loans. That could save the government $87 billion in subsidies over ten years, according to the Congressional Budget Office -- money that would be redirected to Pell Grants for low-income students. Sallie Mae and other lenders would be confined largely to servicing loans held by the government and collecting on defaulted loans.

Presently there are two types of government-backed loans: At schools that have signed up for direct federal lending, students can borrow directly from the government. Or they can borrow from a lender such as Sallie Mae as part of the Federal Family Education Loan Program. Either way, the taxpayers take on the risk that a borrower might default.

Sallie Mae surprised the rest of the industry earlier this year when it announced it supported Obama's plan -- but with certain caveats. The company argues that if lenders are still allowed to originate and service the loans that the government holds, they could produce similar savings that could also go toward Pell Grants. Under its proposal, companies that don't already service loans wouldn't be able to participate in the new system and thus could be pushed out of the business, leaving Sallie Mae with a bigger share.

Based in Reston, Va., Sallie Mae, formally known as SML Corp., was created four decades ago as a government-sponsored enterprise. It went private in the late 1990s. As the number of college students and tuition costs skyrocketed, so did Sallie Mae's profits -- at least until the credit crisis hit. Last year, chief executive Albert Lord earned $4.6 million in cash and stock and Jack Remondi, its vice chairman and chief financial officer, more than $13.2 million in cash and stock, including the use of a company airplane.

Sallie Mae derives about a third of its earnings from federally backed loans, and the rest comes from private loans and other lines of business. Its financial future looks weaker not only because of the political threat but because of growing delinquencies in its non-subsidized student loans. The company reported a loss of $122 million for the most recent quarter, compared with a profit of $265 million a year earlier.