Sallie Mae Suffers Revenue Losses From Economy and Federal Loan Reforms

Sallie Mae, the largest private funding source for student loans, is under fire both from the recession and political reforms in student lending heralded by the Obama administration.

The Reston, Va.-based firm has reported a second-quarter loss of $122.7 million after writing off $355 million in private education loans, an increase from $202 million in such write offs in the first quarter.

The losses were reported just after the firm suffered another blow. A new law that would substantially change how student loans are handled was passed by the House Committee on Education & Labor last week, setting it up for a vote by the full House in coming weeks. The bill is bitterly opposed by Sallie Mae and other private lenders but supported by President Barack Obama.

The law would turn current student lending on its head, eliminating some income that Sallie Mae would get from federal student loans, which represent about one third of the $1.8 billion company’s revenue. The impact would be moderated somewhat since Sallie Mae is one of four firms chosen last month by the U.S. Department of Education to service federal loans for the next five years.

“We have put together a proposal that saves as much money,” Company CEO Albert Lord said in a conference call with analysts. The firm is also putting together new products that make lending easier, cheaper and simpler, says Lord, claiming that the company’s plan is supported by “1,700 college aid officials.”

“We are the leading the loan industry in redesigning loans,” he says. “We think that when students and parents do the math, people will understand that this is a better product.”

Lord and CFO Jack Remondi see recessionary gloom easing. Sixty day delinquencies in paying back loans have eased from 3.2 percent in the first quarter to 2.9 percent in the second quarter, they said. “Early delinquency buckets are showing improvements,” Lord said.

Yet the company faces a big problem with the Student Aid and Fiscal Responsibility Act that is being shepherded by Democratic Congressman George Miller of California, chairman of the Committee on Education & Labor. To fight it, Sallie Mae has hired top Washington lobbyist Tony Podesta to fend off the changes.

Sallie Mae is constantly being criticized on Web sites and in chat rooms by students who say the firm is unclear about details when it makes loans and can be rude and incompetent in servicing them. A common complaint is that Sallie Mae hounds students for payments after they have paid off their loans.

The Web-based Consumer Warning Network reports that customers are frustrated by the workers at the firm’s offshore call centers in Asia who frequently get facts wrong. The group also criticized CEO Lord for getting a $3 million raise after his firm lost $213 million in 2008.

Such complaints are a reason the legislation is moving forward. However, Melissa Salmanowitz, a spokeswoman with the House Committee on Education and Labor says, “the legislation was inspired by chairman Miller and President Obama’s goal of making college more affordable and accessible for every single eligible student and to protect students and borrowers from the volatility in the market.”

The law would convert all federal student lending to direct loans overseen by the federal government and significantly increase awards.

The Annual Pell Grant would increase to $5,550 next year and to $6,900 by 2019. It also would boost the Perkins Loan program, simplify the federal loan application process and invest $1.2 billion in historically Black colleges and universities to help student stay in school and graduate.

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