Sallie Mae to Quit Offering Federal Loan Consolidations

April 11, 2008

Washington — Sallie Mae, the nation’s largest student-loan company, is taking another step away from the government-backed student-loan business, further exacerbating the sense of crisis hanging over the industry.

Sallie Mae announced today in a letter to colleges that it would no longer offer consolidations under the federally guaranteed loan program. Students typically consolidate their loans after they graduate, combining loans from each of their years in college into a single loan to make it easier to manage when paying back the money. Until recent months, consolidations had been regarded as a highly profitable activity for loan companies because consolidation usually occurs as students enter years of repayment.

A series of loan companies, however, has been quitting the system of federally guaranteed student lending in recent months, blaming a combination of cuts in federal subsidy rates enacted last September by Congress and a credit crunch attributed to a surge in mortgage defaults.

Sallie Mae, in its letter today, reiterated that problem, saying that lenders responsible for more than 16 percent of all student loans last year have now announced their departure from the government-backed system.

“As a result,” Sallie Mae said in the letter, signed by its president, Charles E. Andrews, and its executive vice president, Barry Feierstein, “loan demand will significantly exceed lender supply for the upcoming academic year.”

As part of preparations for the possibility that some students might not be able to find willing lenders this fall, Education Secretary Margaret Spellings met here today with representatives of guarantee agencies — a group of 35 nonprofit entities that use federal money to repay student-loan companies when borrowers default — to discuss plans for lending federal money directly to students, on an emergency basis if necessary.

In addition to announcing the termination of its consolidation-loan business, Sallie Mae told colleges that it would no longer pay for students the federally mandated origination fee on government-backed loans. “With the large number of lenders exiting the program,” Mr. Andrews and Mr. Feierstein wrote, ”Sallie Mae cannot justify subsidizing some students at the expense of others who may be unable to get funds for college.” —Paul Basken