Proposals Hurt Student Lenders

Highlights include Sallie Mae (SLM - Analyst Report), Nelnet Corp (NNI - Analyst Report) and Student Loan Corp (STU).

Budget Proposals Hurt Student Lenders

President Obama's budget proposals for fiscal 2010 include the elimination of private lenders from the student-loan market and having the federal government make all such loans directly. Beginning in 2010-2011, all new student loans are proposed to be originated through the direct student loan program.

The shift to the Department of Education's direct-lending program is expected to save more than $4 billion a year in subsidies paid to private lenders, and also eliminate uncertainty for students.

Since the shift in control of the Congress to the Democrats, there has been, on the whole, more support for direct student lending by the Government. Direct loans, however, only accounted for about 20% of the $68.2 billion in new federal loans during for the 2007-2008 school year, but recently many private lenders had stopped making federally guaranteed loans due to the credit crisis.

Most of the student lenders were heavily reliant on the Asset Backed Security (ABS) market for funding, and had to resort to much more expensive funding sources when the ABS market virtually froze late last year. However, the recent legislative enactments had provided some relief on the funding front for FFELP, since it will (now through 2009-2010 academic year) be financed entirely by government financing -- paid for by the Treasury through the Department of Education.

Further, the recently announced TALF facility, which will provide 3-year term loans to investors against AAA-rated securities backed by recently originated consumer and small-business loans, is also expected to bring down the funding costs.

In addition to higher funding costs, the student lenders have been facing increased defaults recently. The shares of student lenders like Sallie Mae (SLM - Analyst Report), Nelnet Corp (NNI - Analyst Report) and Student Loan Corp (STU) sold off sharply today on the news of the proposals.

We maintain our Sell rating on SLM, and our Hold rating on NNI is under review.