December 29, 2007

Education Dept. Investigating Sallie Mae Billing Practices

Posted in Student Loan News at 7:27 AM by Joe From Boston

According to the Washington Post, Sallie Mae announced yesterday that it is being investigated by the Federal Education Department.  Read an excerpt from the article below:

Sallie Mae said yesterday that the Education Department is investigating its billing practices and that its business of issuing loans subsidized by the federal government will be significantly less profitable because of changes by Congress.

The disclosures were in a regulatory filing outlining the Reston student lender’s plans to raise $3 billion to satisfy an agreement requiring it to buy back its own stock at above-market prices. Sallie Mae shares closed
yesterday at their lowest price since 2001.

In its filing with the Securities and Exchange Commission, SLM Corp., as the company is officially known, also said it faces a federal lawsuit filed in Connecticut that seeks class-action status and alleges that Sallie Mae steered minority students toward more expensive loans. The company denied the charge in the filing.

The company has been on a roller coaster since the unraveling of a planned $25.3 billion buyout that would have given its stockholders $60 per share.

The collapse of Sallie Mae’s months-long effort to sell itself to a group of investors led by private-equity firm J.C. Flowers has left the company with a host of problems. Since the deal was announced early this year, Sallie Mae’s credit rating has deteriorated, and its borrowing costs have risen.  Meanwhile, its bread-and-butter business, issuing student loans subsidized by the federal government, has become less profitable.

In its SEC filing, Sallie Mae said that changes enacted this year in a federal student loan program “will
significantly reduce and, combined with higher financing costs, could possibly eliminate the profitability
of” issuing new loans through the program.

That statement struck a different note from arguments the company had made when it was fighting to
keep the buyout on track. The buyers argued that they were entitled to walk away from the deal because
the legislation cutting subsidies to lenders substantially changed the economics of Sallie Mae’s business.