Magazine article American Banker

Plan to Lower Cap on Direct Loans Helps Sallie

Magazine article American Banker

Plan to Lower Cap on Direct Loans Helps Sallie

Article excerpt

Shares of the Student Loan Marketing Association have surged on prospects that the federal government's direct lending program may be cut back by the new Republican majority in Congress.

The stock is up an impressive 17% since yearend, and at least for now, has shed an aura of pessimism that kept it in the doldrums through last year. Tuesday afternoon it was unchanged at $37.875.

The reason is a proposal by Rep. William Goodling, R-Pa., to cap direct student lending at 40% of the market by the end of the decade, down from 60% in current legislation.

Direct lending to college students by the government through the Department of Education is competition for Sallie Mae, an for banks to which it offers a secondary market in government-backed loans.

But several Wall Street analysts said they remain cautious about the prospects for any longer-term improvement in price for the shares of the government-sponsored enterprise.

"The shares have been so depressed [that] we would expect any sign of good news, no matter how slight or uncertain, to provide a near-term boost," said Thomas O'Donnell of Smith Barney Inc., New York,

But the analyst still rates the stock "neutral-speculative."

He cautioned his clients that a move upward in price to the high 30s or low 40s probably will prompt selling by "long-term holders that may be looking for an exit point."

He added that a 40% slice of the student lending market "is still a significant share" and that Sallie Mae "has not announced any definitive plans for other revenue sources that could offset its decreased share."

Mr. O'Donnell further noted that Rep. Goodling's proposal "is in the very early stages and could face a number of obstacles before it can be passed."

Among other things, he said, the original 1993 direct lending proposal aims to produce budgetary savings of $4. …

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