Sallie Mae Shares Gain On Government Contract

TALI ARBEL

NEW YORK (AP) — The Department of Education has selected student lender Sallie Mae and three other companies to service the $550 billion in outstanding federal student loans and future loans owned by the government.

Reston, Va.-based Sallie Mae, officially called SLM Corp., is the country's biggest student lender. It stock surged 42 cents, or 5.5 percent, to close at $8.11 in trading Thursday.

The new contract announced Wednesday may help Sallie Mae offset the loss of income if the government, as President Barack Obama wants, stops subsidizing the government-guaranteed loans that make up the bulk of Sallie Mae's portfolio.

FBR Capital Markets analyst Matthew Snowling said the contract award is a "big win" for Sallie Mae. It allows Sallie Mae to convert its business model from a lender to a servicer if Obama's plan becomes reality. If the president's budget is adopted, Sallie Mae would no longer be a big provider of student loans.

"Winning one of these four spots was certainly a make-or-break decision," Snowling said.

The contract is for the managing of federal student loans owned by the Department of Education and does not include loan origination. The five-year contract is expected to start in August, according to Sallie Mae. The government may renew it for one five-year term.