Sallie Mae Gets in a Fight

The Obama budget calls for an increase in government-sponsored student loans, which isn't favorable to the now-private Sallie Mae.
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Don't expect Aunt Sallie to go down without a fight.

The new Obama budget calls for an increase in the Perkins loan program, which provides government-sponsored student loans.

The gist was that the government decided it was tired of subsidizing private lenders like

Sallie Mae

(SLM) - Get Report

, which owns 34% of the student loan market.

Barclays Capital downgraded Sallie from overweight to equal weight on Friday and slashed the price target from $13 to $7. Credit Suisse cut its price target from $12 to $10. Analysts around the Street are measuring up the pieces of the business, even as they wonder whether the Obama administration will be able to stand firm against a possible Aunt Sallie lobbying effort.

In a press release on Thursday, Sallie CEO Al Lord said, "We are proud that in this economic crisis, we provided more loans to more students than ever before, and we did it using lower-cost federal funding similar to what is being proposed today."

This is fairly accurate, as student loans are the only loans whose rates are set by Congress. Perhaps if this were abolished, an open market would result in lowered rates for students.

In 2006, President Bush and the Congress increased the interest rates on student loans from 4.5% to 6.8%. But one year later, the College Cost Reduction Act was passed and is set to phase in a lower interest rate, but only for undergraduate students. Graduate students still have to pay 6.8%.

The 6.8% level is up there, considering that the government is lobbying to bring mortgage rates down to 4.5%.

lists the national average for a 30-year fixed mortgage at 5.32%.

Bottom line, it's cheaper to borrow for a home than a college education, and in some markets a home is cheaper than a graduate degree.

There are other student lenders such as


(C) - Get Report


Wells Fargo

(WFC) - Get Report

, but Sallie Mae is the grand dame of college lending.

In 2008, the company's core earnings net interest income was $2.4 billion. Loan originations grew 25% in the fourth quarter. Its deposits skyrocketed from $685 million in December 2007 to $2.7 billion in December 2008. Do not expect it to go away quietly for the good of the students.

Aunt Sallie has had a sweetheart deal with the government. It used to be a government-sponsored enterprise (GSE) similar to

Fannie Mae


, but in 2004 finalized its efforts to become a private company. But Sallie retained the government guarantee to its loans. That should have been abolished when the company went private.

More recently, Sallie Mae has been able to take full advantage of all the recent credit market-stimulus plans. It has participated in the TALF program, with the government buying up SLMA bonds with the intent to juice the credit markets.

It has also been able to dump loans on the government. According to

The New York Times

, the Loan Purchase Commitment Program was boosted from $35 million to $60 billion. The government is just buying loans from Sallie Mae. So Sallie Mae is able to continue collecting on loans it has already sold to the government.

Clearly, Sallie Mae has accomplished a lot for its lobbying dollars. The student lender spent $3 million lobbying in 2008 and $4 million for 2007, according to


Another reason to fight hard for the student loan market? If you declare bankruptcy, the only loan that is unlikely to be discharged is the student loan.