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Reform push casts cloud over booming Sallie Mae:

April 2, 2007

Shares of Sallie Mae, one of Hamilton County's biggest employers, have fallen more than 25 percent over the past year as investors fret that Congress will overhaul the student-loan industry, halving interest rates and bringing the company's boom times to an end.

Momentum for an industry overhaul has been building since Democrats gained control of Congress in November. Concerns peaked in February when President Bush submitted a budget proposal that included cuts in industry subsidies. Changes under consideration could whack up to 10 percent off the company's profit in 2008 and more in later years, according to Wall Street analysts.

Reston, Va.-based Sallie Mae, by far the nation's biggest student lender, earned $1.5 billion in 2006. It manages $142 billion in education loans for 10 million students and families. It's a relatively low-risk business because of heavy regulation by the federal government, which sets interest rates and guarantees most of the loans.

Sallie Mae has been a major local employer since buying the Indianapolisbased not-for-profit USA Group for $770 million in 2000. Since then, Sallie Mae has boosted its Fishers work force from 1,600 to 2,300, leaving it tied with Conseco as the county's biggest employer. Last fall, Sallie Mae opened a call center in Muncie that now employs 500.

Sallie Mae officials say the employment outlook in the two cities remains bright, despite uncertainty over what will emerge from Congress.

"We don't get hung up on our stock price from month to month or year to year," said Tom Joyce, vice president of corporate communications. "We think at the end of the day the facts will bear out and we'll get through this and be fine on the other side. We're very happy to be a large employer in Indiana and will continue to be."

In fact, Sallie Mae expects to add to its Indiana work force, primarily in Muncie, said June McCormack, an executive vice president based in Fishers.

A year ago, Sallie Mae projected Muncie employment would reach 500 within two years. Now, the company says employment might reach 700 by the end of this year, fueled by growth in the size of Sallie Mae's loan portfolio.

Since buying USA Group, Sallie Mae has moved information-technology and loandelinquency operations from Reston to Fishers, McCormack said. Those employees account for more than one-third of the Fishers employees.

Hamilton County officials say having a corporate heavyweight with such a large local presence helps draw other firms to the area. Sallie Mae ranks 331st on the Fortune 500.

"[Sallie Mae] is really an anchor employer for the I-69 corridor," said Jeff Burt, president of the Hamilton County Alliance. "Having an employer of their size and name recognition does help set the table as far as being a location that other employers can look at with confidence."

Analysts, however, say choppy waters lie ahead, which helps explain why the company's stock price has sagged in recent months. Since reaching $55 last May, the shares have retreated about $15.

It remains to be seen whether the swoon is an overreaction. Analysts say final changes might not be as dire as feared. They'll likely include reductions in interest rates, government subsidies and insurance against defaults, along with an increase in certain fees.

"The likelihood of worst-case scenario appears to be declining," Prudential Equity Group LLC analyst Matthew Park wrote in a recent report. Even so, he believes the company's projection that 2008 profit will be off just 7 percent because of changes in lending rules is overly optimistic.

Longer term, analysts say, the changes might actually help the company, sparking an industry shakeout.

"We conclude that Bush's budget proposal will pressure margins, but is likely to accelerate Sallie's portfolio growth, as firms with higher costs are forced out of the market," Morgan Stanley analyst Kenneth Posner said in a report.

Industry observers say that, to help offset the tougher regulations, Sallie Mae and other student loan firms likely will cut discounts to students and reinstate fees they now waive.

"The first manifestation for us will be we'll have to back off borrower benefits, like ones that would help military families," said Stephen Clinton, president of Indianapolisbased ISM Education Loans Inc., the only not-for-profit student loan lender in Indiana.

Clinton believes ISM, which has gone from $200 million to $1.6 billion in student loan assets over the past five years, will weather the storm fine.

"I don't have a stock price I have to support," Clinton said. "We can afford to take the long view on a lot of things. That's harder to do as a stock company like Sallie Mae. All lenders will take away borrower benefits. Students will have to pay for it."

Even if Congress imposes tough new restrictions on student loan lenders, the outlook for the industry remains bright, other observers said.

Sallie Mae would benefit from the higher loan limits contained in legislation Congress is considering. A boom in the number of adults going to college also bodes well for the industry.

"I'm not worried about the future of the student loan business at this point," said John Mutz, chairman of Lumina Foundation for Education, a not-for-profit funded with proceeds of the USA Group sale. "They will just adapt to the changes. There will continue to be a need for Sallie Mae."
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