Sallie Mae Pushes $1-Billion Offer to Take Over State-Run Pennsylvania Lender.

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Author: Burd, Stephen

SALLIE MAE, the nation's largest provider of federal student loans, has set its sights on the lucrative student-loan market in Pennsylvania, and money appears to be no object.

In a move that stunned many in the student-loan industry, Sallie Mae last month offered the state $1-billion to take over the Pennsylvania Higher Education Assistance Agency, the state-run student-loan agency that is commonly known as Pheaa. Under the proposed deal, the state would continue to run Pheaa's grant program, which provides financial aid to students attending Pennsylvania colleges.

Gov. Edward G. Rendell, a Democrat, called the offer "intriguing." But officials at the Pennsylvania agency, which is the largest lender in the state, were furious. In a special session, the agency's board unanimously rejected the proposal and passed a resolution opposing any effort to sell.

"Pheaa is not now and never will be for sale, especially to a profit-driven corporation with a track record of overcharging borrowers, laying off workers, and gobbling up any organization that stands between students and a quest for bigger profits," said State Rep. Elinor Z. Taylor, a Republican who serves as chairwoman of the agency's board.

But Sallie Mae is not backing off. "We are disappointed but not disheartened that Pheaa dismissed our proposal out of hand," Albert L. Lord, the company's chief executive officer, said in a written statement. "However, we so believe in the value of this business proposition for all parties that we do not retract our offer but rather seek a fairer hearing of its details."

Despite the board's action, the deal might not be dead.

"This amount of money is an awful lot to just flatly reject," said Kate Philips, Governor Rendell's press secretary. "But at the same time, we don't know enough about the proposal to take a strong position in support of it. We need to review it."

Meanwhile, Sallie Mae officials are expected to focus their energy on building support for the proposal in the state legislature.

Sallie Mae's pursuit of the Pennsylvania agency comes at a pivotal time for the company. Last month the loan giant officially cut its ties to the federal government. That step completed a process that began almost a decade ago, when Congress passed legislation allowing Sallie Mae to become a private corporation.

Congress created Sallie Mae in 1972 to help the fledgling federal-student-loan program. Lawmakers at the time wanted "a secondary market" that would pump more money into the loan program. Sallie Mae was directed to use U.S. Treasury funds to purchase government-backed loans from banks, providing those lenders with money to make more loans.

As a government-sponsored enterprise, Sallie Mae was prohibited from making loans to students. But in the years since the privatization law was enacted, the company has become the nation's top lender, originating more than $12-billion in loans in 2003. Sallie Mae has done that primarily by forging exclusive arrangements with banks and by purchasing nonprofit lenders throughout the country.

Sallie Mae has been particularly aggressive over the past year, acquiring two major lenders in the West. They are the Southwest Student Services Corporation of Arizona and the Student Loan Finance Association, which provides loans primarily to students in Idaho, Oregon, and Washington.

Sallie Mae's critics and competitors are watching the company's pursuit of Pheaa, the 14th-largest lender in the guaranteed-loan program in 2003, with alarm. They warn that, as Sallie Mae grows, diminished competition in the loan program will lead to a decline in services and to higher prices for students, with fewer and less-generous discounts on fees and interest rates.

"Students are going to suffer if there's only one lender in the federal loan program, and we're getting dangerously close to that," a Democratic aide in the U.S. Senate said.

If it appears that a deal will be struck, a group of commercial banks, fearing the impact that a bulked-up Sallie Mae will have on their business, may ask the Justice Department to block the takeover.

But loan-industry officials know that it will be difficult to win the backing of the Bush administration, a major beneficiary of the company's largess. Sallie Mae, for example, is one of 14 corporations that have donated $250,000--the highest amount allowed--for the festivities surrounding President Bush's second inauguration.

Sallie Mae officials say their competitors' fears are overblown. They say their offer would help Pennsylvania students by giving the state $1-billion that it could use to increase support for its public universities and provide more financial aid.

"This proposal, which we carefully crafted, is a win for everyone involved, especially Pennsylvania's students, colleges, and taxpayers," said Tom Joyce, a spokesman for the company.

But Mr. Lord, Sallie Mae's chief executive officer, may have shot the company in the foot when he acknowledged his primary reason for pursuing the Pennsylvania agency in an interview with The Patriot News, the newspaper in Harrisburg, Pa., that broke the story of the proposed deal. "We're doing it to make money," he said.

Pheaa officials have jumped on that quotation to attack the notion that students will benefit by the takeover of a nonprofit lender by a for-profit company.

"When Sallie Mae's CEO was paid $41.8-million in compensation during 2004," Ms. Taylor said, "it stretches the imagination to understand how anyone can honestly believe that they have the best interests of Pennsylvania's students in their hearts and minds."

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By Stephen Burd