Sallie Mae Cuts 1,000 Jobs; Posts Quarterly Loss
By David Hilzenrath
Sallie Mae, the nation's largest student loan company, has eliminated about 1,000 jobs over the past six months representing about 9 percent of its workforce, the company said yesterday.
The layoffs are part of Sallie Mae's continuing effort to cope with cuts in federal subsidies, the collapse of a planned sale of the company, and an upheaval in the financial markets that has made it costlier for lenders to fund their business.
"Under current conditions ..... loans can only be made at an economic loss," the company said in a news release announcing its financial results for the first three months of 2008.
The Reston-based lender said in January that it was laying off 350 employees as it embarked on an effort to cut operating expenses by 20 percent. In yesterday's report, Sallie Mae said it was "still in the preliminary phase of assessing all potential restructuring activities."
SLM Corp., as it is formally known, said it lost $103.8 million (28 cents per share) during the first quarter, compared with a profit of $116.2 million (26 cents) during the first quarter of 2007. The quarterly loss was driven largely by $363 million of unrealized losses on derivatives, which are financial contracts used to hedge against risk.
As a bellwether of how well consumers are managing their debt, Sallie Mae's quarterly report contained mixed signs.
By various measures, delinquency rates improved on those Sallie Mae loans that are not federally subsidized. As a percentage of its private loans that borrowers are supposed be repaying, delinquencies fell to 7.4 percent as of March 31 from 8.3 percent at the end of last year, Sallie Mae reported.
However, the percentage of private loans in a status called "forbearance" rose to 16.4 percent as of March 31 from 13.9 percent as of Dec. 31. When borrowers put their loans in forbearance, they temporarily suspend making payments but must pay more over the long run.
The company put aside $137.3 million during the first quarter to cover actual and expected losses on outstanding loans, which was less severe than the $574.2 million of loan losses the company identified during the fourth quarter of last year and the $150.3 million it set aside during the first quarter of last year.
Historically, Sallie Mae and other student loan companies have raised money by packaging loans into securities and selling them to investors. But investors have grown wary of such securities, much as they have lost their appetite for those backed by mortgages.
Last week, Sallie Mae announced it was no longer offering refinancings that borrowers use to consolidate multiple student loans at a single interest rate. Yesterday, Student Loan Corp., a subsidiary of Citibank, said it too was getting out of the business of consolidating federally backed student loans, joining a wave of other lenders.
In a report issued yesterday before Sallie Mae's earnings announcement, Morgan Stanley analysts Kenneth A. Posner and Andy Bernard warned that a recession could lead to higher loan losses. Meanwhile, leading Democrats have long favored having the government issue student loans directly rather than subsidizing private lenders such as Sallie Mae, the analysts wrote.
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