New Student Loan Bill Could Foul Sallie Mae Buyout

An agreement by House and Senate leaders last night on student loan legislation would see federal subsidies to private student loan lenders cut by some $20 billion over five years and could imperil a buyout of Sallie Mae by a consortium of buyers led by private equity firm JC Flowers.

A compromise bill, the College Cost Reduction and Access Act, was announced last night by Senator Ted Kennedy, D-Mass. — chairman of the Senate Committee on Health, Education, Labor, and Pensions — and Representative George Miller, D-Calif., chairman of the House Education Committee. Both the House and the Senate passed versions of a higher education financing bill earlier in the summer. The compromise announced yesterday reconciles both and will be put up for vote in the House and the Senate this week.

The subsidy cuts in the compromise bill go beyond a proposal by President Bush in February. The cuts come in the form of a reduction of the “special allowance payments” rate the government pays to lenders for federally-backed student loans. The bill would cut the minimum guaranteed interest rate on federally guaranteed student loans by 0.55 percentage points for for-profit lenders. Bush proposed a reduction of 0.50 points in the rate, a difference that amounts to about $4 billion over five years.

The bill would also alter interest rates lenders can charge for need-based loans and increase the cap on federal Pell Grants. The current interest rate on need-based loans, 6.8 percent, would be reduced to 3.4 percent over the next four years. Pell Grant scholarship value limits would be increased from $4,050 in 2006 to $5,400 by 2012. Pell Grants are need-based federal scholarships that do not require repayment.

The fact that the bill goes beyond the President’s proposal could prove to be the sticking point for the Sallie Mae buyers, a consortium that includes Bank of America and JPMorgan Chase and is led by JC Flowers. The consortium told Sallie Mae in July that any increase over the President’s proposal could spell trouble for the buyout since it would mean a material change in the operating environment for Sallie Mae. Sallie Mae responded in a release that it “strongly disagrees with this assertion.”

The proposed buyout price tag of $25 billion is based on the consortium paying $60 per share for Sallie Mae. Since the deal was announced in April, the stock has slipped as much as 20 percent and was trading around $49 per share today. Sallie Mae shareholders approved the deal on August 15.