NEW YORK — A new law that cuts banks out of the federal student loan business is costing 2,500 workers at Sallie Mae their jobs.
The nation's largest student lender has told 1,200 staffers in service centers in Killeen, Texas, and Panama City, Fla., they will lose their jobs by year-end. The remaining cuts will follow in 2011, resulting in nearly a third of the company's total work force of 8,000 losing their jobs.
The cuts result from changes made to the federal student loan program as part of the health care reform signed by President Obama last month.
The law strips the middleman role in student lending away from banks. It's expected to save at least $60 billion in fees that went to banks to process government-backed student loans.
But it will also mean a drastic reshaping of Reston, Va.-based Sallie Mae, which wrote a record $7.7 billion in federal student loans in the first three months of the year.
"Ironically, one quarter before the government takes over loan originations, Sallie Mae broke its own (federal student loan) origination record," Sallie Mae Chairman and CEO Albert L. Lord said in the company's earnings announcement.
The law is "not good for the company and it's certainly not good for the employees," the CEO added during a conference call to discuss the results early Thursday. Losing federal student loans will result in a "draconian drop" in income from loan originations, Lord said.
Like other private lenders, Sallie Mae will still will make student loans that are not backed by the government. It wrote private education loans totaling $840 million during the first quarter, down from $1.5 billion a year ago. The reduction was due to tighter underwriting standards and increases in federal education programs.
Sallie Mae Chief Financial Officer John F. Remondi said during the conference call that there's an "enormous increase" in federal lending and grants this year — he estimated the pool of funding available to students jumped $17 billion for the first half of the year alone.
"We strongly advocate that students take advantage of grants first, free money first, and federal loans second," Remondi said. "And they are doing that appropriately, and as a result private credit demand is down."
Sallie Mae is one of four companies that won contracts with the Education Department for servicing — or handling payments and collections — for some $550 billion in outstanding federally backed loans. The department said these companies will also service future loans.
The contracts are performance-based, and Remondi said during the conference call Sallie Mae is the largest collector. "As we continue to demonstrate our performance in that space, we will continue to see increased market share," he said.
Sallie Mae is also keeping an eye on legislation now being discussed by Congress that would allow private student loans to be discharged, or wiped clean, through bankruptcy.
The company said 85 percent of the private loans it wrote in the first quarter and 55 percent of the private loans in its portfolio were co-signed, meaning parents or others share responsibility for paying them back with students. Such loans would be protected if the new bankruptcy rules pass, except for unlikely situations where both parents and students declare bankruptcy, Remondi said.
However, any legislation making it possible to get out of school and not repay student lending would serve to make lending standards even tighter, he said. "It will very much constrict the supply of credit to students."
Sallie Mae reported a first-quarter profit of $240.1 million, or 45 cents per share, after paying preferred dividends. That compared with a loss of $21.4 million, or 10 cents per share, in the 2009 first quarter.
The results included restructuring charges of $19 million related to the job cuts.
In morning trading, Sallie Mae shares gained 69 cents, or 5.2 percent, to $13.81, after touching a 52-week high of $13.96.