S&P may cut private student loan SLM, Nelnet ratings

NEW YORK, July 23 (Reuters) - Standard & Poor's said on Thursday it may cut the ratings of SLM Corp and Nelnet Inc, citing an increased likelihood the private lenders will no longer be able to originate Federal student loans in the coming year.

The rating agency placed the BBB-minus ratings of both SLM SLM.N and Nelnet (NNI.N) on CreditWatch negative. It cited a recent vote by the U.S. House of Representatives Education Committee to pass a bill that would eliminate the origination of federal student loans by private lenders by mid-2010.

The bill must still be passed by the full House and Senate, and be signed off by the President.

S&P said it was also concerned SLM's lackluster performance over the past few quarters would continue to be pressured by increasing provisions for its private education loans.

In this year's second-quarter, charge-offs or the writedown of bad debt at SLM, grew to $355 million from the $202 million posted in the first quarter.

"The deterioration in this portfolio highlights the higher-risk nature of these loans, which could become a much greater part of SLM's overall business model once legislation is passed," said S&P.

SLM said student loan volume increased 53 percent to $3.7 billion in the second quarter. The firm said it set aside $362 million for loan losses, up from the first quarter's $297 million, while charge-offs on managed private education loans more than doubled from the first quarter to $355 million.

Pending the results of its analysis, the rating agency said it may downgrade SLM's ratings by one or more notches over the next few quarters.

The rating agency is also in the process of determining Nelnet's future ability to generate income without being able to originate FFELP loans, and the transition risk involved in the elimination of lending under the program.

Its analysis will include a view of the growth potential of Nelnet's fee income businesses and its income generation ability as a servicer of government-originated student loans.

"We are also considering the nature of the ongoing relationship that the company will have with the government as a servicer, as well as the runoff timeframe of the company's current FFELP portfolio," said S&P.

Both SLM and Nelnet as well as two other companies were awarded a contract by the Department of Education in June to service $550 billion of federal student loans. The contracts should help the lenders offset potential revenue losses if the government adopts the proposed law.

Pending the outcome of its analysis, a ratings downgrade of Nelnet is possible in the next few quarters, said S&P. (Reporting by Nancy Leinfuss; Editing by James Dalgleish)