April 17 (Bloomberg) -- SLM Corp., the largest U.S. student lender, recorded its third consecutive quarterly loss as gains from selling loans to investors dried up. The company said its new loans are unprofitable.

SLM, known as Sallie Mae, didn't have any first-quarter gains from arranging securities backed by student loans, compared with a $367.3 million infusion the year before. So- called core earnings by the Reston, Virginia-based company missed analysts' estimates.

Sallie Mae, whose shares plunged 71 percent in the 12 months through yesterday, has been pounded by the collapse of a $60-a-share buyout bid for the company and investors' shunning of asset-backed debt, including bonds the company relies on to finance new student loans.

``The business model is fundamentally broken until they can find out a way to fund the business at economical levels,'' Richard Hofmann, an analyst with CreditSights Inc. in New York, said in an interview. ``New loans are unprofitable and that's not a great business.''

Sallie Mae recorded a first-quarter net loss of $103.8 million, or 28 cents a share, compared with net income of $116.2 million, or 26 cents, a year earlier, the company said in a statement yesterday.

Sallie Mae rose 84 cents, or 5.2 percent, to $17.10 at 9:48 a.m. New York time.

Rates Locked In

The global credit crunch has raised student-loan makers' financing costs, and they're unable to raise the rates they charge for federally guaranteed loans. Those rates are locked in by the government.

Sallie Mae said that new student loans can be made only at a loss and it's assessing how ``best to balance its resources.''

At least 50 lenders have ceased writing some form of student loans as the cost of raising money in the asset-backed market has skyrocketed.

Chief Financial Officer John Remondi told the U.S. Senate Banking Committee on April 15 that education-loan demand ``will significantly outstrip supply,'' perhaps as soon as next month. He called on the federal government to intervene quickly to make money available for loans.

``If we didn't convey the urgency of the issue, then we haven't been particularly successful,'' Chief Executive Officer Albert Lord said in a conference call today with analysts. ``We are literally in daily deliberations about how much further we can go.''

A year ago, Sallie Mae accepted a $25.3 billion buyout offer from J.C. Flowers & Co., Bank of America Corp. and JPMorgan Chase & Co. The deal fell apart after Congress passed, and President George W. Bush signed, a measure cutting subsidies to student-loan providers.

Nonrecurring Items

Flowers withdrew its offer, saying the lower government backing would materially harm Sallie Mae's profitability.

Core earnings were $188.3 million, or 34 cents, compared with $251.2 million, or 57 cents a share, a year earlier. Eight analysts surveyed by Bloomberg had estimated core earnings of 34 cents. Core earnings exclude gains and losses from derivative instruments.

Excluding $103 million in nonrecurring items, the core earnings amounted to 48 cents a share. Sameer Gokhale, an analyst with Keefe, Bruyette & Woods Inc. in New York, said Sallie Mae had a lower loan-loss provision than in the 2007 fourth quarter, better expense control and faster loan growth than he expected. Gokhale had estimated earnings at 33 cents, excluding the nonrecurring items.

Lord and Remondi reiterated the company's core earnings forecast of $1.70 to $1.80 a share for 2008, saying the figure was likely to be in the low end of that range.

Investment Losses

The company had losses of $272.8 million on derivatives and hedging in the first quarter, compared with $357 million a year earlier. Sallie Mae set aside $137.3 million for bad loans, down from $150.3 million a year before.

Net interest income from loans was $276.4 million, compared with $413.8 million a year earlier.

Morgan Stanley analyst Kenneth Posner yesterday lowered his rating of Sallie Mae to ``underweight'' from ``equal weight.'' Posner said the cuts in government subsidies and the higher cost of financing new loans created a ``double whammy impact on earnings.'' He set a price target of $13.

Representative George Miller, a California Democrat and chairman of the House education committee, has introduced a measure authorizing the U.S. Education Department to buy loans from lenders who need capital and to raise the annual amount college students can borrow by as much as $2,000. The House is scheduled to debate his proposal today.

Consolidation Loans

The Bush administration said yesterday that any government intervention should be temporary and that it higher lending limits for students.

Last week, Sallie Mae said it would stop making consolidation loans, which allow college graduates to combine several loans into one. Sallie Mae said in a letter to colleges and universities that the market is ``no longer economically viable.''

Student Loan Corp., a lender 80 percent-owned by Citigroup Inc., said yesterday that it was leaving the federal consolidation-business and wouldn't make loans to schools where students had low balances or there were short interest-earning periods. Student Loan, based in Stamford, Connecticut, said it expects the departures to be temporary.

To contact the reporter on this story: Matthew Keenan in Boston at mkeenan6@bloomberg.net.

Last Updated: April 17, 2008 09:51 EDT