New legislation aimed at bringing portions of the federal government's student-loan program back under Uncle Sam's top hat is presenting a growth opportunity for the largest lenders, while smaller players may see only the exit sign.

In March, the government said it would move federal student-loan originations--a $72.7 billion business--in-house starting this summer, eliminating billions of subsidy dollars for companies that had been originating the loans on its behalf. Unable to book fees on new loans, many small lenders whose only business was federal lending see the legislation as a big blow.

However, four organizations that have landed government servicing contracts--SLM Corp. (SLM), also known as Sallie Mae, Nelnet Inc. (NNI) and the non-profits Great Lakes Educational Loan Services Inc. and American Education Services/Pennsylvania Higher Education Assistance Agency--see an opportunity: buying the loans of smaller peers that could be pushed out of the federally guaranteed loan market.

"Those four servicers have scale to grow," said Matt Snowling, analyst at FBR Capital Markets. "Everyone else is in runoff," he said of companies whose existing portfolios will only shrink.

Sallie Mae, created as a government-sponsored enterprise in the vein of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), was privatized in 2004 but remains by far the largest originator of federally guaranteed loans. That company, along with Nelnet, Citigroup Inc. (C), Wells Fargo & Co. (WFC) and others, made money from issuing and servicing the loans backed by the government, which for years didn't want the hassle of overseeing the program. But under a recent cost-cutting initiative, the Department of Education took charge of the loans, eliminating the fees given to middlemen. Four lenders will still be paid for servicing the loans, but they will no longer make money off originations.

It's unclear exactly how many loans would be available for purchase, as not all companies have decided whether to keep their federal portfolios. Some analysts say as much as $100 billion of FFELP loans may ultimately be for sale.

Mark Kantrowitz, publisher of financial-aid website FinAid, said the smallest lenders "will either sell their portfolios to exit the business, outsource the servicing or buy other lenders' loan portfolios; less than a dozen will survive."

Sallie Mae, which in the first quarter originated $7.7 billion in FFELP loans, also bought $1.5 billion of federal loans from other lenders during that period. Vice Chairman and Chief Financial Officer Jack Remondi said in a call with analysts that the company is "eager" to buy loan portfolios or take on servicing responsibilities for those lenders that want to keep their portfolios.

"We'll have to wait and see what will come about, but we're very confident that we should see some good opportunities in the space," Remondi said on the call.

Nelnet is also taking advantage of the new legislation's effect on smaller players, announcing Monday that it had bought $2 billion of FFELP loans since April 1, including $1.5 billion from Colorado non-profit lender CollegeInvest. CollegeInvest said its student loan business is in "wind-down mode," but its 529 college savings plan and some other operations will remain.

"We have and will continue to look for opportunities to add to our portfolio," Nelnet President Jeffrey Noordhoek said in a call with analysts Tuesday. "Our systems have the capacity for growth."

Sallie Mae and Nelnet wouldn't comment on the prices they paid for the new portfolios, though Nelnet said they were "attractive" and the acquisitions will add to earnings immediately. Analysts believe the purchases were made at a slight discount to par value.

Sallie Mae has been vocal about how damaging the new law will be to its business, saying it will lay off nearly a third of its work force as a result of the program upheaval. It, and Nelnet, are diversifying as they settle onto the new student-loan playing field.

-By Melissa Korn, Dow Jones Newswires; 212-416-2271; melissa.korn@dowjones.com
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