updated 12/12/2007 6:45:33 PM ET 2007-12-12T23:45:33

Sallie Mae's stock price sank more than 10 percent Wednesday after the largest U.S. student lender cut its 2008 profit forecast and said it failed to revive interest from an investor group that once offered to buy it for $25 billion.

The company's weakening financial outlook could bolster the investor group's legal argument that it should not have to pay a $900 million fee for walking away from the deal because of significant changes in economic or regulatory conditions affecting SLM Corp., Sallie's formal name.

Reston, Virginia-based Sallie lowered its earnings forecast for next year by more than 13 percent, blaming a new law that reduced federal subsidies and the need to hoard cash to offset bad student loans.

Sallie's shares sank $3.45, or 10.8 percent, to $28.49 a share. That is more than 50 percent below the $60-per-share offer made in April by the investor group, which is led by private-equity firm J.C. Flowers & Co. and includes Bank of America Corp. and JPMorgan Chase & Co.

"Deal dead," declared analyst Matt Snowling at Friedman, Billings, Ramsey & Co. in a research note. In addition to reduced subsidies and higher loan defaults, Snowling said Sallie Mae faces new competition from consolidators, or loan brokers.

The developments come at a stressful time for Sallie — which lost $344 million in the third quarter — and for the student loan industry in general.

Defaults are rising on student loans, and credit-market tremors similar to those linked to the mortgage crisis have begun to show up in the $85 billion student-loan market.

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