HARRISBURG - College borrowing could become more costly if student-loan giant Sallie Mae manages Pennsylvania's student loan program, the state's top financial-aid administrator said Monday.

Sallie Mae is lobbying lawmakers in Harrisburg to support its $1 billion proposal to take over the Pennsylvania Higher Education Assistance Agency, a bid rejected by the PHEAA board.

Like PHEAA, Reston, Va.-based Sallie Mae waives loan origination fees for Pennsylvania students, and has pledged to maintain PHEAA's student benefit programs.

But Richard Willey, president and chief executive officer of PHEAA, speculated in an interview with The Associated Press that could change if Sallie Mae captures PHEAA's dominant share of Pennsylvania's $3 billion student-loan market.

"It's easy for Sallie Mae to do a free loan that is comparable to ours now because they have such a small share of the market," Willey said. "If their share of the market got to be ours, it would cost them a lot of money."

PHEAA is the largest originator of student loans in Pennsylvania, with 21 percent of the market, or $661 million in fiscal 2003. SLM Corp., the official name of Sallie Mae, is third largest, with $226 million in loan volume, or 7 percent. PNC Financial Services Group Inc. is second with $527 million, or 17 percent.

PHEAA also guarantees more than 80 percent of the federally subsidized loans in the state, including those made through banks and other institutions.

Albert Lord, Sallie Mae's vice chairman and chief executive officer, said his company could improve PHEAA's bottom line while maintaining benefits such as discounted student loans and loan-forgiveness programs.

"I've seen their profitability ... I don't see anything that they're doing that we don't already do," Lord said. "Anybody can argue about what somebody else is going to do in the future, and it's very difficult to prove the other person right or wrong."

Critics of a Sallie Mae takeover agree with PHEAA's argument that the student loan market would become less competitive. The agency has received a raft of letters opposing a sale from state lawmakers, financial aid officers and groups such as the Association of Independent Colleges and Universities of Pennsylvania, which represents 83 private colleges and universities.

The $1 billion Sallie Mae is offering for PHEAA is "not even close" to the agency's true value, said Willey, who placed it at somewhere between $5 billion and $10 billion. He said Lord is more interested in PHEAA's market share than its assets.

"He doesn't care whether we're here or not," Willey said. "What he wants is that $3 billion market, or a major chunk of it."

Lord acknowledged that he would like to expand Sallie Mae's business in Pennsylvania, but rejected the notion that doing so would harm students.

"The pursuit of profit, in my view, doesn't lead you to shortchange your customer," Lord said.

As it concentrates on dissuading lawmakers from accepting Sallie Mae's offer, PHEAA is also focused on expanding its business. PHEAA had $342 million in operating revenue in 2004 and Willey said the fastest-growing part of its business is servicing private loans not guaranteed by the federal government.

Parents are relying more on private loans to supplement or substitute for guaranteed student loans, which have federally mandated borrowing limits that have remained unchanged despite soaring increases in college, Willey said.

"Our success is unfortunate, because it is on the backs of students, but that's the business that we're in," he said.

The agency is also considering ways to improve its taxpayer-financed, need-based college grant program. Officials have said the grants - awards of up to $3,300 per year - are paying for a smaller share of college costs amid rising tuition, minimal state funding increases and rising demand for the grants.

A task force was originally expected to recommend changes to the grant formula in November, but its work has been delayed. The panel is expected to complete its work in the spring, and any changes to the grant formula would not be implemented until the 2006-07 school year, he said.