SLM Corp. (SLM) on Wednesday won a crucial contract from the U.S. Department of Education to service federal student loans.

The decision on the contract has been anxiously awaited by investors in the largest U.S. student-loan company, commonly known as Sallie Mae; it will provide income that would help offset the loss in revenue stemming from the Obama administration's plans to rein in subsidies paid to student lenders.

"We are very pleased to be awarded the opportunity to apply our experience and expertise for the benefit of students and the American taxpayer," said Chief Executive Albert Lord, in an email to Dow Jones Newswires sent by a press official at the company. "We look forward to being a partner with the Department in this important effort."

The stock of the Reston, Va.-based company was at $8.60, up 11.83% after the close of the regular trading day in the U.S. market. Still, the shares are way off their 52-week high of $25.05, reached in June last year.

Sallie Mae, which makes private and federal student loans, gets nearly one-third of its income from the federal student loans it makes on behalf of the government. It earns another third of its income from the interest it charges on private student loans; the remaining one-third comes from a number of smaller businesses, including fees from college savings plans and collecting defaulted student debt.

Investors have been concerned about the Obama administration's proposal to eliminate the income that Sallie Mae gets from federal student loans. But they hoped that this loss in income would be somewhat offset by the plan's requirement for the participation of private lenders, such as Sallie Mae, for the servicing of federal student loans.

To be sure, Sallie Mae's earnings are still expected to suffer as a result of the potential revenue loss under the Obama proposal. But additional income from servicing the federal student loans should help make up for that; the extent to which it would help depends on the volume of student loans Sallie Mae would service.

Aside from Sallie Mae, three other companies were also awarded the loan servicing contract, including Nelnet Inc. (NNI).

The contract comes on top of improvements in the company's funding position in the last month that helped dispel investors' concerns about its liquidity. Making use of a federal program aimed at reinvigorating the market for asset-backed securities, Sallie Mae sold $2.6 billion of bonds made up of pools of student loans in May.

The student lender also garnered a one-year extension on a crucial $21.8 billion asset-backed commercial paper facility, which was set to expire in April. In addition, it scored an asset-backed commercial paper facility from the Department of Education that allows Sallie Mae to fund as much as $16 billion of federal student loans.

-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729; aparajita.saha-bubna@dowjones.com