Massive Consolidation In Student Loan Market As Citi Sells Out

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NEW YORK – Citigroup said Friday it agreed to sell the nation’s third-largest student loan operation in two parts – to the biggest student lender, Sallie Mae, and to Discover Financial Services.

Under the terms of the complex deals, Discover will pay $600 million for the Student Loan Corporation, in which Citigroup holds an 80% stake. Sallie Mae will acquire approximately $28 billion in loans held by the loan corporation, the bulk of which are guaranteed by the government, for about $1.2 billion. After the deal, Sallie Mae will manage or service about $200 billion in federal student loans. Discover will end up with $4.2 billion in private loans with no government guarantees, at about an 8.5% discount from their face value.

Citigroup will sell another $4.7 billion in loan assets to the Education Department as part of a program put in place at the height of the crisis to support the student lending market.

Citigroup will keep the remaining assets, totaling about $8.7 billion, and ultimately sell them to private investors.

Sallie Mae, formally known as SLM Corp., is both the largest originator and servicer of student loans, while Discover Financial is the fifth-biggest servicer, with a portfolio of $1 billion. Citi’s Student Loan Corp. is the third-biggest lender, behind Sallie Mae and JP Morgan Chase.

Many private student lenders are pulling out of the business because of new rules enacted by Congress this year that effectively ended the guaranteed Family Federal Loan Program, which allowed banks to issue student loans backed by the government. The new rules, which took effect July 1, have the government lending directly to students.

Citigroup will take a $500 million loss on the deals, resulting in a write-down for the third quarter, but in the process it will unload nearly $40 billion in student loans from its books.

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