SLM Holding Corp., extending its march into business beyond the purchase of student loans, took another step toward competing with the banks that lend to students with an agreement to acquire USA Group Inc.

SLM, which owns Sallie Mae and has inked several other deals over the past year to branch into areas related to its student loan portfolio, will pay $770 million in cash and stock for Indianapolis-based USA Group, which operates financial service offices on college campuses.

The deal, which needs regulatory approval and is expected to close in three months, furthers consolidation in the narrow-margin student loan business, a trend brought on by increased competition and a corresponding slowing of growth by smaller companies.

SLM, which plans to change its name to USA Education Inc., would count among its holdings Sallie Mae's vast student loan portfolio, USA Group's network of financial service offices, and an origination business picked up in last year's acquisition of Nellie Mae. With that package of services, Sallie Mae executives say the deal will give it broad reach on college campuses.

"We had similar but different products and played in sort of complementary areas of the loan delivery process," Paul Carey, an executive vice president at Sallie Mae. "The combination will create a lot more school customers."

"They are going to be a truly powerful, vertically integrated education company," said Consumer Bankers Association president Joe Belew. "This creates a pretty formidable company."

A big competitor of Sallie Mae, Student Loan Corp., also is trying to expand. Student Loan, in which Citigroup has an 80% stake, is the nation's largest originator and ranks behind only Sallie Mae as a holder of insured student loans.

Citigroup had planned to purchase the outstanding shares of Student Loan, but the discussions by both boards did not advance.

"I think these sorts of transactions are inevitable as the industry consolidates," said Brad Svalberg, director of investor relations with Student Loan. He said the merged company would have a reach in offerings that his firm does not have.

Evidence of the industry's shifting landscape emerged this month when National City Corp. of Cleveland said it would sell $2 billion in student loans, which it said were draining its profits.

National City did not name the buyers of those loans, but some had speculated the Student Loan Corp. or Citigroup had acquired the assets. Mr. Svalberg confirmed that speculation Thursday by saying his company recently purchased a large portion of the loans. He said there have been other recent loan purchases as well, but he would not elaborate.

In May 1999 SLM made a significant push into the student loan-generation business by purchasing Nellie Mae Corp. for $320 million in cash. Before the deal, SLM originated some loans, but that was not considered a key part of its business. The prospect of Sallie-originated loans raised concern among other lenders in the area.

Sallie's decision to privatize itself - under a plan that will be completed by 2008 and is being administered by the Treasury Department - means both Treasury and the Federal Trade Commission are likely to weigh in on the deal.

Mr. Carey said loan origination is a major growth area for his company. "We want to be a leading loan generator," he said.

In 1998 Nellie Mae generated more than $375 million in loans, and it carried a $2.6 billion student loan portfolio before the merger. The company was the seventh-largest federal-loan holder in the United States.

In late May SLM said it plans to buy Student Loan Funding Resources Inc. of Cincinnati for $117.3 million in cash, adding a large number of student loans to Sallie's balance sheet.

Thursday's deal will create more fee-based revenue for the company, something that may help smooth its earnings and financing costs, Mr. Carey said.

"This is important to us because of how the bond market may react from one month to the next," he said.

The purchase does not include USA Funds, the nation's largest student loan guarantee agency. Upon the deal's closing, USA Funds would contract marketing and servicing functions to the newly formed holding company that will be known as USA Education.

Sallie Mae's parent, SLM Holding,
has strung together several deals
Date Target Terms
June 2000 USA Group $770 million for campus-based financial service provider
May 2000 Student Loan Funding Resources Undisclosed terms for eighth-largest holder
of federal student loans
May 1999 Nellie Mae $320 million cash for student loan originator

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