More students, more loans.

ROCHESTER, N.Y. -- When Citicorp spun off its Student Loan Corp. unit two years ago, many saw it as a shrewd, timely move.

The nation's largest bank raised capital at a time when student loan-related stocks, like rival Student Loan Marketing Association (Sallie Mac), were the darlings of Wall Street.

After selling an initial 20% stake to the public, Citicorp planned to shed the rest of its holdings, possibly within two years. Then the bottom fell out.

By the spring of 1993, Congress approved a plan that, beginning this summer, put the federal government directly into education lending and shaved one-third of the profit margin from the business. The result: Student Loan Corp.'s stock plummeted and has hovered barely above the $16.75 a share public offering price until recently rising to $20.50.

"The idea was to do the (public) offering and then get out of a business that had lesser prospects than credit cards or Citicorp's foreign expansion," said a Wall Street source close to the deal. "No one counted on direct lending. Now it looks like they may be stuck with Student Loan Corp. for several more years."

A Citicorp spokeswoman confirms that the bank intends to divest itself of its holdings, but she declined to say over what period of time. Asked when Citi might sell down its majority stake, she added: "We don't comment on our future plans."

Indeed, Citicorp may have to wait years for an opportunity to cash out its stake. Analysts say it will be late in the decade before direct lending has had a chance to succeed or fail. Whether or not it is ever repealed by Congress, investors are likely to continue to discount Student Loan Corp. for at least another year.

If Stephen C. Biklen has his way, Citicorp won't regret the wait. The president and chief executive officer of Student Loan Corp. is confident his company will continue to be the leading originator of guaranteed student loans and the No. 2 secondary market player behind Sallie Mae.

"Even if direct lending takes about half [the market], we're looking at half the market that will still be there and it will be larger than the entire market is today," he said. "It's virtually impossible to say what's going to happen with direct lending, but we will be able to grow."

Originations and profits continue to climb, but analysts say the next year will be a test of just how well positioned Mr. Biklen's company is to compete against federal direct lending in its first year.

"The future of Student Loan Corp. is going to be determined by how well the government does with its program," said Tom O'Donnell, an analyst at Smith Barney, Harris Upham Inc.

In an interview, Mr. Biklen made it clear he is not waiting for a federal program before going forward. He may move the company into new areas of college funding, including the one-third of the $20 billion annual need that does not use guaranteed loans.

This summer, Student Loan Corp. announced a new program aimed at graduate students that combines government-guaranteed loans with Supplemental loans. Although going after this market puts the company in competition with local banks, Mr. Biklen thinks it gives his company an edge. "One of the things schools are looking for is onestop shopping," he said.

One thing the company won't do is take on risker loans. Since 1989, Student Loan Corp. has reduced its delinquency rate by one-third, to 12% of all loans that are no longer deferred. The company has done so by refusing to lend at colleges and universities with default rates above 24%.

Perhaps the greatest opportunity will come as smaller players decide over the next year whether to stay in the student lending market. With profit margins deflated, others may he inclined to sell their portfolios and Student Loan Corp. is expected to be a buyer.

"Our goal is for Student Loan Corp. to be successful regardless of what happens to direct lending," Mr. Biklen said. "Even if the government goes to 100% direct lending, we think we can grow."

Investors aren't so sure. Even bullish analysts list Student Loan Corp. and its rivals as speculative until federal direct lending is tested.

"Anytime you see a market decline by 40%, no matter how adaptive a company you are, you've got to be worried," said Peter Russ, an analyst with Shelby, Cullom, Davis & Co. in New York. "I think everyone involved in student lending has his fingers crossed that direct lending does not fulfill its stated mandate."

Indeed, few bankers believe direct lending can succeed, but few believe it will go away. For many, the future is also clouded by Sallie Mae's push to shake off the restrictions of a governmentsponsored enterprise and fully privatize.

Bankers disparage that idea, saying it would provide them with another well-capitalized competitor free to pursue their business. Besides, one official complained, "It would be like having a competitor who got their venture capital from the taxpayers."

While most bankers may oppose the idea of a privatized Sallie Mae, Student Loan Corp. could actually gain a competitive footing, or at least parity, with the government-sponsored enterprise.

At minimum, Sallie Mae would no longer have government-backed bonds that provide its lower cost of funds.

"If Sallie Mae gives up its charter, I think it's a positive for Student Loan Corp.," said Mr. O'Donnell of Smith Barney.

Adds Mr. Biklen: "They're a big competitor today. I don't know how they would be affected."

The prospects of a privatized Sallie Mae is far from certain. The stockholder-owned company has gotten some early support for its plan to shake its government charter, but it is likely to face resistance from a Congress that could either broaden its mandate or make it fully private if an undetermined exit fee is paid.

In the meantime. Student Loan Corp. is not silting still. The company has begun to spend again after three years of holding expenses flat while Citicorp grappled with the worst of its credit problems.

In the first half of the year, nonsalary expenses rose to S13.2 million from $9.345 million for the same period in 1993. Much of the new money was dedicated to launching a new marketing campaign. and for installing new systems for processing deferments and originating loans.

Beyond investing for the future, Mr. Biklen has embarked on a plan to make over the corporate culture, returning it to an entrepreneurial path so the company can react more quickly to customer needs.

Until the late 1970s, Citi ran its student loan business out of New York City and did it largely to accommodate customers. But cost savings soon inspired Citicorp to move the business to Rochester, where its upstate New York banking business is based.

In 1980, Citi began marketing the student loan business nationwide.

That's when Mr. Biklen joined the division after seven years at Citibank.

Tucked away in a three-story glass-and-concrete structure just outside Rochester, Student Loan Corp. had become more hierarchical during its recent years of rapid growth.

A new program is designed to encourage employee teams to work together to accomplish goals.

Mr. Biklen says it is already starting to pay off. More employees are volunteering for overtime and one department reorganized without prompting from management.

Despite the 10-ton gorilla entering its market, Mr. Biklen does not act like Student Loan Corp. is under siege.

He points out that even if its share of the student loan market doesn't grow, the size of the market is expected to reach as much as $28 billion a year by 1997, twice its level of just two years ago.

"The worst case is that loan volume will stay the same, if the government succeeds."

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