Citigroup exits student loan business

Financial services giant Citigroup said Friday it will sell off its student loan business to Sallie Mae and Discover Financial Services, a move that consolidates the sector after the government took over much of the business.

Sallie Mae paid $1.2 billion and Discover paid $600 million, which comes after legislation passed in July that enabled the Education Department to issue new federal student loans.

"It's basically fallout from the government takeover of the federal student loan program," said Matt Snowling, an analyst with FBR Capital Markets.

In the deal, Sallie Mae will be able to collect payments and service $28 billion worth of existing loans that are backed by the federal government. Discover Financial Services took on $4 billion worth of private loans that do not carry federal guarantees but produce higher interest rate payments from borrowers.

Investors in Sallie Mae, which is moving from Reston to Delaware next year, cheered the deal, sending shares up 4.72 percent. They closed at $11.75.

Citigroup was able to sell off its 80 percent stake in what was known as Student Loan Corp. The remaining 20 percent of Student Loan Corp.'s shares trade publicly. Student Loan Corp. is the second-largest student lending business in the country behind Sallie Mae.

"We are one of four companies selected to service federal student loans on behalf of the federal government, and this transaction adds to that servicing business," said Sallie Mae spokeswoman Martha Holler. "We purchased assets that satisfy our target for asset quality and return on investments, and that would increase our customer base."

The student loans were part of Citigroup's portfolio of non-core assets that the company had identified as unnecessary.

"You are either one of the remaining servicers of student loans like Sallie Mae, or you are basically one of the companies just dealing with the runoff from this business," Snowling said. "I suspect Citi saw it was going to have to hold onto this portfolio for 15 years in a business in decline and decided to get whatever cash it could for it and move on."

Sallie Mae, formally known as SLM Corp., has been cutting jobs and restructuring as it adjusts to the new parameters in the wake of the July legislation.

It increasingly is moving towards servicing loans that are backed by the federal government and issuing private loans, although that sector has been shrinking. With the Citigroup deal, Sallie Mae will add 1.3 million new customers.