Discover Financial Services said Friday it would buy Student Loan Corp. (SLC) for $600 million in a deal that beefs up the Riverwoods, Ill., credit card issuer's growing student loan business.

As part of the deal, Discover would acquire $4.2 billion of private student loans at an 8.5% discount and $3.4 billion of the company's securitization.

Discover expects the acquisition to close by yearend.

Prior to the deal's closing, SLC announced separately that it would sell $28 billion of federal student loans and other assets to Sallie Mae (please see separate section below) and $8.7 billion of assets to Citigroup, which owns an 80% stake of SLC.

Bank of America Merrill Lynch analysts said that the sale of SLC to Discover and certain FFELP assets to Sallie Mae should have a minimal impact on the student loans ABS sponsored by SLC.

They cited the fact that Sallie Mae has extensive experience servicing FFELP student loans and that Citibank will still be servicing SLC's existing private student loans.

However, the private student loan ABS that are sponsored by SLC might become vulnerable over time to changes in Citibank's student loan servicing platform, BofA Merrill analysts wrote.

"The private student loan business is an important part of Discover's direct banking strategy and this acquisition will enhance our competitive position in private student loan originations," David Nelms, Discover's chairman and chief executive, said in a press release.

Citi said in an announcement that would "explore opportunities to reduce" the assets it plans to buy from SLC. It expects the deal to result in $500 million after-tax loss in the third quarter.

Sallie Mae Agreement

Separately, student lender Sallie Mae reached an agreement to buy $28 billion of securitized federal student loans and related assets from SLC.

The deal is expected to close by yearend and upon its closing, Sallie will be managing or servicing around $200 billion federal student loans.

According to a press release from Sallie, it is the biggest servicer of federally guaranteed student loans as well as the largest originator and servicer of private student loans.

In addition, the company manages or services $36 billion in private student loans, including the new Smart Option Student Loan, which assists students graduate with less debt and pay off their loans faster.

As required by securities rules, Sallie will be filing form 8-K with the Securities and Exchange Commission describing the details of the transaction.

“This opportunity fits well with our servicing scale and expertise,” said Albert Lord, vice chairman and CEO at Sallie. "We welcome our 1.3 million new customers and commit to assist them in meeting their education loan obligations.”

In a Keefe, Bruyette and Woods (KBW) report, analysts enumerated the deal's target price risks that include significantly higher-than-expected private student loan charge-offs and loss provisions as well as another prolonged credit market disruption.

The report described Sallie as "a leading provider of private student loans" that also provides students and families with options enabling them to save and pay for college.

Moreover, KBw analysts think that the student loan sector has attractive growth prospects. However, they said that political and regulatory risks are still a concern.

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