NEW YORK—Banking giant Citigroup Inc. last week exited the U.S. student loan business, selling its student-lending unit to SLM Corp. (Sallie Mae) and Discover Financial Services.

Citigroup divested its 80 percent stake in the Student Loan Corporation (SLC)—which was 20 percent owned by shareholders—and unloaded nearly $32 billion in student loan assets from its books.

The Reston, Va.-based Sallie Mae, the government-backed student lender, will assume servicing of roughly $28 billion of federally backed student loans while Discover will collect $4 billion in private loans.

The remaining $4.7 billion will be sold to the U.S. Department of Education, and an additional $8.7 billion in federal and private student loans was bought back by Citigroup, to be unwound at a later date.

SLC’s shareholders will receive around $30 per share.

“We are delighted that Discover will acquire SLC’s private student loan business and build on its strong foundation, and we are confident that Sallie Mae will provide high quality service to Federal Family Education Loan Program borrowers after the transition is completed,” said Michael Corbat, CEO of Citi Holdings, in a statement.

Citi Holdings was the “bad” bank set up to unload Citigroup’s unwelcome assets following its federal bailout two years ago.

Citigroup Slims Down

The move comes after the Obama Administration mandated the federal government to provide student loans this summer as the private sector tightens its lending criteria.

Citigroup said that the divestiture would cost the firm $500 million, which will be reflected in its third-quarter financial statements.

This sale represents Citigroup’s biggest since it unloaded its Japanese brokerage Nikko Cordial last year, as a part of Chief Executive Officer Vikram Pandit’s strategy of scaling down the size of the firm. Citigroup identified its student loan business as non-core and decided to unload the unit earlier this year.

More Consolidation On the Way

Sallie Mae paid $1.2 billion and Discover paid $600 in the deal. SLC is the nation’s second-largest student loan servicer behind Sallie Mae. After the transaction closes, Sallie Mae will service roughly $200 billion in student loans, the company said.

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

Experts say that more consolidation is on the horizon for the industry, as legislation this summer essentially barred private institutions from issuing federally backed student-loan programs.

Current student lenders will no longer be able to originate loans, but can buy federally backed loans from Sallie Mae and service them.

“I expect we’re going to see a lot more mergers and acquisitions over the next 12 months,” said Mark Kantrowitz, publisher of the FinAid.org website, in an interview with MarketWatch. “If you can get the portfolio cheap, you can make money off it if you service the loans efficiently.”

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