UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


__________________


FORM
10-Q


__________________





(Mark
      One)x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended June 30, 2008or ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from ___ to ___





Commission
File Number: 1-11616





THE
STUDENT LOAN CORPORATION


(Exact
name of registrant as specified in its charter)





Delaware
            
            16-1427135(State
      or other jurisdiction of
            
            (I.R.S.
      Employer Identification No.)incorporation
      or organization)750
      Washington Blvd.
            
            06901Stamford,
      Connecticut
            
            (Zip
      Code)(Address
      of principal executive offices)





(203)
975-6320


(Registrant's
telephone number, including area code)


__________________





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.





Yes
            x
            No
            o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer  x
            
            Accelerated
      filer                   oNon-accelerated
      filer   o (Do not check if
      a smaller reporting company)
            Smaller
      reporting company   o





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).





Yes
            o
            No
            x





On July
31, 2008, there were 20,000,000 shares of The Student Loan Corporation’s Common
Stock outstanding.














Form
10-Q





TABLE
OF CONTENTS





Part
      I
            Consolidated
      Financial InformationPageItem
      1 -
            Consolidated
      Financial StatementsConsolidated
      Statements of Income (Unaudited) for the Three and Six Months
      Ended June 30, 2008 and 2007
            2Consolidated
      Balance Sheets as of June 30, 2008 (Unaudited) and December 31,
      2007
            3Consolidated
      Statements of Changes in Stockholders’ Equity (Unaudited) for the Six
      Months Ended June 30, 2008 and 2007
            4Consolidated
      Statements of Cash Flows (Unaudited) for the Six Months
      Ended  June 30, 2008 and 2007
            5Notes
      to Consolidated Financial Statements (Unaudited)
            6–
      17Item
      2 -
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            18 –
      32Item
      3 -
            Quantitative
      and Qualitative Disclosures About Market Risk
            33Item
      4 -
            Controls
      and Procedures
            33Part
      II
            Other
      InformationItem
      1A-
            Risk
      Factors
            34
      – 37Item
      6 -
            Exhibits
            38Signature
            39Exhibit
      Index
            40








1





PART
I    CONSOLIDATED FINANCIAL INFORMATION





Item
      1.
            Consolidated
      Financial Statements





THE
STUDENT LOAN CORPORATION


CONSOLIDATED
STATEMENTS OF INCOME


(Dollars
in thousands, except per share amounts)


(Unaudited)





Three
      months ended
            
            
            Six
      months endedJune
      30,
            
            
            June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007NET
      INTEREST INCOMEInterest
      income
            
            $
            318,769
            
            
            $
            400,674
            
            
            $
            648,516
            
            
            $
            779,321Interest
      expense
            
            
            (199,379
            )
            
            
            (297,797
            )
            
            
            (447,679
            )
            
            
            (582,687
            )Net
      interest income
            
            
            119,390
            
            
            
            102,877
            
            
            
            200,837
            
            
            
            196,634Provision
      for loan losses
            
            
            (45,827
            )
            
            
            (3,895
            )
            
            
            (71,139
            )
            
            
            (14,423
            )Net
      interest income after provision for loan losses
            
            
            73,563
            
            
            
            98,982
            
            
            
            129,698
            
            
            
            182,211OTHER
      INCOMEGains
      on loans securitized
            
            
            1,262
            
            
            
            48,548
            
            
            
            1,262
            
            
            
            48,548Gains
      on loans sold
            
            
            859
            
            
            
            2,492
            
            
            
            2,314
            
            
            
            20,266Fee
      and other income
            
            
            39,012
            
            
            
            9,420
            
            
            
            50,471
            
            
            
            24,283Total
      other income
            
            
            41,133
            
            
            
            60,460
            
            
            
            54,047
            
            
            
            93,097OPERATING
      EXPENSESSalaries
      and employee benefits
            
            
            13,593
            
            
            
            16,120
            
            
            
            29,062
            
            
            
            30,570Restructuring
      and related charges
            
            
            8,735
            
            
            
            –
            
            
            
            8,735
            
            
            
            735Other
      expenses
            
            
            29,521
            
            
            
            29,631
            
            
            
            58,187
            
            
            
            58,644Total
      operating expenses
            
            
            51,849
            
            
            
            45,751
            
            
            
            95,984
            
            
            
            89,949Income
      before income taxes
            
            
            62,847
            
            
            
            113,691
            
            
            
            87,761
            
            
            
            185,359Income
      taxes
            
            
            20,831
            
            
            
            43,174
            
            
            
            30,511
            
            
            
            70,819NET
      INCOME
            
            $
            42,016
            
            
            $
            70,517
            
            
            $
            57,250
            
            
            $
            114,540DIVIDENDS
      DECLARED AND PAID
            
            $
            28,600
            
            
            $
            28,600
            
            
            $
            57,200
            
            
            $
            54,600BASIC
      EARNINGS PER COMMON SHARE
            
            $
            2.10
            
            
            $
            3.53
            
            
            $
            2.86
            
            
            $
            5.73(based
      on 20 million average shares outstanding)DIVIDENDS
      DECLARED AND PAID PER COMMON SHARE
            
            $
            1.43
            
            
            $
            1.43
            
            
            $
            2.86
            
            
            $
            2.73








See
accompanying Notes to Consolidated Financial Statements.





2





THE
STUDENT LOAN CORPORATION


CONSOLIDATED
BALANCE SHEETS


(Dollars
in thousands, except per share amounts)





June
      30,
            
            
            December
      31,2008
            
            
            2007(Unaudited)ASSETSFederally
      insured student loans
            
            $
            14,719,407
            
            
            $
            16,244,273Private
      education loans
            
            
            5,819,978
            
            
            
            4,696,337Deferred
      origination and premium costs
            
            
            660,296
            
            
            
            668,082Allowance
      for loan losses
            
            
            (81,817
            )
            
            
            (42,115
            )Student
      loans, net
            
            
            21,117,864
            
            
            
            21,566,577Other
      loans and lines of credit
            
            
            18,157
            
            
            
            87,437Loans
      held for sale
            
            
            1,926,538
            
            
            
            337,790Cash
            
            
            656
            
            
            
            25Residual
      interests in securitized loans
            
            
            701,598
            
            
            
            633,074Other
      assets
            
            
            1,333,562
            
            
            
            1,154,956Total
      Assets
            
            $
            25,098,375
            
            
            $
            23,779,859LIABILITIES
      AND STOCKHOLDERS' EQUITYShort-term
      borrowings, payable to principal stockholder
            
            $
            11,801,600
            
            
            $
            13,373,000Long-term
      borrowings, payable to principal stockholder
            
            
            9,150,000
            
            
            
            8,100,000Long-term
      secured borrowings
            
            
            1,830,988
            
            
            
            –Deferred
      income taxes
            
            
            264,089
            
            
            
            287,462Other
      liabilities
            
            
            427,403
            
            
            
            395,174Total
      Liabilities
            
            
            23,474,080
            
            
            
            22,155,636Common
      stock, $0.01 par value; authorized 50,000,000 shares; 20,000,000 shares
      issued and outstanding
            
            
            200
            
            
            
            200Additional
      paid-in capital
            
            
            141,377
            
            
            
            141,355Retained
      earnings
            
            
            1,482,718
            
            
            
            1,482,668Total Stockholders' Equity
            
            
            1,624,295
            
            
            
            1,624,223Total
      Liabilities and Stockholders' Equity
            
            $
            25,098,375
            
            
            $
            23,779,859








See
accompanying Notes to Consolidated Financial Statements.





3





THE
STUDENT LOAN CORPORATION


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


(Dollars
in thousands, except per share amounts)


(Unaudited)





Six
      months ended June 30,2008
            
            
            2007COMMON
      STOCK AND ADDITIONAL PAID-IN CAPITALBalance,
      beginning of period
            
            $
            141,555
            
            
            $
            141,524Capital
      contributions and other changes
            
            
            22
            
            
            
            19Balance,
      end of period
            
            $
            141,577
            
            
            $
            141,543RETAINED
      EARNINGSBalance,
      beginning of period
            
            $
            1,482,668
            
            
            $
            1,410,968Cumulative
      effect of adoption of accounting standard, net of taxes of
      $506
            
            
            –
            
            
            
            809Net
      income
            
            
            57,250
            
            
            
            114,540Common
      dividends declared, $2.86 per common share in 2008 and $2.73 per common
      share in 2007
            
            
            (57,200
            )
            
            
            (54,600
            )Balance,
      end of period
            
            $
            1,482,718
            
            
            $
            1,471,717ACCUMULATED
      OTHER COMPREHENSIVE INCOMEBalance,
      beginning of period
            
            $
            –
            
            
            $
            809Cumulative
      effect of adoption of accounting standard, net of taxes of
      $(506)
            
            
            –
            
            
            
            (809
            )Balance,
      end of period
            
            $
            –
            
            
            $
            –TOTAL
      STOCKHOLDERS' EQUITY
            
            $
            1,624,295
            
            
            $
            1,613,260








See
accompanying Notes to Consolidated Financial Statements.





4





THE
STUDENT LOAN CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Dollars
in thousands)


(Unaudited)


Six
      months endedJune
      30,2008
            
            
            2007Cash
      flows from operating activities:Net
      income
            
            $
            57,250
            
            
            $
            114,540Adjustments
      to reconcile net income to net cash from operating
    activities:Depreciation
      and amortization of equipment and computer software
            
            
            6,696
            
            
            
            7,142Amortization
      of deferred loan origination and purchase costs
            
            
            49,124
            
            
            
            54,638Accreted
      interest on residual interests
            
            
            (30,964
            )
            
            
            (28,813
            )Provision
      for loan losses
            
            
            71,139
            
            
            
            14,423Restructuring
      and related charges
            
            
            8,735
            
            
            
            735Other
      non-cash charges
            
            
            9,105
            
            
            
            –Deferred
      tax provision
            
            
            (23,373
            )
            
            
            (16,212
            )Gains
      on loans sold and securitized
            
            
            (3,576
            )
            
            
            (68,814
            )(Gain)
      loss on residual interest valuation
            
            
            (46,758
            )
            
            
            1,892Loss
      on servicing asset valuation
            
            
            7,314
            
            
            
            12,397Change
      in loans held for sale
            
            
            (156,707
            )
            
            
            (134,807
            )Change
      in loans held for sale origination and purchase costs
            
            
            (3,593
            )
            
            
            (2,212
            )Proceeds
      from loans sold
            
            
            114,392
            
            
            
            150,978Cash
      received on residual interests in trading securitized
    assets
            
            
            66,064
            
            
            
            36,374Change
      in accrued interest receivable
            
            
            (39,100
            )
            
            
            (139,139
            )Change
      in other assets
            
            
            (38,370
            )
            
            
            (17,074
            )Change
      in other liabilities
            
            
            24,134
            
            
            
            (78,196
            )Net
      cash provided by (used in) operating activities
            
            
            71,512
            
            
            
            (92,148
            )Cash
      flows from investing activities:Change
      in loans
            
            
            (3,137,199
            )
            
            
            (2,800,561
            )Change
      in loan origination and purchase costs
            
            
            (97,248
            )
            
            
            (135,034
            )Proceeds
      from loans sold and securitized
            
            
            1,973,207
            
            
            
            1,973,607Change
      in restricted cash
            
            
            (51,975
            )
            
            
            –Capital
      expenditures on equipment and computer software
            
            
            (5,450
            )
            
            
            (3,971
            )Net
      cash used in investing activities
            
            
            (1,318,665
            )
            
            
            (965,959
            )Cash
      flows from financing activities:Net
      change in borrowings with original maturities of one year or
      less
            
            
            (2,771,400
            )
            
            
            106,500Proceeds
      from borrowings with original terms of one year or more
            
            
            2,550,000
            
            
            
            3,000,000Proceeds
      from issuance of secured borrowings
            
            
            1,848,530
            
            
            
            –Repayments
      of secured borrowings
            
            
            (22,146
            )
            
            
            –Repayments
      of borrowings with original terms of one year or more
            
            
            (300,000
            )
            
            
            (2,000,000
            )Dividends
      paid to stockholders
            
            
            (57,200
            )
            
            
            (54,600
            )Net
      cash provided by financing activities
            
            
            1,247,784
            
            
            
            1,051,900Net
      increase (decrease) in cash
            
            
            631
            
            
            
            (6,207
            )Cash
      - beginning of period
            
            
            25
            
            
            
            6,570Cash
      - end of period
            
            $
            656
            
            
            $
            363Supplemental
      disclosure:Cash
      paid (received) for:Interest
            
            $
            511,080
            
            
            $
            589,927Income
      taxes, net
            
            $
            (2,310
            )
            
            $
            83,936


See
accompanying Notes to Consolidated Financial Statements.


5


THE
STUDENT LOAN CORPORATION


Notes
to Consolidated Financial Statements (Unaudited)


June
30, 2008








1.
            BASIS OF
      PRESENTATION AND SIGNIFICANT ACCOUNTING
  POLICIES





Interim
Financial Information





The
accompanying Unaudited Consolidated Financial Statements of The Student Loan
Corporation (the Company), a Delaware corporation, include the accounts of the
Company and its wholly owned subsidiary, SLC Student Loan Receivables I,
Inc.  Educational Loan Center, Inc., a former subsidiary of the Company,
which was dissolved on June 30, 2008.  All intercompany balances and
transactions have been eliminated.





The
Company, through a trust agreement with Citibank, N.A. (CBNA), is an originator,
manager and servicer of student loans, including loans made in accordance with
federally sponsored guaranteed student loan programs as well as private
education loans.  CBNA, an indirect wholly owned subsidiary of
Citigroup Inc. (Citigroup), is the largest shareholder of the Company, owning
80% of the Company’s outstanding common stock.





In the
opinion of management, all adjustments, consisting of normal, recurring
accruals, necessary to state fairly the Company's financial position and results
of operations in conformity with U.S. generally accepted accounting principles
(GAAP) have been reflected.  The results for the three and six months
ended June 30, 2008 may not be indicative of the results for the full year ended
December 31, 2008.Certain financial
information that is normally included in annual financial statements prepared in
accordance with GAAP, but is not required for interim reporting purposes, has
been condensed or omitted.The accompanying
Unaudited Consolidated Financial Statements should be read in conjunction with
the Consolidated Financial Statements and related Notes included in the
Company’s 2007 Annual Report and Form 10-K and the Company’s Form 10-Q for the
quarter ended March 31, 2008.





Basis
of Presentation





The
Company’s accounting policies are in conformity with GAAP. The Company’s
operations are a single segment for financial reporting purposes, as the
Company’s only operations consist of originating, managing and servicing student
loans.





Certain
amounts in the prior period’s financial statements have been reclassified to
conform to the current period’s presentation. Such reclassification had no
effect on the Consolidated Balance Sheet as previously reported.





Use
of Estimates





The
preparation of the Consolidated Financial Statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the balance
sheet date and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those
estimates.





Revenue Recognition





Revenues,
which include net interest income, fees and gains on loans sold and securitized,
if any, are recognized as they are earned.  Interest income includes
special allowance payments from and excess interest payments to the federal
government as prescribed under the Higher Education Act of 1965, as amended (the
Higher Education Act), and is net of amortization of premiums and origination
costs. The Company accounts for premiums and origination costs in accordance
with Statement of Financial Accounting Standards (SFAS) No. 91, Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases(SFAS 91). Deferred premiums and origination costs on the
Company’s loan portfolio are amortized using the interest method.





6








Loans





The
Company has a portfolio of student loans originated under the Federal Family
Education Loan (FFEL) Program authorized by the U.S. Department of Education
(the Department) under the Higher Education Act, which are insured by guaranty
agencies (guarantors).   Student loan interest, inclusive of
special allowance payments from and excess interest payments to the federal
government, if any, is recognized as it is earned or incurred.





The
Company also has a portfolio of private education loans primarily consisting of
CitiAssist®
loans.  Some of those loans are insured against loss by private
insurers or covered under other risk-sharing agreements with creditworthy
schools.  Some of those loans, including many higher risk loans, are
neither insured nor covered under risk-sharing agreements.  The
Company is exposed to 100% of loss on such loans. Effective January 1, 2008, the
Company elected to stop insuring new CitiAssist loan originations.





Allowance
for Loan Losses





The
Company has an allowance for loan losses that provides a reserve for estimated
losses on: (1) the portion of the FFEL Program loan portfolio that is subject to
the risk-sharing provisions of the Higher Education Act and (2) the private
education loan portfolio, after considering the credit risk insurance coverage
obtained from third parties, the impact of any risk-sharing agreements with
certain schools and counterparty risk ratings. Estimated losses are based on
historical delinquency and credit loss experience adjusted for expected market
conditions and aging of the portfolio.  Estimated losses are expensed
currently and increase the provision for loan losses.  Actual losses
are charged against the reserve as they occur, and subsequent recoveries are
added.





The
Company ceases to accrue interest income on a student loan when one of the
following events occurs: (1) a FFEL Program loan loses its guarantee, (2) an
insured private education loan reaches 150 days of delinquency or (3) an
uninsured private education loan reaches 90 days of
delinquency.  Accrual of interest is resumed if the loan guarantee is
reinstated.  Interest received on non-accruing loans is recorded
directly into interest income. The Company immediately writes off the loan
balance corresponding to the unguaranteed portion of FFEL Program Loans at 270
days of delinquency and the uninsured portion of private education loans at 120
days of delinquency.  Also, the Company writes off the loan balances
for loans in which the guarantee claim is not received for FFEL Program and
private education loans after 450 days and 240 days, respectively. When loans or
portions of loans are written off, the Company reduces interest income by the
amounts of accrued, uncollected interest.





Restricted
Cash





Restricted
cash includes amounts held by loan securitization trusts that are being
accounted for as secured borrowings. This cash must be used to make payments
related to trust obligations and is classified as a component of Otherassets. Amounts on deposit in
these accounts are primarily the result of timing differences between when
principal and interest is collected on the trust assets and when principal and
interest is paid on trust liabilities.





Transfer
of Student Loans through Sale or Securitization





Whole
Loan Sales





The
Company accounts for its whole loan sales in accordance with the provisions of
SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
a replacement of FASB Statement No. 125,as amended(SFAS 140). In order
for a transfer of financial assets to be considered a sale, the assets
transferred by the Company must have been isolated from the seller, even in
bankruptcy or other receivership, and the purchaser must have the right to
pledge or exchange the assets transferred. In addition, the sale accounting
rules of SFAS 140 require the Company to relinquish effective control over the
loans sold as of the sale date.




Loans
Securitized





There are
two key accounting determinations that must be made relating to securitizations.
First, a decision must be made as to whether that transfer is considered a sale
in accordance with SFAS 140. If it is a sale, the transferred assets are removed
from the Company's Consolidated Balance Sheets and a gain or loss is
recognized.  Second, a determination must be made as to whether the
securitization entity should be included in the Company’s Consolidated Financial
Statements. If the securitization entity's activities are sufficiently
restricted to meet accounting requirements for a qualifying special purpose
entity (QSPE), the securitization entity is not consolidated by the seller of
transferred assets.




7





All of
the Company’s off-balance sheet securitization entities meet the definition of a
QSPE and are not consolidated. The Company accounts for its on-balance sheet
securitization entity, which is not a QSPE, as a secured borrowing in accordance
with SFAS 140.





Interest
in the securitized loans accounted for as a sale are retained in the form of
subordinated interest-only strips (i.e., residual interests) and servicing
rights.





Prior to
January 1, 2007, the Company accounted for its residual interest from the 2004
securitization as available-for-sale securities. Effective January 1, 2007,the Company early-adopted
SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities (SFAS 159). In
accordance with SFAS 159, the Company elected to measure its residual interest
from the 2004 securitization at fair value. Upon the adoption of the fair value
method, the Company reclassified $0.8 million of unrealized gain on the residual
interest from the 2004 securitization from Accumulated other comprehensive
incometoRetained
earnings. Beginning January 1, 2007, unrealized gains and losses related
to all of the Company’s residual interests are reported in Fee and other
income.





The
Company’s servicing assets are reported at fair value, in accordance with the
provisions of SFAS No.156, Accounting for Servicing of
Financial Assets – an amendment of FASB statement No. 140(SFAS 156), and
are included in Other
assets. Unrealized gains and losses associated with servicing asset
valuation changes are reported in Fee and other
income.





Gains are
recognized at the time of securitization and are reported in Gains on loans
securitized.  Securitization gains represent the difference
between the cost basis of the assets sold and the fair value of the assets
received, including, as applicable, cash, residual interests, servicing assets
and retained notes.  The Company estimates the fair value of these
retained interests using an income approach by determining the present value of
expected future cash flows using modeling techniques that incorporate
management's best estimates of key assumptions, including prepayment speeds,
credit losses, borrower benefits and discount rates.





Additional
information on the Company's securitization activities may be found in Note
10.





Loans
Held for Sale





Loans
held for sale are loans that the Company plans to include in a future
securitization or sale. Management continually assesses its future
securitization and loan sale plans and transfers sufficient amounts of loans to
the held for sale portfolio to meet the Company’s anticipated near term sale and
securitization requirements. These loans are recorded at the lower of cost,
consisting of principal and deferred costs, or fair value.  For
the three and six months ended June 30, 2008, the fair value was below cost and
a valuation allowance of $4 million was recorded. For the same periods in 2007,
the fair value exceeded cost.  Accordingly, no valuation
allowance was necessary.




Derivatives





The
Company uses derivative financial products, including swaps and options, in an
effort to manage its exposure to interest rate risk. In addition, the Company
uses cross currency swaps in an effort to manage its exposure to foreign
currency exchange rates on its foreign currency denominated secured borrowings.
These derivatives are carried at fair value in Other assets or Other liabilities with changes
in fair value recorded currently in Fee and other
income.





Internally
Developed Software





Certain
direct costs associated with the development of internal use software are
capitalized. The Company capitalizes development costs for internal use software
in accordance with the provisions of Statement of Position 98-1,Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. These costs are
included in Other assets
and are amortized by the straight-line method over the service period, not to
exceed ten years.  Deferral of costs starts after the preliminary
project stage is completed and ends when the project is substantially complete
and ready for its intended use. Capitalized internally developed software costs
are periodically reviewed for obsolescence.  Capitalized costs of
projects deemed to be obsolete or abandoned are written off to operating
expense.




8





2.
            RESTRUCTURING
      AND RELATED CHARGES





On July
9, 2008, the Company announced, under its existing severance policy, a
restructuring of certain functional areas. During the quarter ended June
30, 2008, the Company strategically repositioned in order to benefit from the
products, channels, and operational structure that it believes will best
position the Company to grow profitably while carefully deploying
capital.  This resulted in a reduction of 146 positions in the
Company's overall workforce.  All the affected employees were notified
immediately of the restructuring plan. Full implementation of the plan is
expected to be completed in the fourth quarter of 2008.





As a
result of the repositioning, restructuring and related charges of $9 million
were recorded in the Company’s operating expenses for the quarter ended June 30,
2008.  These charges consist of $8 million in salaries and benefit
costs and $1 million in non-cash charges primarily related to the impairment of
computer software. At June 30, 2008, the Company had a liability of $8 million
related to this restructuring included in Other
liabilities.





3.
            INCOME
      TAXES





The
Company’s effective tax rate during the second quarter decreased to 33.1% from
38.0% during the same quarter in 2007. This decrease reflects a one time credit
to income taxes of $3 million to adjust current and deferred income taxes
payable.




4.      FUTURE
APPLICATION OF ACCOUNTING STANDARDS





Elimination
of QSPEs and Changes in the FIN 46(R) Consolidation Model





During
April of 2008, the FASB voted to eliminate QSPEs from the guidance in SFAS 140.
While the revised standard has not been finalized and the Board’s proposals will
be subject to a public comment period, this change may have a significant impact
on the Company’s Consolidated Financial Statements. The Company may lose sales
treatment for assets previously sold to a QSPE, as well as for future
sales.  This proposed revision could be effective January
2010.  As of June 30, 2008, the total assets of QSPEs to which the
Company has transferred assets and received sales treatment were $16.3
billion.




In
addition, the FASB has proposed three key changes to the consolidation model in
FIN 46(R).  First, the FASB will include former QSPEs in the scope of
FIN 46(R). Second, the proposed amendment to FIN 46(R) will change the method of
analyzing which party to a variable interest entity (VIE) should consolidate the
VIE to a qualitative determination of control instead of the current risks and
rewards model. Finally, the proposed amendment is expected to require all VIEs
and their primary beneficiaries to be reevaluated quarterly.  The
previous rules required reconsideration only when specified events
occurred.





The
Company will be evaluating the impact of these changes on its Consolidated
Financial Statements once the actual guidelines are provided.





Disclosures
about Derivative Instruments and Hedging Activities





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities –


an amendment of FASB Statement No.
133 (SFAS 161). The standard requires enhanced disclosures about
derivative instruments and hedged items that are accounted for under SFAS No.
133, Accounting for Derivative
Instruments and Hedging Activities, as amended (SFAS 133) and related
interpretations. The standard will be effective for all of the Company’s interim
and annual financial statements for periods beginning after November 15, 2008,
with early adoption permitted. The standard expands the disclosure requirements
for derivatives and hedged items and has no impact on how the Company accounts
for these instruments.




9





5.
            STUDENT
      LOANS





The
Company’s portfolio of student loans consists primarily of loans originated
under government guaranteed loan programs, principally the FFEL Program, and
private education loans, primarily CitiAssist loans.





The
Company’s loans are summarized by program type as follows:





June
      30,
            
            
            December
      31,(Dollars in
      thousands)
            
            2008
            
            
            2007Federal
      Stafford Loans
            
            $
            7,793,332
            
            
            $
            8,687,483Federal
      Consolidation Loans
            
            
            6,507,410
            
            
            
            6,364,762Federal
      SLS/PLUS/HEAL Loans
            
            
            418,665
            
            
            
            1,192,028Private
      education loans
            
            
            5,819,978
            
            
            
            4,696,337Total
      student loans held, excluding deferred costs
            
            
            20,539,385
            
            
            
            20,940,610Deferred
      origination and premium costs
            
            
            660,296
            
            
            
            668,082Student
      loans held
            
            
            21,199,681
            
            
            
            21,608,692Less:
      allowance for loan losses
            
            
            (81,817
            )
            
            
            (42,115
            )Student
      loans held, net
            
            
            21,117,864
            
            
            
            21,566,577Loans
      held for sale, excluding deferred costs
            
            
            1,895,069
            
            
            
            331,263Deferred
      origination and premium costs
            
            
            31,469
            
            
            
            6,527Loans
      held for sale
            
            
            1,926,538
            
            
            
            337,790Other
      loans and lines of credit
            
            
            18,157
            
            
            
            87,437Total
      loan assets
            
            $
            23,062,559
            
            
            $
            21,991,804







6.
            OTHER
      ASSETS





Other
assets are summarized as follows:


June
      30,
            
            
            December
      31,(Dollars in
      thousands)
            
            2008
            
            
            2007Accrued
      interest receivablefrom
      student loan borrowers/others
            
            $
            759,874
            
            
            $
            649,219from
      federal government
            
            
            35,131
            
            
            
            106,686Servicing
      asset from securitization activity
            
            
            191,798
            
            
            
            199,112Collateral
      on derivatives with CBNA
            
            
            148,024
            
            
            
            86,699Retained
      notes from securitization activities
            
            
            81,637
            
            
            
            24,204Restricted
      cash
            
            
            51,975
            
            
            
            –Equipment
      and computer software (1)
            
            
            31,894
            
            
            
            34,563Other
            
            
            33,229
            
            
            
            54,473Total
      other assets
            
            $
            1,333,562
            
            
            $
            1,154,956





(1)
            Amounts
      are reflected net of accumulated depreciation and software amortization of
      $55 million and $53 million at June 30, 2008 and December 31, 2007,
      respectively.  The Company disposed of equipment and computer
      software with a net book value of $1.4 million during the six months ended
      June 30, 2008, of which $0.6 million was included in restructuring
      charges.





Accrued
interest receivable from the federal government decreased by $72 million (67%)
during the six months ended June 30, 2008.  This decrease is primarily
due to the impact of declining interest rates, which reduced the special
allowance payments due from the federal government as well as increased the
amount of excess interest payments owed to the federal
government.





The
Company enters into interest rate swaps and options in an effort to manage its
interest rate risk exposure.  The Company’s collateral on these
derivatives increased by $61 million (71%) during the six months ended June 30,
2008, primarily as a result of declining interest rates.  For further
information on the Company’s derivative agreements, see Note 9.





As a
result of current market conditions, the Company has retained certain notes
related to off-balance sheet securitizations.  During the six months
ended June 30, 2008, the recorded value of the retained notes from
securitization activities increased by $57 million, largely due to the retention
of notes from the second quarter off-balance sheet
securitization.


10


During
March 2008, the Company completed its first on-balance sheet
securitization.  As a result, the Company’s Consolidated Financial
Statements include cash held by the trust, or restricted cash, of $52 million as
of June 30, 2008, which can be used only for trust obligations.


7.
            FEE
      AND OTHER INCOME





Fee and
other income is summarized as follows:


Three
      Months Ended
                
                
                Six
      Months EndedJune
      30,
                
                
                June
      30,(Dollars in
      thousands)
                
                2008
                
                
                2007
                
                
                2008
                
                
                2007(Losses)
      gains related to residual interests
                
                $
                (23,661
                )
                
                $
                (114
                )
                
                $
                46,758
                
                
                $
                (1,892
                )Mark-to-market
      gains (losses) on derivatives
                
                
                54,469
                
                
                
                (1,920
                )
                
                
                (17,951
                )
                
                
                (1,662
                )Servicing
      revenue net of valuation gains and losses on servicing
    assets
                
                
                13,422
                
                
                
                8,489
                
                
                
                30,252
                
                
                
                20,125Foreign
      currency translation gains (losses)
                
                
                480
                
                
                
                –
                
                
                
                (4,290
                )
                
                
                –Late
      fees
                
                
                1,362
                
                
                
                1,509
                
                
                
                3,379
                
                
                
                3,541Other
      origination and servicing fees from CBNA
                
                
                1,069
                
                
                
                1,020
                
                
                
                2,801
                
                
                
                3,081Other
      (expense) income (1)
                
                
                (8,129
                )
                
                
                436
                
                
                
                (10,478
                )
                
                
                1,090Total
      fee and other income
                
                $
                39,012
                
                
                $
                9,420
                
                
                $
                50,471
                
                
                $
                24,283


(1)
            Amounts for the
      three and six months ended June 30, 2008 include a $6 million contingent
      loss reserve on a commitment to fund private education loans at a certain
      proprietary school and a $4 million valuation allowance on loans held for
      sale.




8.
            RELATED
      PARTY TRANSACTIONS





Pursuant
to various intercompany agreements, a number of significant transactions are
carried out among the Company and Citigroup, CBNA and/or their affiliates.
Related party agreements with CBNA include an Omnibus Credit Agreement, a
tax-sharing agreement, student loan origination and servicing agreements, and
various derivative contracts.  In addition, the Company maintains a
trust agreement with CBNA through which it originates FFEL Program
loans.  Also, the Company has an agreement for education loan
servicing with Citibank (South Dakota), N.A.  Management believes that
the overall terms under which these transactions and services are provided are
no less favorable to the Company than those that could be obtained from
unaffiliated third parties.





Detailed
below is a description of, and amounts relating to, the Company’s transactions
with either CBNA or other Citigroup affiliates that have been reflected in the
accompanying Consolidated Statements of Income:





Three
      Months Ended
              June
      30,
            
            
            Six Months
      Ended
              June
      30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Revenues:Interest
      income
            
            $
            706
            
            
            $
            285
            
            
            $
            1,537
            
            
            $
            532Interest
      expense
            
            
            181,644
            
            
            
            297,796
            
            
            
            429,215
            
            
            
            582,682Fee
      and other income:Derivative
      valuation gain (loss)
            
            
            54,373
            
            
            
            (1,920
            )
            
            
            (22,458
            )
            
            
            (1,662
            )Other
      origination and servicing fees
            
            
            1,069
            
            
            
            1,020
            
            
            
            2,801
            
            
            
            3,081Operating
      Expenses:Salaries
      and employee benefitsEmployee
      benefits and administration
            
            $
            2,546
            
            
            $
            2,810
            
            
            $
            5,590
            
            
            $
            5,523Stock-based
      compensation
            
            
            528
            
            
            
            558
            
            
            
            1,638
            
            
            
            1,413Other
      expensesServicing,
      professional and other fees paid
            
            
            13,634
            
            
            
            11,689
            
            
            
            26,585
            
            
            
            23,479Data
      processing and communications
            
            
            1,606
            
            
            
            1,518
            
            
            
            3,139
            
            
            
            3,040Premises
            
            
            674
            
            
            
            774
            
            
            
            1,357
            
            
            
            1,527Other
            
            
            4,461
            
            
            
            395
            
            
            
            6,374
            
            
            
            1,163


11


CBNA
Omnibus Credit Agreement





All of
the Company’s outstanding short- and long-term unsecured borrowings were
incurred under the terms of an Omnibus Credit Agreement with CBNA. This
agreement provides a maximum aggregate credit limit of $30 billion through
December 31, 2009. Funding terms and conditions under the agreement are
negotiated between the Company and CBNA on a borrowing-by-borrowing
basis.  Interest expense incurred under these borrowings is reflected
in the table above, see Note 12.




Interest
Rate Swap and Option Agreements





The
Company enters into interest rate swaps and options with CBNA, an
investment-grade counterparty, in an effort to manage its interest rate risk
exposure.  CBNA requires the Company to remit cash into a margin
account as collateral on these derivatives.  The Company’s collateral
on these derivatives increased to $148 million as of June 30, 2008 from $87
million as of December 31, 2007.  For further information on the
Company’s derivative agreements, see Note 9.




Student
Loan Origination Agreement and Servicing Fees Earned





CitiAssist
loans are originated and serviced under an intercompany agreement with
CBNA.  Following final disbursement by CBNA, the Company purchases all
qualified private education loans at CBNA’s carrying value at the time of
purchase, plus a contractual premium. Total principal balances of CitiAssist
loans purchased by the Company were $0.4 billion and $1.4 billion for the three
and six months ended June 30, 2008, respectively, as compared to $0.7 billion
and $1.6 billion for the three and six months ended June 30, 2007, respectively.
Total premiums paid by the Company related to CitiAssist loan purchases were $3
million and $9 million for the three and six months ended June 30, 2008,
respectively, as compared to $4 million and $10 million for the three and six
months ended June 30, 2007, respectively. At June 30, 2008, the Company was
committed to purchase CitiAssist loans of $358 million.





Servicing,
Professional and Other Fees Paid





The
majority of the loan originations and servicing work on the Company’s FFEL
Program and CitiAssist loan portfolios was performed under the provisions of
intercompany agreements with affiliates of the Company, including Citibank
(South Dakota), N.A.  The increases in the charges are primarily due
to managed loan portfolio growth.





CBNA
Tax-sharing Agreement





The
Company is included in the consolidated federal income tax return of Citigroup,
as well as combined or unitary state/local income or franchise tax returns of
Citigroup or its subsidiaries.  As such, the Company pays its income
taxes through CBNA. The taxes paid by the Company are based on an effective tax
rate that approximates the tax expense that would be recognized if the Company
were to file such income tax returns on a stand-alone basis.





Other
Intercompany Arrangements





Citigroup
and its subsidiaries engage in other transactions and servicing activities with
the Company, including cash management, data processing, telecommunications,
payroll processing and administration, facilities procurement and
others.






9.
            DERIVATIVE
      AGREEMENTS





The
Company enters into derivative agreements in an effort to manage its exposure to
interest rate risk and its exposure to foreign currency exchange rate
fluctuations.  The counterparty to the Company’s interest rate
derivative agreements is CBNA, an investment grade company. None of the
derivatives held by the Company at June 30, 2008 were designated as hedges and
accordingly they did not qualify for hedge accounting treatment under SFAS
133.





The
Company’s derivative positions are provided in the table below:





June
      30, 2008
            
            
            December
      31, 2007Fair
      Value
            
            
            
            
            
            Fair
      Value(Dollars in
      thousands)
            
            Notional
            
            
            Asset
            
            
            Liability
            
            
            Notional
            
            
            Asset
            
            
            LiabilityLIBOR-Based
      Swaps
            
            $
            11,901,800
            
            
            $
            1,813
            
            
            $
            31,828
            
            
            $
            8,495,000
            
            
            $
            34,492
            
            
            $
            2,113Interest
      Rate Floor Options
            
            
            12,020,859
            
            
            
            1,772
            
            
            
            118,072
            
            
            
            8,743,266
            
            
            
            1,372
            
            
            
            89,193Foreign
      Currency Swap
            
            
            232,050
            
            
            
            4,507
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –


12


The
Company’s LIBOR-based swaps are intended to economically hedge the interest rate
risk inherent in the Company’s retained interests. These swaps mature between
2011 and 2028.





The
Company’s interest rate floor options are derivative contracts that are designed
to function as economic hedges of the floor income component of the residual
interests. These options mature between 2011 and 2028.





The
Company’s foreign currency swap is intended to economically hedge the foreign
exchange translation on its foreign currency-denominated secured borrowing. The
swap matures in 2032.




10.
            STUDENT
      LOAN SECURITIZATIONS





The
Company maintains programs to securitize certain portfolios of student loan
assets.   Under the Company’s securitization programs,
transactions qualifying as sales are off-balance sheet transactions in which the
loans are removed from the Consolidated Financial Statements of the Company and
sold to an independent trust. In order to pay for the loan assets, the trust
sells debt securities, backed by the student loan assets, to outside
investors.





The
Company also enters into similar securitization transactions that do not qualify
for sale treatment and accordingly, are accounted for as secured
borrowings.  These transactions do not give rise to a gain or loss on
sale.





Securitizations
listed as sales are off-balance sheet transactions and those listed as
financings remain on-balance sheet.  The following table summarizes
the Company’s securitization activity:





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Securitization
      sales:Student
      loans securitized (1)
            
            $
            2,035,540
            
            
            $
            1,201,603
            
            
            $
            2,035,540
            
            
            $
            1,201,603Net
      proceeds from student loans securitized during the period
            
            
            1,973,207
            
            
            
            1,221,216
            
            
            
            1,973,207
            
            
            
            1,221,216Realized
      gains on loans securitized
            
            
            1,262
            
            
            
            48,548
            
            
            
            1,262
            
            
            
            48,548Securitization
      financings:Student
      loans securitized (1)
            
            $
            –
            
            
            $
            –
            
            
            $
            1,993,213
            
            
            $
            –Net
      proceeds from student loans securitized during the period (2)
            
            
            273,619
            
            
            
            –
            
            
            
            1,799,830
            
            
            
            –





(1)
            Amounts
      represent the value of the student loans securitized as of the
      securitization date.




(2)
            The
      proceeds received during the three months ended June 30, 2008 represent
      additional issuances of notes from the first quarter’s on-balance sheet
      securitization transaction.  The difference between student
      loans securitized and net proceeds received for the six months ended June
      30, 2008 primarily reflects $57 million of unissued notes and $130 million
      of required overcollateralization (see Note
12).





The
following table reflects amounts received from trusts related to securitization
sales:





Six Months
      EndedJune
      30,(Dollars
      in thousands)
            
            2008
            
            
            2007Cash
      received from trusts for servicing
            
            $
            37,443
            
            
            $
            31,065Cash
      received from trusts on residual interests
            
            
            66,064
            
            
            
            36,374





During
the three and six month periods ended June 30, 2008, the Company earned $19
million and $38 million, respectively, of contractually specified servicing fees
as compared to $16 million and $33 million for the three and six month periods
ended June 30, 2007, respectively.





13


Changes in the Company’s servicing
assets are presented in the table below:





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Balance
      at beginning of period
            
            $
            197,065
            
            
            $
            164,367
            
            
            $
            199,112
            
            
            $
            169,234Changes
      in fair value due to changes in inputs and assumptions
            
            
            3,407
            
            
            
            135
            
            
            
            10,325
            
            
            
            3,261Other
      changes (1)
            
            
            (8,674
            )
            
            
            (7,665
            )
            
            
            (17,639
            )
            
            
            (15,658
            )Student
      loan securitizations (2)
            
            
            –
            
            
            
            17,240
            
            
            
            –
            
            
            
            17,240Balance
      at end of period
            
            $
            191,798
            
            
            $
            174,077
            
            
            $
            191,798
            
            
            $
            174,077





(1)
            Amounts
      represent the effects of cash received and the passage of
      time.





(2)
            The off-balance sheet
      securitizationthat tookplace during the second quarter of
      2008 did not generate a servicing
asset.





The
Company routinely refines its estimates used to value its retained interests as
future events may deviate from forecasts. Such estimates, while based on
relevant internal data, inherently involve significant judgment and
uncertainty.





The key
assumptions used to value the residual interests of trusts related to
securitization sales were as follows:





June
      30, 2008
            
            
            December
      31, 2007Weighted
      average discount rate:FFEL
      Program Consolidation Loans
            
            10.64
            %
            
            10.56
            %FFEL
      Program Stafford and PLUS loan (1)
            
            10.64
            %
            
            -Private
      education loans
            
            13.64
            %
            
            12.56
            %Constant
      prepayment rates:FFEL
      Program Consolidation Loans
            
            1.22%
      to 2.46
            %
            
            1.73%
      to 3.09
            %FFEL
      Program Stafford and PLUS loan (1)
            
            8.97
            %
            
            -Private
      education loans
            
            11.61
            %
            
            13.03
            %Anticipated
      credit losses, net of insurance and guarantees:FFEL
      Program Consolidation Loans
            
            0.31
            %
            
            0.30
            %FFEL
      Program Stafford and PLUS loan (1)
            
            0.53
            %
            
            -Private
      education loans
            
            0.85
            %
            
            0.81
            %Expected
      basis spread between LIBOR and Commercial Paper rate (1)
            
            12.3
      basis points
            
            
            12.0
      basis pointsUtilization
      rate of borrower benefits:Automated
      clearing house (1)
            
            10.0%
      to 90.1
            %
            
            10.0%
      to 40.2
            %On
      time payments (1)
            
            0%
      to 55.7
            %
            
            0%
      to 41.3
            %




(1)
            These
      assumptionsare unchanged from those used for the 2008-2 trust at
      the inception date of the securitization, which was June 26,
    2008.




The key
assumptions used to value the servicing assets of trusts related to
securitization sales were as follows:





June
      30, 2008
            
            
            December
      31, 2007Weighted
      average discount rate:FFEL
      Program Consolidation Loans
            
            5.83
            %
            
            5.80
            %Private
      education loans
            
            6.33
            %
            
            6.30
            %Constant
      prepayment rates:FFEL
      Program Consolidation Loans
            
            1.22%
      to 2.46
            %
            
            1.73%
      to 3.09
            %Private
      education loans
            
            11.61
            %
            
            13.03
            %Weighted
      average servicing margin
            
            24
      basis points
            
            
            25
      basis points





14


There is
no servicing asset associated with the FFEL Program Stafford and PLUS loan
securitization.





A
sensitivity analysis is provided in the table below that shows the effects of
adverse changes in each of the key assumptions used to determine the fair value
of the retained interests.  The adverse effect of the change in each
assumption is calculated independently while holding all other assumptions
constant.  Because the key assumptions may not be independent, the net
effect of simultaneous adverse changes in the key assumptions may be different
from the sum of the individual effects shown in the table.





The
effects of the key assumptions on the residual interests and servicing assets
are presented below:





(Dollars
      in thousands)
            
            Residual
      Interests
            
            
            Servicing
      AssetsFair
      value at June 30, 2008
            
            $
            701,598
            
            
            $
            191,798Discount
      rate10%
      adverse change
            
            
            (23,048
            )
            
            
            (4,604
            )20%
      adverse change
            
            
            (44,332
            )
            
            
            (8,997
            )Constant
      prepayment rate10%
      adverse change
            
            
            (8,585
            )
            
            
            (2,496
            )20%
      adverse change
            
            
            (16,965
            )
            
            
            (4,951
            )Anticipated
      credit losses, net of insurance and guarantees10%
      adverse change
            
            
            (5,989
            )
            
            
            (1,153
            )20%
      adverse change
            
            
            (12,078
            )
            
            
            (2,328
            )Expected
      basis spread between LIBOR and Commercial Paper rate10%
      adverse change
            
            
            (8,513
            )
            
            
            –20%
      adverse change
            
            
            (17,206
            )
            
            
            –Borrower
      benefits – ACH10%
      adverse change
            
            
            (4,485
            )
            
            
            –20%
      adverse change
            
            
            (8,961
            )
            
            
            –Borrower
      benefits – on time payments10%
      adverse change
            
            
            (13,782
            )
            
            
            –20%
      adverse change
            
            
            (27,551
            )
            
            
            –Servicing
      margin10%
      adverse change
            
            
            –
            
            
            
            (19,135
            )20%
      adverse change
            
            
            –
            
            
            
            (38,087
            )





Principal
amounts of off-balance sheet securitized loans and the related loan
delinquencies (loans which are 90 days or more past due) are presented in the
following table:





(Dollars
      in thousands)
            
            June
      30, 2008
            
            
            December
      31, 2007Principal
      amounts
            
            $
            15,623,599
            
            
            $
            14,123,887Delinquencies
            
            
            470,846
            
            
            
            413,175





Credit
losses, net of recoveries, for the Company’s off-balance sheet securitized loans
are presented in the table below:





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Credit
      losses, net of recoveries:
            
            $
            2,621
            
            
            $
            1,899
            
            
            $
            4,429
            
            
            $
            2,561








15


11.
            FAIR
      VALUE (SFAS 156, 157 AND 159)





The
Company determines fair value using valuation techniques that are based upon
observable and unobservable inputs. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect the
Company’s market assumptions. These two types of inputs create the following
fair value hierarchy:





·
            Level
      1 –
            Quoted
      prices for identical instruments
      in active markets.·
            Level
      2 –
            Quoted
      prices for similar instruments in
      active markets, quoted prices for identical or similar instruments in
      markets that are not active and model-derived valuations whose inputs are
      observable or whose primary value drivers are
  observable.·
            Level
      3 –
            Instruments
      whose primary value drivers are unobservable.




Items Measured at Fair Value on a Nonrecurring
Basis


The
following table presents the Company’s financial assets and liabilities that are
measured at fair value on a recurring basis for each of these hierarchy
levels:





(Dollars
      in thousands)
            
            Level
      2
            
            
            Level
      3AssetsResidual
      interests in securitized loans
            
            $
            –
            
            
            $
            701,598Other
      assets
            
            
            89,729
            
            
            
            191,798Total
      Assets
            
            $
            89,729
            
            
            $
            893,396LiabilitiesOther
      liabilities
            
            $
            149,900
            
            
            $
            –





Derivatives





Derivatives
are used in an effort to manage interest rate and foreign currency exchange rate
risk. Fair value was based upon quotes received from counterparties based on
similar instruments in active markets. Derivatives are recorded at fair value
and are included in Other
assets and Other
liabilities in the table above and on the Consolidated Financial
Statements. For more information on derivatives, see Note 9.





Retained
Interests in Securitized Loans





The fair
values of the residual interests and servicing assets were determined using
discounted cash flow models. Servicing assets are included in Other assets in the table
above. The Company has also retained notes from certain securitization sales,
which are recorded at fair value and included in other assets in the table
above. Fair value of the retained notes was based upon quotes received for
similar instruments in active markets.  Retained interests are recorded at
fair value on the Consolidated Financial Statements.  For more
information on loan securitizations, see Note 10.




The
following table presents the changes in the Level 3 fair value
category:


(Dollars
      in thousands)
            
            Residual
      Interests in Securitized Loans
            
            
            Other
      AssetsBalance
      at December 31, 2007
            
            $
            633,074
            
            
            $
            199,112Total
      gains and losses (realized/unrealized) included in
    earnings:Interest
      income
            
            
            30,964
            
            
            
            –Fee
      and other income
            
            
            46,758
            
            
            
            15,850Purchases,
      issuances and settlements
            
            
            (9,198
            )
            
            
            (23,164
            )Balance
      at June 30, 2008
            
            $
            701,598
            
            
            $
            191,798Unrealized
      gains and losses relating to assets still held at the reporting date (1)
            
            $
            46,758
            
            
            $
            10,325





(1)
            The
      difference between total gains and losses (realized /unrealized) included
      in earnings and unrealized gains and losses relating to assets still held
      at the reporting date represents accreted
yield.





16


Items Measured at
Fair Value on a Nonrecurring Basis




Certain
assets and liabilities are measured at fair value on a non-recurring basis and
therefore are not included in the table above. These include assets such as
loans held for sale that are measured at the lower of cost or fair value and
were recognized at fair value below cost at the end of the period.
  The fair
value of loans measured at the lower of cost or fair value is determined using
discounted cash flow models. Such loans are generally classified in Level 3 of
the fair value hierarchy as these discounted cash flow models utilize
unobservable inputs, including discount rate, expected prepayment rates and
expected credit losses.
  The
following table represents all loans held for sale that are carried at the lower
of cost or fair value:
 
 (Dollars
      in thousands)
                
                Aggregate
      Cost
                
                
                Fair
      valueJune
      30, 2008
                
                $
                1,927,611
                
                
                $
                1,926,538
 
 For both
the three and six months ended June 30, 2008, the resulting charges taken on
loans held for sale carried at fair value below cost were $4
million.


12.
            SHORT-
      AND LONG-TERM BORROWINGS





At June
30, 2008 and December 31, 2007, the Company had borrowings under the terms of an
Omnibus Credit Agreement with CBNA, which expires in December 2009. The maximum
aggregate credit limit available for combined short- and long-term borrowings
was $30 billion at June 30, 2008. Under the Omnibus Credit Agreement, the cost
of funding is negotiated on a borrowing-by-borrowing basis. The Omnibus Credit
Agreement contains no material financial covenants or restrictions, though it
terminates and all outstanding borrowings thereunder become due and payable if
less than 50% of the voting equity interest in the Company is owned or
controlled by CBNA or any of Citigroup’s subsidiaries.  Each one to
three months, the rates reset on all LIBOR- and prime-based borrowings. At June
30, 2008, the amount of credit available for additional short- and long-term
borrowings under the Omnibus Credit Agreement was approximately $9.0
billion.





As of
June 30, 2008, the Company had $1.8 billion of secured borrowings. An additional
$0.1 billion of notes associated with the transaction remain available for
issuance.  The total authorized borrowings of $1.9 billion are
collateralized by $2.0 billion of FFEL Program Consolidation
Loans.  Principal payments on the secured borrowings are made as funds
are collected on the collateralized loans.  As of June 30, 2008, the
Company had $1.8 billion of secured borrowings.





As of
June 30, 2008, approximately $4.5 billion of the Company’s outstanding short-
and long-term borrowings includes derivatives embedded in the respective debt
instruments. These embedded derivatives have been determined to be clearly and
closely related to the underlying debt instruments and, in accordance with SFAS
No. 133, do not require bifurcation. Management considers these options as
economic hedges to the floor income component of its assets.





13.
            COMMITMENTS
      AND CONTINGENCIES





In the
ordinary course of business, the Company is involved in various litigation
proceedings incidental to and typical of the business in which it is
engaged.  In the opinion of the Company’s management, the ultimate
resolution of these matters would not be likely to have a material adverse
effect on the results of the Company’s operations, financial condition or
liquidity.





The
Company has a commitment that expires November 30, 2008 to fund up to $29
million of student loans to a certain proprietary school . During the quarter
the Company determined that due to market conditions, it is probable that this
committed amount will not be fully recoverable.  Accordingly, the
Company recorded a contingent loss reserve of $6 million in Other
liabilities.





17





Item
2.  Management's Discussion and Analysis of Financial Condition and
Results of Operations





The
following discussion should be read in conjunction with the accompanying
Unaudited Consolidated Financial Statements and Notes and The Student Loan
Corporation’s (the Company) 2007 Annual Report and Form 10-K.





Certain
of the statements in the Management’s Discussion and Analysis are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act.  See Forward-Looking Statements on
page 34.





Management’s
Discussion and Analysis provides the Company’s perspective on its operations and
its current business environment, including the following:





Business Overview – a general
description of the Company’s business and the impacts of market conditions on
the business.





Critical Accounting Estimates
– an overview of accounting policies that require critical judgments and
estimates.





Accounting Changes and Future
Application of Accounting Standards– a summary of new accounting
standards.





Financial Condition – a
discussion and analysis of the Company’s loan portfolio, disbursement and
procurement activity and allowance for loan losses.





Results of Operations – a
review of the Company’s results of operations for the three and six months ended
June 30, 2008 and 2007 and discussion of the key factors impacting those
results.





Liquidity and Capital
Resources – an analysis of the Company’s sources and uses of cash
and capital obligations.





Legislation and Regulations –
a discussion of legislative activities that affect the student loan
industry.








Business
Overview





The
Company is one of the nation’s leading originators and holders of student loans
offering a full array of student loan products to students and their parents.
The majority of the Company’s loans are originated and guaranteed under the
Federal Family Education Loan (FFEL) Program, authorized by the U.S. Department
of Education (the Department) under the Higher Education Act of 1965, as amended
(the Higher Education Act). The Company originates, manages and services FFEL
Program loans through a trust agreement with Citibank, N.A. (CBNA), an indirect
wholly owned subsidiary of Citigroup Inc. (Citigroup) and the Company’s
principal shareholder. The Company also originates through CBNA and holds
private education loans that are not insured under the FFEL Program, including
CitiAssist loans and Private Consolidation loans. The Company is committed to
providing exceptional service to borrowers and schools and offering competitive
and innovative products to students and their families. The Company
differentiates itself from its competitors by offering life of loan servicing on
most loans.





The
Company was incorporated in Delaware on November 4, 1992 and commenced
operations on December 22, 1992. CBNA owns 80% of the Company’s common
stock.





The
earnings of the Company are primarily generated by the spread between the
interest earned on its loan assets (based on the 90-day Commercial Paper rate,
the prime rate, or the 91-day Treasury Bill rate) and the interest paid on its
borrowings (primarily based on LIBOR).  The earnings spread between
the interest earned and the interest expense incurred represents net interest
income. Net interest income is impacted by:  spread changes between
the 90-day Commercial Paper rate, the prime rate or the 91-day Treasury Bill
rate and LIBOR; legislative changes that impact FFEL Program subsidies;
utilization rates of borrower benefits; and portfolio growth or
contraction.  The Company regularly monitors interest rates and may
enter into interest rate derivative agreements on portions of its portfolio in
response to interest rate fluctuations.





Historically,
loan securitizations and whole loan sales have contributed significantly to the
Company’s earnings.  From year to year, the Company’s earnings are
impacted by the number, size and profitability of asset sales and
securitizations.  These factors vary from period to period based on
market conditions and the Company’s operational strategies.


18


The
Company’s earnings are also impacted by valuation changes on its retained
interests from off-balance sheet securitizations, which fluctuate based on
factors such as interest rate changes, prepayment and default rates and
regulatory changes.  Other factors that may impact earnings are loan
servicing revenue and loan servicing costs, changes in applicable laws and
regulations, alternative financing options available to students and their
parents, and competition.





The
Company currently funds its loan originations primarily through borrowings under
the Omnibus Credit Agreement with CBNA and loan
securitizations.  Under the Omnibus Credit Agreement, the cost of
funding is negotiated on a borrowing-by-borrowing basis. Due to dislocation and
illiquidity in the credit markets, the credit spreads on the Company’s most
recent securitizations and borrowings under the Omnibus Credit Agreement have
increased considerably. These increases in funding costs, combined with the
impact of the College Cost Reduction and Access Act (CCRA Act) have negatively
affected the Company’s profitability.  In response to these changes,
the Company announced on April 16, 2008 that it would suspend lending at certain
schools where loans with lower balances and shorter interest-earning periods
currently result in unsatisfactory financial returns.  In addition,
the Company announced that it would temporarily withdraw from the FFEL Program
Consolidation Loan market.  The Company will evaluate returning to
these schools and resume offering FFEL Program Consolidation Loans if market
conditions improve.





During
the second quarter of 2008, the Company restructured functional areas of its
business and recorded a restructuring charge, primarily severance, in its
Consolidated Statements of Income. The Company strategically repositioned itself
in an effort to benefit from the products, channels, and operational structure
that it believes will best position it to grow profitably while thoughtfully
deploying capital.





Critical
Accounting Estimates





Certain
accounting estimates made by management are considered to be important to the
portrayal of the Company’s consolidated financial condition. Since management is
required to make difficult, complex or subjective judgments and estimates,
actual results could differ from those estimates. The most significant of these
critical estimates and judgments are those used to account for student loan
securitizations and allowance for loan losses which are described in the
Company’s 2007 Annual Report and Form 10-K.





Financial
Condition





Loans





At June
30, 2008, the Company’s student loan assets were comprised of FFEL Program
loans, private education loans, an inventory of loans held for sale and related
deferred costs. Loan defaults impact earnings through charge offs and increased
servicing and collection costs.





See Note
5 to the Consolidated Financial Statements for a presentation of the loan
portfolio by program type.





Balances
related to the Company’s owned and managed loan portfolios are summarized
below:





Ending
      Balances(Dollars
      in millions)
            
            June
      30, 2008
            
            
            December
      31, 2007Owned
      loans
            
            $
            23,144
            
            
            $
            22,034Managed
      loans
            
            
            39,330
            
            
            
            37,311








Year
      to Date Average Balances(Dollars
      in millions)
            
            June
      30, 2008
            
            
            December
      31, 2007Owned
      loans
            
            $
            24,065
            
            
            $
            22,825Managed
      loans
            
            
            38,951
            
            
            
            36,109








19








Loan
Disbursements and Procurement Activity





The
Company makes loans through retail, direct-to-consumer and wholesale channels.
The retail channel represents loan activity directed by the Company’s retail
sales force and is initiated primarily through the Company’s relationships with
schools and universities. Retail volume consists primarily of FFEL Program
Stafford and PLUS Loans and CitiAssist loans. Loan consolidations and other
secondary market volume represent loan activity initiated outside the retail
channel, through activities such as direct marketing to consumers or purchases
of loans originated by other lenders and includes all loan types.





Details
of the Company’s origination activity are presented in the table
below:





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,(Dollars
      in millions)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Retail:FFEL
      Program Stafford and PLUS loan disbursements
            
            $
            700
            
            
            $
            582
            
            
            $
            2,595
            
            
            $
            2,094CitiAssist
      loans disbursed under commitments to purchase (1)
            
            
            176
            
            
            
            174
            
            
            
            824
            
            
            
            886Total
      Retail
            
            
            876
            
            
            
            756
            
            
            
            3,419
            
            
            
            2,980Loan
      consolidation and other secondary market volume (2)
            
            
            170
            
            
            
            580
            
            
            
            711
            
            
            
            1,146Total
      Originations
            
            $
            1,046
            
            
            $
            1,336
            
            
            $
            4,130
            
            
            $
            4,126





(1)
            This amount consists
      of the CitiAssist loans that were disbursed by CBNA. These loans have been
      or will be purchased by the Company after final
      disbursement.





(2)
            Approximately
      half of the loan consolidation and other secondary market volume presented
      in the table above for the six months ended June 30, 2008 and 2007
      represent consolidations of student loans already held in the Company’s
      loan portfolio.





FFEL
Program loan disbursements increased by $501 million during the six month period
ended June 30, 2008 compared to the same period in 2007, which the Company
believes is primarily attributable to its marketing initiatives, overall growth
in the marketplace and a shift in volume to the Graduate PLUS loan product from
CitiAssist loans.  The Graduate PLUS Loan program, introduced in 2006,
was the primary driver of the $62 million decrease in CitiAssist loan
disbursements during the six months ended June 30, 2008 compared to the same
period in 2007.





In
response to the dislocation in the capital markets and recent federal
legislation, the Company has significantly reduced , and in some cases
discontinued, some of its less profitable retail, wholesale and FFEL Program
Consolidation Loan origination activities.  Although this recent
curtailment could result in a reduction in overall originations, the Company
believes it may experience some growth in markets in which the Company continues
to operate as competitors exit these segments.





In order
to comply with certain legal and regulatory requirements, private education
loans are originated by CBNA through an intercompany
agreement.  Following final disbursement, the Company purchases all
private education loans from CBNA.  At June 30, 2008 and December 31,
2007, the private education loans disbursed and still held by CBNA were $203
million and $669 million, respectively.





Generally,
loans are not specifically purchased or originated for resale, and accordingly
are recorded in the Company’s held portfolio.  However, as sale or
securitization opportunities present themselves, certain of these loan purchases
or originations may be reclassified as held for sale.





20








Allowance
for loan losses





The
Company’s allowance for loan losses and current period provision for loan losses
increased significantly compared to the prior year. This increase reflects the
continued seasoning of the higher risk portion of the uninsured CitiAssist
portfolio. As more of these loans have entered repayment, write-offs have
increased, causing a rise in the current period provision for loan losses. In
addition, analysis of the increased repayment activity provides the Company with
further information regarding the performance of these loans, which enhanced our
estimates of the required allowance for loan losses for the portion of the
portfolio that has not yet entered repayment. During the six months ended 
June 30, 2008, the Company increased its allowance for loan losses by $40
million, substantially all of which relates to higher risk uninsured loans that
have not yet entered repayment status. As these loans move into repayment, the
Company expects that write-offs will continue to increase.   The
Company also expects that the allowance for loan losses will continue to
increase through at least the end of 2008. Also during the second quarter of
2008, the Company terminated many of its relationships with schools that
generated higher risk uninsured CitiAssist originations. In addition, the
elimination of the Exceptional Performer program as of October 1, 2007 has
contributed to the unfavorable year-over-year comparisons.  See Legislation and Regulations on
page 30 for further information about the CCRA Act, which eliminated the
Exceptional Performer program.





An
analysis of the allowance for loan losses and its components is presented in the
table below:





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Balance
      at beginning of periodFFEL
      Program
            
            $
            13,241
            
            
            $
            9,537
            
            
            $
            12,312
            
            
            $
            6,911CitiAssist
      Insured
            
            
            5,331
            
            
            
            1,769
            
            
            
            3,214
            
            
            
            721CitiAssist
      Uninsured
            
            
            36,180
            
            
            
            9,549
            
            
            
            26,589
            
            
            
            6,565$
            54,752
            
            
            $
            20,855
            
            
            $
            42,115
            
            
            $
            14,197Provision
      for loan lossesFFEL
      Program
            
            $
            190
            
            
            $
            (2,955
            )
            
            $
            4,395
            
            
            $
            869CitiAssist
      Insured
            
            
            2,623
            
            
            
            317
            
            
            
            6,107
            
            
            
            1,709CitiAssist
      Uninsured
            
            
            43,014
            
            
            
            6,533
            
            
            
            60,637
            
            
            
            11,845$
            45,827
            
            
            $
            3,895
            
            
            $
            71,139
            
            
            $
            14,423Charge
      offsFFEL
      Program
            
            $
            (2,333
            )
            
            $
            (1,378
            )
            
            $
            (5,609
            )
            
            $
            (2,576
            )CitiAssist
      Insured
            
            
            (2,369
            )
            
            
            (843
            )
            
            
            (3,736
            )
            
            
            (1,187
            )CitiAssist
      Uninsured
            
            
            (13,991
            )
            
            
            (4,997
            )
            
            
            (24,098
            )
            
            
            (8,644
            )$
            (18,693
            )
            
            $
            (7,218
            )
            
            $
            (33,443
            )
            
            $
            (12,407
            )RecoveriesFFEL
      Program
            
            $
            –
            
            
            $
            –
            
            
            $
            –
            
            
            $
            –CitiAssist
      Insured
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –CitiAssist
      Uninsured
            
            
            2,361
            
            
            
            802
            
            
            
            4,436
            
            
            
            2,121$
            2,361
            
            
            $
            802
            
            
            $
            4,436
            
            
            $
            2,121Other
      (1)FFEL
      Program
            
            $
            (2,430
            )
            
            $
            (504
            )
            
            $
            (2,430
            )
            
            $
            (504
            )CitiAssist
      Insured
            
            
            –
            
            
            
            (490
            )
            
            
            –
            
            
            
            (490
            )CitiAssist
      Uninsured
            
            
            –
            
            
            
            (1,929
            )
            
            
            –
            
            
            
            (1,929
            )$
            (2,430
            )
            
            $
            (2,923
            )
            
            $
            (2,430
            )
            
            $
            (2,923
            )Balance
      at end of periodFFEL
      Program
            
            $
            8,668
            
            
            $
            4,700
            
            
            $
            8,668
            
            
            $
            4,700CitiAssist
      Insured
            
            
            5,585
            
            
            
            753
            
            
            
            5,585
            
            
            
            753CitiAssist
      Uninsured
            
            
            67,564
            
            
            
            9,958
            
            
            
            67,564
            
            
            
            9,958$
            81,817
            
            
            $
            15,411
            
            
            $
            81,817
            
            
            $
            15,411





(1)
            Represents
      reserve amounts associated with loans sold, securitized or reclassified as
      held-for-sale.




21


The
Company has a commitment that expires November 30, 2008 to fund up to $29
million of private education loans to a certain proprietary school. During the
quarter, the Company determined that, due to current market conditions, it is
probable that this committed amount will not be fully
recoverable.  Accordingly, the Company recorded a contingent loss
reserve of $6 million in Other
liabilities.





Private
Education Loans in Repayment





The
Company’s private education loan portfolio is not guaranteed by the federal
government. Although private education loans do not carry a federal government
guarantee, the Company has purchased private insurance on 79% of these loans
through either Arrowood Indemnity Company (Arrowood), or United Guaranty
Commercial Insurance Company of North Carolina/New Hampshire Insurance Company
(UGCIC/NHIC).  Arrowood is a part of Arrowpoint Capital Corp.
UGCIC/NHIC are subsidiaries of American International Group (AIG).





These
insurance providers insure the Company against loss in cases of borrower loan
default, bankruptcy or death.  Under the Arrowood program, private
education loans that are submitted for default claim are generally subject to a
risk-sharing deductible of 5% of the sum of the outstanding principal and
accrued interest balances. Under the UGCIC/NHIC program, defaults are generally
subject to risk-sharing deductibles between 10% and 20% of the claim
amounts.  UGCIC was rated Aa2 / Negative by Moody’s and NHIC was rated
AA+ / Negative by Standard & Poor’s as of June 30, 2008. UGCIC’s rating by
Moody’s was downgraded to A1 / Negative on July 9, 2008, reflecting Moody’s view
that within the second lien and student loan sectors, loss emergence could
meaningfully surpass stand alone claims paying resources and that fundamentals
in these segments are unlikely to improve in the medium term. However, these
negative factors are counter-balanced by AIG’s explicit support agreements with
UGCIC, but AIG has no legal obligations to the Company.  Arrowood is
not rated and carries a higher risk that it will be unable to fulfill its
contractual obligations under these insurance agreements.





Since
2003, UGCIC/NHIC has insured the Company for maximum portfolio losses
ranging from 12.5% to 13.5%.  The Company is exposed to 100% of losses that
exceeds these thresholds, although the Company does not expect that this
will occur. For loans insured during 2005 and 2006, the insurance premium
is calculated under an experience-rated plan, which may require additional
premium payments of up to $58million if the loss limits exceed the established parameters. The
Company elected to stop insuring new CitiAssist loans originated on or after
January 1, 2008. The Company expects that the increased loan losses are likely
to be more than offset by decreases in insurance premiums paid.





Information
on private education loans, including delinquency and insurance coverage, are
shown in the table below:





June
      30, 2008
            
            
            December
      31, 2007(Dollars
      in thousands)
            
            Insured
            
            
            Uninsured
            
            
            Total
            
            
            Insured
            
            
            Uninsured
            
            
            TotalTotal
      private education loans
            
            $
            4,589,529
            
            
            $
            1,230,449
            
            
            $
            5,819,978
            
            
            $
            3,869,945
            
            
            $
            826,392
            
            
            $
            4,696,337Private
      education loans in repayment
            
            
            1,706,282
            
            
            
            580,149
            
            
            
            2,286,431
            
            
            
            1,443,110
            
            
            
            494,093
            
            
            
            1,937,203Private
      education loans in forbearance
            
            
            173,550
            
            
            
            44,151
            
            
            
            217,701
            
            
            
            147,243
            
            
            
            22,841
            
            
            
            170,084Percent
      of private education loans that are delinquent 30 - 89
days
            
            
            1.9
            %
            
            
            3.6
            %
            
            
            2.3
            %
            
            
            2.4
            %
            
            
            3.8
            %
            
            
            2.8
            %Percent
      of private education loans that are delinquent 90 days or
    more
            
            
            1.6
            %
            
            
            1.0
            %
            
            
            1.4
            %
            
            
            1.3
            %
            
            
            1.0
            %
            
            
            1.2
            %Allowance
      for loan losses
            
            $
            5,585
            
            
            $
            67,564
            
            
            $
            73,149
            
            
            $
            3,214
            
            
            $
            26,589
            
            
            $
            29,803Private
      education loans covered by risk-sharing agreements with
      schools
            
            
            –
            
            
            
            496,211
            
            
            
            496,211
            
            
            
            –
            
            
            
            493,296
            
            
            
            493,296


22


Of the
$1.2 billion in uninsured loans at June 30, 2008, the Company considers
approximately $0.2 billion to be higher risk loans made to students attending
proprietary schools.  Most of these higher risk loans do not follow
the Company’s traditional underwriting process.




A portion
of the uninsured loans are covered by risk-sharing agreements with schools and
universities. Under these programs, the school or university takes on a portion
of the Company’s credit exposure for the covered loans. The risk-sharing
agreements generally take one of two forms: i) the school reimburses the Company
for a specified percentage of losses of 50% to 100% when the losses exceed an
agreed upon threshold ranging from 0% to 9% or ii) the school pays 20% to 50% of
the total disbursed amount to compensate for future expected
losses.  Although this reduces the Company’s overall risk, these
programs generally transfer less risk away from the Company than private
insurance coverage. Although these risk share agreements exist, the Company
expects that the allowance for loan losses will continue to increase through at
least the end of 2008. Of the $0.2 billion of higher risk loans, $0.1
billion are covered under the risk-sharing agreements described
above.




Results
of Operations





Restructuring
and Related Charges





On July
9, 2008, the Company announced, under its existing severance policy, a
restructuring of certain functional areas. During the second quarter
of 2008, the Company strategically repositioned itself in an effort to benefit
from the products, channels, and operational structure that it believes will
best position it to grow profitably while thoughtfully deploying capital. This
action is part of an ongoing strategic focus on managing the Company through the
current severe market and economic conditions as well as federal policy changes
that have adversely affected the Company’s results of operations.





Recent
modifications to the Company’s business model include temporarily withdrawing
from the Federal Consolidation Loan program and suspending lending at schools
where loans with lower balances and shorter interest-earning periods are less
profitable. Management believes this will create opportunities to grow earnings,
strategically deploy capital, and decrease operating expenses as a result of
reduction and realignment of the Company’s workforce and implementation of
expense controls.  These strategies will result in the net reduction
of 146 positions in the Company's overall workforce.  All the affected
employees were notified immediately of the restructuring plan. Full
implementation of the plan is expected to be completed in the fourth quarter of
2008.





As a
result of this action, restructuring and related charges of $9 million were
recorded in the Company’s operating expenses for the quarter ended June 30,
2008.  These charges consist of $8 million in salaries and benefit
costs and $1 million in non-cash charges primarily related to the impairment of
computer software assets. At June 30, 2008, the Company had a liability of $8
million related to this restructuring.





Factors
Affecting Net Interest Income





Net
Interest Margin Spread Analysis





The
following table analyzes the components of net interest margin for the Company’s
on-balance sheet portfolio:





Six
      months endedJune
      30,2008
            
            
            2007Student
      loan yield
            
            
            5.70
            
            %
            
            7.38
            
            %Consolidation
      loan rebate fees
            
            
            (0.28
            )
            %
            
            (0.42
            )
            %Accreted
      interest on residual interests
            
            
            0.25
            
            %
            
            0.25
            
            %Amortization
      of deferred loan origination and purchase costs
            
            
            (0.40
            )
            %
            
            (0.47
            )
            %Net
      yield
            
            
            5.27
            
            %
            
            6.74
            
            %Cost
      of funds (1)
            
            
            (3.64
            )
            %
            
            (5.04
            )
            %Net
      interest margin
            
            
            1.63
            
            %
            
            1.70
            
            %




(1)
            Costof  funds was calculated by dividing interest expense by
      average interest bearing assets.




23





The
Company’s net interest margin is affected by a variety of factors, including the
interest rate environment, regulatory actions and competition. Most FFEL Program
loans qualify for special allowance payments (SAP) from the federal government.
Whenever the stated interest rate on these FFEL Program loans provides less than
prescribed rates of return, as defined by the Higher Education Act, the federal
government makes a special allowance payment.  For loans originated on
or after April 1, 2006, the Company must return excess interest to the federal
government.  The CCRA Act reduced SAP for new loans originated on or
after October 1, 2007.  The impact of this reduction in SAP will be
gradual as the amount of loans originated after October 1, 2007 increases
relative to the Company’s overall portfolio. See Legislationand Regulations on page 30 for
information on the CCRA Act.





The
Company’s cost of funds is primarily based on LIBOR plus an incremental credit
spread.  Increasing or decreasing LIBOR rates combined with increasing
or decreasing credit spreads affect the Company’s overall interest
expense.  LIBOR rates on the Company’s debt reset periodically while
credit spreads are fixed based on market rates at the time of
borrowing.





In
contrast, the Company’s student loan yield is either based on Commercial Paper
or Treasury rates (FFEL Program loans) or the Prime rate (private education
loans) plus an incremental credit spread.  The Company has the ability
to set credit spreads on its private education loans to reflect current market
conditions at origination.  However, credit spreads earned on FFEL
Program loans are prescribed under the Higher Education Act.





The
credit spreads on the Company’s most recent borrowings under the Omnibus Credit
Agreement and on the most recent securitizations have increased considerably.
During the second quarter of 2008, these credit spread increases raised the
Company’s interest expense by $20 million. This adverse trend towards higher
credit spreads is expected to continue as the Company refinances its maturing
term debt under less favorable conditions.  Because credit spreads
earned on FFEL Program loans are set by the Higher Education Act and cannot be
adjusted to reflect current market conditions, spread increases on refinanced
debt have caused and will continue to cause net interest margin compression on
FFEL Program loans. In an effort to mitigate this compression, the Company has
begun to reposition its portfolio towards higher yielding loans and has reduced
certain borrower incentive programs for new originations. See Sources and Uses
of Cash on page 29 for further information on how the Company funds
its assets.





The
Company’s net interest margin decreased during the six month period ended June
30, 2008 compared to the same period last year. The foremost drivers of this
decrease were rapidly declining interest rates in the first quarter, which
impacted assets more quickly than liabilities, and significantly higher credit
spreads on new borrowings. These factors were partially offset by changes in
portfolio mix towards loans with higher net yields.





At June
30, 2008 and 2007, the outstanding borrowings had contractual weighted average
interest rates of 3.2% and 5.3%, respectively.





Rate/Volume
Analysis





The
following table shows the contribution year-over-year to changes in net interest
income (interest income less interest expense) due to changes in both the
weighted average balances and interest rates of loan assets and funding
liabilities:





For
      the six months ended June 30, 2008 vs. the six months ended June 30,
      2007Increase
      (decrease) due to change in:(Dollars
      in millions)
            
            Volume
            
            
            Rate
            
            
            NetInterest
      earning assets
            
            $
            44
            
            
            $
            (175
            )
            
            $
            (131
            )Interest
      bearing liabilities
            
            
            42
            
            
            
            (177
            )
            
            
            (135
            )Net
      interest income
            
            $
            2
            
            
            $
            2
            
            
            $
            4








24





Three
Months Ended June 30, 2008





The
Company’s comparisons of financial highlights are as follows:




Three
      Months EndedJune
      30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            Favorable
      (Unfavorable) Change
            
            
            Favorable
      (Unfavorable) % ChangeNet
      interest income
            
            $
            119,390
            
            
            $
            102,877
            
            
            $
            16,513
            
            
            
            16
            
            %Provision
      for loan losses
            
            
            (45,827
            )
            
            
            (3,895
            )
            
            
            (41,932
            )
            
            
            (1077
            )
            %Gains
      on loans sold and securitized
            
            
            2,121
            
            
            
            51,040
            
            
            
            (48,919
            )
            
            
            (96
            )
            %Fee
      and other income
            
            
            39,012
            
            
            
            9,420
            
            
            
            29,592
            
            
            
            314
            
            %Operating
      expenses
            
            
            51,849
            
            
            
            45,751
            
            
            
            (6,098
            )
            
            
            (13
            )
            %Income
      taxes
            
            
            20,831
            
            
            
            43,174
            
            
            
            22,343
            
            
            
            52
            
            %Net
      income
            
            $
            42,016
            
            
            $
            70,517
            
            
            $
            (28,501
            )
            
            
            (40
            )
            %Total
      operating expenses as a percentage of average managed student
      loans
            
            
            0.53
            %
            
            
            0.52
            %
            
            
            (0.01
            )
            %Return
      on average equity
            
            
            10.5
            %
            
            
            17.9
            %
            
            
            (7.4
            )
            %Effective
      tax rates
            
            
            33.1
            %
            
            
            38.0
            %
            
            
            4.9
            
            %





Net
interest income





Net
interest income of $119 million for the three months ended June 30, 2008
increased by $17 million compared to the same period in 2007. This increase was
driven by higher average loan balances as well as an increase in net interest
margin. The net interest margin for the quarter was 1.89%. This 15 basis
point improvement over the second quarter in 2007 was driven by the Company’s
repositioning of the portfolio towards higher rate loans, partially offset by a
$20 million increase in funding costs due to higher credit spreads over
LIBOR.  The enactment of the CCRA Act also had a negative impact on
the Company’s net interest income, resulting in a $3 million reduction in the
quarter. See Factors Affecting
Net Interest Income on page 23 for further information.





Gains
on loans sold and securitized





Gains on
loans sold and securitized for the three months ended June 30, 2008 totaled $2
million, a $49 million decrease from the same period in 2007. The decrease was
due to the overall degradation of market conditions, which has virtually
eliminated the market for whole loan sales and dramatically reduced the
profitability of securitizations.





Fee
and other income





The
increase in fee and other income was due to a net mark-to-market gain on the
Company’s retained interests and associated derivatives that serve as economic
hedges.  See Critical
Accounting Estimateson page 19 and Note 10 to the Consolidated
Financial Statements for further information regarding the retained interests in
off-balance sheet securitized assets and the effect of changes in each of the
key assumptions used to determine the fair value of the retained interests. For
more information on the Company’s derivative agreements, see Note 9 to the
Consolidated Financial Statements.





Operating
expenses





Total
operating expenses for the three months ended June 30, 2008 was $52 million, an
increase of $6 million from the same period in 2007.  The increase was
primarily driven by $9 million of restructuring and related charges, primarily
associated with the Company’s strategic repositioning efforts.  These
charges consist of $8 million in severance and benefit costs related to the
reduction of 146 positions in the Company’s overall workforce and $1 million in
non-cash charges primarily related to the impairment of equipment and computer
software.  See Note 2 to the Consolidated Financial Statements for
further information regarding the Company’s restructuring and related
charges.





The
Company’s operating expense ratio, excluding expenses for restructuring and
related charges, for the three months ended June 30, 2008 was 0.44%, eight basis
points lower than the same period in 2007, reflecting the success of the general
expense control initiatives implemented by the Company.





25


Provision
for loan losses





The
increase in provision for loan losses was driven by the continued seasoning of
the uninsured CitiAssist portfolio as well as an increase in the amount of
higher risk loans made to students attending proprietary schools entering
repayment. In addition, the elimination of the Exceptional Performer (EP)
program as of October 1, 2007 caused an increase in the
provision.  The Company expects that these conditions will continue to
impact the provision for loan losses through the remainder of the year. For a
full discussion of trends in the Company’s loan losses, see Allowance for
Loan Losseson page 21.





Income
taxes





The
Company’s effective tax rate during the second quarter decreased to 33.1% from
38.0% in the same quarter in 2007. This decrease reflects a one-time credit to
income taxes of $3 million to adjust current and deferred income taxes
payable.  Excluding the impact of this adjustment, the Company’s
effective tax rate for the second quarter was 38.4%.





Six
Months Ended June 30, 2008





The
Company’s comparisons of financial highlights are as follows:




Six
      Months EndedJune
      30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            Favorable
      (Unfavorable) Change
            
            
            Favorable
      (Unfavorable) % ChangeNet
      interest income
            
            $
            200,837
            
            
            $
            196,634
            
            
            $
            4,203
            
            
            
            2
            %Provision
      for loan losses
            
            
            (71,139
            )
            
            
            (14,423
            )
            
            
            (56,716
            )
            
            
            (393
            )%Gains
      on loans sold and securitized
            
            
            3,576
            
            
            
            68,814
            
            
            
            (65,238
            )
            
            
            (95
            )%Fee
      and other income
            
            
            50,471
            
            
            
            24,283
            
            
            
            26,188
            
            
            
            108
            %Operating
      expenses
            
            
            95,984
            
            
            
            89,949
            
            
            
            (6,035
            )
            
            
            (7
            )%Income
      taxes
            
            
            30,511
            
            
            
            70,819
            
            
            
            40,308
            
            
            
            57
            %Net
      income
            
            $
            57,250
            
            
            $
            114,540
            
            
            $
            (57,290
            )
            
            
            (50
            )%Total
      operating expenses as a percentage of average managed student
      loans
            
            
            0.50
            %
            
            
            0.51
            %
            
            
            0.01
            %Return
      on average equity
            
            
            7.2
            %
            
            
            14.7
            %
            
            
            (7.5
            )%Effective
      tax rates
            
            
            34.8
            %
            
            
            38.2
            %
            
            
            3.4
            %





Net
interest income





Net
interest income of $201 million for the six months ended June 30, 2008 increased
by $4 million as compared to the same period in 2007. The net interest margin
for the six months ended June 30, 2008 was 1.63%, which was a seven basis point
decrease from the same period in 2007. This decrease was primarily driven by
rapidly declining interest rates in the first quarter, which impacted assets
more quickly than liabilities, and a $5 million reduction in interest income due
to the enactment of the CCRA Act, partially offset by changes in portfolio mix
towards loans with higher net yields. The impact of this decrease on net
interest income was partially offset by higher average loan balances.See
Factors
Affecting Net Interest Income on page 23 for further
information.





Gains
on loans sold and securitized





Gains on
loans sold and securitized for the six months ended June 30, 2008 totaled $4
million, a $65 million decrease from the same period in 2007. The decrease was
due to the overall degradation of market conditions which began during the
second half of 2007 and has continued through 2008.





26








Fee
and other income





The
increase in fee and other income was primarily due to a net mark-to-market
gain on the Company’s retained interests and associated
derivatives.  See Critical
Accounting Estimateson page 19 and Note 10 to the Consolidated Financial
Statements for further information regarding the retained interests in
off-balance sheet securitized assets and the effect of changes in each of the
key assumptions used to determine the fair value of the retained interests. For
more information on the Company’s derivative agreements, see Note 9 to the
Consolidated Financial Statements.





Operating
expenses





Total
operating expenses for the six months ended June 30, 2008 was $96 million, an
increase of $6 million from the same period in 2007.  The increase was
primarily driven by $9 million of restructuring and related charges primarily
associated with the Company’s strategic repositioning efforts.  These
charges consist of $8 million in severance and benefit costs related to the
reduction of 146 positions in the Company’s overall workforce and $1 million in
non-cash charges primarily related to the impairment of equipment and computer
software. See Note 2 to the Consolidated Financial Statements for further
information regarding the Company’s restructuring and related
charges.





Provision
for loan losses





The
increase in provision for loan losses was driven by the continued seasoning of
the uninsured CitiAssist portfolio as well as an increase in the amount of
higher risk loans made to students attending proprietary schools entering
repayment. In addition, the elimination of the EP program as of October 1, 2007
caused an increase in the provision.  The Company expects that these
conditions will continue to impact the provision for loan losses through the
remainder of the year. For a full discussion of trends in the Company’s loan
losses, see Allowance for
Loan Losseson page 21.





Income
taxes





The
Company’s effective tax rate during the first half of 2008 decreased to 34.8%
from 38.2% during the same period in 2007. This decrease reflects a one-time
credit to income taxes of $3 million to adjust current and deferred income
taxes payable. Excluding the impact of this adjustment, the Company’s effective
tax rate for the first half of the year was 38.6%.





Securitization
Activity and Off-Balance Sheet Transactions





The
Company securitizes student loans through trusts, which are established to
purchase the loans sold and provide liquidity through the issuance of asset
backed securities.  Historically, the Company has relied on
securitizations to fund a significant portion of its new loan origination
activity.  The Company generally retains a residual interest as well
as the servicing rights in the securitized loans.





The
Company also enters into similar securitization transactions that do not qualify
for sale treatment and accordingly, are accounted for as secured
borrowings.  These transactions do not give rise to a gain or loss on
sale.





27








Securitizations
listed as sales are off-balance sheet transactions and those listed as
financings remain on-balance sheet. The following table summarizes the Company’s
securitization activity:





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Securitization
      sales:Student
      loans securitized (1)
            
            $
            2,035,540
            
            
            $
            1,201,603
            
            
            $
            2,035,540
            
            
            $
            1,201,603Net
      proceeds from student loans securitized during the period
            
            
            1,973,207
            
            
            
            1,221,216
            
            
            
            1,973,207
            
            
            
            1,221,216Realized
      gains on loans securitized
            
            
            1,262
            
            
            
            48,548
            
            
            
            1,262
            
            
            
            48,548Securitization
      financings:Student
      loans securitized (1)
            
            $
            –
            
            
            $
            –
            
            
            $
            1,993,213
            
            
            $
            –Net
      proceeds from student loans securitized during the period (2)
            
            
            273,619
            
            
            
            –
            
            
            
            1,799,830
            
            
            
            –





(1)
            Amounts
      represent the value of the student loans securitized as of the
      securitization date.





(2)
            The
      proceeds received during the three months ended June 30, 2008 represent
      additional issuances of notes from the first quarter’s on-balance sheet
      securitization transaction.  The difference between student loans
      securitized and net proceeds received for the six months ended June 30,
      2008, primarily reflects $57 million of unissued notes and $130 million of
      required overcollateralization (see Note
12).





The
following table reflects balances related to all of the Company’s
securitizations:





(Dollars
      in millions)
            
            June
      30, 2008
            
            
            December
      31, 2007Total
      off-balance sheet student loans securitized (1)
            
            $
            15,624
            
            
            $
            14,124Total
      on-balance sheet student loans securitized (2)
            
            
            1,962
            
            
            
            –Total
      secured borrowings related to on-balance sheet
    securitization
            
            
            1,831
            
            
            
            –Residual
      interests from off-balance sheet student loans securitized
            
            
            702
            
            
            
            633Servicing
      assets from off-balance sheet student loans securitized
            
            
            192
            
            
            
            199





(1)
            Amounts
      include securitized loan balances from ten off-balance sheet
      securitizations as of June 30, 2008 and nine as of December 31,
      2007.




(2)
            Amounts
      include securitized loan balances from one on-balance sheet securitization
      as of June 30, 2008.





For
further information on the Company’s student loan securitizations, see Notes 1
and 10 to the Consolidated Financial Statements.





The
Company also has credit commitments with schools and institutions which are
detailed in Sources and Uses of
Cash on page 29, as well as derivative agreements which are described in
Note 9 to the Consolidated Financial Statements.


28


Liquidity
and Capital Resources





Sources
and Uses of Cash





Cash
received from borrower repayments, claim payments, subsidized interest and SAP
from the federal government, securitizations and the Omnibus Credit Agreement
are the Company’s primary sources of cash. The Company’s primary uses of cash
are new loan originations and purchases, funding operating expenses and
repayment of debt.





In
determining the appropriate mix of funding, the Company strives to balance the
competing objectives of maximizing net interest income and minimizing risk. In
an effort to manage risk, the Company seeks to match the terms of its funding
with the terms of its assets, particularly interest rate characteristics
(including the index on which the rate is based and the timing of rate resets)
and weighted average lives. The Company has historically relied on two primary
sources of funding, the Omnibus Credit Agreement and securitizations, and may
shift its utilization of either source or augment funding with alternate sources
as necessary in response to changes in market conditions.





The
Omnibus Credit Agreement expires in December 2009.  The Company is
currently negotiating a new agreement with CBNA to replace the existing
agreement. This agreement is the Company’s largest financing
source.  Under the current Omnibus Credit Agreement the cost of
funding is negotiated on a borrowing-by-borrowing basis. The agreement provides
a maximum aggregate credit limit for combined short- and long-term borrowings of
$30 billion at market interest rates. The agreement contains no material
financial covenants or restrictions, though it terminates and all outstanding
borrowings thereunder become due and payable if less than 50% of the voting
equity interest in the Company is owned or controlled by CBNA or any of
Citigroup’s subsidiaries. This agreement does not restrict the Company’s right
to borrow from other sources. At June 30, 2008, the amount of credit available
for additional short- and long-term borrowings under the Omnibus Credit
Agreement was approximately $9.0 billion.  During the second quarter
of 2008 the Company entered into long-term borrowings totaling $2.6 billion
under the Omnibus Credit Agreement.  Due to dislocation and
illiquidity in the credit markets, the credit spreads on these borrowings are
substantially higher than the Company’s other borrowings under the Omnibus
Credit Agreement. As of June 30, 2008, the Company has $11.8 billion of
short-term borrowings outstanding under the Omnibus Credit Agreement of which
$10.1 billion will become due and payable during the remainder of 2008. The
Company expects that the interest rates on renewals of these borrowings, if any,
will also be significantly higher than the Company’s prior
borrowings.





Despite
the adverse conditions within the credit markets, the Company was able to
successfully execute one on-balance sheet and one off-balance sheet
securitization in the first half of 2008. The Company used the $3.8 billion of
proceeds to fund its operating activities. The credit spreads realized on these
transactions were higher than any of the Company’s previous deals, with credit
spreads on the Class A notes increasing from between 20 and 110 basis points
over the transaction the Company completed during the fourth quarter in 2007.
This increase is consistent with recent trends in the student loan asset-backed
securities market. See Notes 1 and 10 to the Consolidated Financial Statements
for additional information about the Company’s securitization
activities.





The
Company’s cash expenditures for equipment and computer software are primarily
comprised of software developed for internal use. Cash expenditures for
equipment and computer software amounted to $6 million and $4 million for the
six months ended June 30, 2008 and 2007, respectively.





The
Company’s future cash needs will depend primarily on the volume of new loan
disbursements and purchases as well as the cash provided by, or used in,
operating activities. The Company expects new loan disbursements and purchase
volumes to be funded primarily through borrowings under the Omnibus Credit
Agreement with CBNA and loan securitizations.  The Company is
evaluating alternative funding sources, including the purchase and participation
programs under The Ensuring Continued Access to Student Loans Act of 2008, which
is described more fully in Legislation and
Regulations on page 30.  However, there can be no assurance
that any such alternatives will provide terms that are comparable to or more
favorable than those currently available to the Company. Management currently
considers liquidity and capital to be sufficient to meet the Company's
anticipated requirements for the next twelve months and, based on the Company's
expectation that it will enter into a new funding agreement with CBNA before the
2009 expiration of the Omnibus Credit Agreement, for the
longer-term.


29


Legislation
and Regulations





Legislative
and Regulatory Impacts





Over the
past decade, certain amendments to the Higher Education Act of 1965, which
governs the FFEL Program, have reduced the interest spread earned by holders of
FFEL Program loans. The Company expects that yields will decrease as new loans
with lower yields are added to the portfolio and older, more profitable loans
are repaid. In addition, amendments to the Higher Education Act authorized the
enactment of the Federal Direct Student Loan Program (Direct Lending). Private
lenders, such as the Company, are not eligible to participate in this loan
program, which directly competes with the FFEL Program in originating student
loans.





On July
1, 2008, the Department published a Notice of Proposed Rulemaking (NPRM) which
contains proposed regulations that are needed to implement provisions contained
in the CCRA Act. The majority of the content of the NPRM pertains to the new
Income-based Repayment option that is effective July 1, 2009.




H.R. 5715
(The Ensuring Continued Access to Student Loans Act of 2008) was signed by
President Bush on May 7, 2008. This law, among other things, allows the
Department to purchase qualifying Stafford and PLUS loans during the 2008-2009
academic year.  It was enacted to respond to the belief that there
will be an access problem for students attempting to obtain FFEL Program loans
due to lenders partially or wholly withdrawing from the FFEL Program market due
to the current liquidity restrictions in the capital markets, higher costs of
funds and the effects of the CCRA Act discussed below. The provisions of this
law include increasing the annual and aggregate Stafford borrowing limits,
providing authority for the Department to advance federal funds to FFEL Program
guaranty agencies acting as Lenders of Last Resort, authorizing the Department
to purchase FFEL Program loans from current holders, provided that the proceeds
are reused in the FFEL Program, and allowing Parent PLUS Loan borrowers the
option of postponing payments on the loan until six months after the student's
last day of at least half-time enrollment.





The
Department published a notice in the Federal Register on July 1,
2008 regarding its implementation plans for the program to purchase FFEL Program
loans and has distributed to the student loan industry some of the critical
documents proposed to be used in the program (e.g. Master Purchase Agreement and
a Master Participation Agreement). In accordance with the proposed program, the
Company filed a required Notice of Intent to Participate with the Department on
July 3, 2008. The notice is non-binding, but is a condition precedent to any use
of the new program.





The CCRA
Act was signed into law on September 27, 2007 with many of its provisions
effective October 1, 2007.   Some of the provisions of this new
law had an adverse impact on the financial condition and results of operations
of the Company by decreasing net interest income and the fair value of residual
interests and increasing the provision for loan losses. The CCRA Act also is
expected to have a prospective adverse impact on the Company’s net interest
margin, provision for loan losses and gains on loans securitized.





The CCRA
Act (H.R. 2669) includes provisions that:





·
            Reduce
      the Undergraduate Subsidized Stafford interest rate from 6.80% to 3.40%
      over the next five years, with the rate returning to 6.80% on July 1,
      2012.  The first reduction will occur effective July 1, 2008 as
      such, the Undergraduate Subsidized Stafford loans will have an interest
      rate of 6.0%.·
            Reduce
      lender SAP for new loans originated on or after October 1, 2007 to 1.19%
      for Stafford Loans not in repayment, 1.79% for Stafford Loans in repayment
      and PLUS Loans, and 2.09% for Consolidation Loans. This represents a 55
      basis point reduction for Stafford and Consolidation Loans and an 85 basis
      point reduction for PLUS Loans.·
            Limit
      lender reinsurance to 97% for most claims filed on or after October 1,
      2007 by eliminating the EP program, with a further reduction to 95% for
      loans made on or after October 1, 2012.·
            Increase
      the lender fee from 0.50% to 1.00% for new loans originated on or after
      October 1, 2007.·
            Create
      an income-based repayment plan beginning July 1, 2009 for most FFEL
      Program borrowers (currently an income-contingent repayment plan is only
      available to Direct Lending borrowers).  The new plan provides a
      monthly repayment cap of 15% of the amount by which a borrower’s adjusted
      gross income exceeds 150% of the poverty line, and forgives remaining debt
      after 25 years of repayment.·
            Require
      the Department to conduct a pilot program for an auction of eligible
      Federal PLUS Loans (limited to Parent PLUS loans) beginning on July 1,
      2009.





30


The
Department published regulations that will take effect on July 1, 2008 affecting
the relationships and activities between FFEL Program lenders, guaranty agencies
and institutions of higher education. There is no expectation that the
provisions of these regulations will have any adverse impact on the operations
of the Company.




Current
Activity





H.R. 4137
(the College Affordability and Opportunity Act of 2007) was passed by the House
and Senate on July 31, 2008 and is expected to be signed into law by the
President. It includes the student loan sunshine provisions (previously included
in H.R. 890 - the College Access and Opportunity Act) and the Private Student
Loan Transparency and Improvement Act (a proposed amendment to
S.1642).





Some of
the provisions of H.R. 4137 include:





1)
            Defining
      a preferred lender arrangement between a school and a lender under which
      the lender makes educational loans.2)
            Requiring
      a lender that participates in a preferred lender arrangement to certify to
      the Secretary of the Department that its preferred lender arrangements
      comply with provisions of the Higher Education Act. The certification must
      be attested to by the lender’s auditor.3)
            Requiring
      the Department to develop a model disclosure for use by schools and
      lenders in disclosing the terms of educational loans (including private
      educational loans) offered by the lender.4)
            Requiring
      lenders to submit a report to all schools with which they have preferred
      lender arrangements.  The schools are required to report this
      information to the Department, explaining why the loans are beneficial to
      the students. These reports must be available to students and parents.
      Schools must also disclose that students are not required to use preferred
      lenders.5)
            Requiring
      schools that provide information on private educational loans to inform
      the students of their eligibility for Title IV assistance, with a
      description of the terms of the loans that are less favorable than Title
      IV loans.6)
            Requiring
      schools with preferred lender lists for FFEL Program lenders to list at
      least three unaffiliated lenders and, if they recommend private
      lenders, at least two unaffiliated lenders. The school must disclose
      why it has entered into such an arrangement and disclose the method and
      criteria for selecting such lenders. Schools are identified as having a
      duty of care to compile the list for the students.7)
            Amending
      the Truth-in-Lending Act to include: additional disclosures in an
      application or solicitation upon loan approval of private education loans;
      a requirement that a creditor shall notify the school before it may issue
      educational loan funds; a restriction that no funds may be disbursed until
      acceptance of the loan by the borrower and the expiration of a three
      business day right-to cancel period following consummation; and an
      expansion of other specific provisions.8)
            Directing
      the General Accountability Office to conduct a study on the impact and
      benefits of using non-individual factors (e.g., school attributes) in
      underwriting criteria. The study is due one year following enactment of
      H.R. 4137.







S. 3141,
the Preventing Student Loan Discrimination Act (PSLDA) was introduced on June
17, 2008. The PSLDA would ensure that lenders that receive special allowance
payments on FFELP loans would no longer be able to deny loans to particular
eligible student loans simply based on characteristics of the student’s college.
The intent of the PSLDA is to prevent loan selectivity based on the student's
school, length of the college program, or income level, if they are otherwise
eligible for federal student loans. To date, no action has been taken on the
PSLDA.







31











Forward-Looking
Statements





Certain
statements contained in this report that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act.  Forward-looking statements are typically
identified by the words or phrases “believe”, “expect”, “anticipate”, “intend”,
“estimate”, “may increase”, “may result in”, and similar expressions or future
or conditional verbs such as “will”, “should”, “would” and
“could”.  These forward-looking statements involve risks and
uncertainties, which could cause the Company’s actual results to differ
materially from those the Company expects, including, but not limited to: the
success of the Company’s strategic repositioning efforts, the effects of
legislative changes, particularly those relating to re-authorization of the
Higher Education Act of 1965, as amended, that affect the demand for and
interest rates on student loans, especially the establishment of certain fixed
rates of interest on Stafford Loans and FFEL Program loans; loan origination
costs; the availability and amount of  loan subsidies, and any effect
on the Company’s interest rate spreads; the cost of education; the availability
of alternative financing options to students and their parents, including
competitive products offered by other lenders; the effects of changes in
accounting standards; actual credit losses, loan collection strategies and their
impact on delinquency rates, and the adequacy of loan loss reserves;
fluctuations in interest rates and between various interest rate indices,
particularly the manner in which short-term rates affect the Company’s funding
costs, consolidation rates, the rates at which interest accrues on its loan
portfolio and the demand for student loans; changes in prepayment rates on
student loans from anticipated rates and in the quality and profitability of
those loans that move into repayment status, as well as actual experience with
the repayment cycle of the loan portfolio; the Company’s and other servicers’
ability to continue to service the loan portfolio in accordance with their
contractual obligations; the volume of loan consolidations; the adequacy of the
Company’s capital expenditures and of funds allocated for future capital
expenditures; the success of its marketing efforts, especially its electronic
marketing efforts; the Company’s ability to acquire or originate loans in the
amounts anticipated and with interest rates that generate sufficient yields and
margins; the performance of the Company’s loan portfolio servicers, insurers and
risk-sharers; the Company’s ability to utilize alternative sources of funding,
including its ability to continue to securitize loans; as well as general
economic conditions, including the performance of financial
markets.





32








Item 3.  Quantitative and Qualitative Disclosures About Market
Risk





The
Company’s principal measure of market risk due to interest rate changes is
Interest Rate Exposure (IRE). IRE measures the change in expected net interest
margin that results solely from unanticipated, instantaneous changes in market
rates of interest. Other factors such as changes in volumes, spreads, margins
and the impact of prior period pricing decisions can also change current period
interest income, but are not captured by IRE. While IRE assumes that the Company
makes no additional changes in pricing or balances in response to the
unanticipated rate changes, in practice, the Company may alter its portfolio
mix, customer pricing or hedge positions, which could significantly impact
reported net interest margin. IRE does not measure the impact that market rate
changes would have on the Company’s earnings related to instruments classified
as trading.





IRE is
calculated by multiplying the gap between interest sensitive items, including
loan assets, borrowings and certain derivative instruments, by a 100 basis point
instantaneous change in the yield curve. The exposures in the table below
represent the approximate change in net interest margin for the next 12 months
based on current balances and pricing that would result from specific
unanticipated changes in interest rates:





June
      30,(Dollars
      in millions)
            
            2008
            
            
            2007100
      basis points
            
            Increase
            
            
            Decrease
            
            
            Increase
            
            
            DecreaseChange
      in interest income
            
            $
            (3.3
            )
            
            $
            (1.8
            )
            
            $
            3.1
            
            
            $
            22.4





In
addition, the Company has exposure to uneven shifts in interest rate curves
(i.e., the Commercial Paper to LIBOR spreads). The Company, through its
Asset/Liability Management Committee, actively manages these risks by setting
IRE limits and takes action in response to interest rate movements against the
existing structure.







Item
      4.  Controls and
Procedures





(a)
            Disclosure
      Controls and Procedures





The
Company's management, with the participation of the Company’s Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the Exchange Act)) as of the end of the period covered by this
report.  Based on such evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of such
period, the Company's disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act.





(b)
            Internal
      Control Over Financial Reporting





There has
not been any change in the Company’s internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.





33





Item
1A.  Risk Factors





Certain
of the statements below are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act.  See Forward-Looking Statements on
page 32.
 
 The
following discussion sets forth certain risks that the Company believes could
cause its actual future results to differ materially from expected or historical
results. However, the discussion below is not exhaustive, and other factors
could have a material adverse impact on the Company’s results. These factors
include, among others, natural disasters, acts of terrorism and
epidemics.





The
CCRA Act and increased funding costs have decreased the profitability of FFEL
Program loans. The Company has changed its strategic focus in an effort to
address these changes, but there can be no assurance that the Company’s efforts
will be successful.





The CCRA
Act reduced SAP for new originations by 55 basis points for Stafford and
Consolidation loans and 85 basis points for PLUS loans. In addition, it reduced
lender reinsurance from 99% to 97% by eliminating the EP program with a further
reduction to 95% for loans originated on or after October 1, 2012 and increased
the lender fee from 0.50% to 1.00% for new originations. At the same time,
dislocation and illiquidity in the credit markets has significantly increased
credit spreads on the Company’s most recent securitizations and borrowings under
the Omnibus Credit Agreement.  The confluence of these events has made
FFEL Program lending less profitable.





In
response to these events, the Company has:





·
            Suspended
      lending at certain schools where loans with lower balances and shorter
      interest-earning periods currently result in unsatisfactory
      returns;·
            Temporarily
      withdrawn from the FFEL Program Consolidation Loan
  market;·
            Reduced
      certain borrower incentive programs for new originations;
    and·
            Restructured
      various functional areas of its business and eliminated a total of 146
      positions.





If these
actions or any future actions that the Company may undertake in an effort to
address these events are not successful, the Company’s future profitability may
be adversely affected.





The Company’s profitability could be
adversely affected by general economic conditions as well as regional economic
trends.





Factors
that could significantly affect profitability include:





·
            The
      demand for and net margins on student loans;·
            The
      cost to the Company of funding such loans; and·
            The
      level and volatility of interest rates and
  inflation.





Rising
interest rates could reduce demand for student loans, as some prospective
borrowers could defer attendance at certain eligible educational institutions or
pursue programs at less costly institutions, and thus borrow less, or otherwise
determine that the cost of borrowing for higher education is too great. During
periods of economic weakness, particularly in the case of high unemployment or
high inflation, the relative cost of higher education may increase materially.
As a result, some prospective borrowers may defer pursuing higher education
until economic conditions improve. Also, the ability of some borrowers to repay
their loans on a timely basis may deteriorate, resulting in higher delinquencies
and losses. To the extent that weakness in the U.S. economy continues or
worsens, the Company may experience an increase in defaults and loan losses and,
if the conditions persist for an extended period of time, the Company may exceed
contractual maximum portfolio loss limits related to the insurance on its
private education loan portfolio.





Any of
these conditions may be more prevalent in those particular regions of the United
States that have been affected by natural disasters or regional economic
downturns. If the regions affected were those in which a large segment of the
Company’s loans had been originated or its borrowers reside, a disproportionate
reduction in new loan originations could occur, accompanied by higher
delinquencies and losses. The Company has a high concentration of student loan
originations in New York and California.





34








The Company’s financial condition is
dependent upon and could be adversely affected by the extent to which management
can successfully manage credit risks.





The
Company’s credit risk exposure has been partially mitigated through government
guarantees, third-party insurers, and certain school risk-sharing
agreements.





The
Company actively monitors the creditworthiness of its insurers, but in the event
that a guarantor, third-party insurer or risk-share school is unable to meet its
contractual obligations under the related arrangements, the Company’s financial
condition could be adversely affected. Due to recent regulatory changes and
dislocation in the credit markets, several student lenders as well as the
Company have announced that they are exiting the industry or, as in the case of
the Company, discontinuing certain higher-risk segments of their business. This
decrease in the availability of student loans may adversely impact the financial
condition of certain schools with which the Company does business, particularly
proprietary schools. The Company’s results could be adversely impacted to the
extent that the proprietary schools for which it originates loans do not
continue as going concerns or close individual campus locations. If a school
with which the Company does business closes or otherwise does not provide the
borrower the promised education, the FTC Holder Rule allows the borrower to
raise the same claims and defenses against the Company, as the lender, as it
could against the school. As a result, the Company may not be able to collect on
these loans. In addition, school closings could result in an increase in
defaults for the borrowers attending these schools at the time they close and a
significant increase in school closings could materially increase the Company’s
allowance for loan losses.





The
Company’s credit risk exposure is also impacted by the size and performance of
the uninsured private education loan portfolio that is not originated under a
risk-sharing relationship, which has grown over recent years. As of June 30,
2008, the uninsured private education loan portfolio included $197 million of
higher risk loans made to students attending proprietary schools. Most of these
higher risk loans do not follow the Company’s traditional underwriting process.
As the economy continues to contract, the Company’s financial condition could be
adversely impacted by net credit losses on this portfolio.





The
Company’s financial condition is dependent upon and could be adversely affected
by the extent to which management can successfully manage interest rate
risks.





The
Company uses derivative agreements in an effort to help manage interest rate
risk. The Company’s derivative instruments do not qualify for hedge accounting
under SFAS 133, and consequently, the change in fair value of these derivative
instruments is included in the Company's earnings. Changes in market assumptions
regarding future interest rates could significantly impact the valuation of the
Company's derivative instruments and, accordingly, impact the Company’s
financial position and results of operations.





The
Company's interest rate risk management activities could expose the Company to
losses if future events differ from certain of the Company’s assumptions about
the future regulatory and credit environment. If the Company’s economic hedging
activities are not appropriately monitored or executed, these activities may not
effectively mitigate its interest rate sensitivity or have the desired impact on
its results of operations or financial condition.





The
success of the Company is dependent upon management’s ability to identify
properly and respond promptly to changes in interest rate conditions. The
majority of the Company’s earnings are generated from the spread between the
Company’s interest earning assets (based on the 90-day Commercial Paper rate,
the prime rate, or the 91-day Treasury Bill rate) and its funding costs (based
on LIBOR).  Therefore, basis risk could have an adverse effect on the
Company's results of operations.





One of
the Company’s objectives in determining the appropriate mix of funding is to
match the weighted average life of its loan assets with that of its borrowings.
However, market constraints generally make obtaining a perfect match
cost-prohibitive. Because credit spreads earned on the Company’s loan assets are
fixed at the time of origination, the Company’s net interest margin may be
adversely affected if the Company cannot refinance its maturing debt at rates
that are comparable to its current rates.





35








The
Company’s funding sources are limited and funding costs may vary
significantly.





The
dislocation and illiquidity in the asset-backed securities and credit markets,
since the later half of 2007, have adversely impacted the Company’s
securitization activities. To the extent that these market conditions continue,
they are likely to continue to adversely impact the Company’s ability to
execute future securitization transactions. Current market conditions have
largely eliminated gains on securitization transactions and losses may be
recognized on future securitization transactions.  These trends are
also likely to negatively impact credit spreads on secured borrowings through
on-balance sheet securitizations.





In early
2008, adverse market conditions carried over to the market for student loan
auction-rate notes.  The Company’s outstanding securitizations include
no auction-rate notes, but adversity in that market may nevertheless further
impede the Company’s ability to securitize on favorable terms.





Adverse
market conditions have also significantly increased the credit spreads under the
Omnibus Credit Agreement with CBNA, which is negotiated on a
borrowing-by-borrowing basis. Incremental borrowing rates under the Omnibus
Credit Agreement currently exceed borrowing rates realized in the Company’s most
recent securitization transactions. The Company is currently negotiating a new
agreement to replace the existing agreement with CBNA.





If the
Company is unable to secure more favorable pricing under the Omnibus Credit
Agreement, the Company’s reliance on the asset-backed securitization market may
increase. If the Company is unable to execute future securitization
transactions, the Company may need to identify alternative sources of funding,
which may not be available on favorable pricing or terms, if at all. Failure to
secure cost-effective funding alternatives would adversely impact the Company’s
ability to fund student loan originations and could materially increase the
Company’s cost of funds.





Incorrect
estimates or assumptions made by management in the preparation of the Company’s
consolidated financial statements could adversely affect the Company’s reported
amounts of assets, liabilities or earnings.





The
Company’s earnings are increasingly dependent upon the accuracy of its critical
accounting estimates, particularly those relating to loan securitizations and
the allowance for loan losses. If future conditions deviate from management’s
assumptions, adverse adjustments of certain related balance sheet and/or income
statement line items could result.





The net
cash flow the Company receives from securitized student loan trusts generally
represent the excess amounts, if any, generated by the underlying student loans
over the amounts required to be paid to the noteholders, after deducting
servicing costs and any other expenses. The Company’s rights to these residual
interests are subordinate to the noteholders’ interests and their value is
highly sensitive to factors such as interest rate changes, prepayment speeds,
default rates and regulatory changes. If the securitized loans fail to generate
sufficient excess cash flows, the Company may not realize all of the recorded
value of these interests.





The
Company’s allowance for loan losses is also dependent on estimates. These
estimates are based on historical experience, adjusted for qualitative factors
including changes in recent performance, general economic conditions or
applicable laws and regulations. If actual experience varies significantly from
historical experience or the Company’s projections of the impact of changes in
qualitative factors are inaccurate, the Company’s estimated allowance for loan
losses may be insufficient to cover losses in the Company’s
portfolio.





Future
decreases in the volume of student loan originations could adversely affect the
financial condition of the Company.





The
Company originates loans to borrowers in all 50 states. The loan origination
volume generated by individual schools is primarily dependent on whether the
Company appears on the school’s list of lenders, as well as the number of
students at that school that need financial aid. Origination volume could be
negatively affected by the Company’s determination to suspend lending to certain
schools and to temporarily withdraw from the FFEL Program Consolidation Loan
market, although the Company may experience some growth in the markets in which
it continues to operate as competitors exit these segments. The Company may be
adversely impacted by borrowers’ or schools’ decisions to use competing lenders,
each school’s option to choose the Federal Direct Lending Program instead of
choosing to participate in the FFEL Program, or a school’s decision to begin
making student loans itself.





The
Company’s ability to maintain or increase market share is largely dependent upon
its ability to offer competitively priced, desirable loan products as well as
its ability to communicate effectively to prospective borrowers and schools
about these products. The Company plans to continue to offer competitively
priced products by managing its expenses through economies of scale, which
reduce its origination and servicing costs. The Company also plans to expand its
electronic communications with prospective borrowers and those that affect their
decision making. An inability to achieve these goals could adversely affect the
Company’s competitive position in the marketplace.


36


Servicing
defects in the Company’s loan portfolio could potentially result in
losses.





FFEL
Program loans that are not originated or serviced in accordance with Department
regulations risk loss of guarantee or interest penalties.  Private
education loans that are not originated or serviced in accordance with
provisions set forth in the respective agreements with private insurers risk
cancellation of insurance coverage. In an effort to help manage these risks, the
Company conducts compliance and process reviews of both the Company’s internal
operations and external loan servicers. Servicing failures may have an adverse
effect on the Company’s loan losses and, for FFEL Program loans, interest
income.


Other
risk of loss resulting from inadequate or failed internal processes, people or
systems, or from external events may have an adverse effect on the Company’s
financial condition.
 
 The
Company is subject to many types of operating risks which include, but are not
limited to, risk of loss resulting from inadequate or failed internal processes,
people or systems, or from external events. These operational risks encompass
reputational and franchise elements associated with the Company’s business
practices or market conduct. They also include the risk of failing to comply
with applicable laws, regulations, regulatory administrative actions or the
Company’s internal policies.  Given the high volume of transactions at
the Company, certain errors may be repeated or compounded before they are
discovered and rectified. In addition, the Company’s necessary dependence upon
automated systems to record and process its transaction volume may further
increase the risk that technical system flaws or employee tampering or
manipulation of those systems will result in losses that are difficult to
detect. The Company may also be subject to disruptions of its operating systems
arising from events that are wholly or partially beyond its control (for
example, natural disasters, acts of terrorism, epidemics, computer viruses, and
electrical/telecommunications outages), which may give rise to losses in service
to borrowers and/or monetary loss to the Company, increasing operating expenses
and adversely affecting the Company’s competitive position. All of these risks
are also applicable where the Company relies on outside vendors to provide
services to it and its borrowers.
 
 In
the normal course of business the Company is exposed to various legal risks that
could have an adverse effect on the Company’s business operations.
 
 Various
issues may give rise to legal risk and cause harm to the Company and its
business prospects.  These issues include appropriately dealing with
potential conflicts of interest, legal and regulatory requirements, ethical
issues, privacy laws and information security policies. Failure to address these
issues appropriately could also give rise to additional legal risk to the
Company, which could give rise to litigation claims asserted against the
Company, or subject the Company to regulatory enforcement actions, fines and
penalties.





The
Company’s financial condition or results of operations could be adversely
affected by regulatory and legislative actions.





The
Company’s businesses and earnings are affected by the fiscal policies adopted by
regulatory authorities of the United States. For example, policies of the
Federal Reserve Board directly influence the rate of interest paid by commercial
banks, including CBNA, the Company’s primary funding source, on its
interest-bearing deposits. This may affect the Company’s cost of borrowing from
CBNA, and also may affect the value of financial instruments, including retained
interests in securitizations and assets held for sale by the Company. In
addition, such changes in fiscal policy may adversely affect the ability of the
Company’s borrowers to repay their loans on a timely basis and the ability of
prospective borrowers to qualify for loans.





As a
leading originator and owner of student loans insured under the Higher Education
Act, the Company’s financial results and business are largely affected by the
provisions of the Higher Education Act. Amendments to the Higher Education Act
may be implemented from time to time. New legislation could impact the Company’s
products, its industry or otherwise affect its operations and the environment in
which it operates in substantial and unpredictable ways.  In recent
years, many changes to the Higher Education Act have been implemented, for
example, that adversely impact the operating environment of the Company and its
financial results. Certain amendments to the Higher Education Act governing the
FFEL Program have reduced the interest spread earned by holders of FFEL Program
guaranteed student loans. The Company is also subject to rules and regulations
of the agencies that act as guarantors of the student loans, known as guaranty
agencies. In addition, the Company is subject to certain federal and state
banking laws, regulations, and examinations, as well as federal and state
consumer protection laws and lending regulations, including, specifically with
respect to the Company's CitiAssist loan portfolio, certain state usury laws and
related regulations, and many other lending laws. These laws and regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance. Failure to comply with these laws and regulations could result in
liability to borrowers, the imposition of civil penalties and potential class
action lawsuits.


37




It is
difficult for the Company to plan for or mitigate the effects of such
legislative or regulatory changes. For further information on the impact of the
CCRA Act, see Legislation and
Regulationson page 30.  In addition, future regulatory changes
cannot be predicted and could have a material impact on the Company’s financial
condition or results of operations.




The
Company’s amended Non-Competition Agreement with CBNA and Citigroup provides
fewer protections to the Company and may result in competition between the
Company and its majority shareholder or other Citigroup affiliates.


Effective
August 8, 2008, the Company has amended the Non-Competition Agreement among the
Company, CBNA and Citigroup.   That amendment allows CBNA or any
of its affiliates to acquire another business engaged in student
lending.  If the revenues from student lending represent more than 5%
of the consolidated revenues of the acquired business, then CBNA or its
affiliates are required to cease student lending or use commercially reasonable
efforts to sell the student lending business (which sale may be made to the
Company) within eight months of the acquisition.   If, however,
student lending represents 5% or less of the consolidated revenues of the
acquired business or if after using commercially reasonable efforts, CBNA or its
affiliates is unable to sell the competing business at a price equal to or
greater than the implied price, then CBNA or its affiliates may continue to
engage in the competing business.  Consequently, the Company may face
direct competition from its majority shareholder or other Citigroup affiliates,
which could have an adverse impact on the Company’s financial condition or
results of operations.


Item 6.
            Exhibits





See
Exhibit Index.








38





SIGNATURE








Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





Date:
August 6, 2008





The
      Student Loan CorporationBy:
            /s/ Scot H. ParnellScot
      H. Parnell
              Chief
      Financial Officer and Duly Authorized Officer(Principal
      Financial Officer)








39





EXHIBIT
INDEX








Exhibit


Number
            Description of
      Exhibit





3.1
            Restated
      Certificate of Incorporation of the Company, incorporated by reference to
      Exhibit 3.1 to the Company’s 1992 Annual Report and Form 10-K (File No.
      1-11616).3.2
            By-Laws
      of the Company, as amended, incorporated by reference to Exhibit 3.2 to
      the Company’s 1994 Annual Report and Form 10-K (File No.
      1-11616).10.2.11 *
            Amendment
      No. 10, dated as of August 8, 2008, Non-Competition Agreement among the
      Company, Citibank, N.A. and Citigroup Inc.31.1 *
            Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2 *
            Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1 *
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.


* Filed
herewith