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 March 31, 2009or ̈
            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 o
            
            Accelerated
      filer                   xNon-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 May 4,
2009, 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 Months Ended March 31,
      2009
              and 2008
            2Consolidated
      Balance Sheets as of March 31, 2009 (Unaudited) and December 31,
      2008
            3Consolidated
      Statements of Changes in Stockholders’ Equity (Unaudited) for
      the
              Three
      months Ended March 31, 2009 and 2008
            4Consolidated
      Statements of Cash Flows (Unaudited) for the Three months Ended March 31,
      2009
              and 2008
            5Notes
      to Consolidated Financial Statements (Unaudited)
            6 –
      20Item
      2 -
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            21–
      36Item
      3 -
            Quantitative
      and Qualitative Disclosures About Market Risk
            36Item
      4 -
            Controls
      and Procedures
            36–37Part
      II
            Other
      InformationItem
      1A-
            Risk
      Factors
            38
      – 41Item
      6 -
            Exhibits
            41Signature
            42Exhibit
      Index
            43





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 EndedMarch
      31,2009
                  
                  
                  2008NET
      INTEREST INCOMEInterest
      income
                  
                  $
                  204,196
                  
                  
                  $
                  329,747Interest
      expense
                  
                  
                  (146,118
                  )
                  
                  
                  (248,300
                  )Net
      interest income
                  
                  
                  58,078
                  
                  
                  
                  81,447Provision
      for loan losses
                  
                  
                  (21,142
                  )
                  
                  
                  (25,312
                  )Net
      interest income after provision for loan losses
                  
                  
                  36,936
                  
                  
                  
                  56,135OTHER
      INCOMEGains
      on loans sold
                  
                  
                  –
                  
                  
                  
                  1,455Fee
      and other income
                  
                  
                  6,958
                  
                  
                  
                  11,459Total
      other income
                  
                  
                  6,958
                  
                  
                  
                  12,914OPERATING
      EXPENSESSalaries
      and employee benefits
                  
                  
                  8,978
                  
                  
                  
                  15,469Other
      expenses
                  
                  
                  25,881
                  
                  
                  
                  28,666Total
      operating expenses
                  
                  
                  34,859
                  
                  
                  
                  44,135Income
      before income taxes
                  
                  
                  9,035
                  
                  
                  
                  24,914Provision
      for income taxes
                  
                  
                  1,507
                  
                  
                  
                  9,680NET
      INCOME
                  
                  $
                  7,528
                  
                  
                  $
                  15,234DIVIDENDS
      DECLARED AND PAID
                  
                  $
                  28,600
                  
                  
                  $
                  28,600BASIC
      AND DILUTED EARNINGS PER COMMON SHARE
                  
                  $
                  0.38
                  
                  
                  $
                  0.76(based
      on 20,000,000 shares outstanding)DIVIDENDS
      DECLARED AND PAID PER COMMON SHARE
                  
                  $
                  1.43
                  
                  
                  $
                  1.43








See
accompanying Notes to the unaudited Consolidated Financial
Statements.


2


THE
STUDENT LOAN CORPORATION


CONSOLIDATED
BALANCE SHEETS


(Dollars
in thousands, except per share amounts)





March
      31,
                                                      
                                                      
                                                      December
      31,2009
                                                      
                                                      
                                                      2008(Unaudited)ASSETSFederally
      insured student loans
                                                      
                                                      $
                                                      18,655,058
                                                      
                                                      
                                                      $
                                                      18,064,662Private
      education loans
                                                      
                                                      
                                                      5,926,571
                                                      
                                                      
                                                      
                                                      5,861,545Deferred
      origination and premium costs
                                                      
                                                      
                                                      624,841
                                                      
                                                      
                                                      
                                                      635,449Allowance
      for loan losses
                                                      
                                                      
                                                      (111,377
                                                      )
                                                      
                                                      
                                                      (110,329
                                                      )Student
      loans, net
                                                      
                                                      
                                                      25,095,093
                                                      
                                                      
                                                      
                                                      24,451,327Other
      loans and lines of credit
                                                      
                                                      
                                                      2,589
                                                      
                                                      
                                                      
                                                      9,016Loans
      held for sale
                                                      
                                                      
                                                      2,156,498
                                                      
                                                      
                                                      
                                                      1,072,316Cash
                                                      
                                                      
                                                      774
                                                      
                                                      
                                                      
                                                      595Residual
      interests in securitized loans
                                                      
                                                      
                                                      841,081
                                                      
                                                      
                                                      
                                                      942,807Other
      assets
                                                      
                                                      
                                                      1,586,638
                                                      
                                                      
                                                      
                                                      1,659,617Total
      Assets
                                                      
                                                      $
                                                      29,682,673
                                                      
                                                      
                                                      $
                                                      28,135,678LIABILITIES
      AND STOCKHOLDERS' EQUITYShort-term
      borrowings, payable to principal stockholder
                                                      
                                                      $
                                                      14,246,200
                                                      
                                                      
                                                      $
                                                      12,654,200Short-term
      secured borrowings, payable to Department of Education
                                                      
                                                      
                                                      2,060,096
                                                      
                                                      
                                                      
                                                      1,002,211Long-term
      borrowings, payable to principal stockholder
                                                      
                                                      
                                                      8,602,000
                                                      
                                                      
                                                      
                                                      10,102,000Long-term
      secured borrowings
                                                      
                                                      
                                                      2,227,293
                                                      
                                                      
                                                      
                                                      1,727,744Deferred
      income taxes
                                                      
                                                      
                                                      226,066
                                                      
                                                      
                                                      
                                                      241,642Other
      liabilities
                                                      
                                                      
                                                      757,083
                                                      
                                                      
                                                      
                                                      822,884Total
      Liabilities
                                                      
                                                      
                                                      28,118,738
                                                      
                                                      
                                                      
                                                      26,550,681Common
      stock, $0.01 par value; authorized 50,000,000 shares; 20,000,000 shares
      issued and outstanding
                                                      
                                                      
                                                      200
                                                      
                                                      
                                                      
                                                      200Additional
      paid-in capital
                                                      
                                                      
                                                      141,733
                                                      
                                                      
                                                      
                                                      141,723Retained
      earnings
                                                      
                                                      
                                                      1,422,002
                                                      
                                                      
                                                      
                                                      1,443,074Total
      Stockholders' Equity
                                                      
                                                      
                                                      1,563,935
                                                      
                                                      
                                                      
                                                      1,584,997Total
      Liabilities and Stockholders' Equity
                                                      
                                                      $
                                                      29,682,673
                                                      
                                                      
                                                      $
                                                      28,135,678








See
accompanying Notes to the unaudited Consolidated Financial
Statements.


3


THE
STUDENT LOAN CORPORATION


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


(Dollars
in thousands, except per share amounts)


(Unaudited)





Three
      Months Ended March 31,2009
                    
                    
                    2008COMMON
      STOCK AND ADDITIONAL PAID-IN CAPITALBalance,
      beginning of period
                    
                    $
                    141,923
                    
                    
                    $
                    141,555Capital
      contributions and other changes
                    
                    
                    10
                    
                    
                    
                    10Balance,
      end of period
                    
                    $
                    141,933
                    
                    
                    $
                    141,565RETAINED
      EARNINGSBalance,
      beginning of period
                    
                    $
                    1,443,074
                    
                    
                    $
                    1,482,668Net
      income
                    
                    
                    7,528
                    
                    
                    
                    15,234Common
      dividends declared, $1.43 per common share for both the three
                      months
      ended March 31, 2009 and 2008
                    
                    
                    (28,600
                    )
                    
                    
                    (28,600
                    )Balance,
      end of period
                    
                    $
                    1,422,002
                    
                    
                    $
                    1,469,302TOTAL
      STOCKHOLDERS' EQUITY
                    
                    $
                    1,563,935
                    
                    
                    $
                    1,610,867








See
accompanying Notes to the unaudited Consolidated Financial
Statements.


4


THE
STUDENT LOAN CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Dollars
in thousands)


(Unaudited)





Three
      Months EndedMarch
      31,2009
                                              
                                              
                                              2008Cash
      flows from operating activities:Net
      income
                                              
                                              $
                                              7,528
                                              
                                              
                                              $
                                              15,234Adjustments
      to reconcile net income to net cash from operating
    activities:Depreciation
      and amortization of equipment and computer software
                                              
                                              
                                              2,571
                                              
                                              
                                              
                                              3,485Amortization
      of deferred loan origination and purchase costs
                                              
                                              
                                              22,087
                                              
                                              
                                              
                                              25,714Accreted
      interest on residual interests
                                              
                                              
                                              (17,792
                                              )
                                              
                                              
                                              (15,672
                                              )Provision
      for loan losses
                                              
                                              
                                              21,142
                                              
                                              
                                              
                                              25,312Deferred
      tax (provision) benefit
                                              
                                              
                                              (15,576
                                              )
                                              
                                              
                                              2,028Gains
      on loans sold
                                              
                                              
                                              –
                                              
                                              
                                              
                                              (1,455
                                              )Loss
      (Gain) on residual interest valuation
                                              
                                              
                                              65,659
                                              
                                              
                                              
                                              (70,419
                                              )Loss
      on servicing asset valuation
                                              
                                              
                                              7,335
                                              
                                              
                                              
                                              2,047Change
      in loans held for sale including loan origination and purchase
      costs
                                              
                                              
                                              (1,088,000
                                              )
                                              
                                              
                                              (134,158
                                              )Proceeds
      from loans sold
                                              
                                              
                                              6
                                              
                                              
                                              
                                              55,480Cash
      received on residual interests in trading securitized
    assets
                                              
                                              
                                              53,859
                                              
                                              
                                              
                                              24,326Change
      in accrued interest receivable
                                              
                                              
                                              (31,255
                                              )
                                              
                                              
                                              (30,607
                                              )Other
      non-cash charges
                                              
                                              
                                              (9,039
                                              )
                                              
                                              
                                              4,770Change
      in other assets
                                              
                                              
                                              111,719
                                              
                                              
                                              
                                              (60,967
                                              )Change
      in other liabilities
                                              
                                              
                                              (65,790
                                              )
                                              
                                              
                                              133,913Net
      cash used in operating activities
                                              
                                              $
                                              (935,546
                                              )
                                              
                                              $
                                              (20,969
                                              )Cash
      flows from investing activities:Change
      in loans
                                              
                                              $
                                              (665,366
                                              )
                                              
                                              $
                                              (2,401,345
                                              )Change
      in loan origination and purchase costs
                                              
                                              
                                              (11,390
                                              )
                                              
                                              
                                              (79,586
                                              )Change
      in restricted cash
                                              
                                              
                                              (13,916
                                              )
                                              
                                              
                                              (46,515
                                              )Capital
      expenditures on equipment and computer software
                                              
                                              
                                              (1,820
                                              )
                                              
                                              
                                              (2,608
                                              )Net
      cash used in investing activities
                                              
                                              $
                                              (692,492
                                              )
                                              
                                              $
                                              (2,530,054
                                              )Cash
      flows from financing activities:Net
      change in borrowings with original maturities of three months or
      less
                                              
                                              $
                                              1,392,000
                                              
                                              
                                              $
                                              1,007,600Proceeds
      from issuance of secured borrowings with Department of
      Education
                                              
                                              
                                              1,137,126
                                              
                                              
                                              
                                              –Repayments
      of secured borrowings with Department of Education
                                              
                                              
                                              (79,242
                                              )
                                              
                                              
                                              –Proceeds
      from issuance of long-term secured borrowings
                                              
                                              
                                              544,976
                                              
                                              
                                              
                                              1,574,550Repayments
      of long-term secured borrowings
                                              
                                              
                                              (38,043
                                              )
                                              
                                              
                                              –Repayments
      of borrowings with original terms of three months or more
                                              
                                              
                                              (1,300,000
                                              )
                                              
                                              
                                              –Dividends
      paid to stockholders
                                              
                                              
                                              (28,600
                                              )
                                              
                                              
                                              (28,600
                                              )Net
      cash provided by financing activities
                                              
                                              $
                                              1,628,217
                                              
                                              
                                              $
                                              2,553,550Net
      increase in cash
                                              
                                              $
                                              179
                                              
                                              
                                              $
                                              2,527Cash
      - beginning of period
                                              
                                              
                                              595
                                              
                                              
                                              
                                              25Cash
      - end of period
                                              
                                              $
                                              774
                                              
                                              
                                              $
                                              2,552Supplemental
      disclosure:Cash
      paid (received) for:Interest
                                              
                                              $
                                              212,903
                                              
                                              
                                              $
                                              252,292Income
      taxes, net
                                              
                                              $
                                              8,251
                                              
                                              
                                              $
                                              (9,698
                                              )





See
accompanying Notes to the unaudited Consolidated Financial
Statements.


5


THE
STUDENT LOAN CORPORATION


Notes
to Consolidated Financial Statements (Unaudited)


March
31, 2009








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.  All intercompany balances and transactions have been
eliminated.





The
Company, which has a trust agreement to originate loans through 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 owns 80% of the Company’s
outstanding common stock and is an indirect wholly owned subsidiary of Citigroup
Inc. (Citigroup).





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 months ended
March 31, 2009 may not be indicative of the results for the full year ending
December 31, 2009.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 2008 Annual Report on Form 10-K.





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.





Use
of Estimates





The
preparation of the Consolidated Financial Statements in conformity with GAAP
requires the Company to make estimates based on assumptions about current and
future economic and market conditions (including, but not limited to, credit
risk, market liquidity and interest rates) which affect reported amounts and
related disclosures in the Company’s financial statements. Although current
estimates reflect existing conditions and expected trends, as appropriate, it is
reasonably possible that actual conditions in 2009 could differ from those
estimates.  Such differences could have a material adverse effect on
the Company’s results of operations and financial position. Among other effects,
such changes could result in increases in the allowance for loan losses and
decreases in the fair value of the Company’s
interests in its securitized loans in the form of subordinated residual
interests (i.e., interest-only strips), servicing rights and, in certain cases,
subordinated notes issued by the trusts (collectively, retained
interests)from securitizations.





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 (SAP) 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 and recognized
as yield adjustments to interest income.


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). The Company recognizes student loan interest income as it
is earned.  SAP from and excess interest payments to the federal
government, if any, are recognized as yield adjustments to interest
income.





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.  Other 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.  Losses that are probable and
estimable are expensed currently and increase the provision for loan
losses.  Actual losses are charged against the reserve as they occur,
and subsequent recoveries are credited back to the reserve.





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 or when principal and interest are current.  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 of delinquency, respectively. When
loans or portions of loans are written off, the Company reduces interest income
by the amounts of accrued, uncollected interest and unamortized deferred
premiums and origination costs.








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.


7


Loans
Securitized





The
Company uses two distinct methods of accounting for its
securitizations.  Certain of the Company’s securitizations meet the
qualifications of SFAS 140 to be accounted for as a sale.  The
qualifications are that the assets transferred are legally isolated from the
Company, even in the event of a bankruptcy; that the holders of the beneficial
interests are not constrained from pledging or exchanging their interests; and
that the transferor does not maintain effective control over the transferred
assets.  The Company uses a two-step structure with a qualified
special purpose entity (QSPE) to obtain legal isolation.  For the
Company’s securitizations which are accounted for as a sale, referred to as
off-balance sheet securitizations, the transferred assets are removed from the
consolidated balance sheet and a gain or loss is recognized.  The
Company’s securitizations that fail to meet the accounting requirements for a
sale in accordance with SFAS 140 are accounted for as secured borrowings and the
transferred assets are consolidated in the Company’s financial
statements.  These transactions are referred to as on-balance sheet
securitizations.  See Note 2 for proposed accounting changes which
could change how the Company accounts for its off-balance sheet securitization
entities.





Gains and
losses on off-balance sheet securitizations are recognized at the time of
securitization and are reported in Gains on loans
securitized.  Securitization gains and losses 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
the residual interests and servicing assets 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.





Residual
interests and servicing rights are recorded at fair value in accordance with the
provisions of SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159) and SFAS No. 156, Accounting for Servicing of
Financial Assets – an amendment of FASB Statement No. 140(SFAS 156),
respectively. Retained notes are also recorded at fair value in accordance with
the provisions of SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities (SFAS
115). Unrealized gains and
losses on retained interests are reported in Fee and other income. Accreted
interest on residual interests is reported in Interest income.





Cash is
received from the trusts for servicing fee revenues, residual interest
distributions and payments of principal and interest on retained
notes.





The
Company’s on-balance sheet securitization transactions are collateralized by
student loans, which are recorded in Federally insured student
loans, by accrued interest on the student loans and by certain cash
accounts, which are recorded in Other assetson the
Consolidated Balance Sheets.





Additional
information on the Company's securitization activities may be found in Note
9.





The
Company also obtains debt financing through the Department of Education’s Loan
Participation Purchase Program (the Participation Program).  The
borrowings through the Participation Program are collateralized by FFEL Program
Stafford and PLUS loans which are recorded in Loans held for sale on the
Consolidated Balance Sheet.  Additional information pertaining to the
Company’s borrowings through the Participation Program can be found in Note
11.





Loans
Held for Sale





Loans
held for sale are loans that the Company plans to include in future
securitization or sale transactions, including loans that the Company originates
in anticipation to sell to the Department under the Department’s Loan Purchase
Commitment Program (the Purchase Program). Management continually assesses its
future securitization and loan sale plans and may transfer loans or record
loans directly into 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 months ended March 31, 2009 and 2008, the
fair value of loans held for sale exceeded cost and no write down was
necessary.


8





Changes
in the Company’s loans held for sale are presented in the table
below:





Three
      Months Ended March 31,(Dollars
      in thousands)
                    
                    2009
                    
                    
                    2008Balance
      at beginning of period
                    
                    $
                    1,072,316
                    
                    
                    $
                    337,790Originations
      and purchases
                    
                    
                    1,165,172
                    
                    
                    
                    138,833Transfers
      into loans held for sale
                    
                    
                    –
                    
                    
                    
                    –Transfers
      back to operating loan portfolios
                    
                    
                    (3,812
                    )
                    
                    
                    –Loan
      sales
                    
                    
                    (6
                    )
                    
                    
                    (54,025
                    )Loan
      securitizations
                    
                    
                    –
                    
                    
                    
                    –Cancellations,
      other payments and loan consolidations
                    
                    
                    (77,172
                    )
                    
                    
                    (4,675
                    )Balance
      at end of period
                    
                    $
                    2,156,498
                    
                    
                    $
                    417,923





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 foreign currency swaps in an effort to manage its exposure to foreign
currency exchange rates on its foreign currency denominated secured borrowings.
The Company’s derivative instruments do not qualify for hedge accounting under
SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended (SFAS 133) and
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.  Capitalization of development 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
impairment.  Capitalized costs of projects deemed to be obsolete or
abandoned are written off as operating expenses.





Accounting
Changes





Disclosures
about Derivative Instruments and Hedging Activities





Effective
January 1, 2009, the Company adopted 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 133
and related interpretations. The standard is 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 expanded the disclosure
requirements for derivatives and hedged items and had no impact on how the
Company accounts for these instruments.  None of the derivatives held
by the Company at March 31, 2009 were designated as hedges and accordingly they
did not qualify for hedge accounting treatment under SFAS 133.





Measurement
of Fair Value in Inactive Markets




In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly.”  The FSP reaffirms
that fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date under current market conditions.  The FSP also
reaffirms the need to use judgment in determining if a formerly active market
has become inactive and in determining fair values when the market has become
inactive.  The adoption of the FSP had no material effect on the
Company’s Consolidated Financial Statements.


Other-Than-Temporary
Impairments on Investment Securities
  In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation
of Other-Than-Temporary Impairments,” which amends the recognition guidance for
other-than-temporary impairments (OTTI) of debt securities and expands the
financial statement disclosures for OTTI on debt and equity securities. Because
all securities which the Company accounts for under SFAS 115 are marked to fair
value on a recurring basis, the adoption of this FSP had no effect on the
Company’s Consolidated Financial Statements.


9





2.     FUTURE
APPLICATION OF ACCOUNTING STANDARDS





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





The FASB
has issued an exposure draft of a proposed standard that would eliminate QSPEs
from the guidance in SFAS 140. While the proposed standard has not been
finalized, if it is issued in its current form, this change may have a
significant impact on the Company’s Consolidated Financial Statements as the
Company may lose sales treatment for certain assets previously sold to a
QSPE, as well as for certain future sales, and for certain transfers of portions
of assets that do not meet the proposed definition of “participating interests.”
This proposed revision could become effective in January 2010 and should this
occur, these QSPE’s will then become subject to review under FIN
46(R).  As of March 31, 2009, the total assets of QSPEs of which the
Company has transferred and received sales treatment were $15.3
billion.





In
connection with the proposed changes to SFAS 140, the FASB has also issued a
separate exposure draft of a proposed standard that details three key changes to
the consolidation model in FASB Interpretation No. 46 (Revised December 2003),
“Consolidation of Variable Interest Entities” [FIN 46(R)].  First, the
FASB will now include former QSPEs in the scope of FIN 46(R). In addition, the
FASB supports amending FIN 46(R) to change the method of analyzing which party
to a variable interest entity (VIE) should consolidate the VIE (the primary
beneficiary) to that of a qualitative determination of power combined with
benefits and losses instead of the current risks and rewards model. Finally, the
proposed standard requires that the analysis of primary beneficiaries be
reevaluated whenever circumstances change. The existing rules require
reconsideration only when specified reconsideration events occur.  As
of March 31, 2009, the total assets of significant unconsolidated VIEs with
which the Company is involved were $15.3 billion.





FASB is
currently redeliberating these proposed standards; therefore, they are still
subject to change. Since QSPEs will likely be eliminated from SFAS 140 and thus
become subject to FIN 46(R) consolidation guidance, and since FIN 46(R)’s method
of determining which party must consolidate a VIE will likely change, the
Company expects to consolidate only certain of the VIEs and QSPEs with which the
Company is involved.  The Company is currently evaluating the impact
of these changes on its Consolidated Financial Statements.





Interim
Disclosures about Fair Value of Financial Instruments




In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments.”The FSP requires
disclosing qualitative and quantitative information about the fair value of all
financial instruments on a quarterly basis, including methods and significant
assumptions used to estimate fair value during the period. These disclosures
were previously only done annually. The disclosures required by the FSP are
effective for the quarter ending June 30, 2009, but the Company does not
anticipate it will have any material effect on the Consolidated Balance Sheet or
Statement of Income.





3.     INCOME
TAXES





The
Company’s effective tax rate during the first quarter of 2009 was 16.7%,
compared to 38.9% in the same quarter of 2008. This decrease in the
effective tax rate primarily reflects a $0.9 million reduction of current tax
liabilities related to prior periods. In addition, the Company updated its
blended statutory rate for 2009, which resulted in a current period tax benefit
of $0.7 million for the revaluation of deferred income taxes.





4.
            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.


10





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





March
      31,
                  
                  
                  December
      31,(Dollars in
      thousands)
                  
                  2009
                  
                  
                  2008Federal
      Stafford Loans
                  
                  $
                  10,664,271
                  
                  
                  $
                  10,188,076Federal
      Consolidation Loans
                  
                  
                  6,221,974
                  
                  
                  
                  6,312,535Federal
      SLS/PLUS/HEAL Loans
                  
                  
                  1,768,813
                  
                  
                  
                  1,564,051Private
      education loans
                  
                  
                  5,926,571
                  
                  
                  
                  5,861,545Total
      student loans held, excluding deferred costs
                  
                  
                  24,581,629
                  
                  
                  
                  23,926,207Deferred
      origination and premium costs
                  
                  
                  624,841
                  
                  
                  
                  635,449Student
      loans held
                  
                  
                  25,206,470
                  
                  
                  
                  24,561,656Less:
      allowance for loan losses
                  
                  
                  (111,377
                  )
                  
                  
                  (110,329
                  )Student
      loans held, net
                  
                  
                  25,095,093
                  
                  
                  
                  24,451,327Loans
      held for sale, excluding deferred costs
                  
                  
                  2,131,225
                  
                  
                  
                  1,058,953Deferred
      origination and premium costs
                  
                  
                  25,273
                  
                  
                  
                  13,363Loans
      held for sale
                  
                  
                  2,156,498
                  
                  
                  
                  1,072,316Other
      loans and lines of credit
                  
                  
                  2,589
                  
                  
                  
                  9,016Total
      loan assets
                  
                  $
                  27,254,180
                  
                  
                  $
                  25,532,659





5.     OTHER
ASSETS





Other
assets are summarized as follows:


March
      31,
                  
                  
                  December
      31,(Dollars in
      thousands)
                  
                  2009
                  
                  
                  2008Accrued
      interest receivable:from
      student loan borrowers
                  
                  $
                  839,986
                  
                  
                  $
                  798,113from
      federal government
                  
                  
                  2,271
                  
                  
                  
                  12,889Servicing
      asset from securitization activity
                  
                  
                  200,798
                  
                  
                  
                  208,133Collateral
      on derivatives with CBNA
                  
                  
                  308,393
                  
                  
                  
                  387,498Derivative
      agreements with CBNA
                  
                  
                  56,700
                  
                  
                  
                  91,559Retained
      notes from securitization activities
                  
                  
                  66,487
                  
                  
                  
                  66,487Restricted
      cash
                  
                  
                  61,531
                  
                  
                  
                  47,615Equipment
      and computer software (1)
                  
                  
                  26,713
                  
                  
                  
                  27,457Other
                  
                  
                  23,759
                  
                  
                  
                  19,866Total
      other assets
                  
                  $
                  1,586,638
                  
                  
                  $
                  1,659,617


(1)
            Amounts
      are reflected net of accumulated depreciation and software amortization of
      $60.9 million and $59.1 million at March 31, 2009 and December 31, 2008,
      respectively.





Accrued
interest receivable from the federal government decreased by $10.6 million (82%)
during the three months ended March 31, 2009.  This decrease reflects
the impact of lower average interest rates during the first quarter of 2009,
which reduced the special allowance payments due from the federal
government.





The
Company is required to maintain collateral for its derivative contracts entered
into with CBNA in a margin account.  The Company’s collateral on these
derivatives decreased by $79.1 million during the three months ended March 31,
2009, primarily as a result of increases in interest rates.  For
further information on the Company’s derivative agreements, see Note
8.





During
February 2009, the Company completed an on-balance sheet securitization, which
primarily drove the $13.9 million increase in cash held by the securitization
trusts, or restricted cash, during the three months ended March 31, 2009.
Restricted cash can be used only to satisfy trust obligations.
 11





6.
            FEE
      AND OTHER INCOME





Fee and
other income is summarized as follows:





Three
      Months Ended
                                            March
      31,(Dollars in
      thousands)
                                          
                                          2009
                                          
                                          
                                          2008Net
      gains from securitization retained interests and related
      derivatives
                                          
                                          $
                                          527
                                          
                                          
                                          $
                                          7,360Gains
      (losses) on foreign currency translation net of mark-to-market gains
      (losses) on foreign currency swap
                                          
                                          
                                          2,251
                                          
                                          
                                          
                                          (359
                                          )Other
      origination and servicing fees from CBNA (Note 7)
                                          
                                          
                                          2,148
                                          
                                          
                                          
                                          1,732Late
      fees
                                          
                                          
                                          1,684
                                          
                                          
                                          
                                          2,017Other
      income
                                          
                                          
                                          348
                                          
                                          
                                          
                                          709Total
      fee and other income
                                          
                                          $
                                          6,958
                                          
                                          
                                          $
                                          11,459








7.
            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 summary of the Company’s transactions with either CBNA or other
Citigroup affiliates which are included in the accompanying Consolidated
Statements of Income:





Three
      Months Ended
                    March
      31,(Dollars
      in thousands)
                  
                  2009
                  
                  
                  2008Revenues:Interest
      income
                  
                  $
                  150
                  
                  
                  $
                  830Interest
      expense
                  
                  
                  116,656
                  
                  
                  
                  247,571Fee
      and other income (loss):Derivative
      valuation gain (loss)
                  
                  
                  53,578
                  
                  
                  
                  (76,831
                  )Other
      origination and servicing fees
                  
                  
                  2,148
                  
                  
                  
                  1,732Operating
      Expenses:Salaries
      and employee benefitsEmployee
      benefits and administration
                  
                  $
                  1,696
                  
                  
                  $
                  3,044Stock-based
      compensation
                  
                  
                  (17
                  )
                  
                  
                  1,110Other
      expensesServicing,
      professional and other fees paid
                  
                  
                  15,822
                  
                  
                  
                  14,445Data
      processing and communications
                  
                  
                  1,959
                  
                  
                  
                  1,533Premises
                  
                  
                  555
                  
                  
                  
                  683Other
                  
                  
                  649
                  
                  
                  
                  418




12


CBNA
Omnibus Credit Agreement





All of
the Company’s outstanding short- and long-term unsecured borrowings were
incurred under the terms of the Omnibus Credit Agreement.  At March
31, 2009, the Company had outstanding short- and long-term unsecured borrowings
with CBNA of $14.2 billion and $8.6 billion, respectively, and $12.7 billion and
$10.1 billion, respectively, at December 31, 2008.  Under this
agreement, the maximum aggregate credit available is $30.0 billion. The Omnibus
Credit Agreement expires on December 31, 2009. The Company is currently
negotiating a new agreement with CBNA to replace the existing
agreement.




Funding
terms and conditions under the agreement are negotiated between the Company and
CBNA on a borrowing-by-borrowing basis.  The cost of borrowing is
affected by market conditions and, as such, future borrowing rates will
vary.  The Omnibus Credit Agreement contains no material financial
covenants or restrictions. The Omnibus Credit Agreement 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.  Interest expense incurred under these
borrowings, as reflected in the table above, has decreased by 53% for the three
months ended March 31, 2009 as compared to the same period in
2008.  This is a result of the decline in average interest rates
during the first quarter of 2009.   For further information on
the Company’s borrowings under the Omnibus Credit Agreement, see Note
11.





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 decreased to $308.4 million as of March 31, 2009 from
$387.5 million as of December 31, 2008.  For further information on
the Company’s derivative agreements, see Note 8.





Student
Loan Origination Agreement and Servicing Fees Earned





CitiAssist
loans are originated and serviced under an intercompany agreement with
CBNA.  After 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 $0.1 billion and $1.0 billion for the three
months ended March 31, 2009 and 2008, respectively. Total premiums paid by the
Company related to CitiAssist loan purchases were $0.6 million and $6.3 million
for the three months ended March 31, 2009 and 2008, respectively.  The
decreases in both the principal balances of CitiAssist loans purchased and the
premiums paid for the three months ended March 31, 2009 as compared to the same
period in 2008 is attributable to timing of when the Company purchases the
loans.  At March 31, 2009, the Company was committed to purchase
CitiAssist loans of $1.6 billion.





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.





Stock-based
Compensation





The
Company participates in various Citigroup stock-based compensation programs
under which Citigroup stock or stock options are granted to certain of the
Company’s employees. The Company has no stock-based compensation programs in
which its own stock is granted.  The Company pays Citigroup directly
for participation in certain of its stock-based compensation programs, but
receives a capital contribution for those awards related to participation in the
employee incentive stock option program.





CBNA
Tax-sharing Agreement





The
Company is included in the consolidated federal income tax return of Citigroup,
as well as certain 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.


13


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, underwriting, and
others.





8.
            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 March 31, 2009 were designated as hedges and
accordingly they did not qualify for hedge accounting treatment under SFAS
133.


The fair
values of the Company’s derivatives are included in Other Assets and Other Liabilities,
respectively, and are provided in the table below:
 
 March
      31, 2009
                      
                      
                      December
      31, 2008Fair
      Value
                      
                      
                      
                      
                      
                      Fair
      Value(Dollars in
      thousands)
                      
                      Notional
                      
                      
                      Asset
                      
                      
                      Liability
                      
                      
                      Notional
                      
                      
                      Asset
                      
                      
                      LiabilityLIBOR-Based
      Swaps
                      
                      $
                      12,990,100
                      
                      
                      $
                      5,880
                      
                      
                      $
                      27,537
                      
                      
                      $
                      13,342,300
                      
                      
                      $
                      37,361
                      
                      
                      $
                      65,348Interest
      Rate Floor Options
                      
                      
                      11,866,841
                      
                      
                      
                      50,820
                      
                      
                      
                      344,982
                      
                      
                      
                      12,111,261
                      
                      
                      
                      54,198
                      
                      
                      
                      398,280Foreign
      Currency Swap
                      
                      
                      232,050
                      
                      
                      
                      –
                      
                      
                      
                      32,283
                      
                      
                      
                      232,050
                      
                      
                      
                      –
                      
                      
                      
                      24,935
 
 Gains and
losses on the Company’s derivatives are recorded in Fee and Other Income and are
provided in the table below:
 
 Three
      Months Ended
                                    March
      31,(Dollars in
      thousands)
                                  
                                  2009
                                  
                                  
                                  2008Gains (losses)
      on LIBOR-Based Swaps
                                  
                                  $
                                  6,569
                                  
                                  
                                  $
                                  (625
                                  )Gains (losses)
      on Interest Rate Floor Options
                                  
                                  
                                  47,009
                                  
                                  
                                  
                                  (76,206
                                  )(Losses) gains
      on Foreign Currency Swap
                                  
                                  
                                  (7,349
                                  )
                                  
                                  
                                  4,411Net
      gains (losses) on derivatives
                                  
                                  $
                                  46,229
                                  
                                  
                                  $
                                  (72,420
                                  )





The
Company’s London Interbank Offered Rate (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 written derivative contracts that are designed
to function as economic hedges of the floor income component of the residual
interests. These options mature between 2009 and 2029. The
Company’s foreign currency swap is intended to economically hedge the Euro based
obligations of its foreign currency-denominated secured borrowing. The swap
matures in 2032.




The
Company maintains collateral on its derivatives agreements with
CBNA.  For further information pertaining to the collateral on the
Company’s derivatives, see Notes 5 and 7.





9.
            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, collateralized solely by the student loan assets, to
outside investors.  For off-balance sheet securitizations, the Company
generally retains interests in the form of subordinated residual interests
(i.e., interest-only strips) and servicing rights.





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. Student loan assets sold to these securitization trusts, along with other
assets and liabilities of the trusts, remain on-balance sheet.





As of
March 31, 2009, the carrying amount of assets related to the on-balance sheet
securitized trusts were $2.6 billion of which $2.4 billion was included in Federally insured student
loans, and the remainder was comprised primarily of deferred origination
and premium costs and restricted cash.  The related liabilities of
$2.3 billion at March 31, 2009, included $2.2 billion of Long-term secured borrowings
while the remainder was included in Other
liabilities.  The assets are restricted from being sold or
pledged as collateral.  The cash flows from these assets may be used
only to pay down the debt securities issued by the trust.


14


Under
terms of all the trust arrangements, the Company has no obligations to provide
financial support and has not provided such support.  A substantial
portion of the credit risk associated with the securitized loans has been
transferred to third party guarantors or insurers either under the FFEL Program
or private credit insurance.




The
following table summarizes the principal amounts and fair values of retained
interests in the Company’s off-balance sheet loan securitizations:





March
      31, 2009
                  
                  
                  December
      31, 2008(Dollars
      in thousands)
                  
                  FFEL
                    Program
                    Loans
                  
                  
                  Private
      Education Loans
                  
                  
                  FFEL
                    Program
                    Loans
                  
                  
                  Private
                    Education
                    LoansPrincipal
      amounts
                  
                  $
                  12,565,560
                  
                  
                  $
                  2,227,073
                  
                  
                  $
                  12,809,596
                  
                  
                  $
                  2,286,745Retained
      interests
                  
                  
                  944,147
                  
                  
                  
                  164,219
                  
                  
                  
                  1,042,766
                  
                  
                  
                  174,661





The
following table summarizes the Company’s securitization activity:





Three
      Months EndedMarch
      31,(Dollars
      in thousands)
                            
                            2009
                            
                            
                            2008Securitization
      financings:Student
      loans securitized (1)
                            
                            $
                            587,285
                            
                            
                            $
                            1,993,213Net
      proceeds from student loans securitized during the period
                            
                            
                            546,126
                            
                            
                            
                            1,526,211





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





The
difference between student loans securitized and net proceeds received during
the first quarter of 2009 primarily reflects $2.0 million of issuance costs and
$39.1 million of required overcollateralization.  The difference
between student loans securitized and net proceeds received during the first
quarter of 2008 primarily reflects $337.0 million of then unissued notes, $4.5
million of issuance costs and $125.5 million of required
overcollateralization.





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





Three
      Months EndedMarch
      31,(Dollars
      in thousands)
                    
                    2009
                    
                    
                    2008Cash
      received from trusts for servicing
                    
                    $
                    20,066
                    
                    
                    $
                    18,932Cash
      received from trusts on residual interests
                    
                    
                    53,859
                    
                    
                    
                    24,326Cash
      received from trusts on retained notes
                    
                    
                    781
                    
                    
                    
                    –





During
the three months ended March 31, 2009, the Company earned $19.9 million of
contractually specified servicing fees as compared to $18.7 million for the
three months ended March 31, 2008.  The Company also earned $0.7
million of interest on retained notes for the three months ended March 31,
2009.





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





Three
      Months EndedMarch
      31,(Dollars
      in thousands)
                          
                          2009
                          
                          
                          2008Balance
      at beginning of period
                          
                          $
                          208,133
                          
                          
                          $
                          199,112Changes
      in fair value due to changes in inputs and assumptions
                          
                          
                          1,212
                          
                          
                          
                          6,918Other
      changes (1)
                          
                          
                          (8,547
                          )
                          
                          
                          (8,965
                          )Balance
      at end of period
                          
                          $
                          200,798
                          
                          
                          $
                          197,065





(1)
            Amounts
      represent the effects of excess servicing income received and the passage
      of time.


15




The
following table reflects net gains from securitization retained interests and
related derivatives from off-balance sheet securitization trusts, which is
recorded in Fee and other
income:


Three
      Months Ended March 31,(Dollars in
      thousands)
                    
                    2009
                    
                    
                    2008(Losses)
      gains related to residual interests
                    
                    $
                    (65,659
                    )
                    
                    $
                    70,419Servicing
      revenue net of valuation gains and losses on servicing
    assets
                    
                    
                    12,608
                    
                    
                    
                    16,628Mark-to-market
      gains (losses) on derivatives
                    
                    
                    53,578
                    
                    
                    
                    (76,831
                    )Mark-to-market
      losses on retained notes
                    
                    
                    –
                    
                    
                    
                    (2,856
                    )Net
      gains from securitization retained interests and related
      derivatives
                    
                    $
                    527
                    
                    
                    $
                    7,360





The
Company utilizes discounted cash flow models to measure the fair value of its
residual interests and servicing assets. These models require management to make
certain assumptions which, while based on relevant internal and external data,
inherently involve significant judgment and uncertainty. The discount rates,
basis spreads, anticipated net credit loss rates, anticipated prepayment rates
and projected borrower benefit utilization rates are key assumptions utilized to
measure the fair value of these retained interests. The Company’s discount rate
is the sum of a risk-free rate and a risk premium, which reflected the
prevailing economic and market conditions as of March 31,
2009.  During the three months ended March 31, 2009, the Company
increased the risk premium of its private education loan trust residual
interests by 200 basis points to reflect the current level of cash flow
uncertainty and lack of liquidity that exists in the market.  In
addition, the risk-free component of the discount rate on all of the Company's
residual interests increased by 47 basis points.





The
Company has also lowered its future prepayment assumptions to reflect an overall
slowdown in borrower prepayment activity. The Company believes that this
slowdown is the result of the changes to the FFEL Program as well as the current
economic downturn.  The impact of the change in the prepayment
assumptions was a $12.2 million and $1.9 million mark-to-market gain on the
Company’s residual interests and servicing assets, respectively, for the three
months ended March 31, 2009.





The
Company also recognized a mark-to-market loss on its residual interests as a
result of the change in the fair value of the floor income embedded in the
residual interest cash flows.  The change in the value of the embedded
floor income is primarily due to changes in interest rates.  During
the three months ended March 31, 2009, the mark-to-market loss on the floor
income embedded in the Company’s residual interests was $56.8
million.





The key
assumptions used to value the residual interests of securitized trusts were as
follows:





March
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008Discount
      rates:FFEL
      Program Consolidation Loans
                      
                      10.83
                      %
                      
                      10.36
                      %FFEL
      Program Stafford and PLUS loan
                      
                      10.83
                      %
                      
                      10.36
                      %Private
      education loans
                      
                      15.83
                      %
                      
                      13.36
                      %Constant
      prepayment rates:FFEL
      Program Consolidation Loans
                      
                      0.56%
      to 0.91
                      %
                      
                      0.77%
      to 1.10
                      %FFEL
      Program Stafford and PLUS loan
                      
                      3.55
                      %
                      
                      6.54
                      %Private
      education loans
                      
                      6.80
                      %
                      
                      8.88
                      %Anticipated
      credit losses, net of insurance and guarantees:FFEL
      Program Consolidation Loans
                      
                      0.27
                      %
                      
                      0.32
                      %FFEL
      Program Stafford and PLUS loan
                      
                      0.53
                      %
                      
                      0.52
                      %Private
      education loans
                      
                      0.83
                      %
                      
                      0.67
                      %Basis
      spread between LIBOR and CP rates
                      
                      15
      basis points
                      
                      
                      13
      basis pointsUtilization
      rates of borrower benefits:Automated
      clearing house
                      
                      2.3%
      to 40.2
                      %
                      
                      2.3%
      to 40.2
                      %On
      time payments
                      
                      0%
      to 35.2
                      %
                      
                      0%
      to 35.7
                      %





16


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





March
      31, 2009
                      
                      
                      December
      31, 2008Discount
      rates:FFEL
      Program Consolidation Loans
                      
                      4.37
                      %
                      
                      3.90
                      %Private
      education loans
                      
                      4.87
                      %
                      
                      4.40
                      %Constant
      prepayment rates:FFEL
      Program Consolidation Loans
                      
                      0.56%
      to 0.91
                      %
                      
                      0.77%
      to 1.10
                      %Private
      education loans
                      
                      6.80
                      %
                      
                      8.88
                      %Weighted
      average servicing margin
                      
                      22
      basis points
                      
                      
                      23
      basis points





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 March 31, 2009
                      
                      $
                      841,081
                      
                      
                      $
                      200,798Discount
      rate:10%
      adverse change
                      
                      
                      (23,323
                      )
                      
                      
                      (4,002
                      )20%
      adverse change
                      
                      
                      (44,751
                      )
                      
                      
                      (7,864
                      )Constant
      prepayment rate:10%
      adverse change
                      
                      
                      (4,972
                      )
                      
                      
                      (1,379
                      )20%
      adverse change
                      
                      
                      (9,936
                      )
                      
                      
                      (2,690
                      )Anticipated
      credit losses, net of insurance and guarantees:10%
      adverse change
                      
                      
                      (5,021
                      )
                      
                      
                      (959
                      )20%
      adverse change
                      
                      
                      (10,086
                      )
                      
                      
                      (1,972
                      )Expected
      basis spread between LIBOR and Commercial Paper rate:10%
      adverse change
                      
                      
                      (9,475
                      )
                      
                      
                      –20%
      adverse change
                      
                      
                      (18,939
                      )
                      
                      
                      –Borrower
      benefits – ACH:10%
      adverse change
                      
                      
                      (3,413
                      )
                      
                      
                      –20%
      adverse change
                      
                      
                      (6,817
                      )
                      
                      
                      –Borrower
      benefits – on time payments:10%
      adverse change
                      
                      
                      (10,673
                      )
                      
                      
                      –20%
      adverse change
                      
                      
                      (21,150
                      )
                      
                      
                      –Servicing
      margin:10%
      adverse change
                      
                      
                      –
                      
                      
                      
                      (22,664
                      )20%
      adverse change
                      
                      
                      –
                      
                      
                      
                      (45,130
                      )





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)
                      
                      March
      31, 2009
                      
                      
                      December
      31, 2008Principal
      amounts
                      
                      $
                      14,792,633
                      
                      
                      $
                      15,096,341Delinquencies
                      
                      
                      599,179
                      
                      
                      
                      658,538





17





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





Three
      Months EndedMarch
      31,(Dollars
      in thousands)
                  
                  2009
                  
                  
                  2008Credit
      losses, net of recoveries:
                  
                  $
                  2,778
                  
                  
                  $
                  1,808





10.
            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 Recurring 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:





March
      31, 2009
                  
                  
                  December
      31, 2008(Dollars
      in thousands)
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  Level
      2
                  
                  
                  Level
      3Assets:Residual
      interests in securitized loans
                  
                  $
                  –
                  
                  
                  $
                  841,081
                  
                  
                  $
                  –
                  
                  
                  $
                  942,807Other
      assets
                  
                  
                  56,700
                  
                  
                  
                  267,285
                  
                  
                  
                  91,559
                  
                  
                  
                  274,620Total
      Assets
                  
                  $
                  56,700
                  
                  
                  $
                  1,108,366
                  
                  
                  $
                  91,559
                  
                  
                  $
                  1,217,427Liabilities:Other
      liabilities
                  
                  $
                  404,802
                  
                  
                  $
                  –
                  
                  
                  $
                  488,563
                  
                  
                  $
                  –





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 in the Consolidated Financial
Statements. For more information on derivatives, see Note 8.


18





Retained
Interests in Securitized Loans





The
Company’s residual interests, servicing assets and retained notes in its off
balance-sheet securitizations are classified as Level 3 instruments and utilize
discounted cash flow models to measure the fair value. These models require
management to make certain assumptions which, while based on relevant internal
and external data, inherently involve significant judgment and
uncertainty.  The market for subordinated notes similar to those
retained by the Company is not currently active.  During the first
quarter, the Company changed the discount rate assumptions used in the retained
note discounted cash flow model from one based solely on non-binding broker
quotes to ones that also consider other market indicators and are consistent
with those used to determine the fair values of the Company’s residual interests
and servicing assets.  All of the Company’s retained interests in
off-balance sheet securitizations are recorded at fair value in the Consolidated
Financial Statements.  For more information on loan securitizations,
see Note 9.





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





March
      31,(Dollars
      in thousands)
                              
                              2009
                              
                              
                              2008Residual
      interests in securitized loans:Balance
      at beginning of period
                              
                              $
                              942,807
                              
                              
                              $
                              633,074Total
      gains and losses (realized/unrealized) included in
earningsInterest
      income
                              
                              
                              17,792
                              
                              
                              
                              15,672Fee
      and other income
                              
                              
                              (65,659
                              )
                              
                              
                              70,419Purchases,
      issuances and settlements
                              
                              
                              (53,859
                              )
                              
                              
                              (24,326
                              )Balance
      at end of period
                              
                              $
                              841,081
                              
                              
                              
                              694,839Unrealized
      (losses) gains relating to assets still held at the reporting date (1)
                              
                              $
                              (65,659
                              )
                              
                              $
                              70,419Servicing
      assets and retained notes included in Other assets:Balance
      at beginning of period
                              
                              $
                              274,620
                              
                              
                              $
                              199,112Total
      gains and losses (realized/unrealized) included in
earningsFee
      and other income
                              
                              
                              3,358
                              
                              
                              
                              9,685Purchases,
      issuances and settlements
                              
                              
                              (10,693
                              )
                              
                              
                              (11,732
                              )Balance
      at end of period
                              
                              $
                              267,285
                              
                              
                              $
                              197,065Unrealized
      gains relating to assets still held at the reporting date (1)
                              
                              $
                              1,212
                              
                              
                              $
                              6,918





(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.





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.





The fair
value of loans measured at the lower of cost or fair value is determined using
discounted cash flow models or contractual sales price when applicable. 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.





At March
31, 2009 and December 31, 2008, the fair value of loans held for sale exceeded
the cost basis of $2.2 billion and $1.1 billion, respectively.


19





11.
            SHORT-
      AND LONG-TERM BORROWINGS





At March
31, 2009 and December 31, 2008, short- and long-term borrowings were outstanding
under the terms of an Omnibus Credit Agreement with CBNA.  Under this
agreement, the maximum aggregate credit available is $30.0 billion through
December 31, 2009. If the agreement is not extended or replaced by that date,
the borrowings outstanding at that date would continue to mature based on their
originally contracted maturities, however the Company would no longer have a
guaranteed funding source for new borrowings, which could negatively impact the
Company’s ability to fund future disbursements.  The cost of funding
and maturities are negotiated on a borrowing-by-borrowing basis. The Omnibus
Credit Agreement contains no material financial covenants or restrictions, other
than the agreement 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.  At
March 31, 2009, the amount of credit available for additional short- and
long-term borrowings under the Omnibus Credit Agreement was approximately $7.2
billion.





As of
March 31, 2009 and December 31, 2008, the Company had $2.1 billion and $1.0
billion of short-term secured borrowings, respectively, with the Department as
the result of the sale of participation interests in certain FFEL Program loans
under the Participation Program.  At March 31, 2009, the total
authorized borrowings of $2.1 billion were collateralized by $2.2 billion of
FFEL Program Stafford and PLUS loans in the Company’s held for sale
portfolio.  Loans funded under the Participation Program for the
2008-2009 academic year must be either sold to the Department pursuant to the
Purchase Program or refinanced prior to its expiration on September 30,
2009.




At March
31, 2009 and December 31, 2008, the Company had $2.2 billion and $1.7 billion of
long-term secured borrowings from securitization transactions,
respectively.  The increase in secured borrowings was a result of the
Company’s February 2009 on-balance sheet securitization.  Of the
secured borrowings at March 31, 2009 and December 31, 2008, $0.2 billion is
denominated in Euros and an additional $0.1 billion of notes remains available
for issuance.  At March 31, 2009, the total authorized borrowings of
$2.3 billion were collateralized by $2.4 billion of FFEL Program
loans.  Principal payments on the secured borrowings are made as
principal amounts are collected on the collateralized loans.  See Note
9 for additional information regarding collateralized assets and associated
liabilities related to these secured borrowings.





As of
March 31, 2009, $3.0 billion of the Company’s outstanding borrowings under the
Omnibus Credit Agreement included derivatives embedded in the respective funding
transactions. These embedded derivatives have been determined to be clearly and
closely related to the underlying debt instruments and, in accordance with SFAS
133, do not require bifurcation.





12.
            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.





13.
            RESTRUCTURING
      AND RELATED CHARGES





During
2008, under its then existing severance policy, the Company announced two
restructuring initiatives in an effort to prudently manage the business through
the unprecedented market conditions and to strategically reposition its business
to benefit from certain products, channels, and operational structure while
strategically deploying capital resources.





As a
result of these initiatives, the Company recorded restructuring and related
charges of $12.4 million during 2008.  These charges consisted of
severance related costs of $11.8 million and non-cash charges associated with
the impairment of software assets totaling $0.6 million.  At March 31,
2009, the Company had a liability of $1.1 million related to this restructuring
remaining in Other
liabilities.  This represents a $3.9 million decrease from $5.0
million at December 31, 2008, which was primarily the result of severance
payments made during the first quarter of 2009.  At March 31, 2009, a
majority of the affected employees had been terminated, with the remaining
terminations expected to be completed by the second quarter of
2009.


20


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





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 Student Loan Corporation’s (the Company)
actual results to differ materially from those the Company expects, including,
but not limited to:





·
            the
      effects of legislative and regulatory changes that affect the demand for
      and interest rates on student loans, especially the establishment of
      certain fixed rates of interest on Federal Family Education Loan (FFEL)
      Program loans, as well as the President’s 2010 budget proposal which could
      eliminate the FFEL Program;·
            the
      availability and amount of loan subsidies and any effect on the Company’s
      interest rate spreads;·
            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, including without limitation
      the Financial Accounting Standards Board’s (FASB) proposed changes to
      Statement of Financial Accounting StandardsSFAS 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) and
      FASB Interpretation No.
      46, Consolidation of Variable Interest Entities, revised December 2003
      (FIN 46(R));·
            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;·
            the
      success of the Company’s strategic repositioning
  efforts;·
            the
      Company’s ability to obtain funding on acceptable terms, including
      borrowings from Citibank, N.A.(CBNA), government funding programs,
      securitizations and whole loan sales;·
            the
      Company’s ability to acquire or originate loans in the amounts anticipated
      and with interest rates that generate sufficient yields and
      margins;·
            the
      adequacy of the Company’s capital expenditures and of funds allocated for
      future capital expenditures; and·
            the
      cost of education;·
            general
      economic conditions, including without limitation the performance of
      financial markets;·
            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;·
            actual
      credit losses, loan collection strategies and their impact on delinquency
      rates, and the adequacy of loan loss reserves;·
            the
      performance of the Company’s loan portfolio servicers, insurers and
      risk-sharers;·
            the
      Company’s and other servicers’ ability to continue to service the loan
      portfolio in accordance with their contractual
  obligations;·
            loan
      origination costs;·
            the
      volume of loan consolidations;·
            the
      success of the Company’s marketing efforts, especially its electronic
      marketing efforts.




21


The
following discussion should be read in conjunction with the accompanying
unaudited Consolidated Financial Statements and Notes and the Company’s 2008
Annual Report on Form 10-K.





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 as well as the impacts of market
conditions on the business and business trends.





Business Highlights– a review
of key events affecting the Company’s historical and future operating
results.





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 months ended March
31, 2009 and 2008 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 of student loans offering a
full array of student loan products to students and their parents. The Company
was incorporated in 1992 under the laws of the State of Delaware. CBNA owns 80%
of the Company’s outstanding common stock and is an indirect wholly owned
subsidiary of Citigroup Inc. (Citigroup).  The majority of the
Company’s loans are originated and guaranteed under the 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, which has a
trust agreement to originate loans through 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.  The Company is committed to providing exceptional service to
borrowers and schools, offering competitive and innovative products with
solutions that allow students and their families to finance the education of
their choice.  The Company also differentiates itself from its
competitors by offering life of loan servicing on most loans.





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
as published by the Department (CP), the prime rate, or the 91-day Treasury Bill
rate) and the interest paid on its borrowings (based on London Interbank Offered
Rate (LIBOR) or CP).  Net interest income is the interest earned less
the interest expense incurred during the period. Net interest income is impacted
by, among other things: spread changes between CP, 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
an effort to manage its interest rate risk exposure.





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
loans are removed from the Consolidated Financial Statements of the Company and
sold to an independent trust, giving rise to a gain or loss on sale. The Company
also enters into similar securitization transactions that do not qualify for
sale treatment and accordingly, are accounted for as secured
borrowings.  These secured borrowings do not give rise to a gain or
loss on sale.


22


Historically,
loan securitizations and whole loan sales have contributed significantly to the
Company’s earnings.  From year to year, the Company’s earnings have
been and continue to be 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.  Due to disruptions in the asset-backed securitization
markets, the Company has decreased both its number of off-balance sheet
securitizations and the volume of loans securitized. In April 2008, the FASB
proposed changes to Statement SFAS No. 140 that would make it more difficult for
securitizations to qualify for off-balance sheet treatment. This could result in
the consolidation of assets previously sold to unconsolidated securitization
entities and eliminate future securitization gains. This proposed revision could
be effective as early as January 2010.





The
Company has historically funded its loan originations primarily through
borrowings under the Omnibus Credit Agreement with CBNA and through loan
securitizations.  Under the Omnibus Credit Agreement, the cost of
funding is negotiated on a borrowing-by-borrowing basis.  Since
December 2008, the Company has been utilizing funding available under the
Department’s Loan Participation Purchase Program (the Participation Program)
established under the The Ensuring Continued Access to Student Loans Act of 2008
(ECASLA). In 2009, the Company anticipates selling eligible loans to the
Department under the Loan Purchase Commitment Program (the Purchase Program) and
to access additional funding through the Asset Backed Commercial Paper Conduit
program (the ABCP Conduit) supported by the Department.  See Business Highlights below and
Liquidity and Capital
Resources on page 33 for further details.





The
Company’s earnings are impacted by valuation changes on its subordinated
residual interests (i.e., interest-only strips), servicing rights and, in
certain cases, subordinated notes issued by the trusts (collectively, retained
interests) from off-balance sheet securitizations.  The fair value of
the Company’s retained interests fluctuate based on factors such as interest
rate changes, prepayment and default rates and regulatory
changes.  Other factors that may impact earnings include loan
servicing revenue and loan servicing costs, changes in applicable laws and
regulations, alternative financing options available to students and their
parents, and competition.





Business
Highlights





During
the first quarter of 2009, continued deterioration in the financial markets had
negative consequences to the Company’s operations.  These external
forces contributed to net interest margin compression driven by:





·
            continued
      divergence between the 90-day CP rate, which determines special allowance
      payments, and LIBOR, which is the basis of the Company’s
      funding;·
            refinancing
      of maturing debt at higher premiums over LIBOR; and·
            the
      impact of regulatory changes, particularly the reductions of special
      allowance payments contained in the College Cost Reduction and Access Act
      (CCRA Act).


Net
interest income of $58.1 million for the first quarter of 2009 was $23.4 million
(29%) lower than the same quarter of 2008. This decrease was mainly the result
of a decrease in net interest margin, offset in part by higher average loan
balances. Net interest margin for the quarter was 0.84%, 52 basis points lower
than the same quarter of 2008. The primary driver for this decrease in margin is
the higher cost of funds resulting from the refinancing of maturing term debt
with less favorable terms, resulting in higher credit premiums over LIBOR,
which decreased the Company’s net interest income by $43.5
million.  In addition, there has been a significant divergence between
the CP rate, which determines special allowance payments, and LIBOR, which
is the basis of the Company’s funding. This divergence between CP and LIBOR
further decreased net interest income by $21.0 million.


23


During
the twelve-month period ended March 31, 2009, the Company’s managed student loan
portfolio grew by $4.9 billion (13%) to $44.0 billion, reflecting the Company’s
continued strong origination performance and higher Stafford loan
limits.  The managed portfolio includes $27.3 billion of Company-owned
loan assets and $16.7 billion of loans serviced on behalf of securitization
trusts or other lenders. Originations for the quarter included FFEL Program
Stafford and PLUS originations of $2.2 billion, a 16% increase from the same
quarter of 2008.  The Company also made new CitiAssist® loan commitments of
$0.6 billion, which was 1% lower than the same quarter of 2008.




During
the first quarter of 2009, the Company obtained approximately $1.1 billion of
funding through the Participation Program.  The Company was also able
to secure additional funding of approximately $0.5 billion through the issuance
of asset-backed securities during the first quarter of 2009.





On April
15, 2009, the Company’s Board of Directors declared a second quarter dividend on
the Company’s common stock of $0.35 per share, down from the previous quarter’s
dividend of $1.43.  This decrease is a result of the impact of
external economic conditions on the Company’s results of
operations.





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, the value of related retained interests and allowance for loan
losses, which are more fully described in the Company’s 2008 Annual Report on
Form 10-K. See the Notes to the Consolidated Financial Statements for more
information on the Company’s accounting estimates.





Financial
Condition





Loans





At March
31, 2009, the Company’s student loan assets were comprised of FFEL Program
loans, private education loans, a portfolio of loans held for sale and related
deferred costs.





See Note
4 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)
                      
                      March
      31, 2009
                      
                      
                      December
      31, 2008Owned
      loans
                      
                      $
                      27,366
                      
                      
                      $
                      25,643Managed
      loans
                      
                      
                      44,043
                      
                      
                      
                      42,107







Year
      to Date Average Balances(Dollars
      in millions)
                    March
      31, 2009
                    December
      31, 2008Owned
      loans
                    $27,023
                    $24,316Managed
      loans
                    43,759
                    39,938




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.


24


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





Three
      Months EndedMarch
      31,(Dollars
      in millions)
                    
                    2009
                    
                    
                    2008Retail:FFEL
      Program Stafford and PLUS loan disbursements
                    
                    $
                    2,192
                    
                    
                    $
                    1,894CitiAssist
      loans disbursed under commitments to purchase (1)
                    
                    
                    643
                    
                    
                    
                    649Total
      Retail
                    
                    
                    2,835
                    
                    
                    
                    2,543Loan
      consolidation and other secondary market volume
                    
                    
                    30
                    
                    
                    
                    541Total
      Originations
                    
                    $
                    2,865
                    
                    
                    $
                    3,084





(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.





In
response to the dislocation in the capital markets and federal legislation, the
Company significantly reduced, and in some cases discontinued, its less
profitable retail, wholesale and consolidation loan origination
activities.  Despite these actions, the Company’s FFEL Program
originations have continued to increase, primarily a result of an increase in
the annual and aggregate Stafford borrowing limits, the withdrawal of many
lenders from the FFEL Program and overall growth in the marketplace. CitiAssist
loan disbursements were flat relative to the same period in 2008, reflecting
both the increase in Stafford borrowing limits and the Company’s refined
underwriting standards.





In order
to comply with certain legal and regulatory requirements, private education
loans are originated by CBNA through an intercompany agreement.  After
final disbursement, the Company purchases all private education loans from
CBNA.  At March 31, 2009 and December 31, 2008, the private education
loans disbursed and still held by CBNA were $1.5 billion and $1.0 billion,
respectively.





Generally,
loans are not specifically purchased or originated for resale, and accordingly
are recorded in the Company’s portfolio. However, certain loans originated
subsequent to December 5, 2008 have been originated directly into held for sale
as the Company anticipates that these loans will be sold to the Department under
the Purchase Program.  Of the $2.2 billion of FFEL Program loans
originated during the first quarter of 2009, the Company classified $1.2 billion
as held for sale.  Management continually assesses its future
securitization and loan sale plans and may transfer loans or record loans
directly into the held for sale portfolio to meet the Company’s near term sale
and securitization requirements.





Allowance
for loan losses





The
Company categorizes allowance for loan losses as FFEL Program, Insured
CitiAssist, Uninsured CitiAssist Standard and Uninsured CitiAssist
Custom.  Uninsured CitiAssist Standard is primarily comprised of
CitiAssist loans that have been approved based on standard underwriting criteria
and were originated on or after January 1, 2008.  Uninsured CitiAssist
Custom is primarily comprised of loans made to non-traditional students or loans
with less stringent underwriting standards.





The
Company’s allowance for loan losses at March 31, 2009 losses was significantly
higher compared to the balance at March 31, 2008.  This was primarily
the result of increases in the allowance allocated to the Uninsured CitiAssist
Custom portfolio during 2008.  However, the provision for loan losses
decreased by $4.2 million for the three months ended March 31, 2009 compared to
the same period in 2008 as asset quality and loan charge-offs have stabilized
since December 31, 2008.  The Company’s allowance for loan losses has
increased by $1.1 million since December 31, 2008.  The increase was
due to an additional $3.1 million for credit deterioration, partially offset by
charge-offs of $2.2 million for loans from a bankrupt proprietary school for
which a separate reserve had been established in the prior year.  The
Company expects charge-offs will continue to increase as a result of the
expected seasoning of the higher risk Uninsured CitiAssist Custom portfolio as
loans transition into repayment as well as credit deterioration.  The
Company has discontinued almost all new Uninsured CitiAssist Custom
originations.  While the national unemployment rate for the civilian
institutional population age 25 or over with a four-year degree or higher
continues to run at approximately one-half the national overall average, the
rate continues to trend upward.


25


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





Three
      Months Ended March 31,(Dollars
      in thousands)
                    
                    2009
                    
                    
                    2008Balance
      at beginning of periodFFEL
      Program
                    
                    $
                    14,445
                    
                    
                    $
                    12,312Insured
      CitiAssist
                    
                    
                    8,512
                    
                    
                    
                    3,214Uninsured
      CitiAssist Standard
                    
                    
                    11,891
                    
                    
                    
                    –Uninsured
      CitiAssist Custom
                    
                    
                    75,481
                    
                    
                    
                    26,589$
                    110,329
                    
                    
                    $
                    42,115Provision
      for loan lossesFFEL
      Program
                    
                    $
                    3,371
                    
                    
                    $
                    4,205Insured
      CitiAssist
                    
                    
                    3,858
                    
                    
                    
                    3,484Uninsured
      CitiAssist Standard
                    
                    
                    3,082
                    
                    
                    
                    1,161Uninsured
      CitiAssist Custom
                    
                    
                    10,831
                    
                    
                    
                    16,462$
                    21,142
                    
                    
                    $
                    25,312Charge
      offsFFEL
      Program
                    
                    $
                    (2,973
                    )
                    
                    $
                    (3,276
                    )Insured
      CitiAssist
                    
                    
                    (2,420
                    )
                    
                    
                    (1,367
                    )Uninsured
      CitiAssist Standard
                    
                    
                    (636
                    )
                    
                    
                    –Uninsured
      CitiAssist Custom
                    
                    
                    (16,896
                    )
                    
                    
                    (10,107
                    )$
                    (22,925
                    )
                    
                    $
                    (14,750
                    )RecoveriesFFEL
      Program
                    
                    $
                    –
                    
                    
                    $
                    –Insured
      CitiAssist
                    
                    
                    –
                    
                    
                    
                    –Uninsured
      CitiAssist Standard
                    
                    
                    –
                    
                    
                    
                    –Uninsured
      CitiAssist Custom
                    
                    
                    2,831
                    
                    
                    
                    2,075$
                    2,831
                    
                    
                    $
                    2,075Balance
      at end of periodFFEL
      Program
                    
                    $
                    14,843
                    
                    
                    $
                    13,241Insured
      CitiAssist
                    
                    
                    9,950
                    
                    
                    
                    5,331Uninsured
      CitiAssist Standard
                    
                    
                    14,337
                    
                    
                    
                    1,161Uninsured
      CitiAssist Custom Programs
                    
                    
                    72,247
                    
                    
                    
                    35,019$
                    111,377
                    
                    
                    $
                    54,752






The
Company’s best estimate for the allowance for loan losses includes all losses at
each reporting period that are both probable and estimable.  However,
no assurance can be provided that the allowance for loan losses will be adequate
to cover all losses that may in fact be realized in the future, or that a higher
level of provision for loan losses will not be required.  The
Company’s total allowance for loan losses is available to absorb probable credit
losses inherent to all of the Company’s owned loans.


26


Private
Education Loans





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 purchased private insurance on 74% of the outstanding
balances of these loans through United Guaranty Commercial Insurance Company of
North Carolina and New Hampshire Insurance Company (UGCIC/NHIC), and on 2% of
the outstanding balances of these loans through Arrowood Indemnity Company
(Arrowood).  UGCIC/NHIC are subsidiaries of American International
Group (AIG).  Arrowood is a wholly owned subsidiary of Arrowpoint
Capital Corporation (Arrowpoint).





These
insurance providers insure the Company against a portion of losses arising from
borrower loan default, bankruptcy or death.  Under the Arrowood
program, private education loans submitted for default claim are generally
subject to a risk-sharing deductible of 5% of the outstanding principal and
accrued interest balances. Under the UGCIC/NHIC program, default claims are
generally subject to risk-sharing deductibles between 10% and 20% of
the outstanding principal and accrued interest balances.





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 exceed these
thresholds.  While these losses are not currently forecast to exceed
these thresholds, if deterioration in market conditions continues, losses could
be higher than expected.  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 $58.2 million in order to maintain
insurance coverage for these loans if the loss limits exceed the established
parameters.  No payments are currently expected to be made in
2009.  The Company ceased insuring new CitiAssist Standard loans in
January 2008.





At March
31, 2009, NHIC was rated A+/ Negative by Standard & Poor’s and Aa3/Negative
by Moody’s. On March 2, 2009, NHIC’s Standard & Poor’s rating outlook was
revised from Watch Negative to Negative.  Moody’s has not changed its
rating for NHIC since May 22, 2008. UGCIC is not rated by Standard &
Poor’s.  On February 24, 2009, Moody’s withdrew its rating of both
UGCIC and its parent citing business reasons which Moody’s defines as reasons
unrelated to bankruptcy, reorganization status or adequacy of information.
Previously, UGCIC was rated a Baa2. These negative factors are somewhat
mitigated by AIG’s explicit support agreements with UGCIC.  AIG has no
legal obligations to the Company.  Since September 2008, the US
Treasury and the Federal Reserve have continued to provide extraordinary
external support to AIG in light of its status as a systemically important
financial institution.  Both NHIC and UGCIC continue to make claim
payments as agreed.  Any failure of AIG, or sale of UGCIC/NHIC, could
have an adverse impact on the Company’s financial condition and results of
operations as it relates to the Company’s UGCIC/NHIC insured loan
portfolio.


27





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





March
      31, 2009
                                                        
                                                        
                                                        December
      31, 2008(Dollars
      in thousands)
                                                        
                                                        Insured
                                                        
                                                        
                                                        Uninsured
      Standard
                                                        
                                                        
                                                        Uninsured
      Custom
                                                        
                                                        
                                                        Total
                                                        
                                                        
                                                        Insured
                                                        
                                                        
                                                        Uninsured
      Standard
                                                        
                                                        
                                                        Uninsured
      Custom
                                                        
                                                        
                                                        TotalTotal
      private education loans
                                                        
                                                        $
                                                        4,542,484
                                                        
                                                        
                                                        $
                                                        484,534
                                                        
                                                        
                                                        $
                                                        899,553
                                                        
                                                        
                                                        $
                                                        5,926,571
                                                        
                                                        
                                                        $
                                                        4,541,439
                                                        
                                                        
                                                        $
                                                        409,686
                                                        
                                                        
                                                        $
                                                        910,420
                                                        
                                                        
                                                        $
                                                        5,861,545Private
      education loans in repayment
                                                        
                                                        
                                                        2,250,303
                                                        
                                                        
                                                        
                                                        212,250
                                                        
                                                        
                                                        
                                                        588,494
                                                        
                                                        
                                                        
                                                        3,051,047
                                                        
                                                        
                                                        
                                                        2,183,558
                                                        
                                                        
                                                        
                                                        181,384
                                                        
                                                        
                                                        
                                                        587,634
                                                        
                                                        
                                                        
                                                        2,952,576Private
      education loans in forbearance
                                                        
                                                        
                                                        311,153
                                                        
                                                        
                                                        
                                                        35,804
                                                        
                                                        
                                                        
                                                        57,444
                                                        
                                                        
                                                        
                                                        404,401
                                                        
                                                        
                                                        
                                                        213,479
                                                        
                                                        
                                                        
                                                        26,402
                                                        
                                                        
                                                        
                                                        40,265
                                                        
                                                        
                                                        
                                                        280,146Percent
      of private education loans that are delinquent 30 - 89
days
                                                        
                                                        
                                                        2.6
                                                        %
                                                        
                                                        
                                                        1.2
                                                        %
                                                        
                                                        
                                                        5.1
                                                        %
                                                        
                                                        
                                                        3.0
                                                        %
                                                        
                                                        
                                                        2.3
                                                        %
                                                        
                                                        
                                                        1.0
                                                        %
                                                        
                                                        
                                                        4.2
                                                        %
                                                        
                                                        
                                                        2.6
                                                        %Percent
      of private education loans that are delinquent 90 days or
    more
                                                        
                                                        
                                                        2.2
                                                        %
                                                        
                                                        
                                                        0.5
                                                        %
                                                        
                                                        
                                                        1.9
                                                        %
                                                        
                                                        
                                                        2.0
                                                        %
                                                        
                                                        
                                                        1.6
                                                        %
                                                        
                                                        
                                                        0.1
                                                        %
                                                        
                                                        
                                                        1.2
                                                        %
                                                        
                                                        
                                                        1.4
                                                        %Allowance
      for loan losses
                                                        
                                                        $
                                                        9,950
                                                        
                                                        
                                                        $
                                                        14,337
                                                        
                                                        
                                                        $
                                                        72,247
                                                        
                                                        
                                                        $
                                                        96,534
                                                        
                                                        
                                                        $
                                                        8,512
                                                        
                                                        
                                                        $
                                                        11,891
                                                        
                                                        
                                                        $
                                                        75,481
                                                        
                                                        
                                                        $
                                                        95,884Private
      education loans covered by risk-sharing agreements with
      schools
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        465,644
                                                        
                                                        
                                                        
                                                        465,644
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        474,481
                                                        
                                                        
                                                        
                                                        474,481Year
      to date average of private education loans in repayment
                                                        
                                                        
                                                        2,219,856
                                                        
                                                        
                                                        
                                                        198,379
                                                        
                                                        
                                                        
                                                        587,671
                                                        
                                                        
                                                        
                                                        3,005,906
                                                        
                                                        
                                                        
                                                        1,639,070
                                                        
                                                        
                                                        
                                                        103,025
                                                        
                                                        
                                                        
                                                        494,416
                                                        
                                                        
                                                        
                                                        2,236,511Year
      to date average of private education loans in repayment and
      forbearance
                                                        
                                                        
                                                        2,482,019
                                                        
                                                        
                                                        
                                                        227,490
                                                        
                                                        
                                                        
                                                        637,393
                                                        
                                                        
                                                        
                                                        3,346,902
                                                        
                                                        
                                                        
                                                        1,840,280
                                                        
                                                        
                                                        
                                                        116,403
                                                        
                                                        
                                                        
                                                        528,241
                                                        
                                                        
                                                        
                                                        2,484,924Year
      to date net credit losses as a percentage of average loans in
      repayment
                                                        
                                                        
                                                        0.1
                                                        %
                                                        
                                                        
                                                        0.3
                                                        %
                                                        
                                                        
                                                        2.4
                                                        %
                                                        
                                                        
                                                        0.6
                                                        %
                                                        
                                                        
                                                        0.5
                                                        %
                                                        
                                                        
                                                        0.2
                                                        %
                                                        
                                                        
                                                        9.8
                                                        %
                                                        
                                                        
                                                        2.6
                                                        %Year
      to date net credit losses as a percentage of average loans in repayment
      and forbearance
                                                        
                                                        
                                                        0.1
                                                        %
                                                        
                                                        
                                                        0.3
                                                        %
                                                        
                                                        
                                                        2.2
                                                        %
                                                        
                                                        
                                                        0.5
                                                        %
                                                        
                                                        
                                                        0.48
                                                        %
                                                        
                                                        
                                                        0.2
                                                        %
                                                        
                                                        
                                                        9.2
                                                        %
                                                        
                                                        
                                                        2.3
                                                        %Allowance
      as a percentage of total loan balance
                                                        
                                                        
                                                        0.2
                                                        %
                                                        
                                                        
                                                        3.0
                                                        %
                                                        
                                                        
                                                        8.0
                                                        %
                                                        
                                                        
                                                        1.6
                                                        %
                                                        
                                                        
                                                        0.2
                                                        %
                                                        
                                                        
                                                        2.9
                                                        %
                                                        
                                                        
                                                        8.3
                                                        %
                                                        
                                                        
                                                        1.6
                                                        %Allowance
      as a percentage of total loans in repayment
                                                        
                                                        
                                                        0.4
                                                        %
                                                        
                                                        
                                                        6.8
                                                        %
                                                        
                                                        
                                                        12.3
                                                        %
                                                        
                                                        
                                                        3.2
                                                        %
                                                        
                                                        
                                                        0.4
                                                        %
                                                        
                                                        
                                                        6.6
                                                        %
                                                        
                                                        
                                                        12.8
                                                        %
                                                        
                                                        
                                                        3.3
                                                        %Coverage
      of net credit losses in years
                                                        
                                                        
                                                        1.0
                                                        
                                                        
                                                        
                                                        5.6
                                                        (1)
                                                        
                                                        
                                                        1.3
                                                        
                                                        
                                                        
                                                        1.4
                                                        
                                                        
                                                        
                                                        1.0
                                                        
                                                        
                                                        
                                                        48.1
                                                        (1)
                                                        
                                                        
                                                        1.6
                                                        
                                                        
                                                        
                                                        1.7





(1)
            The
      allowance for loan losses on this portfolio takes into account loans that
      have not entered into
repayment.


28





Forbearance
usage increased during the quarter consistent with expected seasonal
trends.  Such seasonality resulted from traditional student borrowers
graduating and entering repayment in the fourth quarter of each year.  Some
of these new repayment borrowers experience difficulties making their initial
payments and request forbearance.Forbearance
is a key collection tool for borrowers willing to make payments but experiencing
temporary financial difficulties.  Currently, borrowers are generally
limited to 12 months of cumulative forbearance time over the life of the loan.
 Borrower performance after using forbearance is monitored and the tool has
proven to be effective in preventing defaults.  The Office of the
Comptroller of the Currency (OCC) is currently reviewing private student loan
forbearance policies at banks and other financial institutions, including the
Student Loan Corporation.  The OCC may require policy changes,
including but not limited to reducing the maximum cumulative forbearance
permissible.





The
Uninsured Custom loans at March 31, 2009 include $188.0 million of higher risk
loans made to students attending proprietary schools.  Most of these
Uninsured Custom loans did not follow the Company’s standard underwriting
process.  Approximately 50% of the Uninsured Custom loans are covered
by risk-sharing agreements with higher education institutions. Under these
programs, the institution assumes 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 100%,
or ii) the school pays 8% 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.





Results
of Operations





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:





Three
      Months endedMarch
      31,2009
                  
                  
                  2008Student
      loan yield
                  
                  
                  3.27
                  %
                  
                  
                  5.98
                  %Consolidation
      loan rebate fees
                  
                  
                  (0.24
                  )%
                  
                  
                  (0.29
                  )%Accreted
      interest on residual interests
                  
                  
                  0.25
                  %
                  
                  
                  0.26
                  %Amortization
      of deferred loan origination and purchase costs
                  
                  
                  (0.32
                  )%
                  
                  
                  (0.43
                  )%Net
      yield
                  
                  
                  2.96
                  %
                  
                  
                  5.52
                  %Cost
      of funds (1)
                  
                  
                  (2.12
                  )%
                  
                  
                  (4.16
                  )%Net
      interest margin
                  
                  
                  0.84
                  %
                  
                  
                  1.36
                  %





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





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 SAP.  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 grow
gradually over time as the amount of loans originated after October 1, 2007
increases relative to the Company’s overall portfolio.





The
Company’s cost of funds is primarily based on three month 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.


29





In
contrast, the Company’s student loan yield is either based on CP 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
Company’s net interest margin decreased by 52 basis points during the three
month period ended March 31, 2009 compared to the same period last year. The
decrease in margin was attributable to decreases in the student loan yield that
exceeded decreases in the Company’s cost of funds. The yield on the Company’s
student loan assets decreased primarily due to an overall decline in interest
rates, but was also affected by a significant divergence between the 90-day CP
rate, which determines special allowance payments, and three month LIBOR, which
is the basis of the Company’s funding. In response to this, the Department
modified the manner in which it determined SAP for the fourth quarter of 2008,
but did not make a similar modification for the first quarter of 2009. This
divergence between CP and LIBOR further decreased net interest income by $21.0
million.




The cost
of funds was also impacted by the overall decline in interest rates, although
this impact was partially offset by increases in credit premiums incurred as the
Company refinanced maturing term debt under less favorable conditions. This
adverse trend towards higher credit spreads, which decreased the Company’s net
interest income by $43.5 million, is expected to continue as more of the
Company’s debt is refinanced under the existing unfavorable market
conditions.  Because product pricing is fixed at origination, spread
increases on refinanced debt have caused and are expected to continue to cause
net interest margin compression on the Company’s pre-existing loan portfolio. In
an effort to mitigate this compression, the Company continuously refines its
product pricing to reflect current market conditions and has reduced certain
borrower incentive programs for new originations.  In addition, the
Company began borrowing under the Participation Program in December 2008 and is
preparing to participate in the Purchase Program and the ABCP Conduit to fund
FFEL Program loans in 2009. See Legislation and Regulations on
page 34 and Liquidity and
Capital Resources on page 33, for further details.





At March
31, 2009 and 2008, the outstanding borrowings had contractual weighted average
interest rates of 1.8% and 3.9%, respectively.





Rate/Volume
Analysis





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





For
      the three months ended March 31, 2009 vs.
                                          the
      three months endedMarch
      31, 2008Increase
      (decrease) due to change in:(Dollars
      in millions)
                                        
                                        Volume
                                        
                                        
                                        Rate
                                        
                                        
                                        NetInterest
      earning assets
                                        
                                        $
                                        53.7
                                        
                                        
                                        $
                                        (179.3
                                        )
                                        
                                        $
                                        (125.6
                                        )Interest
      bearing liabilities
                                        
                                        
                                        49.3
                                        
                                        
                                        
                                        (151.5
                                        )
                                        
                                        
                                        (102.2
                                        )Net
      interest income
                                        
                                        $
                                        4.4
                                        
                                        
                                        $
                                        (27.8
                                        )
                                        
                                        $
                                        (23.4
                                        )





30





Three
Months Ended March 31, 2009





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





Three
      Months EndedMarch
      31,(Dollars
      in thousands)
                    
                    2009
                    
                    
                    2008
                    
                    
                    Favorable
      (Unfavorable) Change
                    
                    
                    Favorable
      (Unfavorable) % ChangeNet
      interest income
                    
                    $
                    58,078
                    
                    
                    $
                    81,447
                    
                    
                    $
                    (23,369
                    )
                    
                    
                    (29
                    )%Provision
      for loan losses
                    
                    
                    (21,142
                    )
                    
                    
                    (25,312
                    )
                    
                    
                    4,170
                    
                    
                    
                    16
                    %Gains
      on loans sold and securitized
                    
                    
                    –
                    
                    
                    
                    1,455
                    
                    
                    
                    (1,455
                    )
                    
                    
                    (100
                    )%Fee
      and other income
                    
                    
                    6,958
                    
                    
                    
                    11,459
                    
                    
                    
                    (4,501
                    )
                    
                    
                    (39
                    )%Operating
      expenses
                    
                    
                    (34,859
                    )
                    
                    
                    (44,135
                    )
                    
                    
                    9,276
                    
                    
                    
                    21
                    %Provision
      for income taxes
                    
                    
                    (1,507
                    )
                    
                    
                    (9,680
                    )
                    
                    
                    8,173
                    
                    
                    
                    84
                    %Net
      income
                    
                    $
                    7,528
                    
                    
                    $
                    15,234
                    
                    
                    $
                    (7,706
                    )
                    
                    
                    (51
                    )%Total
      operating expenses as a percentage of average managed student
      loans
                    
                    
                    0.32
                    %
                    
                    
                    0.46
                    %
                    
                    
                    0.14
                    %Return
      on average equity
                    
                    
                    2.0
                    %
                    
                    
                    3.8
                    %
                    
                    
                    (1.8
                    )%Effective
      tax rate
                    
                    
                    16.7
                    %
                    
                    
                    38.9
                    %
                    
                    
                    22.2
                    %





Net
interest income





Net
interest income of $58.1 million for the three months ended March 31, 2009
decreased by $23.4 million compared to the same period in 2008. This decrease
was mainly the result of reduced net interest margin, partially offset by higher
average loan balances. The net interest margin for the three months ended March
31, 2009 was 0.84%, a 52 basis point decrease in margin as compared to the same
period in 2008.  This decrease was primarily the result of higher
average credit premiums over LIBOR, which are less favorable on the Company’s
new borrowings. See Factors Affecting
Net Interest Income on page 29 for further information.





Gains
on loans sold





Due to
minimal loan sales during the first quarter of 2009, the Company did not have
any gains on loans sold for the three months ended March 31,
2009.  Loan sales have continued to decrease significantly in
comparison to the same period in 2008 due to the overall degradation of credit
market conditions, which has virtually eliminated the market for whole loan
sales.





Fee
and other income





Fee and
other income was $7.0 million for the three months ended March 31, 2009 as
compared to $11.5 million for the same quarter of 2008.The decrease in fee and other
income was due to a decrease in net gains on the Company’s securitization
retained interests and related derivatives of $6.8 million, primarily due to
reduced interest margins and an increase in discount rates, partially offset by
lower prepayments experienced on the Company’s off-balance sheet securitized
loans. See Critical
Accounting Estimateson page 24 and Note 9 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 8 to the
Consolidated Financial Statements.





Operating
expenses





Total
operating expenses of $34.9 million for the first quarter ended March 31, 2009
were $9.3 million lower than same quarter of 2008.  The Company’s
operating expense ratio for the first quarter was 0.32%, 14 basis points lower
than the same quarter of 2008, reflecting the effects of the Company’s
strategic realignment activities and cost reduction
initiatives.


31





Provision
for loan losses





The
provision for loan losses decreased by $4.2 million for the three months ended
March 31, 2009 as compared to the same period in 2008.  The decrease
was primarily the result of specific allowance builds for the Uninsured
CitiAssist Custom portfolio during 2008 which declined during 2009, partially
offset by increases in net credit losses.  For a full discussion of
trends in the Company’s loan losses, see Allowance for
Loan Losseson page 25.





Provision
for income taxes





The
Company’s effective tax rate during the first quarter of 2009 was 16.7%,
compared to 38.9% in the same quarter of 2008. This decrease in the
effective tax rate primarily reflects a $0.9 million reduction of current tax
liabilities related to prior periods. In addition, the Company updated its
blended statutory rate for 2009, which resulted in a current period tax benefit
of $0.7 million for the revaluation of deferred income taxes.





Securitization
Activity and Off-Balance Sheet Transactions





The
Company securitizes student loans through the establishment of trusts, which
purchase loans from the Company and sell notes backed by those
loans.  The Company has historically relied on securitizations to
assist in funding new loan origination activities. Securitizations that qualify
for sales treatment are referred to as off-balance sheet transactions and those
that do not qualify for sales treatment are included in the Company’s
Consolidated Balance Sheets.  The Company generally retains a residual
interest in, as well as the servicing rights on, its off-balance sheet
transactions.





The
Company completed one securitization financing during the first quarter of each
2009 and 2008.  The following table summarizes the Company’s
securitization activity during these periods:





Three
      Months EndedMarch
      31,(Dollars
      in thousands)
                  
                  2009
                  
                  
                  2008Securitization
      financings:Student
      loans securitized (1)
                  
                  $
                  587,285
                  
                  
                  $
                  1,993,213Net
      proceeds from student loans securitized during the period
                  
                  
                  546,126
                  
                  
                  
                  1,526,211





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







The
difference between student loans securitized and net proceeds received during
the first quarter of 2009 primarily reflects $2.0 million of issuance costs and
$39.1 million of required overcollateralization.  The difference
between student loans securitized and net proceeds received during the first
quarter of 2008 primarily reflects $337.0 million of then unissued notes, $4.5
million of issuance costs and $125.5 million of required
overcollateralization.





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





(Dollars
      in thousands)
                          
                          March
      31, 2009
                          
                          
                          December
      31, 2008Total
      off-balance sheet student loans securitized (1)
                          
                          $
                          14,792,633
                          
                          
                          $
                          15,096,341Total
      on-balance sheet student loans securitized (2)
                          
                          
                          2,431,948
                          
                          
                          
                          1,890,139Total
      secured borrowings related to on-balance sheet
    securitization
                          
                          
                          2,227,293
                          
                          
                          
                          1,727,744Residual
      interests from off-balance sheet student loans securitized
                          
                          
                          841,081
                          
                          
                          
                          942,807Servicing
      assets from off-balance sheet student loans securitized
                          
                          
                          200,798
                          
                          
                          
                          208,133





(1)
            Amounts
      include securitized loan balances from ten off-balance sheet
      securitizations as of March 31, 2009 and December 31, 2008,
      respectively.





(2)
            Amounts
      include securitized loan balances from two on-balance sheet securitization
      as of March 31, 2009 and one as of December 31, 2008,
      respectively.





For
further information on the Company’s student loan securitizations, see Notes 1
and 9 to the Consolidated Financial Statements.


32


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





Liquidity
and Capital Resources





Sources
and Uses of Cash





Cash
received from borrower repayments, claim payments, subsidized interest and SAP
received from the federal government, securitizations and funding under the
Omnibus Credit Agreement and the Participation Program are the Company’s primary
sources of cash.  The Company’s primary uses of cash are new loan
originations, 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 the 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, but has
recently begun participating in the Department’s Participation Program. The
Company is also preparing to begin selling eligible loans to the Department
under the Purchase Program and to access funding through the ABCP Conduit
supported by the Department.  The Company may shift its use of its
available sources or augment funding with additional funding sources in response
to changing market conditions.





The
Omnibus Credit Agreement expires on December 31, 2009.  The Company is
currently negotiating a new agreement with CBNA to replace the existing
agreement. If the agreement is not extended or replaced by that date, the
borrowings outstanding at that date would continue to mature based on their
originally contracted maturities.  However, the Company would no
longer have a guaranteed funding source for new borrowings, which could
negatively impact the ability to fund future
disbursements.  Borrowings under the Ominbus Credit Agreement account
for 84% of the Company’s aggregate borrowings.  Under the current
Omnibus Credit Agreement, the cost of funding is negotiated on a
borrowing-by-borrowing basis.  Hence the cost of borrowing is affected
by market conditions and, as such, future borrowing rates may vary and the
Company’s total funding cost can increase as maturing debt is refinanced with
new borrowings. The agreement provides a maximum aggregate credit limit for
combined short- and long-term borrowings of $30.0 billion. Although the Omnibus
Credit Agreement contains no material financial covenants or restrictions, these
may be incorporated into the terms of future borrowings. The Omnibus Credit
Agreement 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 March
31, 2009, the amount of credit available under the Omnibus Credit Agreement was
approximately $7.2 billion.  As of March 31, 2009, the Company had
$14.2 billion of short-term borrowings outstanding under the Omnibus Credit
Agreement.  The interest rates on renewals of these borrowings are
expected to be significantly higher and other terms may be less favorable than
the Company’s prior borrowings.  See Risk Factors on page 38 for
additional information.





Despite
the adverse conditions within the credit markets, the Company was able to
successfully execute one on-balance sheet securitization during the first
quarter of 2009. The Company used the $0.5 billion of net proceeds to fund its
new loan disbursements and other operating activities.





During
the first quarter of 2009, the Company obtained an additional $1.1 billion of
funding through the Participation Program.  This program provides the
Company with an additional source of funding on qualifying FFEL Program loans
originated during the 2008 – 2009 and 2009 – 2010 academic years at a rate of CP
plus 50 basis points.  As of April 30, 2009, the Company had funded
$2.4 billion of loans under the Participation Program.  The loans
funded under the Participation Program for the 2008 - 2009 academic year must be
refinanced on or before September 30, 2009 or the participated loans may be sold
to the Department through the Purchase Program.  The Company
anticipates selling all of the loans funded by the Participation Program to the
Department through the Purchase Program; and accordingly, at March 31, 2009
these loans have been classified as held for sale.  See Legislation and Regulations on
page 34 for further details.


33





The
Department is supporting the establishment of a multi-lender asset-backed
commercial paper conduit, or the ABCP Conduit. The ABCP Conduit’s intent is to
provide additional liquidity support to the FFEL Program loan market via the
creation of a multi-seller asset-backed commercial paper conduit that purchases
Stafford/PLUS loans first disbursed on or after October 1, 2003 and before July
1, 2009.  Purchases of loans from lenders would be funded indirectly
through the sale to private investors of government back-stopped asset-backed
commercial paper, thereby providing financing at reasonable spreads. In the
event the commercial paper issued cannot be reissued or “rolled” at maturity and
the conduit does not have sufficient cash to repay investors, the Department has
committed to provide liquidity to the ABCP Conduit by entering into forward
purchase agreements to purchase the eligible student loans backing the ABCP
Conduit at a predetermined price.  In addition to providing financing
at more normalized levels, a significant benefit to lenders is that eligible
loans are permitted to have borrower benefits, which are currently not permitted
under the Participation and Purchase Programs. The Company anticipates having
approximately $11 billion of Stafford/PLUS loans that would be eligible for the
ABCP Conduit through the remainder of 2009. The actual amount funded through
this program will be dependent on market conditions, the total capacity of the
conduit and industry demand for the conduit funding.





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 totaled $1.8 million and $2.6 million for
three months ended March 31, 2009 and 2008, respectively.







The
Company’s future cash needs will depend primarily on the volume of new loan
disbursements as well as the cash provided by, or used in, operating activities.
The Company expects new loan disbursement volumes to be funded via the various
sources described above.  In addition, the Company will continue to
evaluate alternative funding sources.  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.





Legislation
and Regulations





Current
Legislative and Regulatory Impacts





In
February 2009, the Department began holding the first in a series of negotiated
rulemaking sessions with industry representatives to develop federal regulations
to support the H.R. 4137, the Higher Education Opportunity Act of 2008 (HEOA)
provisions.  Sessions are scheduled to continue into
May.  Although final regulations are not yet available, the Company is
aggressively assessing and modifying its systems and processes as necessary,
based on the statutory language, to ensure its ongoing compliance with the
Higher Education Act as amended by the HEOA.




On
February 26, 2009, PresidentObama released a summary
of his 2010 proposed budget initiatives, “A New Era of
Responsibility”.  The President’s proposal asks the Congress to end
government support for financial institutions which make student
loans.  If the President's proposals are accepted and
subsequently enacted into law, student lenders would cease making FFEL Program
loans in July of 2010.  The House and Senate passed the Full Year 2009
budget resolution (S. Con. Res 13) on April 29, 2009.   The resolution
includes the President’s proposals related to student lending, however further
legislation would be required in order to effect any changes to the FFEL
Program.
 34
 Historical
Legislative and Regulatory Impacts





Over the
past decade, certain amendments to the Higher Education Act, which governs the
FFEL Program, have reduced the interest spread earned by holders of FFEL Program
loans. The most significant such amendment was the CCRA Act, which was signed
into law on September 27, 2007.  This has contributed to an overall
reduction in yields as new, lower yielding loans 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) which private lenders, such as the Company, are not
eligible to participate in and which directly competes with the FFEL Program in
originating student loans.





The
Ensuring Continued Access to Student Loans Act (ECASLA) 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 was a
problem for students attempting to obtain FFEL Program loans due to lenders
partially or wholly withdrawing from the FFEL Program market as a result of the
liquidity constraints in the capital markets, higher costs of funds and the
effects of the CCRA Act.  Other provisions of this law include
increased annual and aggregate Stafford borrowing limits; provides Parent PLUS
loan borrowers the option of postponing payments on the loan while the students
are enrolled and for six months after the student's last day of at least
half-time enrollment; and authority for the Department to purchase FFEL Program
loans from current holders, provided that the proceeds are reused in the FFEL
Program.  On July 3, 2008, the Company filed a required Notice of
Intent to Participate with the Department.  The Company received its
initial funding through the Participation Program on December 5, 2008 and began
participating loans on that same date.




In an
effort to help ensure the continued availability of funding for higher
education, H.R. 6889 was signed into law by President Bush on October 7, 2008.
This law provides for a one year extension of authority for the Secretary of
Education to purchase certain guaranteed student loans as defined under
ECASLA.   The effect of this extension allows the loan
Participation and Purchase Programs created by the Department to continue
through the 2009-2010 academic year as opposed to the original term, which would
have limited purchases to the 2008-2009 academic year.  The Department
has indicated that it intends to replicate the existing structure of the
Purchase and Participation Programs for the 2009-2010 academic
year.





The HEOA
was signed into law on August 14, 2008. Along with revisions to the Higher
Education Act, it also reauthorized the federal student loan programs through
2014.  Many of the provisions of the HEOA were effective as of the
date of enactment, with others taking effect July 1, 2009. The majority of the
provisions pertain to increasing consumer awareness by increasing the amount of
information that must be disclosed to borrowers throughout the lifecycle of the
loan.





On
October 23, 2008, the Department issued final regulations, published at Federal
Register Vol. 73, No. 206, which were needed to implement provisions contained
in the CCRA. The majority of the content of this regulatory package pertains to
the new income-based repayment option that is effective July 1, 2009. This
income-based repayment plan is available to most Direct Lending and FFEL Program
borrowers. It provides for a monthly payment amount based on the borrower’s
adjusted gross income, family size and the poverty line for the borrower’s state
of residence and forgives any remaining balance after 25 years of qualifying
payments.  The Company is actively working to implement system and
procedural changes needed to begin providing borrowers with this new repayment
option.





The
Department has indicated that it believes some lenders may continue to have
difficulty obtaining funding to make loan commitments for the upcoming academic
year, or to make subsequent disbursements on loans, without a commitment from
the Department to purchase those loans. Therefore, in an effort to provide
additional liquidity to support new lending, the Department also published
regulations on the ABCP Conduit. The Company is currently reviewing these most
recent regulations and participating in the creation of the ABCP Conduit with
other industry participants.


35


Pending
Litigation





The
Company is subject to various claims, lawsuits and other actions that arise in
the normal course of business.  Most of these matters are claims by
borrowers disputing the manner in which their loans have been processed, the
accuracy of the Company’s reports to credit bureaus, or actions taken with
respect to collecting on delinquent or defaulted loans.  Management
believes that ultimate resolutions of these claims, lawsuits and other actions
will not have a material adverse effect on the Company’s business, financial
condition or results of operations.


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:





March
      31,(Dollars
      in millions)
                    
                    2009
                    
                    
                    2008100
      basis points
                    
                    Increase
                    
                    
                    Decrease
                    
                    
                    Increase
                    
                    
                    DecreaseChange
      in interest income
                    
                    $
                    (10.7
                    )
                    
                    $
                    22.1
                    
                    
                    $
                    (6.0
                    )
                    
                    $
                    4.2





In
addition, the Company has exposure to uneven shifts in interest rate curves,
primarily the CP 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 maintains disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934, as amended (the Exchange Act) Rule 13a-15(e)
and 15d-15(e)) that are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported on a timely basis
and that such information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer, or CEO, and its Chief
Financial Officer, or CFO, to allow timely decisions regarding required
disclosure. The Company's management, with the participation of the Company’s
CEO and CFO, has evaluated the effectiveness of the Company's disclosure
controls and procedures as of the end of the period covered by this
report.  Based on such evaluation, the Company’s management, including
the CEO and CFO, concluded that the Company's disclosure controls and procedures
were not effective as of March 31, 2009 solely due to the existence of a
material weakness in internal control over financial reporting (as defined in
Exchange Act Rule 13a-15(f) and 15d-15(f)) related to accounting for income
taxes.
 
 (b)
              Internal
      Control Over Financial Reporting
 
 In the
process of preparing the Company’s consolidated financial statements for the
three months ended March 31, 2009, management identified a material weakness in
internal control over financial reporting in the design and monitoring of the
Company’s processes to analyze, record, value and reconcile current and deferred
income tax accounts. A material weakness is a deficiency, or combination of
deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the Company’s annual or
interim financial statements would not be prevented or detected on a timely
basis. The Company’s management believes that it is reasonably possible that the
current internal controls over financial reporting may not have prevented or
detected errors relating to its current and deferred income tax accounts that
could have been material, either individually or in the aggregate. These
deficiencies did not result in the restatement of any prior period financial
statements as the out-of-period adjustments identified were
immaterial.
 
 In an
effort to compensate for the internal control deficiencies surrounding
accounting for income taxes and ensure that the consolidated financial
statements for the three months ended March 31, 2009 were free from material
misstatement, the Company increased management oversight over the calculation
and reporting of income taxes, performed additional analysis and
reconciliations, and recorded necessary adjustments.
 
 To
remediate the material weakness, the Company plans to:
 
 ·
                re-evaluate
      the level of resources dedicated to tax accounting and reporting and
      augment as necessary;·
                implement
      clear policies and sustainable processes for calculating, reconciling and
      reviewing tax accounts, including
                  streamlining
      and improving control over spreadsheets, to ensure accuracy of these
      accounts; and·
                strengthen
      communication between the Company’s tax advisors and its controllers
      group.
  Except as
expressly noted above in this Item 4(b), there has not been any change in the
Company’s internal control over financial reporting 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.


37


PART
II  OTHER INFORMATION





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 21.
 
 In
addition to the other information set forth in this report, you should carefully
consider the risk factors disclosed in the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2008. We are updating certain of those
risk factors below to discuss how the risk presented in the current economic
environment may impact the Company. 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
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
majority of the Company’s earnings are generated from the spread between the
Company’s interest earning assets (based on CP, the prime rate, or the 91-day
Treasury Bill rate) and its funding costs (primarily based on
LIBOR).  The success of the Company is dependent upon management’s
ability to identify properly and respond promptly to changes in interest rate
conditions. Particularly in the current market environment, which has been
characterized by dislocation, illiquidity and government intervention, changes
in the interest rate environment can be difficult to predict and the Company’s
ability to respond to changes after they occur is hampered by market
constraints, legislation and the terms of the Company’s existing student loan
assets. As a result, changes in the spread between the interest rates earned on
the Company’s assets and incurred on the Company’s liabilities could have an
adverse effect on the Company's financial condition and results of
operations.





Historically,
CP and LIBOR rates have been highly correlated, with the average spread
generally falling in the range of 10 – 12 basis points.  Over the past
year, the spread between these two indices has been highly volatile,
particularly since the implementation of the Federal Reserve Bank’s Commercial
Paper Funding Facility (CPFF) in the third quarter of 2008.  To the
extent that CP falls significantly in relation to LIBOR, the Company’s net
interest margin and the fair value of its residual interests will be adversely
affected.  See Results of Operations - Factors
Affecting Net Interest Income - Net Interest Margin Spread Analysison
page 29 for further information about the impact that the divergence between CP
and LIBOR has had on the Company’s net interest margin.





The
Company uses derivative instruments in an effort to manage certain of its
interest rate risk. The Company’s derivative instruments do not qualify for
hedge accounting under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended (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.





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 and the fact that the Company cannot control the
speed at which borrowers repay their loans generally make obtaining a perfect
match very difficult and cost-prohibitive. In addition, credit spreads earned on
the Company’s loan assets are fixed at the time of origination. As a result, 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.


38


The
Company’s business operations are dependent upon Citigroup and any change that
impacts Citigroup’s involvement in the Company could have an adverse effect on
the Company’s financial condition and operations.





Citigroup
indirectly owns 80% of the Company’s common stock. Through various subsidiaries,
Citigroup serves as the Company’s:





·
            Lender
      – The Omnibus Credit Agreement provides funding up to $30.0 billion
      through December 31, 2009. At March 31, 2009, the Company had outstanding
      borrowings under this agreement of $22.8 billion.·
            Trustee
      – An affiliate of Citigroup acts as eligible lender trustee for the
      Company pursuant to a trust agreement since the Company does not meet the
      definition of an eligible lender in the Higher Education
    Act.·
            Originating
      Lender – The Company originates its private education loans through an
      agreement with an affiliate of Citigroup, under its authority as a
      federally chartered bank, providing certain benefits to which the Company
      would not otherwise be entitled. The Company subsequently acquires such
      loans pursuant to the terms of a separate agreement with the
      affiliate.·
            Service
      Provider – The majority of the work to originate and service the Company’s
      FFEL Program and private education loans is performed by an affiliate of
      Citigroup. Citigroup also provides many other services to the Company,
      including, but not limited to, cash management, tax return preparation,
      data processing, telecommunications, payroll processing and benefits
      administration. These arrangements provide economies of scale that
      significantly reduce the Company’s operating
  expenses.




The
Company has outsourced a significant portion of its overall operations to
certain affiliates and third parties. The Company’s business operations could be
adversely impacted if any of the existing agreements with these servicer
providers was terminated or could not be renewed with substantially similar
terms. In addition, the Company is subject to the risk that these providers may
not continue to provide the level of service that is needed to effectively
operate the Company’s business, including timely response to changes in the
Company’s demand for services.  If any of these risks were to be
realized, and assuming similar agreements with service providers could not be
established, the Company could experience interruptions in operations that could
negatively impact the Company’s ability to meet customer demand for loan
originations and disbursements, damage its relationships with customers, and
reduce its market share, all of which could materially adversely affect the
Company’s results of operations and financial condition.





In
January 2009, Citigroup announced that it was realigning its structure into two
distinct businesses for management reporting purposes: Citicorp, which will be
comprised of Citigroup’s core businesses, and Citi Holdings, which will be
comprised of non-core businesses.  The Company will be included within
Citi Holdings.  The Company does not currently expect this
organizational realignment to adversely affect the Company's business or its
operations, but there can be no assurance that future decisions with respect to
the Company as a non-core business will have no impact on the Company or its
relationships and transactions with CBNA or its affiliates.


Liquidity
is essential to the Company’s business, and the Company relies on external
sources, including the Omnibus Credit Agreement, capital markets, and government
programs to fund its balance sheet.  Failure to secure cost-effective
funding would adversely impact the Company’s ability to fund student loan
originations and could materially increase the Company’s cost of
funds.
 
 Uninterrupted
access to liquidity is essential to the Company’s business.  The
Company’s liquidity and funding has been, and could continue to be, materially
adversely affected by factors the Company cannot control, such as the continued
general disruption of the financial markets or negative views about the
financial services industry in general.
 
 Adverse
market conditions have also significantly increased the credit spreads on the
Omnibus Credit Agreement borrowings, which are negotiated on a
borrowing-by-borrowing basis.  The credit spreads of these borrowings
are highly dependent on the cost of funds to CBNA, which is in turn dependent on
CBNA’s own access to capital markets (through Citigroup), its ability to manage
deposits and its other sources of liquidity and funding.  These are,
in turn, highly dependent on the credit ratings of Citigroup and
CBNA.  A reduction in Citigroup’s or CBNA’s credit ratings could have
a negative impact on the availability and cost of funds to CBNA and consequently
to the Company for new borrowings under the Omnibus Credit
Agreement.  Given the current market conditions, as future funding
transactions are executed under the Omnibus Credit Agreement, funding costs are
expected to rise further.  The Company is currently negotiating a new
agreement to replace the existing agreement with CBNA, which expires on December
31, 2009.  If the agreement is not extended or replaced by that date,
the borrowings outstanding at that date would continue to mature based on their
originally contracted maturities. However, if less than 50% of the voting equity
interest in the Company is owned or controlled by CBNA or any of Citigroup’s
subsidiaries, the Omnibus Credit Agreement terminates and all outstanding
borrowings thereunder become due and payable.  In addition, the
Company would no longer have a guaranteed funding source for new borrowings,
which could negatively impact the Company’s ability to fund future
disbursements.
 
 In
addition, since the latter half of 2007, the dislocation and illiquidity in the
asset-backed securities and credit markets have adversely impacted the Company’s
securitization activities.  To the extent that these market conditions
continue, they are likely to have a further adverse impact on the Company’s
ability to execute future securitization transactions that provide favorable
pricing.  Current market conditions have impeded the Company’s ability
to complete off-balance sheet securitization transactions that result in a gain,
and have had a negative impact on credit spreads on secured borrowings through
on-balance sheet securitizations.  In addition, the current economic
downturn and the high level of volatility in the spread between the Company’s
interest earning assets (based on CP, the prime rate, or the 91-day Treasury
Bill rate) and its funding costs (primarily based on LIBOR) could adversely
affect existing securitization trusts sponsored by the Company. If any of these
trusts were to default on its obligations to noteholders, the Company’s ability
to execute future securitization transactions would be negatively
affected.
 
 As an
alternate source of funding, the Company recently began utilizing the
Department’s Participation Program and is currently preparing to take part in
the Purchase Program in 2009.  These programs are only approved
through the 2009-2010 academic year.  After such time, the Company may
need to identify other alternative sources of funding, which may not be
available on favorable pricing or terms, if at all. In addition, the Company is
preparing to utilize the ABCP Conduit to fund a significant portion of its
assets. Funding for the ABCP Conduit will be provided by the capital markets. In
the event the commercial paper issued by the ABCP Conduit cannot be reissued or
“rolled” at maturity and the ABCP Conduit does not have sufficient cash to repay
investors, the Department has committed to provide liquidity to the ABCP Conduit
by entering into forward purchase agreements to purchase the eligible student
loans backing the ABCP Conduit at a predetermined price. The predetermined price
represents a discount to the principal balance of the
loans.  Accordingly, a sale of loans to the Department would result in
a loss to the Company and negatively impact its results of
operations.
 40
 Recent
governmental proposals could end government support for financial institutions
that make student loans which would have a significant adverse effect on the
Company’s business.
 
 On
February 26, 2009, PresidentObama released a summary
of his 2010 proposed budget initiatives, “A New Era of
Responsibility”.  The President’s proposal asks the Congress to end
government support for financial institutions which make student
loans.  If the President's proposals are accepted and
subsequently enacted into law, student lenders would cease making FFEL Program
loans in July of 2010.  The House and Senate passed the Full Year 2009
budget resolution (S. Con. Res 13) on April 29, 2009.   The resolution
includes the President’s proposals related to student lending, however further
legislation would be required in order to effect any changes to the FFEL
Program.  The majority of the Company’s new loan originations are made
under the FFEL Program and, accordingly, the elimination of the FFEL Program may
have a material adverse effect on the Company’s results of operations and
financial condition.
 
 For
further information on the impact of the recent legislative activities, see
Legislation and Regulationson page 34.
 
 Our businessissubject to extensive
regulationand recent
market disruptions have led to proposals for newlaws andregulations, or changes to existinglaws andregulations.
 
 As a
participant in the financial services industry, the Company is subject to
extensive regulation. In addition, as a result of the current economic and
market downturn, there has been increased discussion of, and calls for,
additional legislative changes and increased scrutiny from a variety of
regulators. New laws or regulations, or changes in enforcement of existing
laws or regulations applicable to the Company’s business, may adversely affect
the Company. Legislative or regulatory changes could lead to business
disruptions, impact the value of assets that the Company holds or the scope or
profitability of its business activities, require the Company to change certain
of its business practices and expose the Company to additional costs (including
compliance costs) and liabilities. For example, the Office of the
Comptroller of the Currency (OCC) is currently reviewing private student loan
forbearance policies at banks and other financial institutions, including The
Student Loan Corporation.  The OCC may require policy changes, including,
but not limited to, reducing the maximum cumulative forbearance time
permitted.  If this or other policy changes were to be adopted, they could
have an adverse effect on the Company’s financial condition and results of
operations, including, among other things, an increase in charge-offs and the
allowance for loan losses related to its private education loans.
 
 For
further information on the impact of other recent legislative and regulatory
activities, see Legislation and
Regulationson page 34.
 Item
      6.
                Exhibits
 
 See
Exhibit Index.


41


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: May
8, 2009





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





42


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 on 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 on Form 10-K (File No.
      1-11616).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