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 September 30, 2008or ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from ___ to ___





Commission
File Number: 1-11616





THE
STUDENT LOAN CORPORATION


(Exact
name of registrant as specified in its charter)





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





(203)
975-6320


(Registrant's
telephone number, including area code)


__________________





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





Yes
            x
            No
            o





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





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





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





Yes
            o
            No
            x





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








Form
10-Q





TABLE
OF CONTENTS





Part
      I
            Consolidated
      Financial InformationPageItem
      1 -
            Consolidated
      Financial StatementsConsolidated
      Statements of Income (Unaudited) for the Three and Nine Months
      Ended  September 30, 2008 and 2007
            2Consolidated
      Balance Sheets as of September 30, 2008 (Unaudited) and December 31,
      2007
            3Consolidated
      Statements of Changes in Stockholders’ Equity (Unaudited) for
      the  Nine Months Ended September 30, 2008 and
    2007
            4Consolidated
      Statements of Cash Flows (Unaudited) for the Nine Months
      Ended  September 30, 2008 and 2007
            5Notes
      to Consolidated Financial Statements (Unaudited)
            6 –
      19Item
      2 -
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            20
      – 34Item
      3 -
            Quantitative
      and Qualitative Disclosures About Market Risk
            35Item
      4 -
            Controls
      and Procedures
            35Part
      II
            Other
      InformationItem
      1A-
            Risk
      Factors
            36
      – 40Item
      6 -
            Exhibits
            40Signature
            41Exhibit
      Index
            42





1


PART
I    CONSOLIDATED FINANCIAL INFORMATION





Item
      1.
            Consolidated
      Financial Statements





THE
STUDENT LOAN CORPORATION


CONSOLIDATED
STATEMENTS OF INCOME


(Dollars
in thousands, except per share amounts)


(Unaudited)





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007NET
      INTEREST INCOMEInterest
      income
            
            $
            279,823
            
            
            $
            398,675
            
            
            $
            928,339
            
            
            $
            1,177,996Interest
      expense
            
            
            (196,302
            )
            
            
            (298,345
            )
            
            
            (643,981
            )
            
            
            (881,032
            )Net
      interest income
            
            
            83,521
            
            
            
            100,330
            
            
            
            284,358
            
            
            
            296,964Provision
      for loan losses
            
            
            (46,791
            )
            
            
            (21,419
            )
            
            
            (117,930
            )
            
            
            (35,842
            )Net
      interest income after provision for loan losses
            
            
            36,730
            
            
            
            78,911
            
            
            
            166,428
            
            
            
            261,122OTHER
      INCOMEGains
      on loans securitized
            
            
            –
            
            
            
            –
            
            
            
            1,262
            
            
            
            48,548Gains
      on loans sold
            
            
            194
            
            
            
            15,815
            
            
            
            2,508
            
            
            
            36,081Fee
      and other income (loss)
            
            
            16,923
            
            
            
            (10,052
            )
            
            
            67,394
            
            
            
            14,231Total
      other income
            
            
            17,117
            
            
            
            5,763
            
            
            
            71,164
            
            
            
            98,860OPERATING
      EXPENSESSalaries
      and employee benefits
            
            
            14,195
            
            
            
            15,202
            
            
            
            43,257
            
            
            
            45,772Restructuring
      and related charges
            
            
            –
            
            
            
            –
            
            
            
            8,735
            
            
            
            735Other
      expenses
            
            
            31,981
            
            
            
            28,776
            
            
            
            90,168
            
            
            
            87,420Total
      operating expenses
            
            
            46,176
            
            
            
            43,978
            
            
            
            142,160
            
            
            
            133,927Income
      before income taxes
            
            
            7,671
            
            
            
            40,696
            
            
            
            95,432
            
            
            
            226,055Provision
      for income taxes
            
            
            287
            
            
            
            15,695
            
            
            
            30,798
            
            
            
            86,514NET
      INCOME
            
            $
            7,384
            
            
            $
            25,001
            
            
            $
            64,634
            
            
            $
            139,541DIVIDENDS
      DECLARED AND PAID
            
            $
            28,600
            
            
            $
            28,600
            
            
            $
            85,800
            
            
            $
            83,200BASIC
      AND DILUTED EARNINGS PER COMMON SHARE
            
            $
            0.37
            
            
            $
            1.25
            
            
            $
            3.23
            
            
            $
            6.98(based
      on 20 million shares outstanding)DIVIDENDS
      DECLARED AND PAID PER COMMON SHARE
            
            $
            1.43
            
            
            $
            1.43
            
            
            $
            4.29
            
            
            $
            4.16








See
accompanying Notes to the unaudited Consolidated Financial
Statements.


2


THE
STUDENT LOAN CORPORATION


CONSOLIDATED
BALANCE SHEETS


(Dollars
in thousands, except per share amounts)





September
      30,
            
            
            December
      31,2008
            
            
            2007(Unaudited)ASSETSFederally
      insured student loans
            
            $
            18,406,466
            
            
            $
            16,244,273Private
      education loans
            
            
            5,815,960
            
            
            
            4,696,337Deferred
      origination and premium costs
            
            
            658,745
            
            
            
            668,082Allowance for loan losses
            
            
            (110,651
            )
            
            
            (42,115
            )Student
      loans, net
            
            
            24,770,520
            
            
            
            21,566,577Other
      loans and lines of credit
            
            
            9,148
            
            
            
            87,437Loans
      held for sale
            
            
            10,530
            
            
            
            337,790Cash
            
            
            683
            
            
            
            25Residual interests in securitized loans
            
            
            743,704
            
            
            
            633,074Other
      assets
            
            
            1,437,198
            
            
            
            1,154,956Total
      Assets
            
            $
            26,971,783
            
            
            $
            23,779,859LIABILITIES
      AND STOCKHOLDERS' EQUITYShort-term borrowings, payable to principal stockholder
            
            $
            10,693,600
            
            
            $
            13,373,000Long-term borrowings, payable to principal stockholder
            
            
            12,102,000
            
            
            
            8,100,000Long-term
      secured borrowings
            
            
            1,773,839
            
            
            
            –Deferred
      income taxes
            
            
            238,071
            
            
            
            287,462Other liabilities
            
            
            561,181
            
            
            
            395,174Total
      Liabilities
            
            
            25,368,691
            
            
            
            22,155,636Common
      stock, $0.01 par value; authorized 50,000,000 shares; 20,000,000 shares
      issued and outstanding
            
            
            200
            
            
            
            200Additional
      paid-in capital
            
            
            141,390
            
            
            
            141,355Retained
      earnings
            
            
            1,461,502
            
            
            
            1,482,668Total
      Stockholders' Equity
            
            
            1,603,092
            
            
            
            1,624,223Total
      Liabilities and Stockholders' Equity
            
            $
            26,971,783
            
            
            $
            23,779,859








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)





Nine
      Months Ended September 30,2008
            
            
            2007COMMON
      STOCK AND ADDITIONAL PAID-IN CAPITALBalance,
      beginning of period
            
            $
            141,555
            
            
            $
            141,524Capital
      contributions and other changes
            
            
            35
            
            
            
            26Balance,
      end of period
            
            $
            141,590
            
            
            $
            141,550RETAINED
      EARNINGSBalance,
      beginning of period
            
            $
            1,482,668
            
            
            $
            1,410,968Cumulative
      effect of adoption of accounting standard, net of taxes of
      $506
            
            
            –
            
            
            
            809Net
      income
            
            
            64,634
            
            
            
            139,541Common
      dividends declared, $4.29 and $4.16 per common share  for the
      nine months ended September 30, 2008 and 2007,
respectively
            
            
            (85,800
            )
            
            
            (83,200
            )Balance,
      end of period
            
            $
            1,461,502
            
            
            $
            1,468,118ACCUMULATED
      OTHER COMPREHENSIVE INCOMEBalance,
      beginning of period
            
            $
            –
            
            
            $
            809Cumulative
      effect of adoption of accounting standard, net of taxes of
      $(506)
            
            
            –
            
            
            
            (809
            )Balance,
      end of period
            
            $
            –
            
            
            $
            –TOTAL
      STOCKHOLDERS' EQUITY
            
            $
            1,603,092
            
            
            $
            1,609,668








See
accompanying Notes to the unaudited Consolidated Financial
Statements.


4


THE
STUDENT LOAN CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Dollars
in thousands)


(Unaudited)


Nine
      Months EndedSeptember
      30,2008
              
              
              2007Cash
      flows from operating activities:Net
      income
              
              $
              64,634
              
              
              $
              139,541Adjustments
      to reconcile net income to net cash from operating
    activities:Depreciation
      and amortization of equipment and computer software
              
              
              9,760
              
              
              
              10,726Amortization
      of deferred loan origination and purchase costs
              
              
              75,013
              
              
              
              80,761Accreted
      interest on residual interests
              
              
              (48,189
              )
              
              
              (44,021
              )Provision
      for loan losses
              
              
              117,930
              
              
              
              35,842Restructuring
      and related charges
              
              
              8,735
              
              
              
              735Deferred
      tax provision
              
              
              (49,391
              )
              
              
              (39,082
              )Gains
      on loans sold and securitized
              
              
              (3,770
              )
              
              
              (84,629
              )(Gain)
      loss on residual interest valuation
              
              
              (104,754
              )
              
              
              28,306Loss
      on servicing asset valuation
              
              
              6,548
              
              
              
              15,160Change
      in loans held for sale including loan origination and purchase
      costs
              
              
              (165,471
              )
              
              
              (249,915
              )Proceeds
      from loans sold
              
              
              137,913
              
              
              
              197,657Cash
      received on residual interests in trading securitized
    assets
              
              
              99,178
              
              
              
              53,991Change
      in accrued interest receivable
              
              
              (119,180
              )
              
              
              (226,818
              )Other
      non-cash charges
              
              
              17,657
              
              
              
              –Change
      in other assets
              
              
              (58,905
              )
              
              
              (47,303
              )Change
      in other liabilities
              
              
              157,925
              
              
              
              (4,182
              )Net
      cash provided by (used in) operating activities
              
              
              145,633
              
              
              
              (133,231
              )Cash
      flows from investing activities:Change
      in loans
              
              
              (4,962,029
              )
              
              
              (4,411,485
              )Change
      in loan origination and purchase costs
              
              
              (121,868
              )
              
              
              (196,094
              )Proceeds
      from loans sold and securitized
              
              
              1,973,207
              
              
              
              2,407,782Change
      in restricted cash
              
              
              (52,328
              )
              
              
              –Capital
      expenditures on equipment and computer software
              
              
              (7,984
              )
              
              
              (4,664
              )Net
      cash used in investing activities
              
              
              (3,171,002
              )
              
              
              (2,204,461
              )Cash
      flows from financing activities:Net
      change in borrowings with original maturities of one year or
      less
              
              
              1,483,600
              
              
              
              1,318,900Proceeds
      from borrowings with original terms of one year or more
              
              
              6,239,000
              
              
              
              3,100,000Net
      proceeds from issuance of secured borrowings
              
              
              1,843,620
              
              
              
              –Repayments
      of secured borrowings
              
              
              (54,393
              )
              
              
              –Repayments
      of borrowings with original terms of one year or more
              
              
              (6,400,000
              )
              
              
              (2,000,000
              )Dividends
      paid to stockholders
              
              
              (85,800
              )
              
              
              (83,200
              )Net
      cash provided by financing activities
              
              
              3,026,027
              
              
              
              2,335,700Net
      increase (decrease) in cash
              
              
              658
              
              
              
              (1,992
              )Cash
      - beginning of period
              
              
              25
              
              
              
              6,570Cash
      - end of period
              
              $
              683
              
              
              $
              4,578Supplemental
      disclosure:Cash
      paid (received) for:Interest
              
              $
              688,298
              
              
              $
              868,846Income
      taxes, net
              
              $
              (1,955
              )
              
              $
              128,333




See
accompanying Notes to the unaudited Consolidated Financial
Statements.


5


THE
STUDENT LOAN CORPORATION


Notes
to Consolidated Financial Statements (Unaudited)


September
30, 2008








1.
            BASIS OF
      PRESENTATION AND SIGNIFICANT ACCOUNTING
  POLICIES





Interim
Financial Information





The
accompanying unaudited Consolidated Financial Statements of The Student Loan
Corporation (the Company), a Delaware corporation, include the accounts of the
Company and its wholly owned subsidiary, SLC Student Loan Receivables I,
Inc.  All intercompany balances and transactions have been
eliminated.





The
Company, with 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 and nine months
ended September 30, 2008 may not be indicative of the results for the full year
ending December 31, 2008.Certain financial
information that is normally included in annual financial statements prepared in
accordance with GAAP, but is not required for interim reporting purposes, has
been condensed or omitted.The accompanying
unaudited Consolidated Financial Statements should be read in conjunction with
the Consolidated Financial Statements and related Notes included in the
Company’s 2007 Annual Report and Form 10-K.





The
Company has revised its financial results for the third quarter of 2008 from the
results released in the Company’s October 16, 2008 Earnings Release and Current
Report on Form 8-K. The
revision reflects a credit resulting from the revaluation of the Company’s
current and deferred income taxes, partially offset by the recognition of a
liability related to uncertain tax positions in certain states. This net credit
amounted to a $3.0 million decrease in Provision
for income taxes and a $0.15 increase in basic and diluted earnings per
common share.




Basis
of Presentation





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





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





Use
of Estimates





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





Revenue Recognition





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


6


Loans





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





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





Allowance
for Loan Losses





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





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





Restricted
Cash





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





Transfer
of Student Loans through Sale or Securitization





Whole
Loan Sales





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


7


Loans
Securitized





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





All of
the Company’s off-balance sheet securitization entities meet the definition of a
QSPE and are not consolidated. See Note 3 for proposed accounting changes which
could change how the Company accounts for its off-balance sheet securitization
entities. The Company accounts for its on-balance sheet securitization entity,
which is not a QSPE and therefore is consolidated in the Company’s financial
statements as a secured borrowing in accordance with SFAS 140.





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





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





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





Gains and
losses 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.





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





Loans
Held for Sale





Loans
held for sale are loans that the Company plans to include in a future
securitization or sale. Management continually assesses its future
securitization and loan sale plans and transfers sufficient amounts of loans to
the held for sale portfolio to meet the Company’s anticipated near term sale and
securitization requirements. These loans are recorded at the lower of cost,
consisting of principal and deferred costs, or fair value.  During the
three and nine months ended September 30, 2008, the Company recorded write downs
of loans that were transferred back into the Company’s portfolio of $31.0
million and $34.7 million, respectively. For the same periods in 2007, the fair
value of loans held for sale exceeded cost and no write down was necessary. See
Note 11 for more information about the carrying value of loans held for
sale.


8


Derivatives





The
Company uses derivative financial products, including swaps and options, in an
effort to manage its exposure to interest rate risk. In addition, the Company
uses cross currency swaps in an effort to manage its exposure to foreign
currency exchange rates on its foreign currency denominated secured borrowings.
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
(loss).





Internally
Developed Software





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





2.
            RESTRUCTURING
      AND RELATED CHARGES





During
the second quarter of 2008, the Company strategically repositioned its business
in order to benefit from the products, channels, and operational structure that
it believes will best position the organization to grow profitably while
carefully deploying capital.  Consequently, on July 9, 2008, the
Company announced, under its existing severance policy, a restructuring of
certain functional areas.





As a
result of the restructuring, the Company recorded restructuring and related
charges of $8.7 million during the second quarter.  These charges
consist of severance related costs of $8.1 million and non-cash charges,
primarily associated with the impairment of software assets, totaling $0.6
million.  As a result of these activities, 146 positions have been
eliminated. At September 30, 2008, the Company had a liability of $6.9 million
related to this restructuring included in Other
liabilities.  Full implementation of the plan is expected to be
completed in the first quarter of 2009.





3.    
FUTURE APPLICATION OF ACCOUNTING STANDARDS





Elimination
of QSPEs and Changes in the FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable
Interest Entities (FIN 46(R)) Consolidation Model





During
April of 2008, the Financial Accounting Standards Board (FASB) voted to
eliminate QSPEs from the guidance in SFAS 140. While the revised standard has
not been finalized and the Board’s proposals will be subject to a public comment
period, this change may have a significant impact on the Company’s Consolidated
Financial Statements as the Company may lose sales treatment for assets
previously sold to a QSPE, as well as for future sales.  This proposed
revision could become effective January 2010.  As of September 30,
2008, the total assets of QSPEs to which the Company, acting as principal, has
transferred assets and received sales treatment were $16.0 billion.





In
connection with the proposed changes to SFAS 140, the FASB also is proposing
three key changes to the consolidation model in 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 to a primarily
qualitative determination of power combined with benefits and losses instead of
today's risks and rewards model. Finally, the proposed amendment is expected to
require all VIEs and their primary beneficiaries to be reevaluated whenever
circumstances change. The previous rules required reconsideration only when
specified reconsideration events occurred.


9


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





Disclosures
about Derivative Instruments and Hedging Activities





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


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





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.





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





September
      30,
            December
      31,(Dollars in
      thousands)
            2008
            2007Federal
      Stafford Loans
            $  10,387,309
            $  8,687,483Federal
      Consolidation Loans
            6,424,540
            6,364,762Federal
      SLS/PLUS/HEAL Loans
            1,594,617
            1,192,028Private
      education loans
            5,815,960
            4,696,337Total
      student loans held, excluding deferred costs
            24,222,426
            20,940,610Deferred
      origination and premium costs
            658,745
            668,082Student
      loans held
            24,881,171
            21,608,692Less:
      allowance for loan losses
            (110,651)
            (42,115)Student
      loans held, net
            24,770,520
            21,566,577Loans
      held for sale, excluding deferred costs
            10,289
            331,263Deferred
      origination and premium costs
            241
            6,527Loans
      held for sale
            10,530
            337,790Other
      loans and lines of credit
            9,148
            87,437Total
      loan assets
            $24,790,198
            $21,991,804





5.
            OTHER
      ASSETS





Other
assets are summarized as follows:





September
      30,
            December
      31,(Dollars in
      thousands)
            2008
            2007Accrued
      interest receivablefrom
      student loan borrowers/others
            $  843,673
            $  649,219from
      federal government
            31,412
            106,686Servicing
      asset from securitization activity
            192,564
            199,112Collateral
      on derivatives with CBNA
            176,213
            86,699Retained
      notes from securitization activities
            78,981
            24,204Restricted
      cash
            52,328
            –Equipment
      and computer software (1)
            29,591
            34,563Other
            32,436
            54,473Total
      other assets
            $1,437,198
            $1,154,956





(1)
            Amounts
      are reflected net of accumulated depreciation and software amortization of
      $57.2 million and $53.4 million at September 30, 2008 and December 31,
      2007, respectively.  The Company disposed of equipment and
      computer software with a net book value of $3.2 million during the nine
      months ended September 30, 2008, of which $2.6 million is included inOther expenses and $0.6 million is included in Restructuring
      and related charges.





10


Accrued
interest receivable from the federal government decreased by $75.3 million (71%)
during the nine months ended September 30, 2008.  This decrease is
primarily due to the impact of declining interest rates, which reduced the
special allowance payments due from the federal government as well as increased
the amount of excess interest payments owed to the federal
government.





The
Company is required to maintain collateral for its derivative contracts entered
into with CBNA in a margin account.  The Company’s collateral on these
derivatives increased by $89.5 million during the nine months ended September
30, 2008, primarily as a result of declining interest rates.  For
further information on the Company’s derivative agreements, see Note
8.





As a
result of current market conditions, the Company has retained certain notes
related to off-balance sheet securitizations.  During the nine months
ended September 30, 2008, the retained notes from securitization activities
increased by $54.8 million, largely due to the retention of notes from the
second quarter off-balance sheet securitization.





During
March 2008, the Company completed its first on-balance sheet
securitization.  As a result, the Company’s Consolidated Financial
Statements include cash held by the trust, or restricted cash, of $52.3 million
as of September 30, 2008, which can be used only for trust
obligations.





6.
            FEE
      AND OTHER INCOME (LOSS)





Fee and
other income (loss) is summarized as follows:





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,(Dollars in
      thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Gains
      (losses) related to residual interests
            
            $
            57,995
            
            
            $
            (26,414
            )
            
            $
            104,754
            
            
            $
            (28,306
            )Mark-to-market
      losses on derivatives
            
            
            (56,295
            )
            
            
            (1,921
            )
            
            
            (74,246
            )
            
            
            (3,583
            )Impairment
      of loans held for sale
            
            
            (30,974
            )
            
            
            –
            
            
            
            (34,672
            )
            
            
            –Servicing
      revenue net of valuation gains and losses on servicing
    assets
            
            
            21,424
            
            
            
            14,452
            
            
            
            51,311
            
            
            
            34,576Foreign
      currency translation gains
            
            
            24,960
            
            
            
            –
            
            
            
            20,670
            
            
            
            –Other
      origination and servicing fees from CBNA
            
            
            2,544
            
            
            
            2,450
            
            
            
            5,345
            
            
            
            5,532Late
      fees (1)
            
            
            (2,325
            )
            
            
            1,105
            
            
            
            1,054
            
            
            
            4,646Other
      (expense) income (2)
            
            
            (406
            )
            
            
            276
            
            
            
            (6,822
            )
            
            
            1,366Total
      fee and other income (loss)
            
            $
            16,923
            
            
            $
            (10,052
            )
            
            $
            67,394
            
            
            $
            14,231





(1)
            Amounts
      for the three and nine months ended September 30, 2008 include an
      adjustment to accrued late fees to reflect updated estimates of
      collectibility.




(2)
            Amount
      for the nine months ended September 30, 2008 includes a $4.1 million
      contingent loss reserve on a commitment to fund private education loans at
      a certain proprietary school.





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.


11


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





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Revenues:Interest
      income
            
            $
            709
            
            
            $
            376
            
            
            $
            2,246
            
            
            $
            908Interest
      expense
            
            
            177,286
            
            
            
            298,345
            
            
            
            606,501
            
            
            
            881,027Fee
      and other income (loss):Derivative
      valuation loss
            
            
            (30,017
            )
            
            
            (1,921
            )
            
            
            (52,475
            )
            
            
            (3,583
            )Other
      origination and servicing fees
            
            
            2,544
            
            
            
            2,450
            
            
            
            5,345
            
            
            
            5,532Operating
      Expenses:Salaries
      and employee benefitsEmployee
      benefits and administration
            
            $
            3,385
            
            
            $
            2,672
            
            
            $
            8,975
            
            
            $
            8,194Stock-based
      compensation
            
            
            596
            
            
            
            501
            
            
            
            2,234
            
            
            
            1,913Other
      expensesServicing,
      professional and other fees paid
            
            
            13,565
            
            
            
            13,648
            
            
            
            40,150
            
            
            
            37,127Data
      processing and communications
            
            
            1,922
            
            
            
            1,715
            
            
            
            5,062
            
            
            
            4,755Premises
            
            
            674
            
            
            
            700
            
            
            
            2,032
            
            
            
            2,227Other
            
            
            3,570
            
            
            
            610
            
            
            
            9,942
            
            
            
            1,773





CBNA
Omnibus Credit Agreement





All of
the Company’s outstanding short- and long-term unsecured borrowings were
incurred under the terms of an Omnibus Credit Agreement with CBNA. 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 Company would not have a guaranteed funding source for new borrowings,
however borrowings outstanding at that date would become due based on their
contractual maturities, which currently extend through 2016.  Funding
terms and conditions under the agreement are negotiated between the Company and
CBNA on a borrowing-by-borrowing basis.  Interest expense incurred
under these borrowings is reflected in the table above. For further information
on the Company’s borrowings under the Omnibus Credit Agreement, see Note
12.





Interest
Rate Swap and Option Agreements





The
Company enters into interest rate swaps and options with CBNA, an
investment-grade counterparty, in an effort to manage its interest rate risk
exposure.  CBNA requires the Company to remit cash into a margin
account as collateral on these derivatives.  The Company’s collateral
on these derivatives increased to $176.2 million as of September 30, 2008 from
$86.7 million as of December 31, 2007.  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.  Following final disbursement by CBNA, the Company purchases all
qualified private education loans at CBNA’s carrying value at the time of
purchase, plus a contractual premium. Total principal balances of CitiAssist
loans purchased by the Company were $0.1 billion and $1.5 billion for the three
and nine months ended September 30, 2008, respectively, as compared to $0.2
billion and $1.8 billion for the three and nine months ended September 30, 2007,
respectively. Total premiums paid by the Company related to CitiAssist loan
purchases were $0.7 million and $9.5 million for the three and nine months ended
September 30, 2008, respectively, as compared to $1.4 million and $11.6 million
for the three and nine months ended September 30, 2007, respectively. At
September 30, 2008, the Company was committed to purchase CitiAssist loans of
$1.3 billion.


12


Servicing,
Professional and Other Fees Paid





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





CBNA
Tax-sharing Agreement





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





Other
Intercompany Arrangements





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





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 September 30, 2008 were designated as hedges
and accordingly they did not qualify for hedge accounting treatment under SFAS
133.





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





September
      30, 2008
            
            
            December
      31, 2007Fair
      Value
            
            
            
            
            
            Fair
      Value(Dollars in
      thousands)
            
            Notional
            
            
            Asset
            
            
            Liability
            
            
            Notional
            
            
            Asset
            
            
            LiabilityLIBOR-Based
      Swaps
            
            $
            13,663,400
            
            
            $
            8,619
            
            
            $
            33,836
            
            
            $
            8,495,000
            
            
            $
            34,492
            
            
            $
            2,113Interest
      Rate Floor Options
            
            
            11,827,520
            
            
            
            1,875
            
            
            
            133,447
            
            
            
            8,743,266
            
            
            
            1,372
            
            
            
            89,193Foreign
      Currency Swap
            
            
            232,050
            
            
            
            –
            
            
            
            21,771
            
            
            
            –
            
            
            
            –
            
            
            
            –





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





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





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





9.
            INCOME
      TAXES




The
Company's effective tax rate during the third quarter was 3.7% and 32.3%, as
compared to 38.6% and 38.3%, for the three and nine months ended September 30,
2008 and 2007, respectively.  These decreases reflect a credit resulting
from the revaluation of the Company's current and deferred income taxes,
partially offset by the recognition of liabilities related to uncertain tax
positions in certain states. This net credit amounted to $3.8 million and $6.8
million, respectively, for the three and nine months ended September 30,
2008.
  The
Company is included in the consolidated U.S. Federal income tax return of
Citigroup and certain multi-combined and unitary state and local tax returns of
Citigroup or its subsidiaries. Citigroup is presently under audit by the
Internal Revenue Service (IRS) for 2003-2005. It is reasonably possible that the
audit will conclude within the next 12 months. The resolution of the uncertain
tax position related to the IRS audit would not affect the Company’s effective
tax rate.
  As of
September 30, 2008, the Company had gross unrecognized tax benefits of $7.7
million. The total amount of unrecognized tax benefits at September 30, 2008
that, if recognized, would affect the effective tax rate is $3.4
million.


13





10.
            STUDENT
      LOAN SECURITIZATIONS





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





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


Securitizations
listed as sales are off-balance sheet transactions and those listed as
financings remain on-balance sheet.





The
following table summarizes the Company’s securitization activity:





Three
      Months Ended
                
                
                Nine
      Months EndedSeptember
      30,
                
                
                September
      30,(Dollars
      in thousands)
                
                2008
                
                
                2007
                
                
                2008
                
                
                2007Securitization
      sales:Student
      loans securitized (1)
                
                $
                –
                
                
                $
                –
                
                
                $
                2,035,540
                
                
                $
                1,201,603Net
      proceeds from student loans securitized during the period
                
                
                –
                
                
                
                –
                
                
                
                1,973,207
                
                
                
                1,221,216Realized
      gains on loans securitized
                
                
                –
                
                
                
                –
                
                
                
                1,262
                
                
                
                48,548Securitization
      financings:Student
      loans securitized (1)
                
                $
                –
                
                
                $
                –
                
                
                $
                1,993,213
                
                
                $
                –Net
      proceeds from student loans securitized during the period (2)
                
                
                –
                
                
                
                –
                
                
                
                1,798,638
                
                
                
                –





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




(2)
            The
      difference between student loans securitized and net proceeds received for
      the nine months ended September 30, 2008 primarily reflects $57.3 million
      of unissued notes, $10.5 million of issuance costs and discounts and
      $126.8 million of required overcollateralization (see Note
      12).





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





Nine
      Months EndedSeptember
      30,(Dollars
      in thousands)
            
            2008
            
            
            2007Cash
      received from trusts for servicing
            
            $
            57,475
            
            
            $
            47,919Cash
      received from trusts on residual interests
            
            
            99,178
            
            
            
            53,991





During
the three and nine months ended September 30, 2008, the Company earned $20.7
million and $57.9 million, respectively, of contractually specified servicing
fees as compared to $17.2 million and $49.7 million for the three and nine
months ended September 30, 2007, respectively.


14


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





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Balance
      at beginning of period
            
            $
            191,798
            
            
            $
            174,077
            
            
            $
            199,112
            
            
            $
            169,234Changes
      in fair value due to changes in inputs and assumptions
            
            
            9,210
            
            
            
            5,258
            
            
            
            19,534
            
            
            
            8,519Other
      changes (1)
            
            
            (8,444
            )
            
            
            (8,020
            )
            
            
            (26,082
            )
            
            
            (23,679
            )Student
      loan securitizations (2)
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            17,241Balance
      at end of period
            
            $
            192,564
            
            
            $
            171,315
            
            
            $
            192,564
            
            
            $
            171,315


(1)
                  Amounts represent the
      effects of cash received and the passage of time.
  (2)
              The
      off-balance sheet securitization that took place during the second quarter
      of 2008 did not generate a servicing
asset.


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 data, inherently
involve significant judgment and uncertainty. The discount rate, basis spreads,
anticipated net credit loss rate, 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 the risk-free rate and a risk premium which reflects the prevailing economic
and market conditions as of September 30, 2008.  During the third
quarter, the Company increased the risk premium for its residual interests by 75
basis points and for its servicing assets by 10 basis points to reflect the
current level of cash flow uncertainty and lack of liquidity that exists in the
market. At the same time the Company lowered its future prepayment assumption to
reflect an overall slowdown in borrower prepayment activity.





Also
during the third quarter, the Company revised its methodology for estimating the
expected utilization rates for on time payment type borrower benefits. The loans
in the Company’s securitized trusts were originated in 2002 or later and loans
generally take three to five years to earn these types of benefits. Accordingly,
only limited trust level data on actual utilization rates has been historically
available to the Company.  As these trusts have seasoned additional
trust level borrower benefit data has become available.  Based on this
new information, the Company revised its methodology for estimating future
borrower benefit utilization.  The Company believes that this
methodology provides a better estimation of future utilization. The revised
methodology generally resulted in lower expected utilization rates, which caused
a net increase in the value of the Company’s residual interests of $27.1
million.





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





September
      30, 2008
            
            
            December
      31, 2007Weighted
      average discount rate:FFEL
      Program Consolidation Loans
            
            11.12
            %
            
            10.56
            %FFEL
      Program Stafford and PLUS loan
            
            11.12
            %
            
            –Private
      education loans
            
            14.12
            %
            
            12.56
            %Constant
      prepayment rates:FFEL
      Program Consolidation Loans
            
            1.11%
      to 1.48
            %
            
            1.73%
      to 3.09
            %FFEL
      Program Stafford and PLUS loan
            
            8.14
            %
            
            –Private
      education loans
            
            9.86
            %
            
            13.03
            %Anticipated
      credit losses, net of insurance and guarantees:FFEL
      Program Consolidation Loans
            
            0.32
            %
            
            0.30
            %FFEL
      Program Stafford and PLUS loan
            
            0.54
            %
            
            –Private
      education loans
            
            0.91
            %
            
            0.81
            %Expected
      basis spread between LIBOR and Commercial Paper rate
            
            12.2
      basis points
            
            
            12.0
      basis pointsUtilization
      rate of borrower benefits:Automated
      clearing house
            
            2.3%
      to 40.1
            %
            
            10.0%
      to 40.2
            %On
      time payments
            
            0%
      to 42.7
            %
            
            0%
      to 41.3
            %





15


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





September
      30, 2008
            
            
            December
      31, 2007Weighted
      average discount rate:FFEL
      Program Consolidation Loans
            
            5.66
            %
            
            5.80
            %Private
      education loans
            
            6.16
            %
            
            6.30
            %Constant
      prepayment rates:FFEL
      Program Consolidation Loans
            
            1.11%
      to 1.48
            %
            
            1.73%
      to 3.09
            %Private
      education loans
            
            9.86
            %
            
            13.03
            %Weighted
      average servicing margin
            
            24
      basis points
            
            
            25
      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 September 30, 2008
            
            $
            743,704
            
            
            $
            192,564Discount
      rate10%
      adverse change
            
            
            (25,406
            )
            
            
            (4,709
            )20%
      adverse change
            
            
            (48,770
            )
            
            
            (9,128
            )Constant
      prepayment rate10%
      adverse change
            
            
            (7,871
            )
            
            
            (2,100
            )20%
      adverse change
            
            
            (15,665
            )
            
            
            (4,210
            )Anticipated
      credit losses, net of insurance and guarantees10%
      adverse change
            
            
            (5,912
            )
            
            
            (1,150
            )20%
      adverse change
            
            
            (11,767
            )
            
            
            (2,260
            )Expected
      basis spread between LIBOR and Commercial Paper rate10%
      adverse change
            
            
            (8,375
            )
            
            
            –20%
      adverse change
            
            
            (16,707
            )
            
            
            –Borrower
      benefits – ACH10%
      adverse change
            
            
            (3,076
            )
            
            
            –20%
      adverse change
            
            
            (6,370
            )
            
            
            –Borrower
      benefits – on time payments10%
      adverse change
            
            
            (9,233
            )
            
            
            –20%
      adverse change
            
            
            (17,735
            )
            
            
            –Servicing
      margin10%
      adverse change
            
            
            –
            
            
            
            (20,038
            )20%
      adverse change
            
            
            –
            
            
            
            (39,729
            )





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)
            
            September
      30, 2008
            
            
            December
      31, 2007Principal
      amounts
            
            $
            15,345,988
            
            
            $
            14,123,887Delinquencies
            
            
            561,171
            
            
            
            413,175


16


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





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Credit
      losses, net of recoveries:
            
            $
            2,237
            
            
            $
            2,124
            
            
            $
            6,667
            
            
            $
            4,685





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





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





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





Items
Measured at Fair Value on a 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:





(Dollars
      in thousands)
            
            Level
      2
            
            
            Level
      3AssetsResidual
      interests in securitized loans
            
            $
            –
            
            
            $
            743,704Other
      assets
            
            
            89,475
            
            
            
            192,564Total
      Assets
            
            $
            89,475
            
            
            $
            936,268LiabilitiesOther
      liabilities
            
            $
            189,054
            
            
            $
            –





Derivatives





Derivatives
are used in an effort to manage interest rate and foreign currency exchange rate
risk. Fair value was based upon quotes received from counterparties based on
similar instruments in active markets. Derivatives are recorded at fair value
and are included in Other
assets and Other
liabilities in the table above and on the Consolidated Financial
Statements. For more information on derivatives, see Note 8.


17


Retained
Interests in Securitized Loans





The fair
values of residual interests and servicing assets were determined using
discounted cash flow models. Servicing assets are included in Other assets in the table
above.  The Company has also retained notes from certain
securitization sales, which are recorded at fair value and included in Other assetsin the table
above.  The fair value of the retained notes was based upon
non-binding independent broker quotes received for similar
instruments.  The Company obtains multiple quotes from independent
brokers who are major participants in the student loan asset-backed securities
market and believes that these quotes are the best indication of the value that
could be realized in a market transaction. However, since the market for notes
of this type is not currently active, the amount which the Company would receive
in a current transaction could differ from this estimate. The Company recorded a
write-down of $2.7 million associated with retained notes during the third
quarter, which is included in Fee and Other Income on the
Consolidated Financial Statements.  Retained interests are recorded at
fair value on the Consolidated Financial Statements.  For more
information on loan securitizations, see Note 10.





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





(Dollars
      in thousands)
                
                Residual
      Interests in Securitized Loans
                
                
                Other
      AssetsBalance
      at December 31, 2007
                
                $
                633,074
                
                
                $
                199,112Total
      gains and losses (realized/unrealized) included in
    earnings:Interest
      income
                
                
                48,189
                
                
                
                –Fee
      and other income
                
                
                104,754
                
                
                
                27,806Purchases,
      issuances and settlements
                
                
                (42,313
                )
                
                
                (34,354
                )Balance
      at September 30, 2008
                
                $
                743,704
                
                
                $
                192,564Unrealized
      gains and losses relating to assets still held at the reporting date (1)
                
                $
                104,754
                
                
                $
                19,534





(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 and
were recognized at fair value below cost at the end of the period.





The fair
value of loans measured at the lower of cost or fair value is determined using
discounted cash flow models. Such loans are generally classified in Level 3 of
the fair value hierarchy as these discounted cash flow models utilize
unobservable inputs, including discount rate, expected prepayment rates and
expected credit losses.





The
following table represents all loans held for sale that are carried at the lower
of cost or fair value as of September 30, 2008:





(Dollars
      in thousands)
            
            Aggregate
      Cost
            
            
            Fair
      valueSeptember
      30, 2008
            
            $
            10,530
            
            
            $
            10,530





For both
the three and nine months ended September 30, 2008, the resulting charges taken
on loans held for sale were $31.0 and $34.7 million, respectively. These charges
are primarily related to $1.9 billion of loans transferred back into the
Company’s portfolio in the third quarter.  In June 2008, in
anticipation of a third quarter securitization, these loans were transferred
into Loans held for sale.  Due to significant deterioration in market
conditions at the beginning of the third quarter, the Company decided to cancel
the planned securitization and to transfer the loans back into portfolio,
requiring a fair value adjustment.


18


12.
            SHORT-
      AND LONG-TERM BORROWINGS





At
September 30, 2008 and December 31, 2007, the Company had borrowings under the
terms of an Omnibus Credit Agreement with CBNA, which expires in December 2009.
If the agreement is not extended or replaced by that date, the Company would not
have a guaranteed funding source for new borrowings, however borrowings
outstanding at that date would become due based on their contractual maturities,
which currently extend through 2016.





Under the
Omnibus Credit Agreement, the maximum aggregate credit available for combined
short- and long-term borrowings was $30.0 billion at September 30, 2008. The
cost of funding is negotiated on a borrowing-by-borrowing basis. The Omnibus
Credit Agreement contains no material financial covenants or restrictions,
though it terminates and all outstanding borrowings thereunder become due and
payable if less than 50% of the voting equity interest in the Company is owned
or controlled by CBNA or any of Citigroup’s subsidiaries.  At
September 30, 2008, the amount of credit available for additional short- and
long-term borrowings under the Omnibus Credit Agreement was approximately $7.2
billion.





As of
September 30, 2008, the Company had $1.8 billion of secured borrowings of which
$0.2 billion is denominated in Euros.  An additional $0.1 billion of
notes associated with the transaction remain available for
issuance.  The total authorized borrowings of $1.9 billion are
collateralized by $2.0 billion of FFEL Program Consolidation
Loans.  Principal payments on the secured borrowings are made as funds
are collected on the collateralized loans.





As of
September 30, 2008, approximately $4.3 billion of the Company’s outstanding
short- and long-term borrowings includes derivatives embedded in the respective
debt instruments. These embedded derivatives have been determined to be clearly
and closely related to the underlying debt instruments and, in accordance with
SFAS No. 133, do not require bifurcation. Management considers these options as
economic hedges to the floor income component of its assets.





13.
            COMMITMENTS
      AND CONTINGENCIES





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





The
Company has a commitment that expires November 30, 2008 to fund up to $17.4
million of student loans to a certain proprietary school.  During
the quarter ended June 30, 2008, the Company determined that due to market
conditions, it is probable that this committed amount will not be fully
recoverable. Accordingly, the Company has a contingent loss reserve of $4.1
million in Other
liabilitiesas of September 30,
2008.


19


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





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





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





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





Business Overview – a general
description of the Company’s business 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 and nine months
ended September 30, 2008 and 2007 and discussion of the key factors impacting
those results.





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





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




Business
Overview





The
Company is one of the nation’s leading originators and holders of student loans
offering a full array of student loan products to students and their parents and
was incorporated in Delaware on November 4, 1992 and commenced operations on
December 22, 1992. Citibank, N.A. (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 Federal Family Education Loan (FFEL) Program, authorized by
the U.S. Department of Education (the Department) under the Higher Education Act
of 1965, as amended (the Higher Education Act). The Company, with 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 holds private education loans that are not insured
under the FFEL Program, including CitiAssist loans and Private Consolidation
loans. The Company is committed to providing exceptional service to borrowers
and schools, offering competitive and innovative products with solutions that
allow students and their families to finance the education of their choice while
simultaneously providing value to the Company’s shareholders.  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,
the prime rate, or the 91-day Treasury Bill rate) and the interest paid on its
borrowings (primarily based on LIBOR).  The earnings spread between
the interest earned and the interest expense incurred represents net interest
income. Net interest income is impacted by:  spread changes between
the 90-day Commercial Paper rate, the prime rate or the 91-day Treasury Bill
rate and LIBOR; legislative changes that impact FFEL Program subsidies;
utilization rates of borrower benefits; and portfolio growth or
contraction.  The Company regularly monitors interest rates and may
enter into interest rate derivative agreements on portions of its portfolio in
response to interest rate fluctuations.


20


Historically,
loan securitizations and whole loan sales have contributed significantly to the
Company’s earnings.  From year to year, the Company’s earnings are
impacted by the number, size and profitability of asset sales and
securitizations.  These factors vary from period to period based on
market conditions and the Company’s operational strategies.  Due to
the disruptions in the asset-backed securitization markets, the Company decided
to cancel its planned third quarter securitization activity. In April 2008, the
Financial Accounting Standards Board (FASB) proposed changes 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 could eliminate any potential for
future securitization gains. This proposed revision could be effective January
2010.





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





During
the nine months ended September 30, 2008, the Company funded its loan
originations primarily through borrowings under the Omnibus Credit Agreement
with CBNA and loan securitizations.  Under the Omnibus Credit
Agreement, the cost of funding is negotiated on a borrowing-by-borrowing basis.
Due to dislocation and illiquidity in the credit markets, the spreads on the
Company’s most recent securitizations and borrowings under the Omnibus Credit
Agreement have increased considerably. These increases in funding costs,
combined with the impact of the College Cost Reduction and Access Act (CCRA Act)
have negatively affected the Company’s profitability.  In response to
these changes, the Company announced on April 16, 2008 that it would suspend
lending at certain schools.  In addition, the Company has withdrawn
from the consolidation loan markets.  The Company will evaluate
returning to these schools and may resume offering consolidation loans if market
conditions improve.





Business
Highlights





During
the third quarter, continued degradation in the financial markets had a profound
impact on the Company’s operations.  These external forces contributed
to:





·
            net
      interest margin compression, driven by refinancing of maturing term debt
      at higher premiums over LIBOR;·
            a
      fair value adjustment required on loans held for sale transferred back
      into the Company’s portfolio; and·
            a
      reduction in gains from loan sales and securitizations as a result of
      illiquidity in both the whole loan and asset-backed securities
      markets.





In
addition, the Company further increased its loan loss reserves, reflecting the
continued seasoning of the uninsured CitiAssist loan portfolio.





The
Company’s funding requirements continue to be met by borrowings under the
Omnibus Credit Agreement with CBNA.  However, on new funding
transactions executed, average premiums over LIBOR continue to increase. Given
current market conditions, as future funding transactions are executed under the
Omnibus Credit Agreement, funding costs could rise further.  During
the third quarter, the Company filed the required Notice of Intent to
participate in the Department’s Loan Participation Commitment Program
(Participation Program) and Loan Purchase Program (Purchase
Program)  to fund FFEL Program loans. See Legislation and Regulations on
page 32 and Liquidity and
Capital Resources on page 31, for further details.





The
Company has revised its financial results for the third quarter of 2008 from the
results released in the Company’s October 16, 2008 Earnings Release and Current
Report on Form 8-K.  The revision reflects a credit resulting from the
revaluation of the Company’s current and deferred income taxes, partially offset
by the recognition of a liability related to uncertain tax positions in certain
states. This net credit amounted to a $3.0 million decrease in Provision for income taxes and a $0.15 increase
in basic and diluted earnings per common share.


21


Critical
Accounting Estimates





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





Financial
Condition





Loans





At
September 30, 2008, the Company’s student loan assets were comprised of FFEL
Program loans, private education loans, an inventory of loans held for sale and
related deferred costs.





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)
            
            September
      30, 2008
            
            
            December
      31, 2007Owned
      loans
            
            $
            24,901
            
            
            $
            22,034Managed
      loans
            
            
            41,387
            
            
            
            37,311





Year
      to Date Average Balances(Dollars
      in millions)
            
            September
      30, 2008
            
            
            December
      31, 2007Owned
      loans
            
            $
            24,009
            
            
            $
            22,825Managed
      loans
            
            
            39,355
            
            
            
            36,109





Loan
Disbursements and Procurement Activity





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





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





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,(Dollars
      in millions)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Retail:FFEL
      Program Stafford and PLUS loan disbursements
            
            $
            2,137
            
            
            $
            1,656
            
            
            $
            4,732
            
            
            $
            3,750CitiAssist
      loans disbursed under commitments to purchase (1)
            
            
            649
            
            
            
            614
            
            
            
            1,474
            
            
            
            1,500Total
      Retail
            
            
            2,786
            
            
            
            2,270
            
            
            
            6,206
            
            
            
            5,250Loan
      consolidation and other secondary market volume (2)
            
            
            95
            
            
            
            853
            
            
            
            821
            
            
            
            1,999Total
      Originations
            
            $
            2,881
            
            
            $
            3,123
            
            
            $
            7,027
            
            
            $
            7,249





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




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





22


FFEL
Program loan disbursements increased by $1.0 billion during the nine month
period ended September 30, 2008 compared to the same period in 2007, which the
Company believes is primarily attributable to its marketing initiatives, overall
growth in the marketplace and a shift in volume to the Graduate PLUS loan
product from CitiAssist loans.  The Graduate PLUS Loan program,
introduced in 2006, was the primary driver of the $26.3 million decrease in
CitiAssist loan disbursements during the nine months ended September 30, 2008
compared to the same period in 2007.





In
response to the dislocation in the capital markets and recent federal
legislation, the Company has significantly reduced, and in some cases
discontinued, its less profitable retail, wholesale and consolidation loan
origination activities.  Despite these actions, the Company’s overall
originations have continued to increase, which may be due to the exit of
competitors from the industry.





In order
to comply with certain legal and regulatory requirements, private education
loans are originated by CBNA through an intercompany
agreement.  Following final disbursement, the Company purchases all
private education loans from CBNA.  At September 30, 2008 and December
31, 2007, the private education loans disbursed and still held by CBNA were
$787.0 million and $669.2 million, respectively.





Generally,
loans are not specifically purchased or originated for resale, and accordingly
are recorded in the Company’s portfolio.  Management continually
assesses its future securitization and loan sale plans and may transfer loans
into the held for sale portfolio to meet the Company’s near term sale and
securitization requirements.





Allowance
for loan losses





The
Company’s allowance for loan losses and current period provision for loan losses
both increased significantly compared to the prior year. These increases reflect
the continued seasoning of the higher risk portion of the uninsured CitiAssist
portfolio. As more of these loans have entered repayment, write-offs have
increased, causing a rise in the current period provision for loan losses.
During the nine months ended September 30, 2008, the Company increased its
allowance for loan losses by $68.5 million, due in large part to the higher risk
uninsured loans that have not yet entered repayment status.  As these
loans move into repayment, the Company expects that write-offs will continue to
increase.   Also the bankruptcy of a proprietary school
contributed $7.1 million to the overall increase. The Company expects that the
allowance for loan losses will continue to increase through at least the end of
2008. During the second quarter of 2008, the Company terminated many of its
relationships with schools that generated higher risk uninsured CitiAssist
originations. In addition, the elimination of the Exceptional Performer program
as of October 1, 2007 has contributed to the unfavorable year-over-year
comparisons.





The
Company categorizes allowance for loan losses as FFEL Program, Insured
CitiAssist, Uninsured CitiAssist Standard and Uninsured CitiAssist
Custom.  Uninsured CitiAssist Standard is primarily related to
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 related to loans made
to non-traditional students or loans with less stringent underwriting
standards.


23


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





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Balance
      at beginning of periodFFEL
      Program
            
            $
            8,668
            
            
            $
            4,700
            
            
            $
            12,312
            
            
            $
            6,911Insured
      CitiAssist
            
            
            5,585
            
            
            
            753
            
            
            
            3,214
            
            
            
            721Uninsured
      CitiAssist Standard
            
            
            3,028
            
            
            
            –
            
            
            
            –
            
            
            
            –Uninsured
      CitiAssist Custom
            
            
            64,536
            
            
            
            9,958
            
            
            
            26,589
            
            
            
            6,565$
            81,817
            
            
            $
            15,411
            
            
            $
            42,115
            
            
            $
            14,197Provision
      for loan lossesFFEL
      Program
            
            $
            4,561
            
            
            $
            11,671
            
            
            $
            8,956
            
            
            $
            12,540Insured
      CitiAssist
            
            
            7,247
            
            
            
            704
            
            
            
            13,354
            
            
            
            2,412Uninsured
      CitiAssist Standard
            
            
            6,155
            
            
            
            –
            
            
            
            9,183
            
            
            
            –Uninsured
      CitiAssist Custom
            
            
            28,828
            
            
            
            9,044
            
            
            
            86,437
            
            
            
            20,890$
            46,791
            
            
            $
            21,419
            
            
            $
            117,930
            
            
            $
            35,842Charge
      offsFFEL
      Program
            
            $
            (3,545
            )
            
            $
            (2,731
            )
            
            $
            (9,154
            )
            
            $
            (5,307
            )Insured
      CitiAssist
            
            
            (3,284
            )
            
            
            (963
            )
            
            
            (7,020
            )
            
            
            (2,149
            )Uninsured
      CitiAssist Standard
            
            
            (78
            )
            
            
            –
            
            
            
            (78
            )
            
            
            –Uninsured
      CitiAssist Custom
            
            
            (13,816
            )
            
            
            (6,526
            )
            
            
            (37,914
            )
            
            
            (15,171
            )$
            (20,723
            )
            
            $
            (10,220
            )
            
            $
            (54,166
            )
            
            $
            (22,627
            )RecoveriesFFEL
      Program
            
            $
            –
            
            
            $
            –
            
            
            $
            –
            
            
            $
            –Insured
      CitiAssist
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Uninsured
      CitiAssist Standard
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Uninsured
      CitiAssist Custom
            
            
            2,766
            
            
            
            1,791
            
            
            
            7,202
            
            
            
            3,912$
            2,766
            
            
            $
            1,791
            
            
            $
            7,202
            
            
            $
            3,912Other
      (1)FFEL
      Program
            
            $
            –
            
            
            $
            (771
            )
            
            $
            (2,430
            )
            
            $
            (1,275
            )Insured
      CitiAssist
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (490
            )Uninsured
      CitiAssist Standard
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Uninsured
      CitiAssist Custom
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (1,929
            )$
            –
            
            
            $
            (771
            )
            
            $
            (2,430
            )
            
            $
            (3,694
            )Balance
      at end of periodFFEL
      Program
            
            $
            9,684
            
            
            $
            12,869
            
            
            $
            9,684
            
            
            $
            12,869Insured
      CitiAssist
            
            
            9,548
            
            
            
            494
            
            
            
            9,548
            
            
            
            494Uninsured
      CitiAssist Standard
            
            
            9,105
            
            
            
            –
            
            
            
            9,105
            
            
            
            –Uninsured
      CitiAssist Custom Programs
            
            
            82,314
            
            
            
            14,267
            
            
            
            82,314
            
            
            
            14,267$
            110,651
            
            
            $
            27,630
            
            
            $
            110,651
            
            
            $
            27,630





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





24


The
Company’s best estimate for the allowance for loan losses includes all losses at
each reporting period that are both probable and reasonable.  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 has a commitment that expires November 30, 2008 to fund up to $17.4
million of private education loans to a certain proprietary school. During the
quarter ended June 30, 2008,  the Company determined that, due to current
market conditions, it is probable that this committed amount will not be fully
recoverable.  Accordingly, the Company has a contingent loss reserve
of $4.1 million in Other
liabilitiesas of September 30,
2008.





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 has purchased private insurance on 76% of these loans
through United Guaranty Commercial Insurance Company of North Carolina/New
Hampshire Insurance Company (UGCIC/NHIC) and on 2% of these loans through
Arrowood Indemnity Company (Arrowood).  UGCIC/NHIC are subsidiaries of
American International Group (AIG).





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





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, which is not expected to occur in the near term.  For
loans insured during 2005 and 2006, the insurance premium is calculated under an
experience-rated plan, which may require additional premium payments in order to
maintain insurance coverage for these loans of up to $58.2 million if the loss
limits exceed the established parameters.  The Company elected to stop
insuring new CitiAssist loans originated on or after January 1, 2008. The
Company expects that the increased loan losses are likely to be more than offset
by decreases in insurance premiums paid.





UGCIC was
rated A3/Negative by Moody’s and NHIC was rated A+/Watch / Negative by
Standard & Poor’s as of September 30, 2008. UGCIC’s rating by Moody’s was
downgraded on October 3, 2008 to Baa1/Negative reflecting Moody’s view that
within the second lien and student loan sectors, loss emergence could
meaningfully surpass stand alone claims paying resources and that fundamentals
in these segments are unlikely to improve in the medium term. These negative
factors are somewhat mitigated by AIG’s explicit support agreements with UGCIC,
however AIG has no legal obligations to the Company.  In addition, on
September 16, 2008, the Federal Reserve announced that it had authorized the
Federal Reserve Bank of New York to lend up to $85.0 billion to AIG to prevent a
disorderly failure of AIG.  According to the Federal Reserve, the loan
is intended to facilitate a process under which AIG can sell certain of its
businesses in an orderly manner, with the least possible disruption to the
overall economy.  Subsequently, AIG announced additional financing
arrangements through the Federal Reserve that could provide approximately $60
billion of additional liquidity.  AIG has announced that it plans to
sell lines of business, which do not include UGCIC and NHIC, and has continued
to make claim payments on a regular basis.  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. Arrowood is not rated and carries a higher risk that it
will be unable to fulfill its contractual obligations under these insurance
agreements.





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





September
      30, 2008
            
            
            December
      31, 2007(Dollars
      in thousands)
            
            Insured
            
            
            Uninsured
      Standard
            
            
            Uninsured
              Custom
            
            
            Total
            
            
            Insured
            
            
            Uninsured
      Standard
            
            
            Uninsured
              Custom
            
            
            TotalTotal
      private education loans
            
            $
            4,523,016
            
            
            $
            373,458
            
            
            $
            919,486
            
            
            $
            5,815,960
            
            
            $
            3,869,945
            
            
            $
            –
            
            
            $
            826,392
            
            
            $
            4,696,337Private
      education loans in repayment
            
            
            1,604,739
            
            
            
            136,365
            
            
            
            472,745
            
            
            
            2,213,849
            
            
            
            1,443,110
            
            
            
            –
            
            
            
            494,093
            
            
            
            1,937,203Private
      education loans in forbearance
            
            
            215,546
            
            
            
            18,480
            
            
            
            38,207
            
            
            
            272,233
            
            
            
            147,243
            
            
            
            –
            
            
            
            22,841
            
            
            
            170,084Percent
      of private education loans that are delinquent 30 - 89
days
            
            
            3.4
            %
            
            
            1.0
            %
            
            
            4.5
            %
            
            
            3.5
            %
            
            
            2.4
            %
            
            
            0
            %
            
            
            3.8
            %
            
            
            2.8
            %Percent
      of private education loans that are delinquent 90 days or
    more
            
            
            1.9
            %
            
            
            0.1
            %
            
            
            1.4
            %
            
            
            1.7
            %
            
            
            1.3
            %
            
            
            0
            %
            
            
            1.0
            %
            
            
            1.2
            %Allowance
      for loan losses
            
            $
            9,548
            
            
            $
            9,105
            
            
            $
            82,314
            
            
            $
            100,967
            
            
            $
            3,214
            
            
            $
            –
            
            
            $
            26,589
            
            
            $
            29,803Private
      education loans covered by risk-sharing agreements with
      schools
            
            
            –
            
            
            
            –
            
            
            
            482,386
            
            
            
            482,386
            
            
            
            –
            
            
            
            –
            
            
            
            493,296
            
            
            
            493,296


25


Forbearance
usage has increased as a result of the economic environment.  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.





Of the
$919.5 million in uninsured custom loans at September 30, 2008, the Company
considers $135.4 million to be higher risk loans generally made to students
attending proprietary schools.  Most of these higher risk loans do not
follow the Company’s traditional underwriting process.  In response to
the economic environment, underwriting criteria have been tightened with
additional tightening planned in the near term.





A portion
of the uninsured loans are covered by risk-sharing agreements with schools and
universities. Under these programs, the school or university 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. Although these risk-sharing agreements exist, the Company
expects that the allowance for loan losses will continue to increase through at
least the end of 2008. Of the $135.4 million of higher risk loans,
approximately 65% are covered under the risk-sharing agreements described
above.





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:





Nine
      Months endedSeptember
      30,2008
            
            
            2007Student
      loan yield
            
            
            5.45
            %
            
            
            7.37
            %Consolidation
      loan rebate fees
            
            
            (0.28
            )%
            
            
            (0.41
            )%Accreted
      interest on residual interests
            
            
            0.26
            %
            
            
            0.25
            %Amortization
      of deferred loan origination and purchase costs
            
            
            (0.41
            )%
            
            
            (0.46
            )%Net
      yield
            
            
            5.02
            %
            
            
            6.75
            %Cost
      of funds (1)
            
            
            (3.48
            )%
            
            
            (5.05
            )%Net
      interest margin
            
            
            1.54
            %
            
            
            1.70
            %





(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 special allowance payment.  For loans originated on
or after April 1, 2006, the Company must return excess interest to the federal
government.  The CCRA Act reduced SAP for new loans originated on or
after October 1, 2007.  The impact of this reduction in SAP will be
gradual as the amount of loans originated after October 1, 2007 increases
relative to the Company’s overall portfolio.





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




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


26


The
credit spreads on the Company’s most recent borrowings under the Omnibus Credit
Agreement and on the most recent securitizations have increased considerably,
reflecting current market conditions. During the three and nine months ended
September 30, 2008, these credit spread increases raised the Company’s interest
expense by $26.0 million and $47.4 million, respectively.  This
adverse trend towards higher credit spreads is expected to continue as the
Company refinances its maturing term debt under less favorable
conditions.  Because product pricing is fixed at origination, spread
increases on refinanced debt have caused and will continue to cause net interest
margin compression on the Company’s pre-existing loan portfolio. In an effort to
mitigate this compression, the Company has begun to refine its product pricing
to reflect current market conditions and reduced certain borrower incentive
programs for new originations.  In addition, the Company expects to
participate in the Department’s Participation and Purchase Programs to fund FFEL
Program loans. See Legislation
and Regulations on page 32 and Liquidity and Capital
Resources on page 31, for further details.





The
Company’s net interest margin decreased by 16 basis points during the nine month
period ended September 30, 2008 compared to the same period last year. The
foremost drivers of this decrease were assets repricing faster than liabilities
in a rapidly declining interest rate environment and due to significantly higher
credit spreads on new borrowings. These factors were partially offset by changes
in portfolio mix towards loans with higher net yields.





At
September 30, 2008 and 2007, the outstanding borrowings had contractual weighted
average interest rates of 3.4% and 5.4%, respectively.





Rate/Volume
Analysis





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





For
      the nine months ended September 30, 2008 vs. the nine months ended
      September 30, 2007Increase
      (decrease) due to change in:(Dollars
      in millions)
            
            Volume
            
            
            Rate
            
            
            NetInterest
      earning assets
            
            $
            64.0
            
            
            $
            (313.6
            )
            
            $
            (249.6
            )Interest
      bearing liabilities
            
            
            61.5
            
            
            
            (298.5
            )
            
            
            (237.0
            )Net
      interest income
            
            $
            2.5
            
            
            $
            (15.1
            )
            
            $
            (12.6
            )





Three
Months Ended September 30, 2008





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




Three
      Months EndedSeptember
      30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            Favorable
      (Unfavorable) Change
            
            
            Favorable
      (Unfavorable) % ChangeNet
      interest income
            
            $
            83,521
            
            
            $
            100,330
            
            
            $
            (16,809
            )
            
            
            (17
            )%Provision
      for loan losses
            
            
            (46,791
            )
            
            
            (21,419
            )
            
            
            (25,372
            )
            
            
            (118
            )%Gains
      on loans sold and securitized
            
            
            194
            
            
            
            15,815
            
            
            
            (15,621
            )
            
            
            (99
            )%Fee
      and other income (loss)
            
            
            16,923
            
            
            
            (10,052
            )
            
            
            26,975
            
            
            
            268
            %Operating
      expenses
            
            
            46,176
            
            
            
            43,978
            
            
            
            (2,198
            )
            
            
            (5
            )%Provision
      for income taxes
            
            
            287
            
            
            
            15,695
            
            
            
            15,408
            
            
            
            98
            %Net
      income
            
            $
            7,384
            
            
            $
            25,001
            
            
            $
            (17,617
            )
            
            
            (70
            )%Total
      operating expenses as a percentage of average managed student
      loans
            
            
            0.46
            %
            
            
            0.49
            %
            
            
            0.03
            %Return
      on average equity
            
            
            1.8
            %
            
            
            6.2
            %
            
            
            (4.4
            )%Effective
      tax rate
            
            
            3.7
            %
            
            
            38.6
            %
            
            
            34.9
            %


27


Net
interest income





Net
interest income of $83.5 million for the three months ended September 30, 2008
decreased by $16.8 million compared to the same period in 2007. This decrease
was mainly the result of a decrease in net interest margin, partially offset by
higher average loan balances. The net interest margin for the quarter was 1.35%.
This 36 basis point decrease in margin occurred as the Company refinanced its
maturing term debt under less favorable conditions, resulting in higher premiums
over LIBOR. During the third quarter of 2008, these higher premiums
decreased the Company’s net interest income by $26.0 million. The enactment of
the CCRA Act also had a negative impact on the Company’s net interest income,
resulting in a $4.4 million reduction in the quarter. See Factors Affecting
Net Interest Income on page 26 for further information.





Gains
on loans sold and securitized





Gains on
loans sold for the three months ended September 30, 2008 totaled $0.2 million, a
$15.6 million decrease from the same period in 2007. There was no securitization
activity in the third quarter of 2008 or 2007. The decrease was due to the
overall degradation of credit market conditions, which has virtually eliminated
the market for whole loan sales and dramatically reduced the economics of
securitizations.





Fee
and other income (loss)





Fee and
other income (loss) was $16.9 million for the three months ended September 30,
2008 as compared to $10.1 million loss for the same quarter of 2007.The increase in fee and other
income (loss) was due to a net mark-to-market gain on the Company’s residual
interests of $58.0 million, which was largely due to lower expected borrower
benefit utilization and lower prepayments experienced within the Company’s
securitization trusts. The increase was also driven by a gain on foreign
currency translation of $25.0 million associated with the Company’s secured debt
and by the servicing fees and income of $20.7 million.  The gains and
income recognized were partially offset by losses on the Company’s
derivatives that serve as economic hedges on certain aspects of the
retained interests and the foreign currency translation of $56.3 million and a
lower of cost or fair value adjustment of $31.0 million on loans transferred
back into portfolio after previously being classified as held for sale in
anticipation of a third quarter securitization.  See Critical
Accounting Estimateson page 22 and Note 10 to the Consolidated Financial
Statements for further information regarding the retained interests in
off-balance sheet securitized assets and the effect of changes in each of the
key assumptions used to determine the fair value of the retained interests. For
more information on the Company’s derivative agreements, see Note 8 to the
Consolidated Financial Statements.





Operating
expenses





Total
operating expenses for the three months ended September 30, 2008 was $46.2
million, an increase of $2.2 million from the same period in
2007.  The increase in operating expenses reflects the write-off of
software assets and increased accruals for franchise related taxes, partially
offset by lower staff-related costs. The Company’s operating expense ratio for
the third quarter of 2008 was 0.46%, which decreased by three basis points over
the same period in 2007.  The decrease in operating expense ratio was
the result of the Company’s expense management and restructuring initiative
announced during the second quarter of 2008.




Provision
for loan losses





The
increase in provision for loan losses was driven by the continued seasoning of
the uninsured CitiAssist portfolio as well as an increase in the amount of
higher risk loans made to students attending proprietary schools entering
repayment. In addition, the elimination of the Exceptional Performer (EP)
program as of October 1, 2007 caused an increase in the
provision.  The Company expects that these conditions will continue to
impact the provision for loan losses through the remainder of the year. For a
full discussion of trends in the Company’s loan losses, see Allowance for
Loan Losseson page 23.




Provision
for income taxes





The
Company’s effective tax rate during the three months ended September 30, 2008
was 3.7%, compared to 38.6% for the same period in 2007.  This decrease
reflects the revaluation of the Company's current and deferred income taxes,
partially offset by the recognition of a liability related to uncertain tax
positions in certain states. The current and deferred
income tax revaluation was due to a reduction of the Company’s blended statutory
rate from 38.5% at the end of the second quarter to 37.6% at the end of the
third quarter.


28


Nine
Months Ended September 30, 2008





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




Nine
      Months EndedSeptember
      30,(Dollars
      in thousands)
            
            2008
            
            
            2007
            
            
            Favorable
      (Unfavorable) Change
            
            
            Favorable
      (Unfavorable) % ChangeNet
      interest income
            
            $
            284,358
            
            
            $
            296,964
            
            
            $
            (12,606
            )
            
            
            (4
            )%Provision
      for loan losses
            
            
            (117,930
            )
            
            
            (35,842
            )
            
            
            (82,088
            )
            
            
            (229
            )%Gains
      on loans sold and securitized
            
            
            3,770
            
            
            
            84,629
            
            
            
            (80,859
            )
            
            
            (96
            )%Fee
      and other income
            
            
            67,394
            
            
            
            14,231
            
            
            
            53,163
            
            
            
            374
            %Operating
      expenses
            
            
            142,160
            
            
            
            133,927
            
            
            
            (8,233
            )
            
            
            (6
            )%Provision
      for income taxes
            
            
            30,798
            
            
            
            86,514
            
            
            
            55,716
            
            
            
            64
            %Net
      income
            
            $
            64,634
            
            
            $
            139,541
            
            
            $
            (74,907
            )
            
            
            (54
            )%Total
      operating expenses as a percentage of average managed student
      loans
            
            
            0.48
            %
            
            
            0.50
            %
            
            
            0.02
            %Return
      on average equity
            
            
            5.4
            %
            
            
            11.8
            %
            
            
            (6.4
            )%Effective
      tax rates
            
            
            32.3
            %
            
            
            38.3
            %
            
            
            6.0
            %




Net
interest income





Net
interest income of $284.4 million for the nine months ended September 30, 2008
decreased by $12.6 million as compared to the same period in 2007. The net
interest margin for the nine months ended September 30, 2008 was 1.54%, which
was a 16 basis point decrease from the same period in 2007. This decrease was
primarily driven by rapidly declining interest rates in the first quarter, which
impacted assets more quickly than liabilities, and higher premiums, which
decreased the Company’s net interest income by $47.4 million.  Also
driving this decrease was a $9.6 million reduction in interest income due to the
enactment of the CCRA Act.  These decreases were partially offset by
changes in portfolio mix towards loans with higher net yields and higher average
loan balances.See
Factors
Affecting Net Interest Income on page 26 for further
information.




Gains
on loans sold and securitized





Gains on
loans sold and securitized for the nine months ended September 30, 2008 totaled
$3.8 million, an $80.9 million decrease from the same period in 2007. The
decrease was due to the overall degradation of market conditions which began
during the second half of 2007 and has continued through 2008.  This
degradation of market conditions has virtually eliminated the market for whole
loan sales and reduced the economics of securitizations.





Fee
and other income





The
increase in fee and other income was due to a net mark-to-market gain on the
Company’s retained interests of $104.8 million and the gain on foreign currency
translation of $20.7 million associated with the Company’s secured debt and
income servicing fees of $57.9 million.  The gains and income
recognized were partially offset by losses on the Company’s
derivatives that serve as economic hedges on certain aspects of the
retained interests and the foreign currency translation of $74.2 million and by
the lower of cost or fair value adjustment of $34.7 million on loans that were
classified as held for sale.  See Note 10 to the Consolidated
Financial Statements for further information regarding the retained interests in
off-balance sheet securitized assets and the effect of changes in each of the
key assumptions used to determine the fair value of the retained interests. For
more information on the Company’s derivative agreements, see Note 8 to the
Consolidated Financial Statements.


29


Operating
expenses





Total
operating expenses for the nine months ended September 30, 2008 was $142.2
million, an increase of $8.2 million from the same period in
2007.  The increase was primarily driven by $8.7 million of
restructuring and related charges primarily associated with the Company’s
strategic repositioning efforts recognized during the second quarter of 2008,
partially offset by the impact of the Company’s expense management and
restructuring initiative.   See Note 2 to the Consolidated
Financial Statements for further information regarding the Company’s
restructuring and related charges.





Provision
for loan losses





The
increase in provision for loan losses was driven by the continued seasoning of
the uninsured CitiAssist portfolio as well as an increase in the amount of
higher risk loans made to students attending proprietary schools entering
repayment. In addition, the elimination of the EP program as of October 1, 2007
caused an increase in the provision.  The Company expects that these
conditions will continue to impact the provision for loan losses through the
remainder of the year. For a full discussion of trends in the Company’s loan
losses, see Allowance for
Loan Losseson page 23.





Provision
for income taxes





The
Company’s effective tax rate during the nine months ended September 30, 2008 was
32.3%, compared to 38.3% in the same period of 2007.  This decrease
reflects the revaluation of the Company’s current and deferred income taxes and
the net effect of the recognition of a liability related to certain state
taxes.  As of September 30, 2008, the blended statutory rate is
37.6%.





Securitization
Activity and Off-Balance Sheet Transactions





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





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




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





Three
      Months Ended
                  
                  
                  Nine
      Months EndedSeptember
      30,
                  
                  
                  September
      30,(Dollars
      in thousands)
                  
                  2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Securitization
      sales:Student
      loans securitized (1)
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  2,035,540
                  
                  
                  $
                  1,201,603Net
      proceeds from student loans securitized during the period
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  1,973,207
                  
                  
                  
                  1,221,216Realized
      gains on loans securitized
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  1,262
                  
                  
                  
                  48,548Securitization
      financings:Student
      loans securitized (1)
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  1,993,213
                  
                  
                  $
                  –Net
      proceeds from student loans securitized during the period (2)
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  1,798,638
                  
                  
                  
                  –





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




(2)
            The
      difference between student loans securitized and net proceeds received for
      the nine months ended September 30, 2008 primarily reflects $57.3 million
      of unissued notes, $10.5 million of issuance costs and discounts and
      $126.8 million of required overcollateralization (see Note
      12).




30


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





(Dollars
      in millions)
              
              September
      30, 2008
              
              
              December
      31, 2007Total
      off-balance sheet student loans securitized (1)
              
              $
              15,346
              
              
              $
              14,124Total
      on-balance sheet student loans securitized (2)
              
              
              1,930
              
              
              
              –Total
      secured borrowings related to on-balance sheet
    securitization
              
              
              1,774
              
              
              
              –Residual
      interests from off-balance sheet student loans securitized
              
              
              744
              
              
              
              633Servicing
      assets from off-balance sheet student loans securitized
              
              
              193
              
              
              
              199





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




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





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





The
Company also has credit commitments with schools and institutions which are
detailed in Sources and Uses of
Cash 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
from the federal government, securitizations and funding under the Omnibus
Credit Agreement 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 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.  The Company may shift its use of either source or
augment funding with alternate sources in response to changes in market
conditions.





The
Omnibus Credit Agreement expires in December 2009.  The Company is
currently negotiating a new agreement with CBNA to replace the existing
agreement. This agreement is the Company’s largest financing
source.  Under the current Omnibus Credit Agreement, the cost of
funding is negotiated on a borrowing-by-borrowing basis. Given current market
conditions, as future funding transactions are executed under the Omnibus Credit
Agreement, funding costs could rise further. 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
September 30, 2008, the amount of credit available under the Omnibus Credit
Agreement was approximately $7.2 billion.  During 2008, the Company
entered into long-term borrowings totaling $6.2 billion under the Omnibus Credit
Agreement.  Due to dislocation and illiquidity in the credit markets,
the credit spreads on these borrowings are substantially higher than the
Company’s previous borrowings under the Omnibus Credit Agreement. As of
September 30, 2008, the Company has $10.7 billion of short-term borrowings
outstanding under the Omnibus Credit Agreement of which $5.6 billion will become
due and payable during the remainder of 2008. The Company expects that the
interest rates on renewals of these borrowings will be significantly higher than
the Company’s prior borrowings.


31


Despite
the adverse conditions within the credit markets, the Company was able to
successfully execute one on-balance sheet and one off-balance sheet
securitization in the first nine months of 2008. The Company used the $3.8
billion of proceeds to fund its new loan disbursements and other operating
activities. The credit spreads realized on these transactions were higher than
any of the Company’s previous securitizations, with credit spreads on the Class
A notes increasing from between 20 and 110 basis points over the transaction the
Company completed during the fourth quarter in 2007. This increase is consistent
with recent trends in the student loan asset-backed securities market. Due to
these recent trends and adverse market conditions, the Company decided to
cancel a previously planned securitization and transfer $1.9 billion of loans
held for sale back into its portfolio.  Market conditions will
continue to be closely monitored and will be influential to the Company’s future
securitization decisions. See Notes 1 and 10 to the Consolidated Financial
Statements for additional information about the Company’s securitization
activities.





In the
fourth quarter the Company expects to begin leveraging the Department’s Loan
Participation Program under The Ensuring Continued Access to Student Loans Act
of 2008.  This program will provide an additional source of funding to
the Company at credit spreads that are typically lower than the Company’s other
funding alternatives.  At the end of the third quarter the
Company had approximately $0.5 billion of loans that could qualify for
participation. See Legislation
and Regulations below for further details.





The
Company’s cash expenditures for equipment and computer software are primarily
comprised of software developed for internal use.  Cash expenditures
for equipment and computer software amounted to $8.0 million and $4.7 million
for the nine months ended September 30, 2008 and 2007,
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 primarily through
borrowings under the Omnibus Credit Agreement with CBNA, loan securitizations
and the Department’s Loan Participation and Purchase Programs under The Ensuring
Continued Access to Student Loans Act of 2008, which is described more fully in
Legislation and
Regulations below. In addition, the Company is evaluating 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, for the longer-term.





Legislation
and Regulations





Legislative
and Regulatory Impacts





Over the
past decade, certain amendments to the Higher Education Act of 1965, which
governs the FFEL Program, have reduced the interest spread earned by holders of
FFEL Program loans. The most significant recent such amendment was the CCRA,
which was signed into law on September 27, 2007.  The Company expects
that yields will decrease as new loans with lower yields are added to the
portfolio and older, more profitable loans are repaid. In addition, amendments
to the Higher Education Act authorized the enactment of the Federal Direct
Student Loan Program (Direct Lending). Private lenders, such as the Company, are
not eligible to participate in this loan program, which directly competes with
the FFEL Program in originating student loans.





H.R. 5715
the Ensuring Continued Access to Student Loans
Act of 2008 (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 will be an access problem for students
attempting to obtain FFEL Program loans due to lenders partially or wholly
withdrawing from the FFEL Program market due to the current liquidity
restrictions in the capital markets, higher costs of funds and the effects of
the CCRA Act discussed below. Other provisions of this law include increasing
the annual and aggregate Stafford borrowing limits, providing authority for the
Department to advance federal funds to FFEL Program guaranty agencies acting as
Lenders of Last Resort, authorizing the Department to purchase FFEL Program
loans from current holders, provided that the proceeds are reused in the FFEL
Program, and allowing Parent PLUS Loan borrowers the option of postponing
payments on the loan until six months after the student's last day of at least
half-time enrollment.  The Department subsequently distributed to the
student loan industry the critical documents to be used in the program (e.g.
Master Purchase Agreement and a Master Participation Agreement). In accordance
with the program, the Company filed a required Notice of Intent to Participate
with the Department on July 3, 2008. The notice is non-binding, but is a
condition precedent to any use of the new program.


32


H.R. 6889
was signed into law by the President 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 purchase program 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.





H.R.
4137, the Higher Education
Opportunity Act of 2008  (HEOA) was signed into law on August
14, 2008. Along with revisions to the Higher Education Act, it also reauthorizes
the federal student loan programs through 2014.  Many of the
provisions of the HEOA are 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. Key provisions
include:





·
            Extending
      the in-school deferment and 6 month post-enrollment period provided to
      Parent PLUS Loan borrowers under H.R. 5715 to also include Graduate PLUS
      Loan borrowers.·
            Providing
      for the Servicemembers' Civil Relief Act provision of limiting the
      interest rate on loans to 6.00% to apply to federal
  loans.·
            Revising
      the existing Teacher Loan Forgiveness program to include teachers employed
      by educational service agencies. Also creates forgiveness programs for
      borrowers employed in areas of national need and as civil legal assistance
      attorneys.·
            Including
      new or revised federal loan disclosures at identified periods including:
      at loan approval, before disbursement, before repayment, during repayment,
      during delinquency, and when borrowers are having difficulty making
      payments.·
            Amending
      the Truth-in-Lending Act to include: additional disclosures in an
      application or solicitation upon loan approval of private education loans;
      a requirement that a creditor shall notify the school before it may issue
      educational loan funds; a restriction that no funds may be disbursed until
      acceptance of the loan by the borrower and the expiration of a three
      business day right-to cancel period following consummation; and an
      expansion of other specific provisions.·
            Defining
      a preferred lender arrangement between a school and lender under which the
      lender makes educational loans.·
            Requiring
      a lender that participates in a preferred lender arrangement to certify to
      the Secretary of the Department that its preferred lender arrangements
      comply with provisions of the Higher Education Act. The certification must
      be attested to by the lender’s auditor.·
            Requiring
      the Department to develop a model disclosure for use by schools and
      lenders in disclosing the terms of educational loans (including private
      educational loans) offered by the lender.·
            Requiring
      lenders to submit a report to all schools with which they have preferred
      lender arrangements.  The schools are required to report this
      information to the Department, explaining why the loans are beneficial to
      the students. These reports must be available to students and parents.
      Schools must also disclose that students are not required to use preferred
      lenders.·
            Requiring
      schools that provide information on private educational loans to inform
      the students of their eligibility for Title IV assistance, with a
      description of the terms of the loans that are less favorable than Title
      IV loans.





In
relation to HEOA, the Department of Education will be providing further
regulatory guidance to the industry on the actual application of the new
statutory requirements. However, the Company is already in the process of
identifying system and procedural changes that will be required to ensure its
ongoing compliance with the Higher Education Act.


33


Current
Activity




On
October 23, 2008, the Department published Federal Register Vol. 73, No. 206
which contains final regulations that are 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. The Company will be reviewing the content of these Final Regulations to
identify what system and procedural changes will be needed to properly comply
with the requirements.







Pending
Litigations




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 likely have a material adverse effect on the Company’s business,
financial condition or 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 Company’s actual results to differ
materially from those the Company expects, including, but not limited to: the
success of the Company’s strategic repositioning efforts, the effects of
legislative changes, particularly those relating to re-authorization of the
Higher Education Act of 1965, as amended, that affect the demand for and
interest rates on student loans, especially the establishment of certain fixed
rates of interest on Stafford Loans and FFEL Program loans; loan origination
costs; the availability and amount of  loan subsidies, and any effect
on the Company’s interest rate spreads; the cost of education; the availability
of alternative financing options to students and their parents, including
competitive products offered by other lenders; the effects of changes in
accounting standards; actual credit losses, loan collection strategies and their
impact on delinquency rates, and the adequacy of loan loss reserves;
fluctuations in interest rates and between various interest rate indices,
particularly the manner in which short-term rates affect the Company’s funding
costs, consolidation rates, the rates at which interest accrues on its loan
portfolio and the demand for student loans; changes in prepayment rates on
student loans from anticipated rates and in the quality and profitability of
those loans that move into repayment status, as well as actual experience with
the repayment cycle of the loan portfolio; the Company’s and other servicers’
ability to continue to service the loan portfolio in accordance with their
contractual obligations; the volume of loan consolidations; the adequacy of the
Company’s capital expenditures and of funds allocated for future capital
expenditures; the success of its marketing efforts, especially its electronic
marketing efforts; the Company’s ability to acquire or originate loans in the
amounts anticipated and with interest rates that generate sufficient yields and
margins; the performance of the Company’s loan portfolio servicers, insurers and
risk-sharers; the Company’s ability to utilize alternative sources of funding,
including its ability to continue to securitize loans; as well as general
economic conditions, including the performance of financial
markets.


34


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:





September
      30,(Dollars
      in millions)
            
            2008
            
            
            2007100
      basis points
            
            Increase
            
            
            Decrease
            
            
            Increase
            
            
            DecreaseChange
      in interest income
            
            $
            (8.4
            )
            
            $
            12.8
            
            
            $
            (6.1
            )
            
            $
            20.8





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




Item
      4.  Controls and
Procedures





(a)
            Disclosure
      Controls and Procedures





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





(b)
            Internal
      Control Over Financial Reporting





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


35


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 34.
 The
following discussion sets forth certain risks that the Company believes could
cause its actual future results to differ materially from expected or historical
results. However, the discussion below is not exhaustive, and other factors
could have a material adverse impact on the Company’s results. These factors
include, among others, natural disasters, acts of terrorism and
epidemics.


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





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




In
response to these events, the Company has:





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





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





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





Factors
that could significantly affect profitability include:





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




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


36


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





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





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





The
Company actively monitors the creditworthiness of its insurers, but in the event
that a guarantor, third-party insurer or risk-share school is unable to meet its
contractual obligations under the related arrangements, the Company’s financial
condition could be adversely affected. On September 16, 2008, the Federal
Reserve announced that it had authorized the Federal Reserve Bank of New York to
lend up to $85.0 billion to AIG to prevent a disorderly failure of
AIG.  According to the Federal Reserve, the loan is intended to
facilitate a process under which AIG can sell certain of its businesses in an
orderly manner, with the least possible disruption to the overall
economy.  Subsequently, AIG announced additional
financing arrangements through the Federal Reserve that could provide
approximately $60 billion of additional liquidity.  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.





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




The
Company’s credit risk exposure is also impacted by the size and performance of
the uninsured private education loan portfolio that is not originated under a
risk-sharing relationship, which has grown over recent years. As of September
30, 2008, the uninsured private education loan portfolio included $135.4 million
of higher risk loans made to students attending proprietary schools. Most of
these higher risk loans do not follow the Company’s traditional underwriting
process. As the economy continues to contract, the Company’s financial condition
could be adversely impacted by net credit losses on this portfolio.




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





The
Company uses derivative agreements in an effort to help manage interest rate
risk. The Company’s derivative instruments do not qualify for hedge accounting
under Statement of Financial Accounting Standards (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.


37


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





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





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





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





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





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





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





If the
Company is unable to secure more favorable pricing under the Omnibus Credit
Agreement, the Company’s reliance on the asset-backed securitization market may
increase. If the Company is unable to execute future securitization
transactions, the Company may need to identify alternative sources of funding.
The Company plans to begin participation in the Department’s Loan Participation
Commitment Program and Loan Purchase Program under The Ensuring Continued Access
to Student Loans Act of 2008 as an alternate source of funding during the fourth
quarter.  If participation is unsuccessful or not cost beneficial it
may have an unfavorable impact. The Company may need to identify other
alternative sources of funding, which may not be available on favorable pricing
or terms, if at all.   Failure to secure cost-effective funding
alternatives would adversely impact the Company’s ability to fund student loan
originations and could materially increase the Company’s cost of
funds.




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





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


38


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





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





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





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





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





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





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


Other
risk of loss resulting from inadequate or failed internal processes, people or
systems, or from external events may have an adverse effect on the Company’s
financial condition.
 
 The
Company is subject to many types of operating risks which include, but are not
limited to, risk of loss resulting from inadequate or failed internal processes,
people or systems, or from external events. These operational risks encompass
reputational and franchise elements associated with the Company’s business
practices or market conduct. They also include the risk of failing to comply
with applicable laws, regulations, regulatory administrative actions or the
Company’s internal policies.  Given the high volume of transactions at
the Company, certain errors may be repeated or compounded before they are
discovered and rectified. In addition, the Company’s necessary dependence upon
automated systems to record and process its transaction volume may further
increase the risk that technical system flaws or employee tampering or
manipulation of those systems will result in losses that are difficult to
detect. The Company may also be subject to disruptions of its operating systems
arising from events that are wholly or partially beyond its control (for
example, natural disasters, acts of terrorism, epidemics, computer viruses, and
electrical/ telecommunications outages), which may give rise to losses in
service to borrowers and/or monetary loss to the Company, increasing operating
expenses and adversely affecting the Company’s competitive position. All of
these risks are also applicable where the Company relies on outside vendors to
provide services to it and its borrowers.
 39
 In
the normal course of business the Company is exposed to various legal risks that
could have an adverse effect on the Company’s business operations.
 
 Various
issues may give rise to legal risk and cause harm to the Company and its
business prospects.  These issues include appropriately dealing with
potential conflicts of interest, legal and regulatory requirements, ethical
issues, privacy laws and information security policies. Failure to address these
issues appropriately could also give rise litigation claims against the Company,
or subject the Company to regulatory enforcement actions, fines and
penalties.





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





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





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





It is
difficult for the Company to plan for or mitigate the effects of such
legislative or regulatory changes. For further information on the impact of the
CCRA Act, see Legislation and
Regulationson page 32.  In addition, future regulatory changes
cannot be predicted and could have a material impact on the Company’s financial
condition or results of operations.





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





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





Item
      6.
              Exhibits





See
Exhibit Index.


40


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:
November 7, 2008





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





41


EXHIBIT
INDEX








Exhibit


Number
            Description of
      Exhibit





3.1
            Restated
      Certificate of Incorporation of the Company, incorporated by reference to
      Exhibit 3.1 to the Company’s 1992 Annual Report and Form 10-K (File No.
      1-11616).3.2
            By-Laws
      of the Company, as amended, incorporated by reference to Exhibit 3.2 to
      the Company’s 1994 Annual Report and Form 10-K (File No.
      1-11616).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




42