Citigroup, Education / Schools, Law Schools, Student Loans, Trendspotting

Citi Sells Student Loan Division: Can’t You Hear the Bubble Bursting?

In a couple of years, we might look back on today as the first point where the giant, unsustainable bubble that is the student loan market began to burst. Check out this press release:

The Student Loan Corporation (NYSE:STU – News), a subsidiary of Citibank, N.A., and a leading originator and servicer of student loans, announced that The Student Loan Corporation (“SLC”) and Discover Financial Services (“Discover”) have entered into a definitive agreement for Discover to acquire SLC, and thereby become the owner of its private student loan business as well as $4 billon of its private student loans. Separately and immediately prior to the transaction, (i) SLM Corporation (“Sallie Mae”) will acquire from SLC $28 billion of securitized federal student loans and related assets and (ii) Citi will acquire from SLC certain federal and private student loans and other assets totaling $8.7 billion. Upon the closing of the transactions described above, shareholders of SLC will receive $30 per share.

So Citi is getting out of the student loan origination business (although they’ll still have some existing loans on their books). I guess they don’t want to be the Lehman Brothers of this failing market…

Obviously, Discover thinks they are getting a good and valuable company. In related news: if you can’t spot the sucker at the poker table, you are the sucker:

“We are pleased that Discover intends to leverage and build upon SLC’s 52 years of experience, proven market leadership, robust distribution, and private loan product expertise to continue serving schools, students and families nationwide,” said Mr. Michael Reardon, Chairman, President and Chief Executive Officer of SLC…

“The combination of SLC’s and Discover’s private student loan capabilities intends to provide a more robust, comprehensive suite of education finance solutions. And it will enable delivery of industry leading service to schools and borrowers, while providing students with reliable access to an affordable education,” added Mr. Reardon.

Does Reardon have any kind of robust and comprehensive strategy for dealing with the fact that these students are not able to pay back their student loans? Because I don’t understand how you can look at the student loan industry without seeing waves and waves of students defaulting on their loans coming just over the horizon. Tuition is out of control. Lenders lend without considering whether these kids will be able to pay the money back, and the American job market is in the tank. Is this really the time you want to be in the business of originating student loans?

Evidently, Citi answered “no” to that question. The fact that student debt is non-dischargeable through bankruptcy absent a showing of undue hardship wasn’t enough to convince Citi to keep shoveling money down this hole.

How long until Discover figures out the same thing? How long until the market realizes that students can’t pay back loans with money they don’t have?

When it hits the fan, remember that this all starts with universities having free rein to charge whatever they want for education, regardless of whether or not there is a job market for the degrees.

The Student Loan Corporation to Be Sold in a Series of Transactions [Yahoo News]
Citi to sell bulk of its student loans unit [Financial Times]

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