Student Loan Corp. in the Spotlight

When a J.C. Flowers-led group of investors bid $25 billion last week to take over the nation's largest student-loan provider, Sallie Mae (NYSE: SLM  ) , the move had a spill-over effect on some of its competitors in the industry. On Monday, Student Loan Corp. (NYSE: STU  ) moved up 5.2% higher than its close on Friday, in part because of the possibility that other lenders could ultimately become takeover targets of private-equity firms, now that the attractiveness of the student-loan business has come to the forefront.

SLC, a lender with a $3.9 billion market cap, is 80% owned by Citibank, a subsidiary of Citigroup (NYSE: C  ) , and has been a steady, long-term performer. It did, however, report a 4.8% decrease in earnings per share on Monday, when it released its first-quarter earnings report. The drop was largely attributable to reduced net interest income, higher loan-loss provisions, and increased Q1 operating expenses. Income from loan sales, however, did rise, along with servicing revenue.

There are other bright spots, too. SLC has almost quadrupled in size since the start of 2000, has paid a quarterly dividend every quarter since 1992, and has upped that amount every year since 2002. And its origination performance has been thriving: The company's managed student loan portfolio grew by 10% to $34.7 billion during the 12-month period ended March 31. 

On the other hand, investors should remember that Citibank agreed earlier this month to a $2 million settlement with the New York Attorney General's office pertaining to questionable marketing practices by student-loan providers. So although things are looking fairly good for SLC, there is indeed some risk involved by diving into the $85 billion student loan industry. Fools would be wise to tread carefully.

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Fool contributor Billy Fisher does not own shares of any of the companies mentioned.


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