Discover buying $2.5B in student loans from Citi

NEW YORK (AP) — Discover Financial Services on Thursday said it is buying another $2.5 billion in private student loans from Citigroup.

The deal, disclosed in a regulatory filing, comes nine months after Discover bought Citi's private student loan business, The Student Loan Corp., and a portfolio of loans and other assets totaling $4.2 billion.

The price for the latest deal is roughly 99 percent of the face value of the loans, which translates to about $2.48 billion. The purchase is expected to close by Sept. 30.

Discover held $52.51 billion in total loans, including credit card balances, as of May 31, the end of its fiscal second quarter. Of that, $4.57 billion was student loans, up from $820 million the year earlier. Most of the increase reflected the Student Loan Corp. buyout.

Income from loan fees is a growing part of Discover's earnings base, rising 16 percent increase from last year in the second quarter, to $81 million.

Student loans tend to be among the most reliable types of lending in terms of payback. Discover wrote off just 0.51 percent of loans on an annualized basis in the second quarter, excluding problem loans that came with the purchase of Student Loan Corp. That compares with a 2.88 percent charge-off rate for personal loans, and a 5.01 percent charge-off rate for its credit cards in the period.

In May, speaking at a conference in London, Harit Talwar, the company's president for U.S. Cards, said the student loan business now exceeds $5 billion a year for Discover, which is based in Riverwoods, Ill.

"We really like this business," he said. "In the U.S., as you know, education costs are increasing much faster than income. And therefore, students need funding for tuition fees."

He noted the business "caters to a student community which is upwardly mobile," and more than 90 percent of student loans are co-signed, which increases the chance that they'll be repaid. Discover expects to be the third-largest originator of private student loans in the country this year.

Discover shares rose 13 cents to $25.29 in midday trading. New York's Citigroup Inc. shares fell 32 cents to $30.73.

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