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(Updated with additional information and stock prices.)



) -- Shares of

Student Loan

( STU) skyrocketed Friday on word of a buyout.

Student Loan shares jumped on reports that

Discover Financial Services

(DFS) - Get Free Report

will pay $600 million, or $30 per share, to acquire the loan provider. It will take on $4.2 billion in private student loans and the ongoing business of Student Loan, including $3.4 billion of Student Loan's existing asset-backed securitization debt funding.

Separately, Student Loan, an indirect subsidiary of


(C) - Get Free Report

, will sell $28 billion of assets to

Sallie Mae

(SLM) - Get Free Report

and $8.7 billion of assets to


, Citigroup's retail banking operations, and "will explore opportunities to reduce these assets over time," Citigroup said.

The remaining $4.7 billion in loans will be sold to the U.S. Department of Education, which was previously disclosed, it said.

Citi will take an after-tax loss on the sales of approximately $500 million for the quarter. Both transactions are expected to be completed by the end of the year.

CEO Vikram Pandit said that once the divestiture is completed, Citi Holdings' remaining assets will be less than 20% of Citigroup's total balance sheet assets.

"We are very pleased with the progress we've made and the momentum we have in executing our strategy," Pandit said.

Citi already owned 80% of Student Loan, or about 16 million shares.

The sale will reduce Citi Holding's assets by $32 billion, or 70% of Citi's private student loans.

"The private student loan business is an important part of Discover's direct banking strategy, and this acquisition will enhance our competitive position in private student loan originations," said Discover CEO David Nelms. "The transaction is expected to be immediately profitable for our shareholders."

Discover expects the deal to boost its per-share earnings by 9 cents in 2011.

"For Sallie Mae this is about serving 1.3 million new customers as they repay their $27 billion of loans," said Sallie Mae spokeswoman Martha Holler. "We pursued what made sense for us in terms of new customers, asset quality and potential return."

Student Loan shares jumped 41.1% just over half way through the day's session on more than 16 times their average trading volume, to $29.83. Sallie Mae gained 4.2% to $11.69. Discover shares slipped 0.3% to $15.75, while Citigroup was flat at $3.97.

The subject of student loans has been a hot topic on Wall Street in recent weeks as for-profit schools traded sharply lower over the summer when the U.S. government proposed regulations that were seen as hurting the industry's booming earnings growth.


S&P 1500 Education Index

, which tracks the industry, was up 11% this month through Tuesday, while the benchmark

S&P 500 Index

rose 6.8%.



, the largest company in the industry and parent of the University of Phoenix, jumped nearly 13% in September after losing half its value over the summer.

The industry index dove 34% from June through August, a retreat that began after the Obama administration announced June 16 that it would seek regulations aimed at stanching for-profit schools' high rate of student-loan defaults and curbing their aggressive marketing practices.

>>Corinthian Miss Drags on School Stocks

That was followed by a series of proposals to meet those objectives from the Department of Education, including one that would reduce schools' ability to make federal loans based on the rate of their students' loan defaults.

Repayment rates at for-profit schools were just 36% in fiscal 2009, according to research from the Institute for College Access and Success, a student-advocacy group. At private nonprofit schools the repayment rate was 56%, and at state colleges and universities the rate was 54%.

Under the Department of Education's proposed "gainful employment" rule, federal aid would be cut for schools where less than 45% of students are able to repay their loans. Additionally, schools would only be eligible for federal aid if student debt remains below 8% of total income or below 20% of discretionary income.

The Higher Education Act of 1965 requires that programs in need of federal aid provide their students "gainful employment in a recognized profession."

Since as much as 90% of for-profit schools' revenue is tied to government loans, losing the right to offer them would be devastating to earnings.

The Education Department also issued its calculations of student-loan-repayment rates for specific schools in August in an attempt to preview its suggested rules' potential impact. That also roiled shares since it showed that most companies are not in compliance.


(DV) - Get Free Report

averaged repayment rates of 40% at its universities last year.

Strayer Education

(STRA) - Get Free Report


Corinthian's Everest colleges

(COCO) - Get Free Report


Washington Post's


Kaplan averaged in the 20s.

At those levels, Strayer, Kaplan and Everest colleges could be ineligible for federal aid if the proposed legislation is enacted.

For now, the industry's investment prospects remain cloudy since the Education Department has to walk a fine line in its attempts at reform. Although critics have suggested that loose student-loan practices have created a scenario similar to that seen prior to the sub-prime mortgage bubble, the Obama administration has done much to emphasize post-secondary education's role in retraining workers to meet the demands of a changing economy.

Although there will probably be some casualties due to reforms, what is clear is that the for-profit education industry is not going to go away since it now serves an estimated 12% of the nation's post-secondary students. And that number should continue to grow as budget cuts force public and non-profit schools to cut their educational offerings.

-- Written by Miriam Marcus Reimer in New York.

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Miriam Reimer


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