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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

          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.

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

          The aggregate market value of voting stock held by non-affiliates of the registrant as of March 5, 2003 was approximately $376 million.  On that date, there were 20,000,000 shares of Common Stock outstanding.

Documents Incorporated by Reference:

          Portions of the Proxy Statement relating to the registrant’s Annual Meeting of Stockholders to be held May 15, 2003 are incorporated by reference into Part III of this Report.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

General

The following discussion should be read in conjunction with the financial statements and accompanying notes.

Background

The Student Loan Corporation (the “Company”) originates, manages and services federally insured student loans through a trust agreement with Citibank (New York State) (“CNYS”), an indirect wholly owned subsidiary of Citigroup Inc. The Company is one of the nation’s largest originators and holders of student loans guaranteed under the Federal Family Education Loan (“FFEL”) Program, authorized by the U.S. Department of Education (the “Department”) under the Federal Higher Education Act of 1965, as amended, (“the Act”).  The Company also holds student loans that are not insured under the Act, primarily CitiAssist Loans, introduced in 1997.

The Company was incorporated in Delaware on November 4, 1992 and commenced operations on December 22, 1992.  For more than 25 years prior to December 22, 1992, the Company operated as a division (the “Division”) of CNYS. On December 22, 1992, the assets of the Division were exchanged with CNYS for 20 million shares of the Company’s common stock and the Company’s agreement to pay approximately $2.8 billion to CNYS and to assume certain obligations of CNYS.  On December 23, 1992, CNYS sold four million shares of its holdings of the Company’s common stock in an initial public offering.  CNYS continues to own 80% of the Company’s outstanding common stock.

Critical Accounting Policies

The Company’s accounting policies are in conformity with accounting principles generally accepted in the United States of America.  Certain of the Company’s accounting policies are considered critical in that they require management’s judgment and the use of estimates in the portrayal of the Company’s financial condition. 

Revenue recognition
Revenues, which include interest, fees and gains on loans securitized, are recognized as earned.  Interest income may include special allowance payments and other interest subsidies made by the federal government as prescribed under the  Act.  Premiums and discounts on loan portfolio purchases and loan origination and lender fees paid on disbursements are deferred and amortized to interest income on a level yield basis over the average life of the student loans in those portfolios. Average life is determined based upon a consideration of a variety of factors, including customer prepayments and guarantor payments received through the claims process.  The average life of a student loan may be different from one portfolio to another based upon loan type, year of origination or purchase, or other factors.  Therefore, different lives are used for different portfolio types based upon these underlying loan characteristics and historical performance.  The average lives of these loans are reviewed periodically and compared to actual loan run off.  The Company makes periodic adjustments to average life based on these comparisons and analyses.

Hedging transactions
The Company’s overall risk management strategy includes utilizing interest rate swap agreements to manage its exposure to interest rate variability between the rates paid on its borrowings and received on its loan assets.  In order to reduce this basis risk, the Company may enter into interest rate swap agreements on portions of its portfolio to receive payments based on LIBOR and make payments based on the asset yield, usually the 91-day Treasury Bill rate. The Company’s interest rate swap agreements are accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No.133, “Accounting for Derivative Instruments and Hedging Activities”, as amended, which requires that all derivatives be recorded at fair value on the balance sheet. These derivatives, which have been designated and are effective as cash flow hedges, are recorded in other liabilities.  Changes in these derivatives’ fair value, net of taxes, are recorded in the accumulated other changes in equity from nonowner sources component of stockholders’ equity.  Fair value was determined by discounting the cash flows using market interest rates through the contractual maturity dates. Hedge ineffectiveness, if any, is reported in interest expense as incurred.  However, since the derivatives are exactly matched with the underlying loan assets they hedge, the Company’s management expects no hedge ineffectiveness. No amounts have been excluded from the assessment of effectiveness and no hedge ineffectiveness has been recognized in earnings pursuant to these swap agreements.  For additional information on the valuation of the Company’s interest rate swaps and the impact of the swaps on the financial statements, see Notes 1 and 12 to the financial statements.

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Student loan securitizations
The Company accounts for its securitization transactions 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”.  Under the Company’s program to securitize student loans, the loans are removed from the financial statements of the Company and ultimately sold to an independent trust. In turn, the trust sells debt securities, backed by the student loan assets, to outside investors.  Since the securitizations meet the SFAS No. 140 criteria for sale recognition, gains or losses on the sale of the student loans are recorded at the time of securitization. Gains or losses are reflective of the difference between the carrying value of the assets sold to the trust and the fair value of assets received, which are composed of cash proceeds and residual interests retained in the loans securitized.

Residual retained interests from the securitizations are accounted for as investments in available-for-sale debt securities and are included in other assets.  Initial and subsequent measurements of the fair value of the residual retained interests were performed using a discounted cash flow model.

As required by SFAS No. 140, the effect of two negative changes in each of the key assumptions used to determine the fair value of retained interests must be disclosed.  The negative effect of the change in each assumption must be calculated independently, 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 below.

At December 31, 2002, the key assumptions used to value the retained interests were as follows:

The sensitivity of the fair value of the retained interests to adverse changes in the key assumptions at December 31, 2002 was:

These estimates and assumptions are subject to change and, therefore, the fair values of the retained interests as presented in the financial statements are subject to possible impairment and may not be fully recoverable. For additional information on the Company’s securitization activities, see Note 15 to the financial statements.

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Allowance for loan losses
An allowance for loan losses has been established primarily to provide a reserve for estimated potential future losses arising from the risk-sharing provisions of the FFEL and CitiAssist Programs.  Amounts for estimated potential future losses are expensed currently; actual losses are charged off against the reserve as they are incurred.  Under the FFEL Program provisions, claims on defaulted FFEL Program student loans disbursed on or after October 1, 1993 that are approved for payment by a guarantor are paid net of a risk-sharing loss, amounting to 2% of the principal and accrued interest claimed.  Most CitiAssist Loans are insured by private third party insurers and are, generally, subject to risk-sharing losses of 5%.  The allowance also provides a reserve for certain CitiAssist Loans that are not insured against loss.

The allowance for loan losses is established using a process that begins with estimates of probable losses inherent in the FFEL Program and CitiAssist Loan portfolios, based upon various statistical analyses.  These include migration analysis, in which historical delinquency and credit loss experience is applied to the current aging of the portfolio, together with analyses that reflect current trends and conditions.  The estimated losses (net of any third party risk-sharing) are accrued to the allowance when the student loans reach 90 days of delinquency.  Actual losses, including those that arise from claims with guarantors and private insurers, are charged against the allowance as they occur.  At December 31, 2002, an adverse change of 20% in each of the key indicators used to determine estimated losses would not have had a material impact on the Company’s financial condition or operating results.  See Note 2 to the financial statements for further information on the allowance for loan losses.

Future Application of Accounting Standards

In January 2003, the Financial Accounting Standards Board (“FASB”) released FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”).  This interpretation changes the method of determining whether certain entities, including securitization entities, should be included in consolidated financial statements.  Variable Interest Entities (“VIEs”) are defined as entities: (1) that have their total equity investment at risk since it is not sufficient to finance their activities without additional subordinated financial support from other parties, or (2) that have equity investors that lack certain essential characteristics of a controlling interest, such as the ability to make significant decisions about the entity’s activities or the obligation to absorb the expected losses or receive the expected returns of the entity.  Certain entities, including transferors to qualifying special-purpose entities (“QSPEs”) meeting the reporting requirements of SFAS No. 140, are specifically exempted from the scope of FIN 46.  Since the Company’s securitizations use trust arrangements that meet the QSPE conditions of SFAS No. 140, the financial statements of the Company’s QSPEs will not be consolidated with the financial statements of the Company.  Therefore, FIN 46 is not expected to have a material impact on the Company’s financial condition or results of operations.

Also, on January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, prospectively to all awards granted, modified, or settled after December 31, 2002.  The prospective method is one of the adoption methods provided for under SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, issued in December 2002.  The fair value recognition provisions of SFAS No. 123 require that compensation cost for all stock awards be calculated and recognized over the service period.  This compensation cost is determined using option pricing models, intended to estimate the fair value of the awards at the grant date.  Prior to January 1, 2003, the Company applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, application of which generally results in no charge to earnings for employee stock option awards because the options granted under these plans have an exercise price equal to the market value of the underlying stock at the grant date.   Starting in 2003, the Company will be recording an expense for stock option awards.  This cost is not expected to have a material impact on the Company’s financial condition or results of operations. See Note 9 to the financial statements for information on the affiliated party transactions related to the stock option program.  The Company, through its parent, Citigroup, has made changes to various stock-based compensation plan provisions for future awards.  Other changes also may be made that may impact the Company’s SFAS No. 123 costs.

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Financial Condition and Results of Operations

Summary

The Company’s 2002 net income was $175.5 million ($8.77 basic earnings per common share), an increase of $40.1 million (30%) compared to 2001 net income of $135.4 million ($6.77 basic earnings per common share).  The increase in net income was primarily due to higher net interest income generated by portfolio growth and improved net interest margin attributable to lower funding costs.

At December 31, 2002, the Company’s student loan assets were composed of a $17.3 billion portfolio of FFEL Program loans held, a $1.8 billion portfolio of CitiAssist and other alternative loans held, and a $1.4 billion inventory of FFEL Program loans available for sale.  Total loan assets of $20.5 billion increased $2.3 billion (13%) from the December 31, 2001 balance of $18.2 billion.  The increase in the loan balance was due to new FFEL Program loan disbursements of $3.5 billion and loan purchases of $3.0 billion, partially offset by loan repayments of $3.1 billion, loan sales of $0.6 billion, and loan securitizations of $0.5 billion.

An analysis of loan disbursements is presented in the table below:         

The FFEL Program Stafford and Plus Loan disbursements and CitiAssist Loan disbursements under commitments to purchase represent the Company’s loan activity sourced through primary school channels (see Marketing on page 15 for further information), as well as FFEL Program Federal Consolidation Loan disbursements in which the underlying loans are obtained through these channels. The increase in loan disbursements for 2002, compared to 2001, is primarily attributable to ongoing sales and electronic commerce initiatives and increased Federal Consolidation Loan volume resulting from the interest rate environment, which induced more borrowers to consolidate their loans to lock in the prevailing rates for a new contractual repayment term.  The Company’s total FFEL Program loan disbursements were $3,484 million in 2002 and $2,428 million in 2001.

The Federal Consolidation Loan originations reflected in the above table do not include the Consolidation Loans generated through third party marketing relationships.  Loans generated through third party marketing relationships are reported as purchases since unconsolidated loan balances held by other lenders must be purchased at face value from the other lenders prior to loan consolidation and incur third party procurement costs. The inventory of loans available for sale was established in the first quarter of 2002 and at December 31, 2002 was composed entirely of FFEL Program Consolidation Loans purchased through third party marketing relationships.

An analysis of loan purchases is presented in the table below: 

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The Company’s student loan purchases included $1,077 million of loans purchased for portfolio and $1,931 million purchased for its resale inventory.   Compared to loans purchased in 2001, the Company’s loan purchases in 2002 increased $517 million (21%), primarily as a result of increased Consolidation Loan volume.

Not reflected in the table above are CitiAssist Loans of $501 million, disbursed in 2002 by CNYS but not yet acquired by the Company.  These amounts are not included in the Company’s December 31, 2002 loan portfolio.  In order to comply with certain legal requirements, CitiAssist Loans are originated by CNYS through an intercompany agreement.  Following full disbursement, the Company purchases all qualified CitiAssist Loans at the current value at the time of purchase, including contractual fees.  Under the agreement, the Company expects to acquire substantially all of the $501 million CNYS-owned CitiAssist Loans during the first half of 2003.  Approximately $874 million of CitiAssist Loans were originated by CNYS in 2002, $256 million (41%) higher than in 2001.  Excluding the purchase premium, the Company’s CitiAssist Loan portfolio grew to a balance of $1,784 million at December 31, 2002, reflecting a $657 million increase from December 31, 2001.

Allowance for loan losses primarily represents estimated potential losses arising from the risk-sharing provisions of the FFEL and CitiAssist Programs.  Under the FFEL Program provisions, most FFEL Program loans submitted for default claim are subject to 2% risk-sharing losses.  Most CitiAssist Loans are insured by private third party insurers and are, generally, subject to risk-sharing losses of 5%.  The allowance also provides a reserve for certain CitiAssist Loans that are not insured against loss.  At December 31, 2002 and 2001, the Company held $268.7 million and $162.2 million, respectively, of CitiAssist Loans that did not carry third party insurance.  Approximately two-thirds of these uninsured CitiAssist Loans carry risk-sharing agreements with creditworthy universities.  Allowance for loan losses increased to $5.5 million at December 31, 2002, $1.9 million higher than the $3.6 million balance at December 31, 2001. The increase in allowance for loan losses is primarily attributable to growth in the repayment portfolio, including CitiAssist Loans, and is not indicative of any material changes in delinquency rates between the two years.

The Company’s return on equity for 2002 was 24.7%, an increase of 2.3% from 22.4% in 2001.  The improvement was primarily attributable to increases in net interest income generated by portfolio growth and floor income.  See Special Allowance and Floor Income on page 6 for further discussion.

Net Interest Income

Net interest income (interest earned from student loans less interest expense on borrowings) for 2002 was $393.3 million, a $76.8 million (24%) increase, compared to 2001 net interest income of $316.5 million. The 2002 increase is a result of higher floor income and growth in the Company’s interest-earning assets. 

Net interest margin for 2002 was 2.02%, an increase of 19 basis points from 1.83% in 2001.  The margin improvement in 2002 was attributable to increased floor income (see Special Allowance and Floor Income on page 6), resulting from the Company’s ability to take advantage of favorable funding opportunities.

The Act imposes a 0.5% origination fee on FFEL Program student loan disbursements and an annual fee of 1.05% on the portfolio balance of Federal Consolidation Loans held.  In addition, in 1998 the Act reduced the interest rate borrowers pay on Federal Stafford Loan disbursements by 0.8%, of which 0.3% is borne by lenders.  These amendments have reduced the interest spread earned on the FFEL Program guaranteed student loan portfolio as new loans with lower yields were added to the portfolio and older, more profitable loans were repaid.  Despite the reduction in funding costs and its expected effect on net income, pressure on margins will continue as more loans are originated with lower yields.  In addition, the Act may be amended by Congress at any time, possibly resulting in further reductions in FFEL Program loan subsidies and reduced interest margins.  Any such amendment could adversely affect the Company’s business and prospects.  The Company continues to search for ways to take advantage of greater economies of scale. It is pursuing both new and existing marketing programs, including e-commerce, and continues to expand its guarantor relationships and market alternative loan products, such as CitiAssist, that are not dependent on federal funding and program authorization.

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The following table sets forth the average rates earned on interest earning assets and paid on interest bearing liabilities:

The following table shows the components of the annual changes in net interest income:

Special Allowance and Floor Income

Most FFEL Program loans originated prior to July 23, 1992 have fixed interest rates.  Those issued subsequent to July 23, 1992 generally have variable rates.  Most FFEL Program loans also qualify for the federal government’s special allowance payment (“SAP”).  Whenever the stated interest rates on these FFEL Program loans provide less than prescribed rates of return, as defined by the Act, the federal government makes a SAP, which increases the lender’s loan yield by markups ranging between 1.74 and 3.50 percentage points per annum, over a base rate (“Base Rate”) tied to either the 91-day Treasury Bill auction yield or the 90-day Commercial Paper rate, depending on the loan’s origination date.

In periods of declining interest rates, the stated fixed borrower rates, which are subject to various annual reset provisions, become, in effect, interest rate floors.  Floor income is generally earned in declining short-term interest rate environments when the Company’s cost of funds declines while this borrower interest rate remains fixed, generating net interest margin in excess of the expected spread.  Floor income may also be earned on certain Federal Consolidation Loans since the borrower interest rate for these loans is fixed for the life of the

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loan.  Depending on the manner in which the Company’s assets are funded, the Company may earn net interest margin spreads, which include floor income, on portions of its portfolio until the borrower interest reset date, which occurs annually for the majority of the Company’s loans.  The Company earned $66.1 million of floor income in 2002, compared to $35.9 million in 2001, when short-term interest rates were higher.

Fee and Other Income

For 2002, the Company generated fee and other income of $18.2 million, a $7.7 million (72%) increase from 2001. This increase is attributable primarily to a $5.0 million growth in late fees.  This growth was generated by the larger portfolio in repayment and the inclusion of a full year of late fees, compared to 2001, when late fees were first introduced to a significant portion of the portfolio.

Operating Expenses

Operating expenses for 2002 were $108.9 million, or 0.56% of average student loans.  For 2001, operating expenses were $91.8 million or 0.53% of average student loans. The $17.1 million (19%) increase in operating expenses is primarily attributable to the incremental costs incurred to service the larger portfolio, investments in systems infrastructure and growth in the Company’s sales organization.  The three basis point increase in the expense ratio was primarily attributable to increased investments in sales and technology.

Income Taxes

The Company’s effective tax rates were 40.64% for 2002, 40.63% for 2001 and 41.55% for 2000.

The Company’s 2002 income tax provision of $120.1 million was $27.5 million (30%) higher than the 2001 income tax provision of $92.6 million.  The increase was primarily attributable to a 30% increase in income before income taxes, as compared to the prior year.

The Company had net deferred income tax liabilities of $105.9 million at December 31, 2002, $12.0 million higher than the balance of $93.9 million at December 31, 2001.  The deferred income tax liabilities resulted primarily from temporary differences related to deferred loan origination and procurement costs.  Procurement costs have increased over the past few years due to the larger volumes of loans purchased in these years.  See Notes 1 and 11 to the financial statements for further discussion.

2001 Compared to 2000

The Company’s 2001 net income was $135.4 million ($6.77 basic earnings per common share), up $30.5 million (29%) from 2000 net income of $104.9 million ($5.24 basic earnings per common share). The increase in net income was primarily attributable to higher net interest income, generated by both loan portfolio growth and floor income. 

At December 31, 2001, the Company’s student loan portfolio reached $18.2 billion, an increase of $2.5 billion (16%) from December 31, 2000.  The increase in loans outstanding was primarily due to new FFEL Program loan disbursements of $2.4 billion and portfolio purchases of $2.5 billion during 2001, primarily offset by loan repayments.  The December 31, 2001 student loan balance was composed of $17.0 billion of FFEL Program loans and $1.2 billion of CitiAssist and other alternative loans. 

An analysis of loan disbursements is presented in the table below:

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The Company’s total FFEL Program loan disbursements were $2,428 million in 2001 and $2,208 million in 2000.

The Company’s loan purchases for 2001 and 2000 are shown in the table below:

Allowance for loan losses at December 31, 2001 was $3.6 million, $0.7 million higher than the balance at the end of 2000. The increase in allowance for loan losses is primarily attributable to growth in the portion of the student loan portfolio that is in repayment and at least 90 days delinquent.

Net interest income was $316.5 million for 2001, compared with 2000 net interest income of $258.3 million.  The $58.2 million (23%) increase primarily resulted from increased floor income and higher interest revenue attributable to the growth in average loans outstanding.  Net interest margin for 2001 decreased to 1.83% from 1.95% in 2000.  The 12 basis points decline was attributable to legislated interest rate reductions as well as the Company’s decision to diversify loan sourcing to include loans obtained through non-school distribution channels, specifically the secondary market and third party loan consolidation channels.  Loans acquired through these channels generally have lower yields than loans sourced through primary school channels.  The impact of the lower yields was partially offset by increased floor income.

Operating expenses were $91.8 million (or 0.53% of average student loans) for 2001, compared to $79.6 million (or 0.60% of average student loans) for 2000.  The $12.2 million (15%) increase in 2001 operating expenses was due primarily to increases in sales and technology investments and higher external servicing costs incurred to maintain the larger loan portfolio.  The seven basis points improvement in the expense ratio was primarily driven by leveraging the Company’s infrastructure to support asset growth, partially offset by increased investments in sales and technology.

Off-Balance Sheet Transactions

Securitization is a process by which the loans are transferred to a special purpose entity (“SPE”), thereby converting the loans into cash before they would have been realized in the normal course of business.  The SPE obtains the cash to pay for the loan assets received by issuing securities to investors in the form of debt instruments (asset-backed securities).  Investors have recourse to the assets in the SPE and benefit from other credit enhancements, such as a cash collateral account and other specified enhancements. 

During 2002, the Company entered into off-balance sheet arrangements in which $449 million of Federal Consolidation Loans were securitized.  These loans were removed from the financial statements of the Company and ultimately sold to an independent trust that was established for that purpose. The loans were sold at par value to the trust through a wholly owned SPE formed to acquire the Company’s loans. In turn, the trust sold debt securities, backed by the student loan assets, to outside investors (“the Noteholders”).

The Company accounts for its securitization transactions in accordance with the provisions of SFAS No. 140.  Since the securitizations meet the SFAS No. 140 criteria for sale recognition, gain or loss on the sale of the student loans is recorded at the time of securitization.  During 2002, the Company recorded a pre-tax gain of $4.1 million on the sale of the securitized assets. The gain was reflective of the difference between the carrying value of the assets sold to the trust by the Company’s wholly owned special purpose subsidiary and the fair value of the assets received, composed of cash proceeds and assets retained in the trust. The Company may use the cash proceeds from securitization to retire debt, fund new loan originations, purchase loans or for other business purposes.  The Company relies on securitizations to provide funding for these activities. Proceeds of $449 million were realized in 2002 related to student loan securitizations.

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The documents establishing the trust generally require the Company to maintain an ownership interest in the trust.  At December 31, 2002, the Company maintained a residual ownership interest in the assets securitized of approximately $21.7 million.  These interests are composed of a note receivable of $8.6 million and other retained interests of $13.1 million and are included in other assets in the Company’s financial statements.  The Company regularly reviews these retained interests for impairment and accounts for them as investments in available-for-sale debt securities. In the event that net cash flows derived from the securitized student loan assets are insufficient to meet the payments of interest to trust investors and make the other fee and transaction payments of the trust, the Company’s retained interest is reduced or forfeited. The Company’s loss is limited to its retained interest in the securitized assets.

The Company retained the servicing relationship on the portfolios securitized in 2002 and receives servicing and administrative fees from the trust. Failure to service the loans in accordance with contractual obligations could lead to a termination of the servicing rights and the loss of future servicing revenue. As a result, the Company considers both the securitized and unsecuritized student loans to be part of the business it manages.

The $449 million proceeds from the 2002 securitizations were used to retire debt.  During 2002, cash flows of $0.2 million were received by the Company from the trust for loan servicing and administrative fees.  Also, consistent with terms agreed upon at the time the transactions were consummated, $1.8 million was paid to the Company by the trust to acquire additional eligible add-on loan assets during 2002.  Add-on loan assets are other outstanding loans, eligible for consolidation under the Act, that a borrower requests to have added on to his or her Consolidation Loan within a prescribed period after consolidation.  At December 31, 2002, total student loan assets held by the trust were approximately $442 million.  At that time, both receivables due from the trust and payables due to the trust were approximately $0.1 million.  During 2002, the trust paid $3.8 million in note interest to third party Noteholders.  As of December 31, 2002, the Company had unpaid accrued interest of $0.2 million on its note receivable since, consistent with the terms of the securitization, no cash flows were required to be paid to the Company in 2002 for interest.

For additional information on the Company’s securitization activities, see Notes 1 and 15 to the financial statements.

Related Party Transactions

CNYS owns 80% of the Company’s outstanding common stock.  CNYS and other affiliates of Citigroup have entered into a number of significant transactions with the Company through intercompany agreements.  The Company believes that the terms of these agreements are no less favorable to the Company than those that could be obtained from unaffiliated third parties.

The Company’s loan portfolio primarily consists of student loans originated under the FFEL Program through a trust agreement with CNYS.  The majority of the Company’s loan originations and servicing is performed through the provisions of intercompany agreements with affiliates of Citigroup.  The Company incurred charges of $32.4 million, $32.3 million and $28.0 million pursuant to these agreements in 2002, 2001 and 2000, respectively.

In addition, the Company holds a portfolio of alternative loans, primarily CitiAssist Loans, which are purchased from CNYS after final disbursement.  Although the CitiAssist Loans are originated by CNYS, the Company provides the  servicing on these loans.   Expenses incurred by the Company to underwrite, disburse and service these loans for CNYS are reflected in a service fee, which the Company charges to CNYS based on the provisions of an intercompany agreement.  Amounts paid to the Company by CNYS pursuant to the servicing agreement amounted to $8.0 million, $5.6 million and $4.0 million in 2002, 2001 and 2000, respectively. Following full disbursement, the Company purchases all qualified CitiAssist Loans at the current value at the time of purchase, including contractual fees.   Loan premiums paid on the purchased loans are amortized as yield adjustments over the average life of a CitiAssist Loan.  As of December 31, 2002 and 2001, the Company’s CitiAssist Loan portfolio was $1,784.0 million and $1,127.1 million, respectively, exclusive of unamortized premiums.

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The Company shares with CNYS 50% of the deferred tax assets resulting from the payments made to CNYS by the Company in November 1992 in exchange for the transfer of assets to the Company and the execution of a noncompetition agreement.  The corresponding liability is recorded as a payable to principal stockholder on the Company’s financial statements.  The Company is also included in the consolidated federal income tax return of Citigroup and is included in certain combined or unitary state/local income or franchise tax returns of Citicorp/Citigroup or its subsidiaries.

The Company’s borrowings of $19.8 billion and $17.6 billion at December 31, 2002 and 2001, respectively, were made under the terms of an Omnibus Credit Agreement with CNYS, which currently provides for $25 billion in total credit.  Interest expense of $579.2 million, $835.1 million and $835.5 million was incurred under the terms of the agreement in 2002, 2001 and 2000, respectively.  See Notes 4 and 5 to the financial statements for further information on the Company’s borrowings.

Also, the Company’s interest rate swap program is administered by an affiliate of Citigroup.  The affiliated party receives a fee of 0.005% of the notional amount of the swaps, primarily for the use of credit lines and counterparty risk management systems.   Also, in 2002 interest expense of approximately $2.0 million was incurred pursuant to interest rate swap agreements with an affiliate of Citigroup.

The Company, through its participation in Citigroup’s employee benefit plans, participates in various stock-based compensation plans under which Citigroup stock or stock options are granted to certain of the Company’s employees.  For the years ending December 31, 2002, 2001 and 2000, participation in these plans had no material impact on the Company’s financial condition or results of operations.

Certain services, including facilities procurement, employee benefits, data processing, telecommunications, payroll processing and administration, and others, are provided to the Company under agreements with CNYS and other Citigroup affiliates.  The Company also receives servicing and administrative fees for work performed on portfolios owned by affiliates in accordance with terms of intercompany agreements.  Such service fees recorded by the Company for services received and earned by the Company for services provided are recorded based on assessments of actual usage or using other allocation methods, which, in the opinion of management, approximate actual usage.  Management believes that the terms of these agreements are no less favorable to the Company than those that could be obtained from unaffiliated third parties.  The Company was charged $15.5 million, $13.8 million and $12.6 million for services received pursuant to intercompany agreements in 2002, 2001 and 2000, respectively, and recorded revenue of $8.0 million, $5.6 million and $4.0 million in 2002, 2001 and 2000, respectively, for services provided to affiliates.  See Note 9 to the financial statements for further information.

Regulatory Impacts

See discussion of the regulations to which the Company’s student loan portfolios are subject and their impact on the Company at Notes 1, 2 and 16 to the financial statements.

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.  The Company’s actual results may differ materially from those suggested by the forward-looking statements, which 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 including, but not limited to, the following: the effects of future legislative changes, including those affecting the interest rates borrowers pay on certain loans and the magnitude of certain loan subsidies; the effects of changes in accounting standards; actual credit losses experienced by the Company in future periods compared to the estimates used in calculating reserves; fluctuations in the interest rates paid by the Company for its funding and received on its loan portfolio; the actual level of the Company’s capital expenditures; the success of the Company’s hedging policies; the Company’s ability to acquire or originate loans in the amounts anticipated and with interest rates to generate sufficient yields and margins; the Company’s ability to continue to develop its electronic commerce initiatives; the Company’s success in expanding its guarantor relationships and products; the Company’s ability to utilize alternative sources of funding, including its ability to continue to securitize loan portfolios; the Company’s ability to derive incremental economic benefits from greater economies of scale as its portfolio grows; as well as general economic conditions, including the performance of financial markets and the implementation of regulatory changes.

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Risk Management

Risk management is an important business objective of the Company. The Company actively manages market, credit and operating risks.

Market risk encompasses both liquidity risk and price risk. Liquidity risk is the risk that an entity may be unable to meet a financial commitment to a customer, creditor or investor when due. Price risk is the risk to earnings that arises from changes in interest rates. Market risk is managed through the Company’s Asset/Liability Management Committee (“ALCO”).  ALCO reviews the current and prospective funding requirements and makes recommendations to management. Also, the Company periodically reviews expectations for the market and sets limits as to interest rate and liquidity risk exposure.

The Company manages credit risk by maintaining risk-sharing agreements with servicers performing certain underwriting and collection operations and by ensuring that the Company’s interest rate swap agreements, if any, are entered into only with those counterparties having investment-grade external credit ratings.  Also, for each of its loan products, the Company prepares annual credit product programs that are approved by senior management and include detailed risk analysis by loan type.  In addition, the Company is periodically reviewed by Citigroup Audit and Risk Review teams, guarantors and third party insurers to monitor portfolio quality and processing compliance.  The Company is also subject to annual Department-mandated independent compliance reviews of its FFEL Program student loan portfolio.  Credit risk is minimized by the federal guarantees maintained on its FFEL Program student loan portfolio and by the credit loss insurance carried on a significant portion of its alternative loan portfolio.  The alternative loan credit loss insurance is purchased from investment-grade insurance companies.  Counterparty risk from these third party insurers is actively managed by the Company.

Operating risks are those risks arising from servicing defects that could potentially result in losses to the guaranteed student loan portfolio.  FFEL Program loans that are not originated or serviced in accordance with Department regulations risk loss of guarantee or interest penalties.  The Company manages operating and credit risks by conducting compliance and process reviews of the Company’s loan servicers and through contractual remedies for losses incurred due to servicing errors.

In addition, the Company is subject to operating risk resulting from the servicing of a substantial portion of its loan portfolio by one servicer, an affiliate.  The Company believes that its policies, procedures, servicer reviews and contractual remedies mitigate this risk.  Furthermore, the Company currently maintains servicing agreements on portions of its portfolio with several other servicers, each capable of providing servicing to additional portions of the portfolio, if needed.

The Company’s FFEL Program guaranteed loan portfolio is subject to regulatory risk in the form of reduced interest subsidies and increased origination costs, in addition to risk to the existence of the program itself.  Historically,  legislation and the reauthorization process have reduced the net interest margin earned by lenders.

Market Risk

The Company’s primary market risk exposure results from fluctuations in the spreads between the Company’s borrowing and lending rates, which may be impacted by shifts in market interest rates.  The Company’s overall risk management strategy includes utilizing interest rate swap agreements to manage its exposure to interest rate variability between the rates paid on its borrowings and received on its loan assets.  In order to reduce this basis risk, the Company may enter into interest rate swaps on a portion of its portfolio to receive payments based on LIBOR and make payments based on the asset yield, usually the 91-day Treasury Bill rate. The Company’s hedge program is effective in offsetting changes in cash flows for the risk being hedged and is in compliance with the hedge accounting requirements of SFAS No. 133, as amended.

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During 2002, the Company entered into a number of interest rate swap contracts with an affiliate of Citigroup to receive payments based on LIBOR and make payments based on the 91-day Treasury Bill rate.  These derivatives, which have been designated and are effective as cash flow hedges, have notional amounts totaling $3.2 billion. The contractual terms of these agreements are for periods ranging from six to twenty-four months. The fair value of the swaps at December 31, 2002 was a $11.8 million liability and is reflected in other liabilities on the balance sheet with a corresponding amount, net of taxes of $4.8 million, reflected in accumulated other changes in equity from nonowner sources, a component of stockholders’ equity.

Net amounts reclassified from accumulated other changes in equity from nonowner sources are reported in interest expense. Substantially all of the balance in accumulated other changes in equity from nonowner sources is expected to be reclassified into earnings within the next twelve months.  For 2002, no amounts were excluded from the assessment of effectiveness and no hedge ineffectiveness was recognized in earnings related to these swap agreements.   Hedge ineffectiveness, if any, is reported in interest expense as incurred.  During 2001, the Company had no interest rate swap agreements and managed interest rate risk directly through its funding agreements.

Market risk is measured using various tools, including Earnings-at-Risk.  The Earnings-at-Risk calculation seeks to determine the effect that shifts in interest rates are expected to have on net interest margin in future periods.  The Company prepares Earnings-at-Risk calculations to measure the discounted pre-tax earnings impact over a preset time span of a specified upward and downward shift in the interest rate yield curve.  The Earnings-at-Risk calculation, a static and passive measurement that excludes management’s responses to prospective changes in market interest rates, reflects the repricing gaps in the position as well as option positions, both explicit and embedded, in the loan portfolio.  Earnings-at-Risk is calculated by multiplying the gap between interest sensitive items, including assets, liabilities and derivative instruments, by a 100 basis point change in the yield curve.

The Earnings-at-Risk calculation measures the Company’s position at one point in time. As indicated in the table below, as of December 31, 2002, a 100 basis point increase in the interest yield curve would have a potential negative impact on the Company’s pre-tax earnings of approximately $38.8 million for the next twelve months and approximately $174.7 million thereafter.  A 100 basis point decrease in the interest yield curve as of December 31, 2002 would have a potential positive impact on the Company’s pretax earnings of approximately $43.5 million for the next twelve months and approximately $174.7 million thereafter.  The increase in the 2002 year-end Earnings-at-Risk calculations, compared to the previous year-end, was due to the interest rate environment at December 31, 2002 and its impact on floor income.

Earnings-At-Risk (on pre-tax earnings)

In addition, the Company has significantly greater exposure to uneven shifts in interest rate curves (i.e. the Treasury Bill to LIBOR rate spreads).  The Company, through its ALCO, actively manages these risks by setting Earnings-at-Risk limits and takes actions in response to interest rate movements against the existing structure.

Liquidity and Capital Resources

The Company’s primary funding needs are those required to finance its loan portfolio and meet its cash requirements for new loan originations and operating expenses.  The Company’s cash expenditures for software developed for internal use was $10.5 million, $7.5 million and $6.3 million in 2002, 2001 and 2000, respectively.  In those periods, the Company had no material capital expenditures, other than software developed for internal use.  The Company expects the level of capital expenditures for the next several years to be generally consistent with 2002 levels.

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The Company’s cash used for investing activities, primarily consisting of disbursements and purchases of loans, amounted to $2,398.3 million in 2002, $2,531.9 million in 2001, and $4,955.8 million in 2000.  Investing activities were financed in 2002, 2001 and 2000 primarily through the utilization of available short- and long-term credit lines.  New borrowings, net of repayments, for 2002, 2001 and 2000 increased $2,206.1 million, $2,194.0 million and $4,855.7 million, respectively, compared to borrowings outstanding a year ago from those dates.

The Company’s future cash needs will depend primarily on the volume of new loan disbursements and purchases as well as the cash provided (or used) by operating activities.  The Company expects new loan disbursements and purchases volumes to continue to be funded primarily through additional borrowing.

The Company’s primary contractual cash obligations are indicated in the chart below:

The Company carefully weighs interest rate risk in choosing between funding alternatives.  It currently meets its funding requirements primarily through credit facilities provided by CNYS.

In October 2002, the existing credit agreement with CNYS was amended to increase the maximum aggregate credit limit available for combined short- and long-term borrowings from $20.0 billion to $25.0 billion.  Maturity dates and terms for all existing outstanding borrowings were unchanged.  At December 31, 2002, $5.2 billion of the credit facility was available for additional short- and long-term borrowings.  The current credit agreement expires on December 31, 2004. Since its inception, the term of the Company’s assets has exceeded the term of the credit facilities with CNYS.  To date, the Company has successfully extended the terms of these facilities and/or increased its borrowing limits when needed.  In addition, the Company has successfully developed alternative sources of financing, such as securitization.  

At December 31, 2002, the Company was a party to several forward funding agreements with CNYS to procure short- and long-term funding in amounts of $15.8 billion and $2.0 billion, respectively, at specified times in the future.  From time to time, the Company is able to take advantage of prevailing interest rate conditions by entering into agreements to procure future funding at current rates.  Since the Company’s funding arrangements are term fundings with fixed maturity dates, these forward funding agreements generally extend the due dates on existing borrowings that otherwise would mature on the start date of the forward contracts.  Interest rates are at the implied current forward rates at the time the contracts were entered into and range between 1.4% and 2.6%.  The forward funding agreements commenced between January 2, 2003 and January 16, 2003 and are contracted to mature between April 1, 2003 and January 4, 2005.

In 2002, as noted above, the Company began a securitization program, which also provides an alternative source of funding.  During 2002, the Company securitized approximately $449 million of FFEL Program Consolidation Loans.  The Company used the proceeds from the securitizations to reduce its outstanding borrowings and intends to use the proceeds from any future securitizations for additional debt reduction.  See Note 15 to the financial statements and Off-Balance Sheet Transactions on page 8 for additional information about the Company’s securitization activity.

Management currently considers liquidity and capital to be sufficient to meet the Company’s anticipated requirements for the next twelve months.

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Other Business and Industry Information

Student Loans

The Company is currently eligible to make the following types of FFEL Program loans: subsidized Federal Stafford, unsubsidized Federal Stafford, Federal Parent Loans to Undergraduate Students (“PLUS”) and Federal Consolidation Loans. Subsidized Federal Stafford Loans are generally made to students who pass certain need criteria.  Unsubsidized Federal Stafford Loans are designed for students who do not qualify for subsidized Federal Stafford Loans due to parental and/or student income and assets in excess of permitted amounts or whose need exceeds the basic Stafford limit.  Federal PLUS Loans are made to parents of students who are dependents.  The Federal Consolidation Loan Program allows multiple federal loans, including those of both the FFEL and the Federal Direct Student Loan Programs, to be combined into one single aggregate insured loan.  Consolidation Loans may include government-guaranteed loans formerly held by other lenders.  Prior to consolidation, any loan balances that are not currently owned by the Company are purchased at face value from other lenders.  A Consolidation Loan is allowed an extended repayment term of up to 30 years, depending on the loan balance.  In addition, the Company’s portfolio includes Federal Supplemental Loans for Students (“SLS Loans”).  SLS Loans were originated prior to July 1994, when new loan disbursements through this program were discontinued.  Federal SLS Loans include loans to graduate, professional and independent undergraduate students, and, under certain circumstances, dependent undergraduate students.  In 1994, the SLS Program was replaced with an expanded unsubsidized Federal Stafford Loan program. The Company also owns a portfolio of Health Education Assistance Loans (“HEAL” Loans), composed of guaranteed student loans for borrowers in designated health professions under a federally insured loan program administered by the U.S. Department of Health and Human Services.  Although no new loans are being originated under this program, the Company has pursued acquisition of HEAL Loans from other holders.

The Department administers the FFEL Program under Title IV of the Act.  In order to comply with the provisions of the Act, all of the Company’s FFEL Program loans are held, and all new FFEL Program loans are originated, by the Company through a trust established solely for the benefit of the Company.  An institution, such as the Company, that does not fall within the Act’s definition of “eligible lender” may hold and originate FFEL Program loans only through a trust or similar arrangement with an eligible lender.  The Company’s trust agreement is with CNYS, a New York State bank, which qualifies as an eligible lender under the provisions of the Act.

The Company’s portfolio also contains loans originated through alternative loan programs, primarily CitiAssist.  Alternative loan programs are available for students who either do not qualify for government student loan programs or need additional financial assistance beyond that available through government programs.  Alternative loans are offered based on the borrower’s or co-signer’s creditworthiness, in addition to financial need as established by the educational institution.  Most are insured by private insurers.

The Company also participates in the secondary student loan market through purchases of loans that consist of subsidized Federal Stafford Loans, unsubsidized Federal Stafford Loans, PLUS Loans, Federal Consolidation Loans and HEAL Loans.  Most Federal Consolidation Loans are made through third party marketing channels.  Loans acquired through these channels generally have lower yields than student loans sourced through school lender lists and other primary channels.

Origination of FFEL Program Loans

The Company is one of the nation’s largest originators and holders of student loans guaranteed under the FFEL Program. The Company’s student loan volume primarily results from the Company’s marketing efforts (see Marketing on page 15), repeat borrowers, Internet leads and college fair participants.

A student must attend an eligible educational institution in order to participate in the FFEL Program. Eligible institutions can be divided into three categories: four-year colleges and universities, two-year institutions and proprietary (vocational) schools.  In addition to other criteria, school eligibility is determined by the default rate on guaranteed loans to its students. Under the Act, eligible lenders, subject to certain restrictions, may choose not to make loans to students attending certain schools, defined by school type, geographic location or default experience.

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For Stafford loans, the student and school complete a Master Promissory Note and send it either to the Company or directly to the guaranty agency (“guarantor”).  For PLUS Loans, the school, parent and student complete a combined application/promissory note.  Both the guarantor and the Company must approve the loan request.   Upon guarantor approval, the guarantor sends a notice of guarantee to the Company.  After receiving the notice of guarantee, the Company makes disbursements of the loan directly to the school and sends a disclosure statement to the borrower confirming the terms of the loan.

In 2001, the Company began originating loans under “blanket guarantee” agreements with certain guarantors, under which the Company is eligible to retain guarantees on certain loan originations without having to obtain loan approval on each individual loan.

Seasonality

Origination of student loans is generally subject to seasonal trends, which correspond to the beginning of the school year. Student loans are disbursed as directed by the school and are usually divided into two or three equal disbursements released at specified times during the school year. The two periods of August through October and December through February account for approximately 75% of the Company’s total annual disbursements. While applications and disbursements are seasonal, the Company’s earnings are generally not tied to this cycle.  Due to the Company’s portfolio size, new disbursements or run-off for any given month will not materially change the net interest earnings of the portfolio.

Marketing

Unlike many other lenders, the Company has a policy of holding and servicing the majority of the loans it directly originates through school channels.  Management believes that this policy makes the repayment process easier for the borrower and gives the Company a marketing advantage with potential borrowers and financial aid administrators (“FAAs”).  The Company attributes its growth primarily to its emphasis on: 1) providing service to FAAs, 2) offering competitive and innovative products that meet the needs of schools and students, 3) expanding marketing channels through electronic commerce and 4) employing a focused marketing and sales team.  In addition, the Federal Consolidation Loan volumes increased in 2002, compared to 2001, as a result of the interest rate environment, which induced more borrowers to consolidate their loans to lock in the prevailing rates for a new contractual repayment term.

Management believes that FAAs are one of the most important influences on lender selection. An FAA, in order to streamline the financial aid process and promote competition, may develop a list of preferred lenders which students may utilize. Accordingly, the Company focuses marketing efforts on meeting the needs of FAAs by offering a variety of products and services that help FAAs aid students in financing their education. The Company’s account managers service the financial aid community and assist FAAs by resolving problems and issues, providing updates on the Company’s programs and supplying information for students.

The Company has made advancements in and expects to continue to develop its electronic commerce initiatives. The Company’s main website, http://www.studentloan.com, as well as its other proprietary websites, http://www.citiassist.com and http://www.faaonline.com, provide useful information and online functionality for both students and FAAs. In 2002, the Company introduced a new website, http://www.prestamosestudiantiles.com, which provides information in Spanish on college planning, education loans and the financial aid process.  The http://www.studentloan.com and http://www.citiassist.com websites have been redesigned with enhanced features, making them even easier to use and enhancing their functionalities.  Development of online application and approval capabilities has contributed to the growth of the private loan CitiAssist product.

Enhancements were made to the online servicing platform http://www.studentloan.com, providing borrowers with the ability to self-service their accounts, view statements and choose repayment options online.  In 2002, the Company introduced electronic signature to http://www.studentloan.com’s Stafford, PLUS and CitiAssist online application systems, enabling a convenient, completely paperless application process.  Also in 2002, the Company added the ability for borrowers to make payments online.

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A lender can lose eligibility to participate in the FFEL Program if it does not comply with certain rules specified in the Act. Lenders are prohibited from offering points, premiums, payments or other inducements, directly or indirectly, to any educational institution, guarantor or individual in order to secure loan applications.  Lenders may not offer loans as an inducement to a prospective borrower, either directly or indirectly, to purchase insurance policies or other products.  Also, a lender may not conduct unsolicited mailings of FFEL Program student loan applications to students who have not previously received student loans from that lender.  In addition, lenders may not engage in fraudulent or misleading advertising.

The Company’s borrowers are students and parents from all 50 states, the District of Columbia and the U.S. territories.  Approximately one-half of the Company’s loan portfolio is composed of loans made to or on behalf of students from New York and California.

Competition

The student loan industry is highly competitive and the Company competes with thousands of eligible lenders. The Company is one of the nation’s largest originators of FFEL Program loans and has been increasing its market share.  As a large participant in the student loan industry, the Company has been able to leverage economies of scale to partially mitigate regulatory changes.  The Company competes by offering a full array of FFEL Program and private loan products.  In addition, unlike many other lenders, the Company has a policy of holding and servicing the majority of the loans that it directly originates through school channels.

The Company is the nation’s second largest holder of FFEL Program loans.  Sallie Mae, the largest holder, has a portfolio that is several times larger than the Company’s.   When Sallie Mae began originating loans on its own behalf, it became a direct competitor of the Company.  The Company also competes directly with Sallie Mae and other secondary markets in making loan purchases.

The Federal Direct Student Lending (“FDSL”) Program, which also provides loans to students and parents, has, by its existence, reduced the origination volume available for FFEL Program loans.  Currently, the FDSL Program accounts for between 20 - 30% of total federal student loan program originations (exclusive of the Perkins Loan Program).  In November 2000, the Company, together with a number of other FFEL Program participants, filed a legal action against the Secretary of Education in the United States District Court for the District of Columbia seeking a declaratory judgment that certain actions of the Department are in violation of the Higher Education Act and the Administrative Procedures Act and enjoining the Department’s preferential treatment of the FDSL Program over private FFEL Program lenders. The action remains pending.

FFEL Program Guaranty Agencies and Third Party Insurers

The Company is insured on its portfolio of FFEL Program loans as to principal and interest in the case of a borrower’s default, death, disability, bankruptcy, closed school or unpaid school refund. The coverage is provided by certain state or non-profit guaranty agencies (“guarantors”), which are reinsured by the federal government. The Act provides that guarantors have contractual rights against the federal government to receive reinsurance in accordance with its provisions.

If a guarantor’s administrative or financial condition falls below specified levels or the Secretary of Education determines that the guarantor is in danger of financial collapse, the Secretary of Education is authorized to undertake specified actions to assure the continuance of claim payments, including the transfer of guarantees to another guarantor or paying claims directly to lenders.  To date, all claims filed by the Company that had been approved for payment by guarantors have been paid.

The Company purchases “life of loan” insurance on the majority of its holdings of alternative student loans, providing loss protection in the case of borrower default, death or bankruptcy.  Insurance coverage is currently provided by Globe Indemnity  Company (“GIC”), a subsidiary of Royal & Sun Alliance, and other private third party insurers, which are large investment-grade insurers and reinsurers.  Transition to a new AAA-rated insurer is expected to occur by mid-2003.  This will diversify private insurer risk for alternative loans held in portfolio.  To date, substantially all of alternative loan claims have been paid.

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FFEL Program Collections and Claims

Certain requirements have to be met in order to maintain the government guarantee coverage on FFEL Program loans, as described above.  These requirements specify school and borrower eligibility criteria and establish servicing requirements and procedural guidelines. The Company’s collections department, or that of its servicers, begins contact in the event of payment delinquency shortly after delinquency occurs and continues prescribed collection efforts through mailings, telephone contact and skip tracing, as needed.

At prescribed times, the Company requests collection assistance from the relevant guarantor before submitting a claim.  These requests serve to notify the guarantor of seriously delinquent accounts before claim and permit the guarantor to make additional attempts to collect on the loan.  If a loan is rejected for claim payment by a guarantor due to a violation of FFEL Program due diligence collection requirements, the collection department or servicer resumes working the account for payment and/or institutes a process to reinstate the guarantee.

Generally, loans that are 270 days past due are considered to be in default.  Claims must be filed with the guarantor no later than the 360^th day of delinquency or loss of guarantee could occur.

In addition to due diligence collection violations, a claim may be rejected by a guarantor under certain other circumstances, including, for example, if a claim is not timely filed, adequate documentation is not maintained or the loan is improperly serviced. Once a loan ceases to be guaranteed, it is ineligible for interest and special allowance benefits.

Rejected claims may be “cured”, involving reinstatement of the guarantee, and may receive reinstated interest and special allowance benefits when the lender locates the borrower in a case involving a timely claim filing violation or by obtaining a payment or a new signed repayment agreement from the borrower in the case of certain collection due diligence violations. In 2002, the Company was able to cure approximately 79% of all rejected FFEL Program claims.  For rejected claims, the Company allows a full four months for the collections department or servicers to work the accounts in attempts to effect cures before the loans are written off as operating losses.  Operating losses were immaterial in 2002, 2001 and 2000.  Interest penalties may be assessed by guarantors for certain violations of the due diligence requirements even though the remainder of a claim may be paid.  Examples of errors that cause interest penalties include isolated missed collection calls or failures to send collection letters as required.

The rate of FFEL Program student loan defaults tends to be higher than default rates for other consumer loans, especially among students at proprietary schools.  In an effort to reduce the default rates, revised school eligibility requirements, which include default rate limits, have been implemented by the Department.  In order to maintain eligibility in the FFEL Program, schools must maintain default rates below specified levels, and both guarantors and lenders are required to ensure that loans are made to students attending schools that meet default criteria.  Accordingly, the Company has procedures designed to assure that it provides FFEL Program loans only to students attending institutions that meet the Act’s default limits.

The Company’s CitiAssist Loans, which incorporate credit screening and may require a co-signer, have significantly lower default rates than government-guaranteed loans.

Quality and Regulatory Reviews

The Company recognizes the importance of maintaining compliance with Department and guarantor regulations and reporting requirements.  Accordingly, the Company has implemented policies and procedures to monitor and review ongoing processes that have an impact on, or may jeopardize a loan guarantee or lender eligibility.  An affiliate of the Company that services most of the Company’s student loan portfolio also performs regular ongoing compliance reviews at its facility.

In addition, the Company has a formal quality assurance program that monitors and measures performance and customer satisfaction levels.  Also, the Company’s Operations Audit staff monitors quality assurance throughout the business. These quality assurance reviews include, but are not limited to, reviews of loan origination, due diligence and disbursement processes, including work performed to ensure adherence to regulatory requirements. Also, individual departments perform self-reviews on a risk-based frequency. These reviews are done to ensure compliance with the federal, guarantor and corporate policies/procedures, as well as to identify areas needing process or control improvements.

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Regulations of the Department authorize it to limit, suspend or terminate lenders from participation in the FFEL Program, as well as impose civil penalties if lenders violate program regulations.  The Department conducts frequent on-site audits of the Company’s student loan servicing activities.  Guarantors conduct similar audits on a biennial basis.  During 2002, the Company was audited by four guarantors and a third party insurer.  In addition, an independent compliance review, as required by the Department, was conducted of the Company’s FFEL Program student loan portfolio.  None of the audits conducted during 2002 disclosed any material audit exceptions.

Historically, the student loan industry has been subject to extensive regulatory and reporting requirements, concentrated primarily in the areas of loan servicing and due diligence.  Both the Department and the guarantors have established stringent servicing requirements that the lender must meet and have developed audit criteria that the lender must pass in order to receive guarantee benefits.

Also, as an operating subsidiary of a New York State bank, the Company is subject, in general, to examination and supervision by the New York State Banking Department and the Federal Deposit Insurance Corporation.  The Company is subject to the New York Banking Law and the Federal Deposit Insurance Act, which restrict certain affiliate transactions and limit the permissible investment and business activities in which an operating subsidiary of a bank may engage.

Employees

At December 31, 2002, the Company had 397 employees, none of whom was covered by a collective bargaining agreement.

Properties

The Company maintains its headquarters in Stamford, CT.  The Stamford facility, as well as another facility located in Pittsford, NY, primarily for the accounting, school servicing and technology employees, are maintained under the provisions of affiliate agreements.  The Pittsford, NY agreement has a seven-year lease term, expiring in February 2007.  There is no contractual lease expiration date for the Stamford, CT agreement. 

Legal Proceedings

This section describes the major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company is a party or to which any of its property is subject. 

In February 2000, three stockholders’ derivative complaints, captioned Alan Kahn v. Citigroup Inc., Kenneth Steiner v. Citigroup Inc., and Katherine F. Petty v. Citigroup Inc., were filed in the Delaware Court of Chancery against the Company and its directors (as well as Citigroup and certain subsidiaries). The complaints alleged, among other things, that defendants breached their fiduciary duties by engaging in a series of self-dealing transactions that are unfair to the Company and a waste of corporate assets. Plaintiffs asserted that Citigroup would continue to self-deal to benefit itself and further depress the price of the Company’s outstanding public stock so that it could acquire the stock at a depressed price in the future. 

In April 2000, the Delaware Court of Chancery consolidated the three complaints for all purposes under the caption In re The Student Loan Corp. Derivative Litigation and designated the Alan Kahn v. Citigroup Inc. complaint as the operative pleading. On November 25, 2002, the action was dismissed without prejudice. Pursuant to the Stipulation and Order of Dismissal, no compensation in any form has passed directly or indirectly from the Company to the plaintiffs or plaintiffs’ attorneys and no promise to give any such compensation has been made.

In the ordinary course of business, the Company is also involved in various legal 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 proceedings would not be likely to have a material adverse effect on the results of the Company’s operations, financial condition or liquidity.

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders of
The Student Loan Corporation:

We have audited the accompanying balance sheet of The Student Loan Corporation as of December 31, 2002 and 2001 and the related statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2002.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Student Loan Corporation as of December 31, 2002 and 2001 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

/s/    KPMG LLP

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Financial Statements
The Student Loan Corporation
STATEMENT OF INCOME

See accompanying notes to financial statements.

The Student Loan Corporation
BALANCE SHEET

See accompanying notes to financial statements.

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The Student Loan Corporation
STATEMENT OF STOCKHOLDERS’ EQUITY

See accompanying notes to financial statements.

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The Student Loan Corporation
STATEMENT OF CASH FLOWS