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. Forward-looking statements 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, which could cause The Student Loan Corporation's (the Company) actual results to differ materially from those the Company expects, including, but not limited to:

· the effects of legislative and regulatory changes that affect the demand for and interest rates on student loans, especially the establishment of certain fixed rates of interest on Federal Family Education Loan (FFEL) Program loans, as well as the President's 2010 budget proposal which could eliminate the FFEL Program;

· the availability and amount of loan subsidies and any effect on the Company's interest rate spreads;

· the availability of alternative financing options to students and their parents, including competitive products offered by other lenders;

· the effects of changes in accounting standards, including without limitation the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140 (SFAS 166) and FASB Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS167);

· fluctuations in interest rates and between various interest rate indices, particularly the manner in which short-term rates affect the Company's funding costs, consolidation rates, the rates at which interest accrues on its loan portfolio and the demand for student loans;

· the success of the Company's strategic repositioning efforts;

· the amount, availability, and cost of future short- and long-term financing to the Company from Citibank, N.A.(CBNA), government funding programs, securitizations, whole loan sales, and other sources;

· the Company's ability to acquire or originate loans in the amounts anticipated and with interest rates that generate sufficient yields and margins;

· any change in ownership of the Company that could result from the potential disposition by Citibank, N.A.;

· the adequacy of the Company's capital expenditures and of funds allocated for future capital expenditures;

· the cost of education;

· general economic conditions, including without limitation the performance of financial markets;

· changes in prepayment rates on student loans from anticipated rates and in the quality and profitability of those loans that move into repayment status, as well as actual experience with the repayment cycle of the loan portfolio;

· actual credit losses, loan collection strategies and their impact on delinquency rates, and the adequacy of loan loss reserves;

· the performance of the Company's loan portfolio servicers, insurers and risk-sharers;

· the Company's and other servicers' ability to continue to service the loan portfolio in accordance with their contractual obligations;

· loan origination costs;

· the volume of loan consolidations; and

· the success of the Company's marketing and sales efforts.

The following discussion should be read in conjunction with the accompanying unaudited Consolidated Financial Statements and Notes, the Company's 2008 Annual Report on Form 10-K, and the Company's Form 10-Q for the quarter ended March 31, 2009.

Management's Discussion and Analysis provides the Company's perspective on its operations and business environment, including the following:

Business Overview - a general description of the Company's business as well as the impacts of market conditions on the business and business trends.

Business Highlights - a review of key events affecting the Company's historical and future operating results.

Critical Accounting Estimates - an overview of accounting policies that require critical judgments and estimates.

Financial Condition - a discussion and analysis of the Company's loan portfolio, disbursement and procurement activity and allowance for loan losses.

Results of Operations - a review of the Company's results of operations for the three and six months ended June 30, 2009 and 2008 and discussion of the key factors impacting those results.

Liquidity and Capital Resources - an analysis of the Company's sources and uses of cash and capital obligations.

Legislation and Regulations - a discussion of legislative activities that affect the student loan industry.

Business Overview

The Company is one of the nation's leading originators of student loans. The Company was incorporated in 1992 under the laws of the State of Delaware. CBNA owns 80% of the Company's outstanding common stock and is an indirect wholly owned subsidiary of Citigroup Inc. (Citigroup). The majority of the Company's loans are originated and guaranteed under the FFEL Program, authorized by the U.S. Department of Education (the Department) under the Higher Education Act of 1965, as amended (the Higher Education Act). The Company, which has a trust agreement to originate loans through CBNA, is an originator, manager and servicer of student loans made in accordance with federally sponsored guaranteed student loan programs.

The Company, through its trust agreement with CBNA, is also a leading originator, manager and servicer of private education loans. The Company's portfolio of private education loan products provides it with the ability to offer a full array of student loan products to students and their parents. The Company is committed to providing exceptional service to borrowers and schools, offering competitive and innovative products with solutions that allow students and their families to finance the education of their choice.

Congress is currently considering legislation that will likely result in significant changes to federal student loan programs. The President and various industry groups have offered proposals for reform, the most significant of which could result in the elimination of the FFEL Program. The Company cannot predict what the new legislation will look like in its final form. Any of the proposed changes, in particular the proposal to eliminate the FFEL Program, could have a material adverse effect on the Company's financial condition and results of operations. See Legislation and Regulations on page 43 for additional information about the proposals.

The earnings of the Company are primarily generated by the spread between the interest earned on its loan assets, (based on the 90-day Commercial Paper rate as published by the Department (CP), the prime rate, or the 91-day Treasury Bill rate) and the interest paid on its borrowings (based on London Interbank Offered Rate (LIBOR), CP or the prime rate). Net interest income is the interest earned less the interest expense incurred during the period. Net interest income is impacted by, among other things: spread changes between CP, the prime rate or the 91-day Treasury Bill rate and LIBOR; credit spreads on the Company's debt; legislative changes that impact FFEL Program subsidies; utilization rates of borrower benefits; and portfolio growth or contraction. The Company regularly monitors interest rates and may enter into interest rate derivative agreements on portions of its portfolio in an effort to manage its interest rate risk exposure.

The Company maintains programs to securitize certain portfolios of student loan assets. Under the Company's securitization programs, transactions qualifying as sales are off-balance sheet transactions, in which loans are removed from the Consolidated Financial Statements of the Company and sold to an independent trust, giving rise to a gain or loss on sale. The Company also enters into similar securitization transactions that do not qualify for sale treatment and accordingly, are accounted for as secured borrowings. These secured borrowings do not give rise to a gain or loss on sale.

Historically, loan securitizations and whole loan sales have contributed significantly to the Company's earnings. From year to year, the Company's earnings have been and continue to be impacted by the number, size and profitability of asset sales and securitizations. The Company's involvement in future asset sales and securitization transactions will vary from period to period based on market conditions and the Company's operational strategies. The types of transactions with which the Company is involved are also expected to change as a result of the effects of accounting changes, which will make it more difficult for securitizations to qualify for off-balance sheet treatment. The accounting changes are also expected to result in the consolidation of assets previously sold to unconsolidated securitization entities, as well as the elimination of future securitization gains. The effective date of these new standards is January 1, 2010. See Note 2 to the Consolidated Financial Statements for additional information on the accounting changes.

The Company has derivative financial instruments including interest rate swaps and floor options, which are intended to economically hedge the interest rate risk inherent in its retained interests in its off-balance sheet securitizations. If the Company continues to hold these positions after the new standards are adopted, earnings volatility would increase as changes in the fair value of these derivatives would no longer be offset by mark-to-market adjustments on the Company's retained interests.

The Company has historically funded its loan originations primarily through borrowings under the Omnibus Credit Agreement with CBNA and through loan securitizations. The current Omnibus Credit Agreement expires on December 31, 2009. However, existing borrowings will continue to mature based on their originally contracted maturities. Additionally, the Company is currently negotiating a new agreement with CBNA as well as exploring other sources of funding. If a suitable replacement is not put in place by year-end, the Company will no longer have a guaranteed funding source for new borrowings. See Liquidity and Capital Resources on page 41 and Risk Factors on page 48 for additional information related to the Omnibus Credit Agreement and associated risks.

In addition to funding available to the Company under the Omnibus Credit Agreement and through loan securitizations, the Company has further diversified its sources of funding, and continues to seek additional alternative sources of funding. Since December 2008, the Company has been utilizing funding available under the Department's Loan Participation Purchase Program (the Participation Program) established under the Ensuring Continued Access to Student Loans Act of 2008 (ECASLA). In the second quarter of 2009, the Company sold eligible loans to the Department under the Loan Purchase Commitment Program (the Purchase Program) and accessed additional funding through the Department sponsored conduit, Straight-A Funding, LLC (the Conduit). See Business Highlights below and Liquidity and Capital Resources on page 41 for further details.

The Company's earnings are impacted by valuation changes on its subordinated residual interests (i.e., interest-only strips), servicing rights and, in certain cases, subordinated notes issued by the trusts (collectively, retained interests) from off-balance sheet securitizations. The fair value of the Company's retained interests fluctuates based on factors such as interest rate changes, prepayment and default rates and regulatory changes. Other factors that may impact earnings include loan servicing revenue and loan servicing costs, changes in applicable laws and regulations, alternative financing options available to students and their parents, competition, and overall economic conditions.

Business Highlights

During the six months ended June 30, 2009, continued challenges in the financial markets had negative consequences to the Company's operations. These external forces contributed to net interest margin compression driven by:

· continued divergence between the 90-day CP rate, which determines special allowance payments, and LIBOR, which is the basis for a majority of the Company's funding;

· refinancing of maturing debt at higher premiums over base indices; and

· the impact of regulatory changes, particularly the reductions of special allowance payments contained in the College Cost Reduction and Access Act (CCRA Act).

The US economy has continued to weaken during 2009, increasing both current quarter loan charge-offs as well as expected loss rates. The Company expects these conditions to continue in the near to medium term.

During the second quarter of 2009, the Company further diversified its sources of funding by accessing $8.5 billion of secured borrowings from the Conduit. The Company also continued to draw on financing through the Department's Participation Program, which is currently available for FFEL Program loans originated during the 2008-2009 and 2009-2010 academic years, by procuring an additional $0.6 billion of funding for its current quarter disbursements. The Company has funded $2.7 billion of FFEL Program Stafford and PLUS Loan disbursements through the Participation Program since its inception. At June 30, 2009, $1.3 billion of funding under the Participation Program remained outstanding. During the second quarter of 2009, the Company also completed a $1.2 billion sale of loans originally funded under the Participation Program to the Department through the Purchase Program, which resulted in a gain on sale of $17.9 million. The proceeds of this sale were used to pay back funding from the Participation Program.

Net interest income of $70.9 million for the second quarter of 2009 was $48.5 million or 41% lower than the same quarter of 2008 as the Company continues to experience net interest margin compression. This compression is largely due to the continued dislocation between CP and LIBOR. Although the Company has experienced some narrowing in the spread between CP and LIBOR since the first quarter, the spread between CP and LIBOR is still significantly higher than the historical average. This dislocation reduced second quarter net interest margin on the Company's FFEL Program loans by 40 basis points and net interest income by $18.5 million as compared to the same quarter in 2008. Net interest margin compression has also been impacted by an increase in the spread between the prime rate and LIBOR, which decreased second quarter net interest margin on the Company's prime rate based loans by 81 basis points and net interest income by $11.9 million as compared to the same quarter in 2008. Net interest margin is being further compressed by increases in credit spreads as the Company replaces maturing long-term debt with new borrowings. These increased credit spreads decreased second quarter net interest income by $21.6 million compared to the same quarter in 2008.

During the twelve-month period ended June 30, 2009, the Company's managed student loan portfolio grew by $3.7 billion or 9% to $43.0 billion, reflecting the Company's continued commitment to the FFEL Program as well as a decrease in borrower prepayment activity. The managed portfolio includes $26.6 billion of the Company's owned loan assets and $16.4 billion of loans serviced on behalf of securitization trusts or other lenders. Originations for the quarter included FFEL Program Stafford and PLUS loan originations of $0.7 billion, a 3% increase from the same quarter of 2008. Almost all of the FFEL Program Stafford and PLUS loan originations during the quarter were funded through the Participation Program. The Company also made new CitiAssist® loan commitments of $0.1 billion, which was 30% lower than the same quarter of 2008. This decrease is a direct result of initiatives the Company has introduced to improve the profitability of its private education loan product and changes to its underwriting standards.

Critical Accounting Estimates

Certain accounting estimates made by management are considered to be important to the portrayal of the Company's consolidated financial condition. Since management is required to make difficult, complex or subjective judgments and estimates, actual results could differ from those estimates. The most significant of these critical estimates and judgments are those used to account for student loan securitizations, the value of related retained interests and allowance for loan losses, which are more fully described in the Company's 2008 Annual Report on Form 10-K. See the Notes to the Consolidated Financial Statements for more information on the Company's accounting estimates.

Financial Condition

Loans

At June 30, 2009, the Company's student loan assets were comprised of FFEL Program loans, private education loans, a portfolio of loans held for sale and related deferred costs.

See Note 4 to the Consolidated Financial Statements for a presentation of the loan portfolio by program type.

Balances related to the Company's owned and managed loan portfolios are summarized below:

                                               Ending Balances
           (Dollars in millions)    June 30, 2009       December 31, 2008
           Owned loans             $        26,597     $            25,643
           Managed loans                    43,022                  42,107



                                        Year to Date Average Balances
           (Dollars in millions)   June 30, 2009         December 31, 2008
           Owned loans             $       27,260       $            24,316
           Managed loans                   43,903                    39,938

Loan Disbursements and Procurement Activity

The Company makes loans through the retail and wholesale channels. The retail channel represents loan activity initiated through the Company's relationships with schools and universities. The majority of the Company's new FFEL Program Stafford and PLUS loan, and school-certified private education loan originations are initiated through the efforts of the Company's retail sales force. The Company originates the remaining portion of such originations by marketing directly to students and their families, for example, through email and online advertising campaigns. In previous years, the Company also originated FFEL Program and private education loan consolidations through direct marketing to consumers. The wholesale channel, which accounts for a fraction of the Company's new loan originations, represents loan activity initiated outside of the retail channel, such as purchases of loans originated by other lenders under existing loan purchase commitments.

Details of the Company's origination activity are presented in the table below:

                                               Three Months Ended              Six Months Ended
                                                    June 30,                       June 30,
(Dollars in millions)                            2009             2008           2009          2008
Retail:
FFEL Program Stafford and PLUS loan
disbursements                              $      721       $      700     $    2,913     $   2,595
CitiAssist loans disbursed under
commitments to purchase (1)                       123              176            766           824
Total Retail                                      844              876          3,679         3,419
Loan consolidation and other secondary
market volume                                      12              186             42           727
Total Originations                         $      856       $    1,062     $    3,721     $   4,146

(1) This amount consists of the CitiAssist loans that were disbursed by CBNA. These loans have been or will be purchased by the Company after final disbursement.

In response to the dislocation in the capital markets and federal legislation, the Company significantly reduced, and in some cases discontinued, its less profitable retail, wholesale and consolidation loan origination activities. Despite these actions, the Company's FFEL Program loan originations have continued to increase, primarily as a result of an increase in the annual and aggregate Stafford borrowing limits, the withdrawal of many lenders from the FFEL Program and overall growth in the marketplace. The Company's CitiAssist loan commitments are significantly lower than the same periods in 2008 as a direct result of initiatives the Company has introduced to improve the profitability of its private education loan product and changes to its underwriting standards.

In order to comply with certain legal and regulatory requirements, private education loans are originated by CBNA through an intercompany agreement. After final disbursement, the Company purchases all private education loans from CBNA. At June 30, 2009 and December 31, 2008, the private education loans disbursed and still held by CBNA were $1.6 billion and $1.0 billion, respectively.

Historically, loans were not specifically purchased or originated for resale, and accordingly were recorded in the Company's portfolio. However, certain loans originated since December 5, 2008 have been originated with the intent of selling to the Department under the Purchase Program and, accordingly, were recorded in held for sale. Of the $2.9 billion of FFEL Program loans originated during 2009, $1.9 billion were funded through the Participation Program. At June 30, 2009, $1.6 billion of loans funded were classified as held for sale.

Allowance for loan losses

The Company categorizes allowance for loan losses as FFEL Program, Insured CitiAssist, Uninsured CitiAssist Standard and Uninsured CitiAssist Custom. Uninsured CitiAssist Standard is primarily comprised of CitiAssist loans that have been approved based on standard underwriting criteria and were originated on or after January 1, 2008. Uninsured CitiAssist Custom is primarily comprised of loans made to non-traditional students or loans with less stringent underwriting standards.

The Company's allowance for loan losses at June 30, 2009 increased by $46.9 million compared to the balance at June 30, 2008. This increase was primarily the result of portfolio seasoning (new loans transitioning into repayment) and higher loss estimates given current adverse economic conditions. The provision for loan losses, which is comprised of builds or releases in the loan loss reserves plus net charge-offs, decreased by $5.2 million for the first half of 2009 compared to the same period in 2008. Loan loss reserve builds in 2009 were lower than 2008 largely due to estimate enhancements made in the second quarter of 2008 associated with the seasoning of the Uninsured CitiAssist Custom portfolio. Charge-offs increased by $20.6 million for the first six months ended June 30, 2009 compared to the same period in 2008 primarily as a result of seasoning of the Uninsured CitiAssist Custom portfolio. The Company expects charge-offs will continue to increase as a result of the expected seasoning of the higher risk Uninsured CitiAssist Custom portfolio as well as credit deterioration across all portfolios. The Company no longer originates Uninsured CitiAssist Custom loans and the portfolio balance is starting to decrease.

An analysis of the allowance for loan losses and its components is presented in the table below:

                                           Three Months Ended           Six Months Ended
                                                June 30,                    June 30,
  (Dollars in thousands)                   2009          2008          2009          2008
  Balance at beginning of period
  FFEL Program                           $  14,843     $  13,241     $  14,445     $  12,312
  Insured CitiAssist                         9,950         5,331         8,512         3,214
  Uninsured CitiAssist Standard             14,337         1,161        11,891             -
  Uninsured CitiAssist Custom               72,247        35,019        75,481        26,589
                                         $ 111,377     $  54,752     $ 110,329     $  42,115
  Provision for loan losses
  FFEL Program                           $   8,992     $     190     $  12,363     $   4,395
  Insured CitiAssist                         7,641         2,623        11,499         6,107
  Uninsured CitiAssist Standard              3,055         1,867         6,137         3,028
  Uninsured CitiAssist Custom               25,138        41,147        35,969        57,609
                                         $  44,826     $  45,827     $  65,968     $  71,139
  Charge offs
  FFEL Program                           $  (2,213 )   $  (2,333 )   $  (5,186 )   $  (5,609 )
  Insured CitiAssist                        (4,820 )      (2,369 )      (7,240 )      (3,736 )
  Uninsured CitiAssist Standard             (1,879 )           -        (2,515 )           -
  Uninsured CitiAssist Custom              (22,253 )     (13,991 )     (39,149 )     (24,098 )
                                         $ (31,165 )   $ (18,693 )   $ (54,090 )   $ (33,443 )
  Recoveries
  FFEL Program                           $       -     $       -     $       -     $       -
  Insured CitiAssist                             -             -             -             -
  Uninsured CitiAssist Standard                  -             -             -             -
  Uninsured CitiAssist Custom                3,699         2,361         6,530         4,436
                                         $   3,699     $   2,361     $   6,530     $   4,436
  Other (1)
  FFEL Program                           $       -     $  (2,430 )   $       -     $  (2,430 )
  Insured CitiAssist                             -             -             -             -
  Uninsured CitiAssist Standard                  -             -             -             -
  Uninsured CitiAssist Custom                    -             -             -             -
                                         $       -     $  (2,430 )   $       -     $  (2,430 )
  Balance at end of period
  FFEL Program                           $  21,622     $   8,668     $  21,622     $   8,668
  Insured CitiAssist                        12,771         5,585        12,771         5,585
  Uninsured CitiAssist Standard             15,513         3,028        15,513         3,028
  Uninsured CitiAssist Custom Programs      78,831        64,536        78,831        64,536
                                         $ 128,737     $  81,817     $ 128,737     $  81,817

(1) Represents reserve amounts associated with loans sold, securitized or reclassified as held-for-sale.

The Company's allowance for loan losses includes all losses at each reporting period that are both probable and estimable. However, no assurance can be provided that the allowance for loan losses will be adequate to cover all losses that may in fact be realized in the future, or that a higher level of provision for loan losses will not be required. The Company's total allowance for loan losses is available to absorb probable credit losses inherent to all of the Company's owned loans.

Private Education Loans

The Company's private education loan portfolio is not guaranteed by the federal government. Although private education loans do not carry a federal government guarantee, the Company has purchased private insurance on 74% of the outstanding balances of these loans through United Guaranty Commercial Insurance Company of North Carolina and New Hampshire Insurance Company (UGCIC/NHIC), and on 2% of the outstanding balances through Arrowood Indemnity Company (Arrowood). UGCIC/NHIC are subsidiaries of American International Group (AIG). Arrowood is a wholly owned subsidiary of Arrowpoint Capital Corporation (Arrowpoint).

These insurance providers insure the Company against a portion of losses arising from borrower loan default, bankruptcy or death. Under the Arrowood program, private education loans submitted for default claim are generally subject to a risk-sharing deductible of 5% of the outstanding principal and accrued interest . . .