by Kit R. Roane, contributor

Citigroup’s revelation last Friday that it finally found buyers for its troubled student loan business was good news to investors betting on a turnaround. But finding a home for the roughly $480 billion in remaining troubled assets on the bank’s balance sheet may be no easy task.

“The low-hanging fruit has obviously been dealt with,” notes Harlan Platt, a finance professor at Northeastern University, adding that many of the assets held in Citi Holdings, otherwise known as “the bad bank” have been marketed on and off for about a year “with virtually no bidders.”

Last week’s deal removes about $40 billion of student loans from Citigroup’s troubled asset unit and shifts the former financial bazaar a bit closer toward CEO Vikram Pandit’s dream of a slimmed-down behemoth that does banking, but little else. It also signals a welcome relaxation in the financial markets, which have seen a notable increase in mergers and acquisitions, and a general willingness to take on more risk.

It’s encouraging that Citigroup (C) made progress with its student loans. For a long time, Citi couldn’t even give them away. But time — and extraordinarily low interest rates — apparently cures all ills.

This has helped Citi get out from under about half of the nearly $870 billion in troubled assets it started out 2008 with, and it’s provided buyers for assets as diverse as its Primerica life insurance business, its Smith Barney brokerage unit and its Canadian MasterCard portfolio. Shares of Citigroup have bounced between $3 and $5 for the past year, and closed Monday at $3.99.

Although the true value of its remaining troubled assets remains something of a mystery, Pandit said that he expected the unloading of the student loan portfolio would reduce those assets to “less than 20% of our balance sheet as of year-end.”

S&P notes this, calling the student loan transaction “a small positive” for Citigroup, while Fitch Ratings says Citigroup’s resulting $500 million loss on the deal “is considered minimal.”

Even though the deal is an incremental step for Citi, which certainly faces continuing headwinds in gaining investor confidence, Robert Hansen, Associate Dean at Dartmouth College’s Tuck School of Business, says it shows Citi’s management team is turning the company in the right direction. “They are doing what everybody thought banks should do, which is try to get down to a balance sheet that people can understand and that doesn’t have these huge dark clouds hanging over it so they can raise capital and lend again,” he adds.

Making that turn was easier said than done. The fact that Citigroup will be able to walk away from its student loan portfolio with only a half-a-billion dollar loss is amazing given the way things looked only a year ago. Back then, Platt says, there was real concern Citigroup might have to pay somebody to take the loans off their hands.

Getting the deal done

“They are getting cash and getting rid of detritus,” he explains. “Pandit lucked out in that he found somebody who was willing to put up a fair amount of money and take these assets off his hands because that party really needs to jack up its earnings.”

That party is Discover Financial Services (DFS), which is paying about $600 million for Citigroup’s 80% stake in the Student Loan Corporation and is taking over about $4.2 billion in private student loans at an 8.5% discount to face value. Also as part of the convoluted deal, Sallie Mae (SLM), the largest servicer of federally-guaranteed student loans, is paying about $1.2 billion to take over another $28 billion in federally guaranteed student loans, while $4.7 billion in loans will be sold to the Education Department as part of a federal program to prop up student lending. Citigroup will still service about $8.7 billion in loans that will have to find homes with private investors.

Although the deal helps Sallie Mae bulk up its already massive portfolio of federally-guaranteed loans, Platt says that Discover (which just reported better than expected earnings on Monday) may have come out best.

The credit card company has had a tough time wooing Wall Street, carrying a much lower multiple than competitors like Mastercard or Visa (V). Proving one man’s trash is another’s treasure, the Citi deal will quadruple the portfolio of private student loans it services, providing it enough scale to stay in a game where the vast majority of loans now originate directly from the federal government. The loans — 70% of which are covered by insurance and 65% of which are currently being repaid — also give it an anchor to expand its relationship with more than 1,000 colleges and 300,000 new customers to which it can hawk its credit cards.

For Citi shareholders, the bad news is that much of what is left in Citi’s troubled asset unit may be harder to sell, and may not fetch what the bank currently believes they are worth. As analysts at Susquehanna Financial Group noted following the deal news on Friday, only about 7% of Citi Holdings total assets are marked to market and they are dominated by a potentially noxious farrago of about $286 billion in mortgages, auto loans, credit cards and remaining student loans.

In March, Pandit said there were “early signs of improvement” in the consumer lending area. But that doesn’t mean these assets will ever find buyers willing to pay anywhere near full freight. Citi’s loss on the student loan deal wasn’t enough for Susquehanna to change their neutral rating on Citigroup, but it “is a warning that asset sales at book value are not guaranteed.”