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SLM Corporation (Sallie Mae)
SLM
#3351
Rank
A$6.40 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
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Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. SLM Corporation (Sallie Mae)
  2. Quarterly Reports (10-Q)
  3. Submitted on 2009-08-05

SLM Corporation (Sallie Mae) - 10-Q quarterly report FY


Text size:
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
   
(Mark One)  
þ
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly period ended June 30, 2009
or
o
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from          to          
 
Commission File Number:001-13251
 
 
 
 
SLM Corporation
(Exact name of registrant as specified in its charter)
 
   
Delaware 52-2013874
(State or other jurisdiction of
incorporation or organization)		 (I.R.S. Employer
Identification No.)
   
12061 Bluemont Way, Reston, Virginia
(Address of principal executive offices)		 20190
(Zip Code)
 
(703) 810-3000
 
(Registrant’s telephone number, including area code)
 
 
 
 
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.  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2of the Exchange Act. (Check one):
 
Large accelerated filer þ Accelerated filer o Non-acceleratedfiler o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-Tduring the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
 
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2of the Exchange Act).  Yes o     No þ
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
   
Class
 
Outstanding at June 30, 2009
 
Voting common stock, $.20 par value 467,607,602 shares
 

 

 
SLM CORPORATION
 
FORM 10-Q
INDEX
June 30, 2009
 
         
Part I. Financial Information
    
 
Item 1.
  Financial Statements  2 
 
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations  57 
 
Item 3.
  Quantitative and Qualitative Disclosures about Market Risk  126 
 
Item 4.
  Controls and Procedures  131 
    
PART II. Other Information    
 
Item 1.
  Legal Proceedings  132 
 
Item 1A.
  Risk Factors  132 
 
Item 2.
  Unregistered Sales of Equity Securities and Use of Proceeds  132 
 
Item 3.
  Defaults Upon Senior Securities  132 
 
Item 4.
  Submission of Matters to a Vote of Security Holders  133 
 
Item 5.
  Other Information  133 
 
Item 6.
  Exhibits  134 
Signatures
  135 
Glossary(1)
  136 
 
 
(1)Definitions for capitalized terms used in this document can be found in the “Glossary” at the end of this document.


1

 

 
PART I. FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
SLM CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
 
         
  June 30,
  December 31,
 
  2009  2008 
 
Assets
        
FFELP Stafford and Other Student Loans (net of allowance for losses of $102,857 and $90,906, respectively)
 $44,044,636  $44,025,361 
FFELP Stafford LoansHeld-for-Sale
  18,159,232   8,450,976 
FFELP Consolidation Loans (net of allowance for losses of $50,181 and $46,637, respectively)
  70,102,304   71,743,435 
Private Education Loans (net of allowance for losses of $1,396,707 and $1,308,043, respectively)
  21,850,688   20,582,298 
Other loans (net of allowance for losses of $68,282 and $58,395, respectively)
  489,180   729,380 
Investments:
        
Available-for-sale
  1,186,971   861,008 
Other
  885,511   180,397 
         
Total investments
  2,072,482   1,041,405 
Cash and cash equivalents
  6,139,957   4,070,002 
Restricted cash and investments
  5,245,702   3,535,286 
Retained Interest in off-balance sheet securitized loans
  1,820,614   2,200,298 
Goodwill and acquired intangible assets, net
  1,233,871   1,249,219 
Other assets
  10,025,129   11,140,777 
         
Total assets
 $181,183,795  $168,768,437 
         
Liabilities
        
Short-term borrowings
 $47,331,576  $41,933,043 
Long-term borrowings
  125,880,044   118,224,794 
Other liabilities
  3,120,636   3,604,260 
         
Total liabilities
  176,332,256   163,762,097 
         
Commitments and contingencies
        
Equity
        
Preferred stock, par value $.20 per share, 20,000 shares authorized:
        
Series A: 3,300 and 3,300 shares, respectively, issued at stated value of $50 per share
  165,000   165,000 
Series B: 4,000 and 4,000 shares, respectively, issued at stated value of $100 per share
  400,000   400,000 
Series C: 7.25% mandatory convertible preferred stock; 1,150 and 1,150 shares, respectively, issued at liquidation preference of $1,000 per share
  1,149,770   1,149,770 
Common stock, par value $.20 per share, 1,125,000 shares authorized: 534,842 and 534,411 shares issued, respectively
  106,969   106,883 
Additional paid-in capital
  4,709,053   4,684,112 
Accumulated other comprehensive loss (net of tax benefit of $27,750 and $43,202, respectively)
  (48,683)  (76,476)
Retained earnings
  229,865   426,175 
         
Total SLM Corporation stockholders’ equity before treasury stock
  6,711,974   6,855,464 
Common stock held in treasury at cost: 67,128 and 66,958 shares, respectively
  1,860,440   1,856,394 
         
Total SLM Corporation stockholders’ equity
  4,851,534   4,999,070 
Noncontrolling interest
  5   7,270 
         
Total equity
  4,851,539   5,006,340 
         
Total liabilities and equity
 $181,183,795  $168,768,437 
         
 
See accompanying notes to consolidated financial statements.


2

 

SLM CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Interest income:
                
FFELP Stafford and Other Student Loans
 $323,939  $497,598  $666,755  $962,074 
FFELP Consolidation Loans
  460,690   769,664   950,052   1,606,320 
Private Education Loans
  393,019   409,323   780,060   852,845 
Other loans
  18,468   21,355   34,888   44,699 
Cash and investments
  7,044   70,521   13,015   194,337 
                 
Total interest income
  1,203,160   1,768,461   2,444,770   3,660,275 
Total interest expense
  819,459   1,365,918   1,846,006   2,981,363 
                 
Net interest income
  383,701   402,543   598,764   678,912 
Less: provisions for loan losses
  278,112   143,015   528,391   280,326 
                 
Net interest income after provisions for loan losses
  105,589   259,528   70,373   398,586 
                 
Other income:
                
Servicing and securitization revenue (loss)
  87,488   1,630   (7,817)  109,272 
Losses on sales of loans and securities, net
  —   (43,583)  —   (78,249)
Gains (losses) on derivative and hedging activities, net
  (561,795)  362,043   (457,770)  89,247 
Contingency fee revenue
  73,368   83,790   148,183   169,096 
Collections revenue
  22,068   26,365   738   83,604 
Guarantor servicing fees
  24,772   23,663   58,780   58,316 
Other
  399,065   108,728   591,523   202,261 
                 
Total other income
  44,966   562,636   333,637   633,547 
                 
Expenses:
                
Salaries and benefits
  139,419   167,788   276,340   347,517 
Other operating expenses
  175,766   185,900   340,328   361,819 
Restructuring expenses
  4,430   46,740   9,203   67,418 
                 
Total expenses
  319,615   400,428   625,871   776,754 
                 
Net income (loss) before income tax benefit
  (169,060)  421,736   (221,861)  255,379 
Income tax expense (benefit)
  (46,551)  153,074   (78,247)  90,586 
                 
Net income (loss)
  (122,509)  268,662   (143,614)  164,793 
Less: net income attributable to noncontrolling interest
  211   2,926   492   2,861 
                 
Net income (loss) attributable to SLM Corporation
  (122,720)  265,736   (144,106)  161,932 
Preferred stock dividends
  25,800   27,391   52,195   56,416 
                 
Net income (loss) attributable to SLM Corporation common stock
 $(148,520) $238,345  $(196,301) $105,516 
                 
Basic earnings (loss) per common share attributable to SLM Corporation common shareholders
 $(.32) $.51  $(.42) $.23 
                 
Average common shares outstanding
  466,799   466,649   466,780   466,615 
                 
Diluted earnings (loss) per common share attributable to SLM Corporation common shareholders
 $(.32) $.50  $(.42) $.23 
                 
Average common and common equivalent shares outstanding
  466,799   517,954   466,780   467,316 
                 
Dividends per common share attributable to SLM Corporation common shareholders
 $—  $—  $—  $— 
                 
 
See accompanying notes to consolidated financial statements.


3

 

 
SLM CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
                                                     
                       Accumulated
                
  Preferred
                 Additional
  Other
        Total
       
  Stock
  Common Stock Shares  Preferred
  Common
  Paid-In
  Comprehensive
  Retained
  Treasury
  Stockholders’
  Noncontrolling
  Total
 
  Shares  Issued  Treasury  Outstanding  Stock  Stock  Capital  Income (Loss)  Earnings  Stock  Equity  Interest  Equity 
 
Balance at March 31, 2008
  8,450,000   533,678,028   (66,301,201)  467,376,827  $1,715,000  $106,736  $4,610,278  $(2,394) $617,184  $(1,838,637) $5,208,167  $6,608  $5,214,775 
Comprehensive income:
                                                    
Net income (loss)
                                  265,736       265,736   2,926   268,662 
Noncontrolling interest — other
                                          —   (54)  (54)
Other comprehensive income, net of tax:
                                                    
Change in unrealized gains (losses) on investments, net of tax
                              (8,984)          (8,984)      (8,984)
Change in unrealized gains (losses) on derivatives, net of tax
                              73,844           73,844       73,844 
Defined benefit pension plans adjustment
                              (472)          (472)      (472)
                                                     
Comprehensive income
                                          330,124   2,872   332,996 
Cash dividends:
                                                    
Preferred stock, series A ($.87 per share)
                                  (2,875)      (2,875)      (2,875)
Preferred stock, series B ($.88 per share)
                                  (3,511)      (3,511)      (3,511)
Preferred stock, series C ($18.13 per share)
                                  (20,844)      (20,844)      (20,844)
Restricted stock dividend
                                  (2)      (2)      (2)
Issuance of common shares
      332,150   3,142   335,292       66   6,761           70   6,897       6,897 
Issuance of preferred shares
                          161       (161)      —         
Tax benefit related to employee stock option and purchase plans
                          (3,866)              (3,866)      (3,866)
Stock-based compensation cost
                          24,397               24,397       24,397 
Repurchase of common shares:
                                                    
Benefit plans
          (146,726)  (146,726)                      (3,483)  (3,483)      (3,483)
                                                     
Balance at June 30, 2008
  8,450,000   534,010,178   (66,444,785)  467,565,393  $1,715,000  $106,802  $4,637,731  $61,994  $855,527  $(1,842,050) $5,535,004  $9,480  $5,544,484 
                                                     
Balance at March 31, 2009
  8,449,770   534,698,117   (67,105,360)  467,592,757  $1,714,770  $106,940  $4,694,155  $(70,450) $378,387  $(1,859,955) $4,963,847  $12  $4,963,859 
Comprehensive income:
                                                    
Net income (loss)
                                  (122,720)      (122,720)  211   (122,509)
Noncontrolling interest — other
                                          —   (218)  (218)
Other comprehensive income, net of tax:
                                                    
Change in unrealized gains (losses) on investments, net of tax
                              1,319           1,319   —   1,319 
Change in unrealized gains (losses) on derivatives, net of tax
                              20,606           20,606   —   20,606 
Defined benefit pension plans adjustment
                              (158)          (158)      (158)
                                                     
Comprehensive income
                                          (100,953)  (7)  (100,960)
Cash dividends:
                                                    
Preferred stock, series A ($.87 per share)
                                  (2,875)      (2,875)      (2,875)
Preferred stock, series B ($.51 per share)
                                  (1,923)      (1,923)      (1,923)
Preferred stock, series C ($18.13 per share)
                                  (20,840)      (20,840)      (20,840)
Restricted stock dividend
                                  (2)      (2)      (2)
Issuance of common shares
      143,762   —   143,762       29   181               210       210 
Issuance of preferred shares
                          162       (162)      —       — 
Tax benefit related to employee stock option and purchase plans
                          (1,324)              (1,324)      (1,324)
Stock-based compensation cost
                          15,879               15,879       15,879 
Repurchase of common shares:
                                                    
Benefit plans
          (22,839)  (22,839)                      (485)  (485)      (485)
                                                     
Balance at June 30, 2009
  8,449,770   534,841,879   (67,128,199)  467,713,680  $1,714,770  $106,969  $4,709,053  $(48,683) $229,865  $(1,860,440) $4,851,534  $5  $4,851,539 
                                                     
 
See accompanying notes to consolidated financial statements.


4

 

 
SLM CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
                                                     
                       Accumulated
                
  Preferred
                 Additional
  Other
        Total
       
  Stock
  Common Stock Shares  Preferred
  Common
  Paid-In
  Comprehensive
  Retained
  Treasury
  Stockholders’
  Noncontrolling
  Total
 
  Shares  Issued  Treasury  Outstanding  Stock  Stock  Capital  Income (Loss)  Earnings  Stock  Equity  Interest  Equity 
 
Balance at December 31, 2007
  8,300,000   532,493,081   (65,951,394)  466,541,687  $1,565,000  $106,499  $4,590,174  $236,364  $557,204  $(1,831,706) $5,223,535  $11,360  $5,234,895 
Comprehensive income:
                                                    
Net income (loss)
                                  161,932       161,932   2,861   164,793 
Acquisition of noncontrolling interest in Purchased Paper business
                                          —   (4,355)  (4,355)
Noncontrolling interest — other
                                          —   (386)  (386)
Other comprehensive income, net of tax:
                                                    
Change in unrealized gains (losses) on investments, net of tax
                              (21,513)          (21,513)      (21,513)
Change in unrealized gains (losses) on derivatives, net of tax
                              42,270           42,270       42,270 
Defined benefit pension plans adjustment
                              (472)          (472)      (472)
                                                     
Comprehensive income
                                          182,217   (1,880)  180,337 
Cash dividends:
                                                    
Preferred stock, series A ($1.74 per share)
                                  (5,750)      (5,750)      (5,750)
Preferred stock, series B ($2.31 per share)
                                  (8,897)      (8,897)      (8,897)
Preferred stock, series C ($33.23 per share)
                                  (41,446)      (41,446)      (41,446)
Restricted stock dividend
                                  (1,848)      (1,848)      (1,848)
Issuance of common shares
      1,517,097   3,142   1,520,239       303   18,704           70   19,077       19,077 
Issuance of preferred shares
  150,000               150,000       (4,332)      (323)      145,345       145,345 
Tax benefit related to employee stock option and purchase plans
                          (10,016)              (10,016)      (10,016)
Stock-based compensation cost
                          43,201               43,201       43,201 
Cumulative effect of accounting change
                              (194,655)  194,655       —       — 
Repurchase of common shares:
                                                    
Benefit plans
          (496,533)  (496,533)                      (10,414)  (10,414)      (10,414)
                                                     
Balance at June 30, 2008
  8,450,000   534,010,178   (66,444,785)  467,565,393  $1,715,000  $106,802  $4,637,731  $61,994  $855,527  $(1,842,050) $5,535,004  $9,480  $5,544,484 
                                                     
Balance at December 31, 2008
  8,449,770   534,411,271   (66,958,400)  467,452,871  $1,714,770  $106,883  $4,684,112  $(76,476) $426,175  $(1,856,394) $4,999,070  $7,270  $5,006,340 
Comprehensive income:
                                                    
Net income (loss)
                                  (144,106)      (144,106)  492   (143,614)
Sale of international Purchased Paper — Non-Mortgage business
                                          —   (7,257)  (7,257)
Noncontrolling interest — other
                                          —   (500)  (500)
Other comprehensive income, net of tax:
                                                    
Change in unrealized gains (losses) on investments, net of tax
                              2,269           2,269   —   2,269 
Change in unrealized gains (losses) on derivatives, net of tax
                              26,015           26,015   —   26,015 
Defined benefit pension plans adjustment
                              (491)          (491)      (491)
                                                     
Comprehensive income
                                          (116,313)  (7,265)  (123,578)
Cash dividends:
                                                    
Preferred stock, series A ($1.74 per share)
                                  (5,750)      (5,750)      (5,750)
Preferred stock, series B ($1.17 per share)
                                  (4,443)      (4,443)      (4,443)
Preferred stock, series C ($36.25 per share)
                                  (41,680)      (41,680)      (41,680)
Restricted stock dividend
                                  (9)      (9)      (9)
Issuance of common shares
      430,608   98   430,706       86   2,226           5   2,317       2,317 
Issuance of preferred shares
                          322       (322)      —       — 
Tax benefit related to employee stock option and purchase plans
                          (5,819)              (5,819)      (5,819)
Stock-based compensation cost
                          28,212               28,212       28,212 
Repurchase of common shares:
                                                    
Benefit plans
          (169,897)  (169,897)                      (4,051)  (4,051)      (4,051)
                                                     
Balance at June 30, 2009
  8,449,770   534,841,879   (67,128,199)  467,713,680  $1,714,770  $106,969  $4,709,053  $(48,683) $229,865  $(1,860,440) $4,851,534  $5  $4,851,539 
                                                     
 
See accompanying notes to consolidated financial statements.


5

 

 
SLM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
         
  Six Months Ended
 
  June 30, 
  2009  2008 
 
Operating activities
        
Net income (loss)
 $(143,614) $164,793 
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
        
Losses on sales of loans and securities, net
  —   78,249 
Stock-based compensation cost
  30,144   48,080 
Unrealized (gains)/losses on derivative and hedging activities
  497,361   (64,418)
Provisions for loan losses
  528,391   280,326 
Decrease in purchased paper mortgages, net
  174,701   109,720 
Student loans originated for sale
  (10,171,363)  — 
Decrease in restricted cash — other
  52,552   1,050 
Decrease in accrued interest receivable
  481,791   52,020 
(Decrease) in accrued interest payable
  (409,109)  (166,484)
Adjustment for non-cash loss related to Retained Interest
  351,331   279,900 
(Increase) in other assets, goodwill and acquired intangible assets, net
  (120,788)  (55,712)
(Decrease) in other liabilities
  (150,321)  (346,220)
         
Total adjustments
  (8,735,310)  216,511 
         
Net cash (used in) provided by operating activities
  (8,878,924)  381,304 
         
Investing activities
        
Student loans acquired
  (4,944,270)  (15,340,698)
Loans purchased from securitized trusts (primarily loan consolidations)
  (3,698)  (555,024)
Reduction of student loans:
        
Installment payments, claims and other
  5,148,780   5,268,996 
Proceeds from sales of student loans
  462,311   27,239 
Other loans — originated
  (2,817)  (931,752)
Other loans — repaid
  217,557   1,183,672 
Other investing activities, net
  (736,002)  (58,287)
Purchases ofavailable-for-salesecurities
  (66,062,442)  (72,071,580)
Proceeds from sales ofavailable-for-salesecurities
  100,056   — 
Proceeds from maturities ofavailable-for-salesecurities
  65,615,526   72,279,652 
Purchase ofheld-to-maturityand other securities
  —   (400)
Proceeds from maturities ofheld-to-maturitysecurities and other securities
  68,928   12,502 
(Increase) decrease in restricted cash — on-balance sheet trusts
  (663,658)  874,029 
Return of investment from Retained Interest
  16,361   217,391 
Purchase of subsidiaries, net of cash acquired
  —   (37,868)
         
Net cash used in investing activities
  (783,368)  (9,132,128)
         
Financing activities
        
Borrowings collateralized by loans in trust — issued
  9,040,986   11,590,919 
Borrowings collateralized by loans in trust — repaid
  (2,932,288)  (3,535,266)
Asset-backed commercial paper conduits — net activity
  (12,454,223)  (161,576)
ED Participation Program
  9,871,053   — 
ED Conduit Program facility
  11,094,745   — 
Other short-term borrowings issued
  298,294   1,304,509 
Other short-term borrowings repaid
  (990,720)  (333,397)
Other long-term borrowings issued
  4,333,168   2,437,226 
Other long-term borrowings repaid
  (4,935,047)  (5,942,937)
Other financing activities, net
  (1,533,226)  842,957 
Excess tax benefit from the exercise of stock-based awards
  —   282 
Common stock issued
  5   4,403 
Preferred stock issued
  —   145,345 
Preferred dividends paid
  (51,873)  (56,093)
Noncontrolling interest, net
  (8,627)  (4,378)
         
Net cash provided by financing activities
  11,732,247   6,291,994 
         
Net increase (decrease) in cash and cash equivalents
  2,069,955   (2,458,830)
Cash and cash equivalents at beginning of period
  4,070,002   7,582,031 
         
Cash and cash equivalents at end of period
 $6,139,957  $5,123,201 
         
Cash disbursements made for:
        
Interest
 $2,303,145  $3,557,181 
         
Income taxes
 $177,478  $564,269 
         
 
See accompanying notes to consolidated financial statements.


6

 

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
1.  Significant Accounting Policies
 
Basis of Presentation
 
The accompanying unaudited, consolidated financial statements of SLM Corporation (the “Company” or “Sallie Mae”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of the results for the interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three months ended June 30, 2009 are not necessarily indicative of the results for the year ending December 31, 2009. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s 2008 Annual Report onForm 10-K.Management has evaluated subsequent events, and the impact on the reported results and disclosures, through August 5, 2009, which is the date these financial statements were issued.
 
Reclassifications
 
Certain reclassifications have been made to the balances as of and for the three and six months ended June 30, 2008 to be consistent with classifications adopted for 2009, and had no effect on net income, total assets, or total liabilities.
 
Recently Issued Accounting Pronouncements
 
Transfers of Financial Assets and the Variable Interest Entity (“VIE”) Consolidation Model
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 166, “Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140,” and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).”
 
SFAS No. 166, among other things, (1) eliminates the concept of a Qualifying Special Purpose Entity (“QSPE”), (2) changes the requirements for derecognizing financial assets, (3) changes the amount of the recognized gain/loss on a transfer accounted for as a sale when beneficial interests are received by the transferor, and (4) requires additional disclosure. SFAS No. 166 is effective for fiscal years beginning after November 15, 2009.
 
SFAS No. 167 significantly changes the consolidation model for Variable Interest Entities (“VIEs”). SFAS No. 167 amends FIN No. 46(R) and, among other things, (1) eliminates the exemption for QSPEs, (2) provides a new approach for determining who should consolidate a VIE which is more focused on control rather than economic interest, (3) changes when it is necessary to reassess who should consolidate a VIE and (4) requires additional disclosure. SFAS No. 167 is effective for the first annual reporting period beginning after November 15, 2009.
 
The Company is currently evaluating the impact of these statements to its consolidated financial statements. Based on the Company’s preliminary review, management expects these changes will lead to the consolidation of QSPEs that are currently not consolidated by the Company. Assuming no changes to the Company’s current business model, the Company will consolidate its securitization trusts that are currently off-balance sheet on January 1, 2010 at their historical cost basis. The historical cost basis is the basis that would exist if these securitization trusts had remained on balance sheet since they settled. These proposed new


7

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
1.  Significant Accounting Policies (Continued)
 
accounting rules would also be applied to new transactions entered into from January 1, 2010 forward. If these statements had been adopted as of June 30, 2009, the Company would have removed the $1.8 billion of Residual Interests associated with these trusts from the consolidated balance sheet and the Company would have consolidated $36.7 billion of assets and $35.9 billion of liabilities, which would have resulted in an approximate $0.6 billion reduction of stockholders’ equity as of June 30, 2009. Management allocates capital on a Managed Basis. This change will not impact management’s view of capital adequacy.
 
FASB Accounting Standards Codification
 
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” which replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” and establishes the FASB Accounting Standards Codification (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009. The Company will begin to use the new Codification when referring to GAAP in itsForm 10-Qfor the quarter ending September 30, 2009. The Codification does not change authoritative guidance. Accordingly, implementing the Codification will not change any of the Company’s accounting, and therefore, will not have an impact on the consolidated results of the Company.
 
Subsequent Events
 
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” This standard is intended to establish general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for fiscal years and interim periods ending after June 15, 2009. The Company adopted this standard effective June 15, 2009 and has evaluated any events subsequent to June 30, 2009, and their impact on the reported results and disclosures, through the date of this filing. The Company does not believe there are any material subsequent events that would require further disclosure.
 
Fair Value Measurements
 
On April 9, 2009, the FASB issued three staff positions regarding fair value measurements and recognition of impairment. Under FASB Staff Position (“FSP”) Financial Accounting Standards (“FAS”)No. 115-2andFAS No. 124-2,“Recognition and Presentation ofOther-Than-TemporaryImpairments,” impairment must be recorded within the consolidated statements of income for debt securities if there exists a fair value loss and the entity intends to sell the security or it is more likely than not the entity will be required to sell the security before recovery of the loss. Additionally, expected credit losses must be recorded through income regardless of the impairment determination above. Remaining fair value losses are recorded to other comprehensive income. FSPFAS No. 107-1and APBNo. 28-1,“Interim Disclosures about Fair Value of Financial Instruments,” requires interim disclosures of the fair value of financial instruments that were previously only required annually. Finally, FSPFAS No. 157-4,“Determining Fair Value When the Volume


8

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
1.  Significant Accounting Policies (Continued)
 
and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides guidance for determining when a significant decrease in market activity has occurred and when a transaction is not orderly. It further reiterates that prices from inactive markets or disorderly transactions should carry less weight, if any, to the determination of fair value. These standards were effective for the Company beginning April 1, 2009. The adoption of these standards was not material to the Company.
 
On February 12, 2008, the FASB issued FSPFAS No. 157-2,“Effective Date of Statement of Financial Accounting Standards (“SFAS”) No. 157,” which defers the effective date of SFAS No. 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSPFAS No. 157-2delayed the implementation of SFAS No. 157 for the Company’s accounting of goodwill, acquired intangibles, and other nonfinancial assets and liabilities that are measured at the lower of cost or market until January 1, 2009. Adoption of this standard was not material to the Company.
 
Business Combinations
 
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the entire acquisition-date fair value of assets acquired and liabilities assumed in both full and partial acquisitions; changes the recognition of assets acquired and liabilities assumed related to contingencies; changes the recognition and measurement of contingent consideration; requires expensing of most transaction and restructuring costs; and requires additional disclosures to enable the users of the financial statements to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) applies to all transactions or other events in which the Company obtains control of one or more businesses. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the reporting period beginning on or after December 15, 2008, which for the Company was January 1, 2009. The adoption of this standard on January 1, 2009, did not have a material effect on the Company’s results of operations or financial position.
 
In February 2009, the FASB issued FSP FAS No. 141(R), “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP FAS No. 141(R) amends the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination under SFAS No. 141(R), “Business Combinations.” FSP FAS No. 141(R) had the same effective date as SFAS No. 141(R). The adoption of this standard did not have a material effect on the Company’s results of operations or financial position.
 
Noncontrolling Interests in Consolidated Financial Statements — an Amendment of Accounting Research Bulletin No. 51
 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of Accounting Research Bulletin No. 51.” SFAS No. 160 requires reporting entities to present noncontrolling (minority) interests as equity (as opposed to a presentation as a liability or mezzanine equity) and provides guidance on the accounting for transactions between an entity and noncontrolling interests. On January 1, 2009, the Company adopted SFAS No. 160, the provisions of which, among other things, require that minority interests be renamed “noncontrolling interests” and that a company present a consolidated net income (loss) measure that includes the amount attributable to such “noncontrolling interests” for all periods presented. SFAS No. 160 applies prospectively for reporting periods beginning on or


9

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
1.  Significant Accounting Policies (Continued)
 
after December 15, 2008, except for the presentation and disclosure requirements which are applied retrospectively for all periods presented. The Company has reclassified financial statement line items within its consolidated balance sheets, statements of income, statements of changes in stockholders’ equity and statements of cash flows for the prior period to conform to this standard. Other than the change in presentation of noncontrolling interests, the adoption of SFAS No. 160 had no impact on the consolidated financial statements.
 
Disclosures about Derivative Investments and Hedging Activities — an Amendment of FASB Statement No. 133
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Investments and Hedging Activities — an Amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities, including (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related interpretations, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. To meet those objectives, SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted this standard on January 1, 2009.
 
Accounting for Hedging Activities — An Amendment of FASB Statement No. 133
 
In June 2008, the FASB issued an exposure draft to amend the accounting for hedging activities in SFAS No. 133. This proposed statement is intended to simplify accounting for hedging activities, improve the financial reporting of hedging activities, resolve major practice issues related to hedge accounting that have arisen under SFAS No. 133, and address differences resulting from recognition and measurement anomalies between the accounting for derivative instruments and the accounting for hedged items or transactions. While the amendment as currently drafted may simplify the Company’s accounting model for hedging activities under SFAS No. 133, the Company does not expect it to significantly impact its results of operations. The full impact of this amendment, effective January 1, 2010, as currently proposed, cannot be evaluated until the final statement is issued. The exposure draft is currently in redeliberations at the FASB.
 
2.  Allowance for Loan Losses
 
The Company’s provisions for loan losses represent the periodic expense of maintaining an allowance sufficient to absorb incurred losses, net of recoveries, in the held-for-investment loan portfolios. The evaluation of the provisions for loan losses is inherently subjective as it requires material estimates that may be susceptible to significant changes. The Company believes that the allowance for loan losses is appropriate to cover probable losses incurred in the loan portfolios.


10

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
2.  Allowance for Loan Losses (Continued)
 
The following table summarizes the total loan provisions for the three and six months ended June 30, 2009 and 2008.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Private Education Loans
 $241,759  $119,838  $445,304  $238,449 
FFELP Stafford and Other Student Loans
  25,595   19,295   59,993   35,398 
Mortgage and consumer loans
  10,758   3,882   23,094   6,479 
                 
Total provisions for loan losses
 $278,112  $143,015  $528,391  $280,326 
                 
 
Allowance for Private Education Loan Losses
 
The following table summarizes changes in the allowance for loan losses for Private Education Loans for the three and six months ended June 30, 2009 and 2008.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Allowance at beginning of period
 $1,384,454  $1,073,317  $1,308,043  $1,003,964 
Provision for Private Education Loan losses
  241,759   119,838   445,304   238,449 
Charge-offs
  (238,943)  (72,249)  (377,758)  (129,601)
Reclassification of interest reserve(1)
  9,437   8,094   21,118   16,188 
                 
Allowance at end of period
 $1,396,707  $1,129,000  $1,396,707  $1,129,000 
                 
Charge-offs as a percentage of average loans in repayment (annualized)
  8.2%  3.6%  6.7%  3.5%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)
  7.6%  3.2%  6.2%  3.0%
Allowance as a percentage of the ending total loan balance
  5.9%  5.8%  5.9%  5.8%
Allowance as a percentage of ending loans in repayment
  11.5%  13.1%  11.5%  13.1%
Allowance coverage of charge-offs (annualized)
  1.5   3.9   1.8   4.3 
Ending total loans(2)
 $23,784,039  $19,607,553  $23,784,039  $19,607,553 
Average loans in repayment
 $11,700,129  $7,991,624  $11,405,253  $7,543,605 
Ending loans in repayment
 $12,145,736  $8,608,651  $12,145,736  $8,608,651 
 
 
(1)Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.
 
(2)Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans.


11

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
2.  Allowance for Loan Losses (Continued)
 
 
Private Education Loan Delinquencies
 
The table below presents the Company’s Private Education Loan delinquency trends as of June 30, 2009, December 31, 2008, and June 30, 2008.
 
                         
  Private Education Loan Delinquencies 
  June 30, 2009  December 31, 2008  June 30, 2008 
(Dollars in millions)
 Balance  %  Balance  %  Balance  % 
 
Loans in-school/grace/deferment(1)
 $10,355      $10,159      $9,662     
Loans in forbearance(2)
  945       862       1,178     
Loans in repayment and percentage of each status:
                        
Loans current
  10,294   84.8%  9,748   87.2%  7,720   89.7%
Loans delinquent31-60 days(3)
  504   4.2   551   4.9   326   3.8 
Loans delinquent61-90 days(3)
  335   2.7   296   2.6   210   2.4 
Loans delinquent greater than 90 days(3)
  1,013   8.3   587   5.3   353   4.1 
                         
Total Private Education Loans in repayment
  12,146   100%  11,182   100%  8,609   100%
                         
Total Private Education Loans, gross
  23,446       22,203       19,449     
Private Education Loan unamortized discount
  (537)      (535)      (508)    
                         
Total Private Education Loans
  22,909       21,668       18,941     
Private Education Loan receivable for partially charged-off loans
  338       222       159     
Private Education Loan allowance for losses
  (1,396)      (1,308)      (1,129)    
                         
Private Education Loans, net
 $21,851      $20,582      $17,971     
                         
Percentage of Private Education Loans in repayment
      51.8%      50.4%      44.3%
                         
Delinquencies as a percentage of Private Education Loans in repayment
      15.2%      12.8%      10.3%
                         
Loans in forbearance as a percentage of loans in repayment and forbearance
      7.2%      7.2%      12.0%
                         
 
 
(1)Loans for borrowers who may be attending school or engaging in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.
 
(2)Loans for borrowers who have used their allowable deferment time or do not qualify for deferment and need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors consistent with the established loan program servicing procedures and policies.
 
(3)The period of delinquency is based on the number of days scheduled payments are contractually past due.


12

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
2.  Allowance for Loan Losses (Continued)
 
 
Allowance for FFELP Loan Losses
 
The following table summarizes changes in the allowance for loan losses for the FFELP loan portfolio for the three and six months ended June 30, 2009 and 2008.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Allowance at beginning of period
 $152,294  $93,997  $137,543  $88,729 
Provision for FFELP loan losses
  25,595   19,295   59,993   35,398 
Charge-offs
  (24,851)  (15,876)  (43,731)  (26,711)
Increase (decrease) for student loan sales
  —   277   (767)  277 
                 
Allowance at end of period
 $153,038  $97,693  $153,038  $97,693 
                 
Charge-offs as a percentage of average loans in repayment (annualized)
  .1%  .1%  .1%  .1%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)
  .1%  .1%  .1%  .1%
Allowance as a percentage of the ending total loan balance
  .1%  .1%  .1%  .1%
Allowance as a percentage of ending loans in repayment
  .2%  .1%  .2%  .1%
Allowance coverage of charge-offs (annualized)
  1.5   1.5   1.7   1.8 
Ending total loans
 $130,084,026  $114,067,540  $130,084,026  $114,067,540 
Average loans in repayment
 $68,657,756  $65,967,183  $68,949,585  $65,101,991 
Ending loans in repayment
 $70,011,495  $66,687,513  $70,011,495  $66,687,513 
 
The Company maintains an allowance for Risk Sharing loan losses on its FFELP loan portfolio. The level of Risk Sharing has varied over the past few years with legislative changes. As of June 30, 2009, 53 percent of the on-balance sheet FFELP loan portfolio was subject to three-percent Risk Sharing, 46 percent was subject to two-percent Risk Sharing and the remaining 1 percent was not subject to any Risk Sharing.


13

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
2.  Allowance for Loan Losses (Continued)
 
FFELP Loan Delinquencies
 
The table below shows the Company’s FFELP loan delinquency trends as of June 30, 2009, December 31, 2008 and June 30, 2008.
 
                         
  FFELP Loan Delinquencies 
  June 30, 2009  December 31, 2008  June 30, 2008 
(Dollars in millions)
 Balance  %  Balance  %  Balance  % 
 
Loans in-school/grace/deferment(1)
 $46,644      $39,270      $35,136     
Loans in forbearance(2)
  13,428       12,483       12,245     
Loans in repayment and percentage of each status:
                        
Loans current
  58,746   83.9%  58,811   83.8%  57,046   85.5%
Loans delinquent31-60 days(3)
  3,996   5.7   4,044   5.8   3,573   5.4 
Loans delinquent61-90 days(3)
  1,959   2.8   2,064   2.9   1,662   2.5 
Loans delinquent greater than 90 days(3)
  5,311   7.6   5,255   7.5   4,406   6.6 
                         
Total FFELP loans in repayment
  70,012   100%  70,174   100%  66,687   100%
                         
Total FFELP loans, gross
  130,084       121,927       114,068     
FFELP loan unamortized premium
  2,375       2,431       2,347     
                         
Total FFELP loans
  132,459       124,358       116,415     
FFELP loan allowance for losses
  (153)      (138)      (97)    
                         
FFELP loans, net
 $132,306      $124,220      $116,318     
                         
Percentage of FFELP loans in repayment
      53.8%      57.6%      58.5%
                         
Delinquencies as a percentage of FFELP loans in repayment
      16.1%      16.2%      14.5%
                         
FFELP loans in forbearance as a percentage of loans in repayment and forbearance
      16.1%      15.1%      15.5%
                         
 
 
(1)Loans for borrowers who may be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as, loans for borrowers who have requested extension of grace period during employment transition or who have temporarily ceased making full payments due to hardship or other factors.
 
(2)Loans for borrowers who have used their allowable deferment time or do not qualify for deferment, and need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors, consistent with the established loan program servicing policies and procedures.
 
(3)The period of delinquency is based on the number of days scheduled payments are contractually past due.


14

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
2.  Allowance for Loan Losses (Continued)
 
 
3.  Investments
 
A summary of investments and restricted investments as of June 30, 2009 and December 31, 2008 follows:
 
                 
  June 30, 2009 
     Gross
  Gross
    
  Amortized
  Unrealized
  Unrealized
  Fair
 
  Cost  Gains  Losses  Value 
 
Investments
                
Available-for-sale
                
U.S. Treasury securities and other U.S. government agency obligations
 $9,061  $73  $—  $9,134 
Other securities:
                
Asset-backed securities
  115,114   —   (843)  114,271 
Commercial paper and asset-backed commercial paper
  1,049,988   —   —   1,049,988 
Municipal bonds
  10,298   2,048   —   12,346 
Other
  1,530   —   (298)  1,232 
                 
Total investment securities available-for-sale
 $1,185,991  $2,121  $(1,141) $1,186,971 
                 
Restricted Investments
                
Available-for sale
                
U.S. Treasury securities and other U.S. government agency obligations
 $32,750  $—  $—  $32,750 
Guaranteed investment contracts
  25,189   —   —   25,189 
                 
Total restricted investments available-for-sale
 $57,939  $—  $—  $57,939 
                 
Held-to-maturity
                
Guaranteed investment contracts
 $3,963  $—  $—  $3,963 
Other
  215   —   —   215 
                 
Total restricted investments held-to-maturity
 $4,178  $—  $—  $4,178 
                 
 


15

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
3.  Investments (Continued)
 
                 
  December 31, 2008 
     Gross
  Gross
    
  Amortized
  Unrealized
  Unrealized
  Fair
 
  Cost  Gains  Losses  Value 
 
Investments
                
Available-for-sale
                
U.S. Treasury securities and other U.S. government agency obligations
 $8,908  $195  $—  $9,103 
Other securities:
                
Asset-backed securities
  40,907   13   (4,299)  36,621 
Commercial paper and asset-backed commercial paper
  801,169   —   —   801,169 
Municipal bonds
  10,883   1,924   —   12,807 
Other
  1,673   —   (365)  1,308 
                 
Total investment securities available-for-sale
 $863,540  $2,132  $(4,664) $861,008 
                 
Restricted Investments
                
Available-for sale
                
Guaranteed investment contracts
 $31,914  $—  $—  $31,914 
                 
Total restricted investments available-for-sale
 $31,914  $—  $—  $31,914 
                 
Held-to-maturity
                
Guaranteed investment contracts
 $5,500  $—  $—  $5,500 
Other
  215   —   —   215 
                 
Total restricted investments held-to-maturity
 $5,715  $—  $—  $5,715 
                 
 
In addition to the restricted investments detailed above, at June 30, 2009 and December 31, 2008, the Company had restricted cash of $5.2 billion and $3.5 billion, respectively.
 
As of June 30, 2009 and December 31, 2008, $1 million and $(2) million, respectively, of the net unrealized gain (loss) (after tax) related to available-for-sale investments was included in accumulated other comprehensive income. As of June 30, 2009 and December 31, 2008, $60 million ($33 million of this is in restricted cash and investments on the balance sheet) and $26 million (none of which is in restricted cash and investments on the balance sheet), respectively, of available-for-sale investment securities were pledged as collateral.
 
There were no sales of investments during the three-months ended June 30, 2009. In the six months ended June 30, 2009, the Company sold available-for-sale securities with a fair value of $100 million, resulting in no realized gain or loss. There were no sales of securities in the three and six months ended June 30, 2008. The cost basis for these securities was determined through specific identification of the securities sold.

16

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
3.  Investments (Continued)
 
As of June 30, 2009, the stated maturities for the investments (including restricted investments) are shown in the following table:
 
             
  June 30, 2009 
  Held-to-
  Available-for-
    
  Maturity  Sale(1)  Other 
 
Year of Maturity
            
2009
 $—  $1,093,104  $814,316 
2010
  215   —   6,833 
2011
  —   —   5,092 
2012
  —   —   — 
2013
  —   936   — 
2014-2018
  —   12,346   31,044 
After 2018
  3,963   138,524   28,226 
             
Total
 $4,178  $1,244,910  $885,511 
             
 
 
(1)Available-for-sale securities are stated at fair value.
 
At June 30, 2009 and December 31, 2008, the Company also had other investments of $886 million and $180 million, respectively. At June 30, 2009, other investments included a $772 million receivable for cash collateral posted to derivative counterparties. Other investments also included leveraged leases which at June 30, 2009 and December 31, 2008, totaled $65 million and $76 million, respectively, that are general obligations of American Airlines and Federal Express Corporation. At June 30, 2009 and December 31, 2008, other investments also included the Company’s remaining investment in The Reserve Primary Fund totaling $42 million and $97 million, respectively.
 
4.  Goodwill and Acquired Intangible Assets
 
Goodwill
 
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” all acquisitions must be assigned to a reporting unit or units. A reporting unit is the same as or one level below an operating segment, as defined in SFAS No. 131. The following table summarizes the Company’s allocation of goodwill to its reporting units.
 
         
  As of June 30, 
(Dollars in millions)
 2009  2008 
 
Lending
 $388  $388 
Asset Performance Group
  401   396 
Guarantor services
  62   62 
Upromise
  140   140 
         
Total
 $991  $986 
         


17

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
4.  Goodwill and Acquired Intangible Assets (Continued)
 
Impairment Testing
 
In accordance with SFAS No. 142, the Company performs goodwill impairment testing annually in the fourth quarter as of a September 30 valuation date or more frequently if an event occurs or circumstances change such that there is a potential that the fair value of a reporting unit or reporting units may be below their respective carrying values.
 
On February 26, 2009, the Obama Administration (“the Administration”) issued their 2010 budget request to Congress, which included provisions that could significantly impact the FFELP. In light of the potential implications of the Administration’s 2010 budget proposal to the Company’s business model, as well as continued uncertainty in the economy, the tight credit markets and the Company’s decline in market capitalization during the first quarter of 2009, the Company assessed goodwill impairment as of March 31, 2009. This assessment resulted in estimated fair values of the Company’s reporting units in excess of their carrying values. Accordingly, no goodwill impairment was recorded in the first quarter.
 
During the second quarter, no new unfavorable events or changes in circumstances occurred to warrant an impairment assessment as of June 30, 2009. Nevertheless, in light of ongoing uncertainties associated with the Administration’s proposed budget and the economic conditions described above, the Company continues to monitor the fair value of goodwill for each of its reporting units on a quarterly basis. Based on the Company’s assessment that there have been no change in circumstances associated with any of its reporting units during the second quarter and based on its aforementioned monitoring process, the Company concluded that goodwill is not impaired as of June 30, 2009.
 
Acquired Intangible Assets
 
Acquired intangible assets include the following:
 
                   
  Average
 As of June 30, 2009 
  Amortization
       Accumulated
    
(Dollars in millions)
 Period    Gross  Amortization  Net 
 
Intangible assets subject to amortization:
                  
Customer, services, and lending relationships
 12 years     $332  $(190) $142 
Software and technology
 7 years      98   (88)  10 
Non-compete agreements
 2 years      11   (10)  1 
                   
Total
        441   (288)  153 
Intangible assets not subject to amortization:
                  
Trade name and trademark
 Indefinite      91   —   91 
                   
Total acquired intangible assets
       $532  $(288) $244 
                   
 


18

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
4.  Goodwill and Acquired Intangible Assets (Continued)
 
                   
  Average
 As of December 31, 2008 
  Amortization
       Accumulated
    
(Dollars in millions)
 Period    Gross  Amortization  Net 
 
Intangible assets subject to amortization:
                  
Customer, services, and lending relationships
 13 years     $332  $(173) $159 
Software and technology
 7 years      93   (85)  8 
Non-compete agreements
 2 years      11   (10)  1 
                   
Total
        436   (268)  168 
Intangible assets not subject to amortization:
                  
Trade name and trademark
 Indefinite      91   —   91 
                   
Total acquired intangible assets
       $527  $(268) $259 
                   
 
The Company recorded amortization of acquired intangible assets totaling $10 million and $15 million for the three months ended June 30, 2009 and 2008, respectively, and $19 million and $31 million for the six months ended June 30, 2009 and 2008, respectively. The Company will continue to amortize its intangible assets with definite useful lives over their remaining estimated useful lives.
 
5.  Borrowings
 
The following table summarizes the Company’s borrowings as of June 30, 2009 and December 31, 2008.
 
                         
  June 30, 2009  December 31, 2008 
  Short
  Long
     Short
  Long
    
(Dollars in millions)
 Term  Term  Total  Term  Term  Total 
 
Unsecured borrowings
 $4,249  $28,416  $32,665  $6,794  $31,182  $37,976 
Term bank deposits
  901   5,199   6,100   1,148   1,108   2,256 
Indentured trusts
  8   1,761   1,769   31   1,972   2,003 
2008 Asset-Backed Financing Facilities
  12,476   —   12,476   24,768   —   24,768 
ED Participation Program facility
  17,236   —   17,236   7,365   —   7,365 
ED Conduit Program facility
  11,095   —   11,095   —   —   — 
On-balance sheet securitizations
  —   87,386   87,386   —   80,601   80,601 
Other
  1,358   —   1,358   1,827   —   1,827 
                         
Total before fair value adjustments
  47,323   122,762   170,085   41,933   114,863   156,796 
SFAS No. 133 fair value adjustments
  9   3,118   3,127   —   3,362   3,362 
                         
Total
 $47,332  $125,880  $173,212  $41,933  $118,225  $160,158 
                         
 
As of June 30, 2009, the Company had $3.5 billion in unsecured revolving credit facilities which provide liquidity support for general corporate purposes. The Company has never drawn on these facilities. The facilities include a $1.9 billion revolving credit facility maturing in October 2010 and $1.6 billion maturing in October 2011. These figures do not include a $215 million commitment from a subsidiary of Lehman Brothers Holding, Inc. On April 24, 2009, in conjunction with the extension of the 2008 ABCP Facilities, a $1.4 billion

19

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
5.  Borrowings (Continued)
 
revolving credit facility maturing in October 2009 was retired and a $1.9 billion revolving credit facility maturing in October 2011 was reduced to $1.6 billion. In connection with the early termination of the unsecured revolving credit facilities, interest on these facilities, if drawn, increases to LIBOR plus 450 basis points. The principal financial covenants in the unsecured revolving credit facilities require the Company to maintain tangible net worth of at least $1.38 billion at all times. Consolidated tangible net worth as calculated for purposes of this covenant was $2.9 billion as of June 30, 2009. The covenants also require the Company to meet either a minimum interest coverage ratio or a minimum net adjusted revenue test based on the four preceding quarters’ adjusted “Core Earnings” financial performance. The Company was compliant with both the minimum interest coverage ratio and the minimum net adjusted revenue tests as of the quarter ended June 30, 2009. Failure to meet these covenants would result in the facilities being withdrawn. In the past, the Company has not relied upon its unsecured revolving credit facilities as a primary source of liquidity. Although the Company has never borrowed under these facilities, they are available to be drawn upon for general corporate purposes.
 
Lehman Brothers Bank, FSB, a subsidiary of Lehman Brothers Holdings Inc., is a party to the Company’s unsecured revolving credit facilities under which they provide the Company with a $215 million commitment. Lehman Brothers Holdings Inc. declared bankruptcy on September 15, 2008. The Company is operating under the assumption that the lending commitment of Lehman Brothers Bank, FSB, will not be honored if drawn upon. While the Company continues to explore various options, it does not anticipate replacing its commitment from Lehman Brothers Bank, FSB.
 
Secured Borrowings
 
FIN No. 46(R), “Consolidation of Variable Interest Entities,” requires VIEs to be consolidated by their primary beneficiaries. A VIE exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics are the direct or indirect ability to make decisions about an entity’s activities that have a significant impact on the success of the entity, the obligation to absorb the expected losses of an entity, and the rights to receive the expected residual returns of the entity.
 
The Company currently consolidates a number of financing entities that are VIEs as a result of being the entities’ primary beneficiary. As a result, these financing VIEs are accounted for as secured borrowings. The process of identifying the primary beneficiary involves identifying all other parties that hold variable interests in the entity and determining which of the parties, including the Company, has the responsibility to absorb the majority of the entity’s expected losses or the rights to its expected residual returns. The Company is the


20

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
5.  Borrowings (Continued)
 
primary beneficiary of and currently consolidates the following financing VIEs as of June 30, 2009 and December 31, 2008:
 
                             
  June 30, 2009 
  Debt Outstanding             
  Short
  Long
     Carrying Amount of Assets Securing Debt Outstanding 
(Dollars in millions)
 Term  Term  Total  Loans  Cash  Other Assets  Total 
 
Secured Borrowings:
                            
ED Participation Program facility
 $17,236  $—  $17,236  $17,472  $127  $243  $17,842 
ED Conduit Program facility
  11,095   —   11,095   11,390   204   353   11,947 
2008 Asset-Backed Financing Facilities(1)
  12,476   —   12,476   13,707   346   126   14,179 
On-balance sheet securitizations
  —   87,386   87,386   90,161   3,523   2,816   96,500 
Indentured trusts
  8   1,761   1,769   2,253   189   31   2,473 
                             
   40,815   89,147   129,962   134,983   4,389   3,569   142,941 
SFAS No. 133 fair value adjustment
  —   1,307   1,307   —   —   —   — 
                             
Total
 $40,815  $90,454  $131,269  $134,983  $4,389  $3,569  $142,941 
                             
 
 
(1)Includes $95 million of assets within the facility that can be released to the Company.
 
                             
  December 31, 2008 
  Debt Outstanding             
  Short
  Long
     Carrying Amount of Assets Securing Debt Outstanding 
(Dollars in millions)
 Term  Term  Total  Loans  Cash  Other Assets  Total 
 
Secured Borrowings:
                            
ED Participation Program facility
 $7,365  $—  $7,365  $7,733  $88  $85  $7,906 
2008 Asset-Backed Financing Facilities
  24,768   —   24,768   31,953   462   816   33,231 
On-balance sheet securitizations
  —   80,601   80,601   81,547   2,632   999   85,178 
Indentured trusts
  31   1,972   2,003   2,199   236   40   2,475 
                             
   32,164   82,573   114,737   123,432   3,418   1,940   128,790 
SFAS No. 133 fair value adjustment
  —   872   872   —   —   —   — 
                             
Total
 $32,164  $83,445  $115,609  $123,432  $3,418  $1,940  $128,790 
                             
 
Asset-Backed Financing Facilities
 
During the first quarter of 2008, the Company entered into three new asset-backed financing facilities (the “2008 Asset-Backed Financing Facilities”): (i) a $26.0 billion FFELP student loan ABCP conduit facility (the “2008 FFELP ABCP Facility”); (ii) a $5.9 billion Private Education Loan ABCP conduit facility (the “2008 Private Education Loan ABCP Facility”) (collectively, the “2008 ABCP Facilities”); and (iii) a


21

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
5.  Borrowings (Continued)
 
$2.0 billion secured FFELP loan facility (the “2008 Asset-Backed Loan Facility”). The initial term of the 2008 Asset-Backed Financing Facilities was 364 days. The underlying cost of borrowing under the 2008 ABCP Facilities was approximately LIBOR plus 0.68 percent for the FFELP loan facilities and LIBOR plus 1.55 percent for the Private Education Loan facility, excluding up-front and unused commitment fees. All-in pricing on the 2008 ABCP Facilities varies based on usage. For the full year 2008, the combined, all-in cost of borrowings related to the 2008 Asset-Backed Financing Facilities, including amortized up-front fees and unused commitment fees, was three-month LIBOR plus 2.47 percent. The primary use of the 2008 Asset-Backed Financing Facilities was to refinance comparable ABCP facilities incurred in connection with the Proposed Merger, with the expectation that outstanding balances under the 2008 Asset-Backed Financing Facilities would be reduced through securitization of the underlying student loan collateral in the term asset-backed securities (“ABS”) market.
 
On February 2, 2009, the Company extended the maturity date of the 2008 ABCP Facilities from February 28, 2009 to April 28, 2009 for a $61 million upfront fee. The other terms of the facilities remained materially unchanged.
 
On February 27, 2009, the Company extended the maturity date of the 2008 Asset-Backed Loan Facility from February 28, 2009 to April 28, 2009 for a $4 million upfront fee. The other terms of this facility remained materially unchanged.
 
On April 24, 2009, the Company extended the maturity of $21.8 billion of the 2008 FFELP ABCP Facility for one year to April, 23, 2010. The Company also extended its 2008 Asset-Backed Loan Facility in the amount of $1.5 billion. The 2008 Asset-Backed Loan Facility matured on June 26, 2009 and was paid in full. A total of $86 million in fees were paid related to these extensions. The 2008 Private Education Loan ABCP Facility was paid off and terminated on April 24, 2009. The stated borrowing rate of the 2008 FFELP ABCP Facility is the applicable funding rate plus 130 basis points excluding upfront fees. The applicable funding rate generally will be either a LIBOR or commercial paper rate. The terms of the 2008 FFELP ABCP Facility call for an increase in the applicable funding spread to 300 basis points if the outstanding borrowing amount is not reduced to $15.2 billion and $10.9 billion as of June 30, 2009 and September 30, 2009, respectively. If the Company does not negotiate an extension or pay off all outstanding amounts of the 2008 FFELP ABCP Facility at maturity, the facility will extend by 90 days with the interest rate generally increasing to LIBOR plus 250 basis points to 550 basis points over the 90 day period. The other terms of the facilities remained materially unchanged.
 
The maximum amount the Company may borrow under the 2008 FFELP ABCP Facility is limited based on certain factors, including market conditions and the fair value of student loans in the facility. As of June 30, 2009, the maximum borrowing amount was approximately $14.8 billion under the 2008 FFELP ABCP Facility. Funding under the 2008 FFELP ABCP Facility is subject to usual and customary conditions. The 2008 FFELP ABCP Facility is subject to termination under certain circumstances, including the Company’s failure to comply with the principal financial covenants in its unsecured revolving credit facilities.
 
Borrowings under the 2008 FFELP ABCP Facility are nonrecourse to the Company. As of June 30, 2009, the Company had $12.5 billion outstanding in connection with the 2008 FFELP ABCP Facility. The book basis of the assets securing this facility as of June 30, 2009 was $14.2 billion.


22

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
5.  Borrowings (Continued)
 
ED Conduit Program
 
Pursuant to the Ensuring Continued Access to Student Loans Act of 2008 (“ECASLA”), on January 15, 2009, ED published summary terms under which it will purchase eligible FFELP Stafford and PLUS loans from a conduit vehicle established to provide funding for eligible student lenders (the “ED Conduit Program”). Loans eligible for the ED Conduit Program must be first disbursed on or after October 1, 2003, but not later than July 1, 2009, and fully disbursed before September 30, 2009, and meet certain other requirements including with respect to borrower benefits. The ED Conduit was launched on May 11, 2009. Funding for the ED Conduit Program is provided by the capital markets at a cost based on market rates, with the Company being advanced 97 percent of the student loan face amount. The ED Conduit Program has a term of five years and will expire on January 19, 2014. The Student Loan Short-Term Notes (“SLST Notes”), issued by the ED Conduit, are supported by a combination of i) Funding Notes backed by FFELP student loans, ii) the Liquidity Agreement with the Federal Financing Bank (“FFB”) and iii) the Put Agreement provided by ED. If the conduit does not have sufficient funds to pay all SLST Notes then those SLST Notes will be repaid with funds from the FFB. The FFB will hold the notes for a short period of time and if at the end of that time the SLST Notes still cannot be paid off, the underlying FFELP loans that serve as collateral to the ED Conduit will be sold to ED through the Put Agreement at a price of 97 percent of the face amount of the loans. Approximately $15.5 billion of the Company’s Stafford and PLUS loans (excluding loans currently in the Participation Program) are eligible for funding under the ED Conduit Program. As of June 30, 2009, $11.4 billion of these assets have been funded through this program with a weighted average issuance cost of approximately .74 percent.
 
Term Asset-Backed Securities Loan Facility (“TALF”)
 
On February 6, 2009, the Federal Reserve Bank of New York published proposed terms for a program designed to facilitate renewed issuance of consumer and small business ABS at lower interest rate spreads. TALF was initiated on March 17, 2009 and currently provides investors with funding of up to five years for eligible ABS rated by two or more rating agencies in the highest investment-grade rating category. Eligible ABS include ‘AAA’ rated student loan ABS backed by FFELP and private student loans first disbursed since May 1, 2007. As of June 30, 2009, the Company had approximately $12.7 billion book basis ($13.4 billion face amount) of student loans eligible to serve as collateral for ABS funded under TALF; this amount does not include loans eligible for ECASLA financing programs. The Federal Reserve Bank launched the TALF program on March 3, 2009.
 
On May 5, 2009, the Company priced a $2.6 billion Private Education Loan securitization which closed on May 12, 2009. The issue bears a coupon of 1-month LIBOR plus 6.0 percent and is callable at the Company’s option at 93 percent of the outstanding balance of the ABS between November 15, 2011 and April 15, 2012. If the issue is called on November 15, 2011, which the Company believes is probable, the effective cost of the bond financing will be approximately 1-month LIBOR plus 3.7 percent. This transaction was TALF-eligible.
 
This securitization is accounted for as a secured borrowing. The Company has concluded that it is probable it will call these bonds at the call date at the 7 percent discount. Probability is based on the Company’s assessment on whether these bonds can be refinanced at the call date at or lower than a breakeven cost of funds based on the call discount. As a result, the Company is accreting this call discount as a reduction to interest expense through the call date under APB No. 21, “Interest on Receivables and Payables,” and SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans


23

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
5.  Borrowings (Continued)
 
and Initial Direct Costs of Leases.” If it becomes less than probable the Company will call these bonds at a future date it will result in the Company reversing this prior accretion as a cumulative catch up under SFAS No. 91 and the effective interest rate method. The Company has accreted approximately $9 million as a reduction of interest expense through June 30, 2009.
 
Consolidation of Off-Balance Sheet Securitizations
 
In the second quarter of 2009, three of the Company’s off-balance sheet securitization trusts were re-evaluated under SFAS No. 140 and it was determined that they no longer met the criteria to be considered QSPEs. These trusts were then evaluated as VIEs using the guidance in FIN No. 46(R) and it was determined that they should be consolidated and accounted for as secured borrowings as the Company is the primary beneficiary. These trusts had reached their 10 percentclean-upcall levels but the call was not exercised by the Company. Under SFAS No. 140, because the Company can now exercise that option at their discretion going forward, the Company effectively controls the assets of the trusts. This resulted in the Company consolidating at fair value $454 million in assets and $432 million in liabilities related to these trusts. This resulted in an $11 million gain being recognized during the second quarter of 2009.
 
6.  Student Loan Securitization
 
The Company securitizes its FFELP Stafford loans, FFELP Consolidation Loans and Private Education Loan assets and, for transactions qualifying as sales, retains a Residual Interest and servicing rights (as the Company retains the servicing responsibilities), all of which are referred to as the Company’s Retained Interest in off-balance sheet securitized loans. The Residual Interest is the right to receive cash flows from the student loans and reserve accounts in excess of the amounts needed to pay servicing, derivative costs (if any), other fees, and the principal and interest on the bonds backed by the student loans.


24

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
6.  Student Loan Securitization (Continued)
 
Securitization Activity
 
The following table summarizes the Company’s securitization activity for the three and six months ended June 30, 2009 and 2008. Those securitizations listed as sales are off-balance sheet transactions and those listed as financings remain on-balance sheet.
 
                                 
  Three Months Ended June 30, 
  2009  2008 
     Loan
  Pre-
        Loan
  Pre-
    
  No. of
  Amount
  Tax
     No. of
  Amount
  Tax
    
(Dollars in millions)
 Transactions  Securitized  Gain  Gain%  Transactions  Securitized  Gain  Gain% 
 
Securitizations — sales:
                                
FFELP Stafford/PLUS loans
  —  $—  $—   —%  —  $—  $—   —%
FFELP Consolidation Loans
  —   —   —   —   —   —   —   — 
Private Education Loans
  —   —   —   —   —   —   —   — 
                                 
Total securitizations — sales
  —   —  $—   —%  —   —  $—   —%
                                 
Securitizations — financings:
                                
FFELP Stafford/PLUS Loans(1)
  —   —           3   7,125         
FFELP Consolidation Loans(1)
  2   4,524           —   —         
Private Education Loans(1)
  1   3,527           —   —         
                                 
Total securitizations — financings
  3   8,051           3   7,125         
                                 
Total securitizations
  3  $8,051           3  $7,125         
                                 
 
                                 
  Six Months Ended June 30, 
  2009  2008 
     Loan
  Pre-
        Loan
  Pre-
    
  No. of
  Amount
  Tax
     No. of
  Amount
  Tax
    
(Dollars in millions)
 Transactions  Securitized  Gain  Gain%  Transactions  Securitized  Gain  Gain% 
 
Securitizations — sales:
                                
FFELP Stafford/PLUS loans
  —  $—  $—   —%  —  $—  $—   —%
FFELP Consolidation Loans
  —   —   —   —   —   —   —   — 
Private Education Loans
  —   —   —   —   —   —   —   — 
                                 
Total securitizations — sales
  —   —  $—   —%  —   —  $—   —%
                                 
Securitizations — financings:
                                
FFELP Stafford/PLUS Loans(1)
  —   —           6   11,825         
FFELP Consolidation Loans(1)
  2   4,524           —   —         
Private Education Loans(1)
  2   6,419           —   —         
                                 
Total securitizations — financings
  4   10,943           6   11,825         
                                 
Total securitizations
  4  $10,943           6  $11,825         
                                 
 
 
(1)In certain securitizations there are terms within the deal structure that result in such securitizations not qualifying for sale treatment and accordingly, they are accounted for on-balance sheet as VIEs. Terms that prevent sale treatment include: (1) allowing the Company to hold certain rights that can affect the remarketing of certain bonds, (2) allowing the trust to enter into interest rate cap agreements after the initial settlement of the securitization, which do not relate to the reissuance of third party beneficial interests or (3) allowing the Company to hold an unconditional call option related to a certain percentage of the securitized assets.


25

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
6.  Student Loan Securitization (Continued)
 
 
The following table summarizes cash flows received from or paid to the off-balance sheet securitization trusts during the three and six months ended June 30, 2009 and 2008.
 
                 
  Three Months Ended June 30,  Six Months Ended June 30, 
(Dollars in millions)
 2009  2008  2009  2008 
 
Net proceeds from new securitizations completed during the period
 $—  $—  $—  $— 
Cash distributions from trusts related to Residual Interests
  154   285   268   515 
Servicing fees received(1)
  57   62   115   125 
Purchases of previously transferred financial assets for representation and warranty violations
  (2)  (10)  (5)  (13)
Reimbursements of borrower benefits(2)
  (8)  (7)  (16)  (14)
Purchases of delinquent Private Education Loans from securitization trusts using delinquent loan call option
  —   (52)  —   (100)
Purchases of loans usingclean-upcall option
  —   112   —   112 
 
 
(1)The Company receives annual servicing fees of 90 basis points, 50 basis points and 70 basis points of the outstanding securitized loan balance related to its FFELP Stafford, FFELP Consolidation Loan and Private Education Loan securitizations, respectively.
 
(2)Under the terms of the securitizations, the transaction documents require that the Company reimburse the trusts for any borrower benefits afforded the borrowers of the underlying securitized loans.


26

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
6.  Student Loan Securitization (Continued)
 
 
Retained Interest in Securitized Receivables
 
The following tables summarize the fair value of the Company’s Residual Interests, included in the Company’s Retained Interest (and the assumptions used to value such Residual Interests), along with the underlying off-balance sheet student loans that relate to those securitizations in transactions that were treated as sales as of June 30, 2009 and December 31, 2008.
 
                 
  As of June 30, 2009 
  FFELP
  Consolidation
  Private
    
  Stafford and
  Loan
  Education
    
(Dollars in millions)
 PLUS  Trusts(1)  Loan Trusts  Total 
 
Fair value of Residual Interests(2)
 $272  $721  $827  $1,820 
Underlying securitized loan balance
  6,046   14,736   13,372   34,154 
Weighted average life
  3.1 yrs.   8.0 yrs.   6.4 yrs.     
Prepayment speed (annual rate)(3)
                
Interim status
  0%  N/A   0%    
Repayment status
  2-19%  1-6%  2-15%    
Life of loan — repayment status
  12%  4%  6%    
Expected remaining credit losses (% of outstanding student loan principal)(4)
  .10%  .22%  5.76%    
Residual cash flows discount rate
  11.5%  13.0%  32.4%    
 
                 
  As of December 31, 2008 
  FFELP
  Consolidation
  Private
    
  Stafford and
  Loan
  Education
    
(Dollars in millions)
 PLUS  Trusts(1)  Loan Trusts  Total 
 
Fair value of Residual Interests(2)
 $250  $918  $1,032  $2,200 
Underlying securitized loan balance
  7,057   15,077   13,690   35,824 
Weighted average life
  3.0 yrs.   8.1 yrs.   6.4 yrs.     
Prepayment speed (annual rate)(3)
                
Interim status
  0%  N/A   0%    
Repayment status
  2-19%  1-6%  2-15%    
Life of loan — repayment status
  12%  4%  6%    
Expected remaining credit losses (% of outstanding student loan principal)(4)
  .11%  .23%  5.22%    
Residual cash flows discount rate
  13.1%  11.9%  26.3%    
 
 
(1)Includes $529 million and $762 million related to the fair value of the Embedded Floor Income as of June 30, 2009 and December 31, 2008, respectively. Changes in the fair value of the Embedded Floor Income are primarily due to changes in the interest rates and the paydown of the underlying loans.
 
(2)The Company had no unrealized gains (pre-tax) in accumulated other comprehensive income that related to the Retained Interests for any of the periods presented.
 
(3)The Company uses CPR curves for Residual Interest valuations that are based on seasoning (the number of months since entering repayment). Under this methodology, a different CPR is applied to each year of a loan’s seasoning. Repayment status CPR used is based on the number of months since first entering repayment (seasoning). Life of loan CPR is related to repayment status only and does not include the impact of the loan while in interim status. The CPR assumption used for all periods includes the impact of projected defaults.
 
(4)Remaining expected credit losses as of the respective balance sheet date.


27

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
6.  Student Loan Securitization (Continued)
 
 
The Company recorded net unrealized mark-to-market losses in “servicing and securitization revenue (loss)” of $90 million and $192 million in the three months ended June 30, 2009 and 2008, respectively, and $351 million and $280 million in the six months ended June 30, 2009 and 2008, respectively, related to the Residual Interest.
 
As of June 30, 2009, the Company did not change any significant assumptions compared to those used as of March 31, 2009, to determine the fair value of the Residual Interests. The $90 million unrealized mark-to-market loss in the second quarter of 2009 was primarily a result of an increase in forward interest rates which resulted in a higher discount rate used to value the Residual Interests as well as a reduction in the fair value of the Embedded Fixed Rate Floor Income. The $192 million unrealized mark-to-market loss in the second quarter of 2008 was primarily related to increases in forward interest rates during the quarter reducing the value of Embedded Fixed Rate Floor Income ($137 million decrease) and increasing the discount rate used to value the Residual Interests ($57 million decrease). Additionally, the Company increased the spread to LIBOR component of the Private Education discount rate formula to better reflect current market conditions which resulted in a $113 million Residual Interest mark-to-market loss. Actual quarterly experience, including improved forward curve spreads used in the valuation of the Residual Interests, partially mitigated these mark-to-market losses.
 
The following table reflects the sensitivity of the current fair value of the Residual Interests to adverse changes in the key economic assumptions used in the valuation of the Residual Interest at June 30, 2009, discussed in detail in the preceding table. The effect of a variation in a particular assumption on the fair value of the Residual Interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower


28

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
6.  Student Loan Securitization (Continued)
 
prepayments and increased credit losses), which might magnify or counteract the sensitivities. These sensitivities are hypothetical, as the actual results could be materially different than these estimates.
 
             
  As of June 30, 2009 
  FFELP
  FFELP
    
  Stafford/PLUS
  Consolidation
  Private Education
 
(Dollars in millions)
 Loan Trusts(5)  Loan Trusts(5)  Loan Trusts(5) 
 
Fair value of Residual Interest
 $272  $721(1) $827 
Weighted-average life
  3.1 yrs.   8.0 yrs.   6.4 yrs. 
Prepayment speed assumptions(2)
            
Interim status
  0%  N/A   0%
Repayment status
  2-19%  1-6%  2-15%
Life of loan — repayment status
  12%  4%  6%
Impact on fair value of 5% absolute increase
 $(24) $(82) $(108)
Impact on fair value of 10% absolute increase
 $(43) $(143) $(195)
Expected credit losses (as a% of student loan principal)
  .10%  .22%  5.76%(3)
Impact on fair value of 5% absolute increase in default rate
 $(6) $(8) $(170)
Impact on fair value of 10% absolute increase in default rate
 $(10) $(16) $(339)
Residual cash flows discount rate
  11.5%  13.0%  32.4%
Impact on fair value of 5% absolute increase
 $(25) $(115) $(94)
Impact on fair value of 10% absolute increase
 $(46) $(198) $(169)
             
             
  3 month LIBOR forward curve
at June 30, 2009 plus contracted spreads
Difference between Asset and Funding underlying indices(4)
            
Impact on fair value of 0.25% absolute increase in funding index compared to asset index
 $(42) $(161) $(2)
Impact on fair value of 0.50% absolute increase in funding index compared to asset index
 $(85) $(322) $(4)
 
 
(1)Certain consolidation trusts have $3.3 billion ofnon-U.S.dollar (Euro denominated) bonds outstanding. To convert thesenon-U.S.dollar denominated bonds into U.S. dollar liabilities, the trusts have entered into foreign-currency swaps with certain counterparties. Additionally, certain Private Education Loan trusts contain interest rate swaps that hedge the basis and reset risk between the Prime indexed assets and LIBOR index notes. As of June 30, 2009, these swaps are in an $833 million gain position (in the aggregate) and the trusts had $600 million of exposure to counterparties (gain position less collateral posted) primarily as a result of the decline in the exchange rates between the U.S. dollar and the Euro. This unrealized market value gain is not part of the fair value of the Residual Interest in the table above. Not all derivatives within the trusts require the swap counterparties to post collateral to the respective trust for changes in market value, unless the trust’s swap counterparty’s credit rating has been withdrawn or has been downgraded below a certain level. If the swap counterparty does not post the required collateral or is downgraded further, the counterparty must find a suitable replacement counterparty or provide the trust with a letter of credit or a guaranty from an entity that has the required credit ratings. Ultimately, the Company’s exposure related to a swap counterparty failing to make its payments is limited to the fair value of the related trust’s Residual Interest which was $1.3 billion as of June 30, 2009.
 
(2)See previous table for details on CPR. Impact on fair value due to increase in prepayment speeds only increases the repayment status speeds. Interim status CPR remains 0%.
 
(3)Expected credit losses are used to project future cash flows related to the Private Education Loan securitization’s Residual Interest. However, until the fourth quarter of 2008 when it ceased this activity for all trusts settling prior to September 30, 2005, the Company purchased loans at par when the loans reached 180 days delinquent prior to default under a contingent call option, resulting in no credit losses at the trust nor related to the Company’s Residual Interest. When the Company exercised its contingent call option and purchased the loans from the trust at par, the Company recorded a loss related to these loans that are now on the Company’s balance sheet. The Company recorded losses of $43 million and $80 million, respectively, for the three and six months ended June 30, 2008, and did not record any losses for the three and six months ended June 30, 2009, related to this activity. For all trusts settling after October 1, 2005, the Company does not hold this contingent call option.
 
(4)Student loan assets are primarily indexed to a Treasury bill, commercial paper or a prime index. Funding within the trust is primarily indexed to a LIBOR index. Sensitivity analysis increases funding indices as indicated while keeping assets underlying indices fixed.
 
(5)In addition to the assumptions in the table above, the Company also projects the reduction in distributions that will result from the various benefit programs that exist related to consecutive on-time payments by borrowers. Related to the entire $1.8 billion Residual Interest, there are $205 million (present value) of benefits projected which reduce the fair value.


29

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
6.  Student Loan Securitization (Continued)
 
 
The table below shows the Company’s off-balance sheet Private Education Loan delinquency trends as of June 30, 2009 and 2008.
 
                 
  Off-Balance Sheet Private Education Loan Delinquencies 
  June 30, 2009  June 30, 2008 
(Dollars in millions)
 Balance  %  Balance  % 
 
Loans in-school/grace/deferment(1)
 $2,974      $4,159     
Loans in forbearance(2)
  583       1,339     
Loans in repayment and percentage of each status:
                
Loans current
  8,874   90.4%  7,871   95.1%
Loans delinquent31-60 days(3)
  261   2.7   178   2.2 
Loans delinquent61-90 days(3)
  174   1.8   102   1.2 
Loans delinquent greater than 90 days(3)
  505   5.1   124   1.5 
                 
Total off-balance sheet Private Education Loans in repayment
  9,814   100%  8,275   100%
                 
Total off-balance sheet Private Education Loans, gross
 $13,371      $13,773     
                 
 
 
(1)Loans for borrowers who may be attending school or engaging in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.
 
(2)Loans for borrowers who have used their allowable deferment time or do not qualify for deferment, and need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors consistent with the established loan program servicing procedures and programs.
 
(3)The period of delinquency is based on the number of days scheduled payments are contractually past due.
 
The following table summarizes charge-off activity for Private Education Loans in the off-balance sheet trusts for the three and six months ended June 30, 2009 and 2008.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
(Dollars in millions)
 2009  2008  2009  2008 
 
Charge-offs
 $116  $40  $179  $73 
Charge-offs as a percentage of average loans in repayment (annualized)
  4.8%  2.1%  3.8%  1.9%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)
  4.6%  1.8%  3.6%  1.6%
Ending off-balance sheet total Private Education Loans(1)
 $13,520  $13,831  $13,520  $13,831 
Average off-balance sheet Private Education Loans in repayment
 $9,630  $7,811  $9,522  $7,638 
Ending off-balance sheet Private Education Loans in repayment
 $9,814  $8,275  $9,814  $8,275 
 
 
(1)Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans (see Note 2, “Allowance for Loan Losses”).


30

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
6.  Student Loan Securitization (Continued)
 
 
7.  Derivative Financial Instruments
 
Derivative instruments that are used as part of the Company’s interest rate and foreign currency risk management strategy include interest rate swaps, basis swaps, cross-currency interest rate swaps, interest rate futures contracts, and interest rate floor and cap contracts with indices that relate to the pricing of specific balance sheet assets and liabilities including the Residual Interests from off-balance sheet securitizations. (For a full discussion of the Company’s risk management strategy and use of derivatives, please see the Company’s 2008Form 10-K,Note 9, “Derivative Financial Instruments,” to the consolidated financial statements.) The Company accounts for its derivatives under SFAS No. 133 which requires that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The Company’s derivative instruments are classified and accounted for by the Company as fair value hedges, cash flow hedges or trading activities.
 
Fair Value Hedges
 
Fair value hedges are generally used by the Company to hedge the exposure to changes in fair value of a recognized fixed rate asset or liability. The Company enters into interest rate swaps to convert fixed rate assets into variable rate assets and fixed rate debt into variable rate debt. The Company also enters into cross-currency interest rate swaps to convert foreign currency denominated fixed and floating debt to U.S. dollar denominated variable debt. Changes in value for both the hedge and the hedged item are recorded to earnings. These amounts offset each other with the net amount representing the ineffectiveness of the relationship.
 
Cash Flow Hedges
 
Cash flow hedges are used by the Company to hedge the exposure to variability in cash flows for a forecasted debt issuance and for exposure to variability in cash flows of floating rate debt. This strategy is used primarily to minimize the exposure to volatility from future changes in interest rates. Gains and losses on the effective portion of a qualifying hedge are accumulated in other comprehensive income and ineffectiveness is recorded immediately to earnings.
 
Trading Activities
 
When instruments do not qualify as hedges under SFAS No. 133, they are accounted for as trading where all changes in fair value of the derivatives are recorded through earnings. In general, derivative instruments included in trading activities include Floor Income Contracts, basis swaps and various other derivatives that do not qualify for hedge accounting under SFAS No. 133.


31

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
7.  Derivative Financial Instruments (Continued)
 
Summary of Derivative Financial Statement Impact
 
The following tables summarize the fair values and notional amounts of all derivative instruments at June 30, 2009 and December 31, 2008, and their impact on other comprehensive income and earnings for the three and six months ended June 30, 2009 and 2008.
 
Impact of Derivatives on Consolidated Balance Sheet
 
                                   
    Cash Flow  Fair Value  Trading  Total 
  Hedged Risk
 Jun. 30,
  Dec. 31,
  Jun. 30,
  Dec. 31,
  Jun. 30,
  Dec. 31,
  Jun. 30,
  Dec. 31,
 
(Dollars in millions)
 Exposure 2009  2008  2009  2008  2009  2008  2009  2008 
 
Fair Values(1)
                                  
Derivative Assets
                                  
Interest rate swaps
 Interest rate $—  $—  $810  $1,529  $82  $323  $892  $1,852 
Cross currency interest rate swaps
 Foreign currency
and interest rate		  —   —   2,498   2,743   36   13   2,534   2,756 
                                   
Total derivative assets(3)
    —   —   3,308   4,272   118   336   3,426   4,608 
Derivative Liabilities
                                  
Interest rate swaps
 Interest rate  (106)  (146)  —   —   (635)  (332)  (741)  (478)
Floor/Cap contracts
 Interest rate  —   —   —   —   (1,143)  (1,466)  (1,143)  (1,466)
Futures
 Interest rate  —   —   —   —   (2)  (3)  (2)  (3)
Cross currency interest rate swaps
 Foreign currency
and interest rate		  —   —   (210)  (640)  (1)  —   (211)  (640)
Other(2)
 Interest rate  —   —   —   —   (22)  —   (22)  — 
                                   
Total derivative liabilities(3)
    (106)  (146)  (210)  (640)  (1,803)  (1,801)  (2,119)  (2,587)
                                   
Net total derivatives
   $(106) $(146) $3,098  $3,632  $(1,685) $(1,465) $1,307  $2,021 
                                   
 
 
(1)Fair values reported are exclusive of collateral held and pledged and accrued interest. Assets and liabilities are presented without consideration of master netting agreements. Derivatives are carried on the balance sheet based on net position by counterparty under master netting agreements, and classified in other assets or other liabilities depending on whether in a net positive or negative position.
 
(2)“Other” includes the fair value of the embedded derivatives in the total return swap related to the $1.5 billion asset-backed securities based facility which closed in January 2009. The embedded derivatives are required to be accounted for as derivatives under SFAS No. 133.
 
(3) The following table reconciles gross positions without the impact of master netting agreements to the balance sheet classification:
 
                 
  Other Assets  Other Liabilities 
  June 30,
  December 31,
  June 30,
  December 31,
 
  2009  2008  2009  2008 
 
Gross position
 $3,426  $4,608  $(2,119) $(2,587)
Impact of master netting agreements
  (1,052)  (1,594)  1,052   1,594 
                 
Derivative values with impact of master netting agreements
 $2,374  $3,014  $(1,067) $(993)
                 
 


32

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
7.  Derivative Financial Instruments (Continued)
 
                                 
  Cash Flow  Fair Value  Trading  Total 
  Jun. 30,
  Dec. 31,
  Jun. 30,
  Dec. 31,
  Jun. 30,
  Dec. 31,
  Jun. 30,
  Dec. 31,
 
(Dollars in billions)
 2009  2008  2009  2008  2009  2008  2009  2008 
 
Notional Values
                                
Interest rate swaps
 $3.9  $4.8  $10.9  $13.4  $154.8  $159.3  $169.6  $177.5 
Floor/Cap contracts
  —   —   —   —   38.7   32.4   38.7   32.4 
Futures
  —   —   —   —   .2   .2   .2   .2 
Cross currency interest rate swaps
  —   —   20.9   23.1   .3   .1   21.2   23.2 
Other(1)
  —   —   —   —   5.1   .7   5.1   .7 
                                 
Total derivatives
 $3.9  $4.8  $31.8  $36.5  $199.1  $192.7  $234.8  $234.0 
                                 
 
 
(1) “Other” includes embedded derivatives bifurcated from newly issued on-balance sheet securitization debt, as a result of adopting SFAS No. 155 as well as embedded derivatives in the total return swap discussed in footnote 2 to the table above.
 
Impact of Derivatives on Consolidated Statements of Income
 
                                 
  Three Months Ended June 30, 
     Realized Gain
       
  Unrealized Gain
  (Loss)
  Unrealized Gain
    
  (Loss) on
  on
  (Loss)
  Total Gain
 
  Derivatives(1)(2)  Derivatives(3)  on Hedged Item(1)  (Loss) 
(Dollars in millions)
 2009  2008  2009  2008  2009  2008  2009  2008 
 
Fair Value Hedges
                                
Interest rate swaps
 $(487) $(364) $97  $42  $521  $358  $131  $36 
Cross currency interest rate swaps
  1,163   (396)  120   (3)  (1,524)  439   (241)  40 
                                 
Total fair value derivatives
  676   (760)  217   39   (1,003)  797   (110)  76 
Cash Flow Hedges
                                
Interest rate swaps
  (5)  —   (21)  (11)  —   —   (26)  (11)
                                 
Total cash flow derivatives
  (5)  —   (21)  (11)  —   —   (26)  (11)
Trading
                                
Interest rate swaps
  (301)  (170)  119   105   —   —   (182)  (65)
Floor/Cap contracts
  236   569   (171)  (174)  —   —   65   395 
Futures
  —   (3)  —   3   —   —   —   — 
Cross currency interest rate swaps
  (1)  (4)  1   (1)  —   —   —   (5)
Other
  (115)  —   2   —   —   —   (113)  — 
                                 
Total trading derivatives
  (181)  392   (49)  (67)  —   —   (230)  325 
                                 
Total
  490   (368)  147   (39)  (1,003)  797   (366)  390 
Less: realized gains (losses) recorded in interest expense
  —   —   196   28   —   —   196   28 
                                 
Gains (losses) on derivative and hedging activities, net
 $490  $(368) $(49) $(67) $(1,003) $797  $(562) $362 
                                 
 
 
(1)Recorded in “Gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.
 
(2)Represents ineffectiveness related to cash flow hedges.
 
(3)For fair value and cash flow hedges, recorded in interest expense. For trading derivatives, recorded in “Gains (losses) on derivative and hedging activities, net.”

33

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
7.  Derivative Financial Instruments (Continued)
 
 
                                 
  Six Months Ended June 30, 
        Realized Gain
             
  Unrealized Gain
  (Loss)
  Unrealized Gain
       
  (Loss) on
  on
  (Loss)
  Total Gain
 
  Derivatives(1)(2)  Derivatives(3)  on Hedged Item(1)  (Loss) 
(Dollars in millions)
 2009  2008  2009  2008  2009  2008  2009  2008 
 
Fair Value Hedges
                                
Interest rate swaps
 $(670) $40  $176  $46  $715  $(44) $221  $42 
Cross currency interest rate swaps
  241   1,497   196   76   (501)  (1,394)  (64)  179 
                                 
Total fair value derivatives
  (429)  1,537   372   122   214   (1,438)  157   221 
Cash Flow Hedges
                                
Interest rate swaps
  —   —   (39)  (20)  —   —   (39)  (20)
                                 
Total cash flow derivatives
  —   —   (39)  (20)  —   —   (39)  (20)
Trading
                                
Interest rate swaps
  (601)  (302)  348   338   —   —   (253)  36 
Floor/Cap contracts
  402   274   (311)  (315)  —   —   91   (41)
Futures
  1   (2)  —   3   —   —   1   1 
Cross currency interest rate swaps
  (34)  (5)  1   (1)  —   —   (33)  (6)
Other
  (51)  —   2   —   —   —   (49)    
                                 
Total trading derivatives
  (283)  (35)  40   25   —   —   (243)  (10)
                                 
Total
  (712)  1,502   373   127   214   (1,438)  (125)  191 
Less: realized gains (losses) recorded in interest expense
  —   —   333   102   —   —   333   102 
                                 
Gains (losses) on derivative and hedging activities, net
 $(712) $1,502  $40  $25  $214  $(1,438) $(458) $89 
                                 
 
 
(1)Recorded in “Gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.
 
(2)Represents ineffectiveness related to cash flow hedges.
 
(3)For fair value and cash flow hedges, recorded in interest expense. For trading derivatives, recorded in “Gains (losses) on derivative and hedging activities, net.”


34

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
7.  Derivative Financial Instruments (Continued)
 
 
Impact of Derivatives on Consolidated Statements of Changes in Stockholders’ Equity (net of tax)
 
                 
  Interest Rate Swaps  Interest Rate Swaps 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
(Dollars in millions)
 2009  2008  2009  2008 
 
Total gains (losses) on cash flow hedges
 $5  $67  $1  $30 
Realized (gains) losses reclassified to interest expense(1)(2)(3)
  13   7   25   12 
Hedge ineffectiveness reclassified to earnings(1)(4)
  3   —   —   — 
                 
Total change in stockholders’ equity for unrealized gains (losses) on derivatives
 $21  $74  $26  $42 
                 
 
 
(1)Amounts included in “Impact of Derivatives on Consolidated Statements of Income” table above.
 
(2)Includes net settlement income/expense.
 
(3)The Company expects to reclassify $.1 million of after-tax net losses from accumulated other comprehensive income to earnings during the next 12 months related to net settlement accruals on interest rate swaps.
 
(4)Recorded in “Gains (losses) derivatives and hedging activities, net” in the consolidated statements of income.


35

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
7.  Derivative Financial Instruments (Continued)
 
 
Collateral
 
Collateral held and pledged at June 30, 2009 and December 31, 2008 related to derivative exposures between the Company and its derivative counterparties are detailed in the following table:
 
         
(Dollars in millions)
 June 30, 2009  December 31, 2008 
 
Collateral held:(1)
        
Cash (obligation to return cash collateral is recorded in short-term borrowings)(2)
 $1,055  $1,624 
Securities at fair value — corporate derivatives (not recorded in financial statements)(3)
  185   689 
Securities at fair value — on-balance sheet securitization derivatives (not recorded in financial statements)(4)
  610   688 
         
Total collateral held
 $1,850  $3,001 
         
Derivative asset at fair value including accrued interest
 $2,809  $3,741 
         
Collateral pledged to others:
        
Cash (right to receive return of cash collateral is recorded in investments)
 $772  $— 
Securities at fair value (recorded in investments)(5)
  27   26 
Securities at fair value (recorded in restricted investments)(6)
  33   — 
Securities at fair value re-pledged (not recorded in financial statements)(6)(7)
  —   191 
         
Total collateral pledged
 $832  $217 
         
Derivative liability at fair value including accrued interest and premium receivable
 $856  $677 
         
 
 
(1)In addition to collateral held for derivative exposures, the Company held $779 million (fair value) of mortgage-backed securities as collateral in a reverse repurchase transaction. The securities are not reflected in the consolidated financial statements; however, the reverse repurchase transaction is reflected in the Company’s “cash and cash equivalents” line of the consolidated balance sheets.
 
(2)Effective with the downgrade in the Company’s unsecured credit ratings on May 13, 2009, cash collateral is held in restricted cash accounts.
 
(3)Effective with the downgrade in the Company’s unsecured credit ratings on May 13, 2009, the Company does not have the ability to sell or re-pledge securities it holds as collateral.
 
(4)The trusts do not have the ability to sell or re-pledge securities they hold as collateral.
 
(5)Counterparty does not have the right to sell or re-pledge securities.
 
(6)Counterparty has the right to sell or re-pledge securities.
 
(7)Represents securities the Company holds as collateral that have been pledged to other counterparties.
 
Additionally, as of June 30, 2009 and December 31, 2008, $259 million and $340 million, respectively, in collateral related to off-balance sheet trust derivatives were held by these off-balance sheet trusts. Collateral posted by third parties to the off-balance sheet trusts cannot be sold or re-pledged by the trusts.


36

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
7.  Derivative Financial Instruments (Continued)
 
 
8.  Other Assets
 
The following table provides detail on the Company’s other assets at June 30, 2009 and December 31, 2008.
 
                 
  June 30,
  December 31,
 
  2009  2008 
  Ending
  % of
  Ending
  % of
 
  Balance  Balance  Balance  Balance 
 
Accrued interest receivable
 $2,993,603   30% $3,466,404   31%
Derivatives at fair value
  2,373,712   24   3,013,644   27 
Income tax asset
  1,895,199   19   1,661,039   15 
APG purchased paper receivables and real estate owned
  856,929   9   1,222,345   11 
Benefit and insurance-related investments
  475,780   5   472,899   4 
Fixed assets, net
  309,925   3   313,059   3 
Accounts receivable — general
  652,036   7   712,854   6 
Other
  467,945   3   278,533   3 
                 
Total
 $10,025,129   100% $11,140,777   100%
                 
 
The “Derivatives at fair value” line in the above table includes the fair value of the Company’s derivatives in a gain position by counterparty exclusive of accrued interest and collateral. At June 30, 2009 and December 31, 2008, these balances included cross-currency interest rate swaps and interest rate swaps designated as fair value hedges that were offset by an increase in interest-bearing liabilities related to the hedged debt. As of June 30, 2009 and December 31, 2008, the cumulativemark-to-marketadjustment to the hedged debt was $(3.1) billion and $(3.4) billion, respectively.
 
9.  Stockholders’ Equity
 
The following table summarizes the Company’s common share repurchases and issuances for the three and six months ended June 30, 2009 and 2008.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
(Shares in millions)
 2009  2008  2009  2008 
 
Common shares repurchased:
                
Benefit plans(1)
  —   .2   .1   .5 
                 
Total shares repurchased
  —   .2   .1   .5 
                 
Average purchase price per share
 $—  $23.74  $23.84  $20.98 
                 
Common shares issued
  .1   .3   .4   1.5 
                 
Authority remaining at end of period for repurchases
   38.8   38.8   38.8   38.8 
                 
 
 
(1)Includes shares withheld from stock option exercises and vesting of restricted stock for employees’ tax withholding obligations and shares tendered by employees to satisfy option exercise costs.
 
The closing price of the Company’s common stock on June 30, 2009 was $10.27.


37

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
9.  Stockholders’ Equity (Continued)
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated other comprehensive income (loss) includes the after-tax change in unrealized gains and losses onavailable-for-saleinvestments, unrealized gains and losses on derivatives, and the defined benefit pension plans adjustment. The following table presents the cumulative balances of the components of other comprehensive income (loss) as of June 30, 2009, December 31, 2008 and June 30, 2008.
 
             
  June 30,
  December 31,
  June 30,
 
  2009  2008  2008 
 
Net unrealized gains (losses) on investments(1)
 $1,026  $(1,243) $22,604 
Net unrealized gains (losses) on derivatives(2)
  (67,971)  (93,986)  19,696 
Defined benefit pension plans:
            
Net prior service cost
  —   —   — 
Net gain
  18,262   18,753   19,694 
             
Total defined benefit pension plans(3)
  18,262   18,753   19,694 
             
Total accumulated other comprehensive income (loss)
 $(48,683) $(76,476) $61,994 
             
 
 
(1)Net of tax expense of $560 as of June 30, 2009, tax benefit of $750 as of December 31, 2008, and tax expense of $12,707 as of June 30, 2008.
 
(2)Net of tax benefit of $39,086, and $53,419 as of June 30, 2009 and December 31, 2008, respectively, and tax expense of $11,118 as of June 30, 2008.
 
(3)Net of tax expense of $10,776, $10,967 and $11,425 as of June 30, 2009, December 31, 2008 and June 30, 2008, respectively.


38

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
9.  Stockholders’ Equity (Continued)
 
 
10.  Earnings (Loss) per Common Share
 
Basic earnings (loss) per common share (“EPS”) are calculated using the weighted average number of shares of common stock outstanding during each period. A reconciliation of the numerators and denominators of the basic and diluted EPS calculations follows for the three and six months ended June 30, 2009 and 2008.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Numerator:
                
Net income (loss) attributable to common stock
 $(148,520) $238,345  $(196,301) $105,516 
Adjusted for dividends of convertible preferred stock series C(1)
  —   20,844   —   — 
                 
Net income (loss) attributable to common stock, adjusted
 $(148,520) $259,189  $(196,301) $105,516 
                 
Denominator (shares in thousands):
                
Weighted average shares used to compute basic EPS
  466,799   466,649   466,780   466,615 
Effect of dilutive securities:
                
Dilutive effect of convertible preferred stock series C(1)
  —   50,568   —   — 
Dilutive effect of stock options, nonvested deferred compensation, nonvested restricted stock, restricted stock units and Employee Stock Purchase Plan (“ESPP”)(2)
  —   737   —   701 
                 
Dilutive potential common shares(3)
  —   51,305   —   701 
                 
Weighted average shares used to compute diluted EPS
  466,799   517,954   466,780   467,316 
                 
Net earnings (loss) per share:
                
Basic earnings (loss) per common share
 $(.32) $.51  $(.42) $.23 
Dilutive effect of convertible preferred stock series C(1)
  —   (.01)  —   — 
Dilutive effect of stock options, nonvested deferred compensation, nonvested restricted stock, restricted stock units, and ESPP(2)
  —   —   —   — 
                 
Diluted earnings (loss) per common share
 $(.32) $.50  $(.42) $.23 
                 
 
 
(1)The Company’s 7.25 percent mandatory convertible preferred stock series C was issued on December 31, 2007. The mandatory convertible preferred stock will automatically convert on December 15, 2010, into between approximately 48 million shares and 59 million shares of common stock, depending upon the Company’s stock price at that time. Depending upon the amount of the mandatory convertible preferred stock outstanding as of that date, the actual number of shares of common stock issued may be less. These instruments were anti-dilutive for the three months ended June 30, 2009 and the six months ended June 30, 2009 and 2008. These instruments were anti-dilutive for the three and six months ended June 30, 2009, due to the net losses attributable to common stock for those periods.
 
(2)Includes the potential dilutive effect of additional common shares that are issuable upon exercise of outstanding stock options, non-vested deferred compensation and restricted stock, restricted stock units, and the outstanding commitment to issue shares under the ESPP, determined by the treasury stock method.
 
(3)For the three and six months ended June 30, 2009, stock options covering approximately 45 million shares for each period, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive. For the three and six months ended June 30, 2008, stock options covering approximately 40 million and 41 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.


39

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
10.  Earnings (Loss) per Common Share (Continued)
 
 
11.  Other Income
 
The following table summarizes the components of “Other income” in the consolidated statements of income for the three and six months ended June 30, 2009 and 2008.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Gains on debt repurchases
 $325,294  $21,284  $389,049  $21,284 
Late fees and forbearance fees
  32,051   34,030   68,763   71,185 
Asset servicing and other transaction fees
  26,391   26,067   51,446   51,935 
Loan servicing fees
  8,687   5,616   18,733   12,268 
Foreign currency translation gains (losses), net
  (5,692)  3,958   33,992   4,127 
Other
  12,334   17,773   29,540   41,462 
                 
Total
 $399,065  $108,728  $591,523  $202,261 
                 
 
The increase in other income for the three and six months ended June 30, 2009 over the year-ago periods presented is primarily the result of the gains on debt repurchased. The Company began repurchasing its outstanding debt in the second quarter of 2008. In the second quarter of 2009, the Company repurchased $1.1 billion face amount of its senior unsecured notes compared to $1.2 billion in the second quarter of 2008. Since the second quarter of 2008, the Company has repurchased $3.2 billion face amount of its senior unsecured notes in the aggregate, with maturity dates ranging from 2008 to 2014.
 
12.  Restructuring Activities
 
During the fourth quarter of 2007, the Company initiated a restructuring program to reduce costs and improve operating efficiencies in response to the impacts of The College Cost Reduction and Access Act of 2007 (“CCRAA”) and challenges in the capital markets. As part of this restructuring program, the Company has refocused its lending activities, exited certain customer relationships and product lines and consolidated and exited certain facilities. Management estimates approximately $7 million of additional restructuring expenses associated with the Company’s current cost reduction efforts will be incurred. These estimated additional restructuring costs relate primarily to position eliminations and resulting employee terminations as well as lease termination costs in the Company’s Asset Performance Group (“APG”) business segment. Management expects the Company’s current restructuring program will be substantially complete by the end of 2009. However, management is continuing to review the Company’s business to determine whether there are other opportunities to further streamline the business.


40

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
12.  Restructuring Activities (Continued)
 
The following table summarizes the restructuring expenses incurred during the quarters ended June 30, 2009 and 2008 and cumulative restructuring expenses incurred through June 30, 2009.
 
                     
        Cumulative
 
        Expense as of
 
  Three Months Ended June 30,  Six Months Ended June 30,  June 30, 
  2009  2008  2009  2008  2009 
 
Severance costs
 $4,291  $34,214  $6,957  $49,083  $92,320 
Lease and other contract termination costs
  67   8,634   742   9,069   10,259 
Exit and other costs
  72   3,892   1,504   9,266   12,904 
                     
Total(1)
 $4,430  $46,740  $9,203  $67,418  $115,483 
                     
 
 
(1)Aggregate restructuring expenses incurred across the Company’s reportable segments during the three months ended June 30, 2009 and 2008 totaled $4 million and $31 million, respectively, in the Company’s Lending reportable segment, $.4 million and $5 million, respectively, in the Company’s APG reportable segment, and $(.2) million and $11 million, respectively, in the Company’s Corporate and Other reportable segment.
 
As of June 30, 2009 and 2008, severance costs were incurred in conjunction with aggregate completed and planned position eliminations of approximately 2,800 and 2,500 positions, respectively, across all of the Company’s reportable segments, with position eliminations ranging from senior executives to clerical personnel. Lease and other contract termination costs and exit and other costs incurred during the three months ended June 30, 2009 and 2008, respectively, related primarily to terminated or abandoned facility leases and consulting costs incurred in conjunction with various cost reduction and exit strategies.
 
The following table summarizes the restructuring liability balance, which is included in other liabilities in the accompanying consolidated balance sheet.
 
                 
     Lease and
       
     Other
       
     Contract
       
  Severance
  Termination
  Exit and
    
  Costs  Costs  Other Costs  Total 
 
Balance at December 31, 2007
 $18,329  $—  $—  $18,329 
Net accruals
  62,858   9,517   11,400   83,775 
Cash paid
  (66,063)  (6,719)  (11,340)  (84,122)
                 
Balance at December 31, 2008
  15,124   2,798   60   17,982 
Net accruals
  6,957   742   1,504   9,203 
Cash paid
  (15,104)  (982)  (1,564)  (17,650)
                 
Balance at June 30, 2009
 $6,977  $2,558  $—  $9,535 
                 
 
13.  Fair Value Measurements
 
The Company uses estimates of fair value as defined by SFAS No. 157 in applying various accounting standards for its financial statements. Under GAAP, fair value measurements are used in one of four ways:
 
  • In the consolidated balance sheet with changes in fair value recorded in the consolidated statement of income;


41

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
13.  Fair Value Measurements (Continued)
 
 
  • In the consolidated balance sheet with changes in fair value recorded in the accumulated other comprehensive income section of the consolidated statement of changes in stockholders’ equity;
 
  • In the consolidated balance sheet for instruments carried at lower of cost or fair value with impairment charges recorded in the consolidated statement of income; and
 
  • In the notes to the financial statements as required by SFAS No. 107, “Disclosures about Fair Value of Financial Instruments.”
 
Fair value under SFAS No. 157 is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, the Company’s policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads (including for the Company’s liabilities), relying first on observable data from active markets. Additional adjustments may be made for factors including liquidity, credit, bid/offer spreads, etc., depending on current market conditions. Transaction costs are not included in the determination of fair value. When possible, the Company seeks to validate the model’s output to market transactions. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable.
 
Under SFAS No. 157, the Company categorizes its fair value estimates based on a hierarchical framework associated with three levels of price transparency utilized in measuring financial instruments at fair value. Classification is based on the lowest level of input that is significant to the fair value of the instrument. The three levels are as follows:
 
  • Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. The types of financial instruments included in level 1 are highly liquid instruments with quoted prices;
 
  • Level 2 — Inputs from active markets, other than quoted prices for identical instruments, are used to model fair value. Significant inputs are directly observable from active markets for substantially the full term of the asset or liability being valued; and
 
  • Level 3 — Pricing inputs significant to the valuation are unobservable. Inputs are developed based on the best information available; however, significant judgment is required by management in developing the inputs.
 
Student Loans
 
The Company’s FFELP loans and Private Education Loans are accounted for at cost or at the lower of cost or market if the loan isheld-for-sale(see Note 2, “Significant Accounting Policies — Loans,” to the consolidated financial statements in the Company’s 2008 Annual Report onForm 10-K,for a discussion of the accounting treatment); however, the fair value is disclosed in compliance with SFAS No. 107. FFELP loans classified asheld-for-saleare those which the Company has the ability and intent to sell under various ED loan purchase programs. In these instances, the FFELP loans are valued using the committed sales price under the programs. For all other FFELP loans and Private Education Loans, fair value was determined by modeling loan level cash flows using stated terms of the assets and internally-developed assumptions to determine aggregate portfolio yield, net present value and average life. The significant assumptions used to project cash


42

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
13.  Fair Value Measurements (Continued)
 
flows are prepayment speeds, default rates, cost of funds, required return on equity, and expected Repayment Borrower Benefits to be earned. In addition, the Floor Income component of the Company’s FFELP loan portfolio is valued through discounted cash flow and option models using both observable market inputs and internally developed inputs. A number of significant inputs into the models are not observable.
 
Other Loans
 
Warehousing, facilities financings, and mortgage and consumer loans held for investment are accounted for at cost with fair values being disclosed as required by SFAS No. 107. Mortgage loans held for sale are accounted for at lower of cost or market. Fair value was determined with discounted cash flow models using the stated terms of the loans and observable market yield curves. In addition, adjustments and assumptions were made for credit spreads, liquidity, prepayment speeds and defaults. A number of significant inputs into the models are not observable.
 
Cash and Investments (Including “Restricted”)
 
Cash and cash equivalents are carried at cost. Carrying value approximated fair value for disclosure purposes. Investments accounted for under SFAS No. 115 and classified as trading oravailable-for-saleare carried at fair value in the financial statements. Investments in U.S. Treasury securities and securities issued by U.S. government agencies that are traded in active markets were valued using observable market prices. Other investments for which observable prices from active markets are not available were valued through standard bond pricing models using observable market yield curves adjusted for credit and liquidity spreads. The fair value of investments in Commercial Paper, Asset Backed Commercial Paper, or Demand Deposits that have a remaining term of less than 90 days when purchased are estimated at cost and when needed, adjustments for liquidity and credit spreads are made depending on market conditions and counterparty credit risks. These investments consist of mostly overnight/weekly maturity instruments with highly-rated counterparties.
 
Borrowings
 
Borrowings are accounted for at cost in the financial statements except when denominated in a foreign currency or when designated as the hedged item in a fair value hedge relationship under SFAS No. 133. When the hedged risk is the benchmark interest rate and not full fair value, the cost basis is adjusted for changes in value due to benchmark interest rates only. Additionally, foreign currency denominated borrowings are re-measured at current spot rates in the financial statements. The full fair value of all borrowings is disclosed as required by SFAS No. 107. Fair value was determined through standard bond pricing models and option models (when applicable) using the stated terms of the borrowings, and observable yield curves, foreign currency exchange rates and volatilities from active markets; or from quotes from broker-dealers. Credit adjustments for unsecured corporate debt are made based on indicative quotes from observable trades and spreads on credit default swaps specific to the Company. Credit adjustments for secured borrowings are based on indicative quotes from broker-dealers. These adjustments for both secured and unsecured borrowings are material to the overall valuation of these items and, currently, are based on inputs from inactive markets.
 
Derivative Financial Instruments
 
All derivatives are accounted for at fair value in the financial statements. The fair values of a majority of derivative financial instruments, including swaps and floors, were determined by standard derivative pricing


43

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
13.  Fair Value Measurements (Continued)
 
and option models using the stated terms of the contracts and observable yield curves, forward foreign currency exchange rates and volatilities from active markets. In some cases, management utilized internally developed amortization streams to model the fair value for swaps whose notional amounts contractually amortizes with securitized asset balances. Complex structured derivatives or derivatives that trade in less liquid markets require significant adjustments and judgment in determining fair value that cannot be corroborated with market transactions. When determining the fair value of derivatives, the Company takes into account counterparty credit risk for positions where it is exposed to the counterparty on a net basis by assessing exposure net of collateral held. The net exposures for each counterparty are adjusted based on market information available for the specific counterparty including spreads from credit default swaps. Additionally, when the counterparty has exposure to the Company related to SLM Corporation derivatives, the Company fully collateralizes the exposure minimizing the adjustment necessary to the derivative valuations for the Company’s credit risk. While trusts that contain derivatives are not required to post collateral to counterparties, the credit quality and securitized nature of the trusts minimizes any adjustments for the counterparty’s exposure to the trusts. It is the Company’s policy to compare its derivative fair values to those received by its counterparties in order to validate the model’s outputs. The carrying value of borrowings designated as the hedged item in a SFAS No. 133 fair value hedge are adjusted for changes in fair value due to benchmark interest rates and foreign-currency exchange rates. These valuations are determined through standard bond pricing models and option models (when applicable) using the stated terms of the borrowings, and observable yield curves, foreign currency exchange rates, and volatilities.
 
During 2008 and 2009, the bid/ask spread widened significantly for certain interest rate indices for which the Company had derivatives as a result of market inactivity. As such, significant adjustments for the bid/ask spread and unobservable inputs were used in the fair value calculation resulting in these instruments being classified as level 3 in the hierarchy. Additionally, significant unobservable inputs were used to model the amortizing notional of some swaps tied to securitized asset balances and as such, these derivatives have been classified as level 3 in the hierarchy.
 
Residual Interests
 
The Residual Interests are carried at fair value in the financial statements. No active market exists for student loan Residual Interests; as such, the fair value is calculated using discounted cash flow models and option models. Observable inputs from active markets are used where available, including yield curves and volatilities. Significant unobservable inputs such as prepayment speeds, default rates, certain bonds’ costs of funds and discount rates, are used in determining the fair value and require significant judgment. These unobservable inputs are internally determined based upon analysis of historical data and expected industry trends. On a quarterly basis the Company back tests its prepayment speed, default rates and costs of funds assumptions by comparing those assumptions to actuals experienced. Additionally, the Company uses non-binding broker quotes and industry analyst reports which show changes in the indicative prices of the asset-backed securities tranches immediately senior to the Residual Interest as an indication of potential changes in the discount rate used to value the Residual Interests. Market transactions are not available to validate the models’ results. An analysis of the impact of changes to significant inputs is addressed further in Note 6, “Student Loan Securitization.”


44

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
13.  Fair Value Measurements (Continued)
 
The following tables summarize the valuation of the Company’s financial instruments that aremarked-to-marketon a recurring basis in the consolidated financial statements as of June 30, 2009 and December 31, 2008.
 
                         
  Fair Value Measurements on a Recurring
 
  Basis as of June 30, 2009 
              Cash
    
(Dollars in millions)
 Level 1  Level 2  Level 3  Total  Collateral  Net 
 
Assets
                        
Available for sale investments
 $—  $1,187  $—  $1,187  $—  $1,187 
Retained Interest in off-balance sheet securitized loans
  —   —   1,821   1,821   —   1,821 
Derivative instruments(1)(2)
  —   1,584   790   2,374   (1,055)  1,319 
                         
Total Assets
 $—  $2,771  $2,611  $5,382  $(1,055) $4,327 
                         
Liabilities(3)
                        
Derivative instruments(1)(2)
 $(2) $(1,065) $—  $(1,067) $772  $(295)
                         
Total Liabilities
 $(2) $(1,065) $—  $(1,067) $772  $(295)
                         
 
                         
  Fair Value Measurements on a Recurring
 
  Basis as of December 31, 2008 
              Cash
    
(Dollars in millions)
 Level 1  Level 2  Level 3  Total  Collateral  Net 
 
Assets
                        
Available for sale investments
 $—  $861  $—  $861  $—  $861 
Retained Interest in off-balance sheet securitized loans
  —   —   2,200   2,200   —   2,200 
Derivative instruments(1)(2)
  —   3,014   —   3,014   (1,624)  1,390 
                         
Total Assets
 $—  $3,875  $2,200  $6,075  $(1,624) $4,451 
                         
Liabilities(3)
                        
Derivative instruments(1)(2)
 $(3) $(648) $(341) $(992) $—  $(992)
                         
Total Liabilities
 $(3) $(648) $(341) $(992) $—  $(992)
                         
 
 
(1)Fair value of derivative instruments is comprised of market value less accrued interest and excludes collateral.
 
(2)Level 1 derivatives include euro-dollar futures contracts. Level 2 derivatives include derivatives indexed to interest rate indices and currencies that are considered liquid. Level 3 derivatives include derivatives indexed to illiquid interest rate indices and derivatives for which significant adjustments were made to observable inputs.
 
(3)Borrowings which are the hedged items in a fair value hedge relationship and which are adjusted for changes in value due to benchmark interest rates only are not carried at full fair value and are not reflected in this table.


45

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
13.  Fair Value Measurements (Continued)
 
 
The following table summarizes the change in balance sheet carrying value associated with Level 3 financial instruments carried at fair value on a recurring basis during the three and six months ended June 30, 2009 and 2008.
 
                         
  Three Months Ended June 30, 
  2009  2008 
  Residual
  Derivative
     Residual
  Derivative
    
(Dollars in millions)
 Interests  Instruments  Total  Interests  Instruments  Total 
 
Balance, beginning of period
 $1,951  $437  $2,388  $2,874  $(52) $2,822 
Total gains/(losses) (realized and unrealized):
                        
Included in earnings(1)
  36   206   242   (43)  (72)  (115)
Included in other comprehensive income
  —   —   —   —   —   — 
Purchases, issuances and settlements
  (166)  147   (19)  (286)  3   (283)
Transfers in and/or out of Level 3
  —   —   —   —   —   — 
                         
Balance, end of period
 $1,821  $790  $2,611  $2,545  $(121) $2,424 
                         
Change in unrealized gains/(losses) relating to instruments still held at the reporting date
 $(90)(2) $339(3) $249  $(192)(2) $(68)(3) $(260)
                         
 
                         
  Six Months Ended June 30, 
  2009  2008 
  Residual
  Derivative
     Residual
  Derivative
    
(Dollars in millions)
 Interests  Instruments  Total  Interests  Instruments  Total 
 
Balance, beginning of period
 $2,200  $(341) $1,859  $3,044  $(71) $2,973 
Total gains/(losses) (realized and unrealized):
                        
Included in earnings(1)
  (99)  (124)  (223)  17   (62)  (45)
Included in other comprehensive income
  —   —   —   —   —   — 
Purchases, issuances and settlements
  (280)  187   (93)  (516)  12   (504)
Transfers in and/or out of Level 3
  —   1,068   1,068   —   —   — 
                         
Balance, end of period
 $1,821  $790  $2,611  $2,545  $(121) $2,424 
                         
Change in unrealized gains/(losses) relating to instruments still held at the reporting date
 $(351)(2) $66(3) $(285) $(280)(2) $(49)(3) $(329)
                         
 
 
(1)“Included in earnings” is comprised of the following amounts recorded in the specified line item in the consolidated statements of income:
 
                 
  Three Months Ended June 30,  Six Months Ended June 30, 
(Dollars in millions)
 2009  2008  2009  2008 
 
Servicing and securitization revenue
 $36  $(43) $(99) $17 
Gains (losses) on derivative and hedging activities, net
  264   (72)  (28)  (62)
Interest expense
  (58)  —   (96)  — 
                 
Total
 $242  $(115) $(223) $(45)
                 
 
(2)Recorded in “servicing and securitization revenue (loss)” in the consolidated statements of income.
 
(3)Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.


46

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
13.  Fair Value Measurements (Continued)
 
 
In addition, at June 30, 2009, the Company had real estate owned assets, related to its Purchased Paper — Mortgage/Properties business, held on its balance sheet at fair value totaling $130 million. These assets are carried at the lower of cost or fair value and as such aremarked-to-marketon a non-recurring basis. Fair value is determined using significant unobservable inputs primarily based on broker price opinions and are considered Level 3 valuations.
 
The following table summarizes the fair values of the Company’s financial assets and liabilities, including derivative financial instruments, as of June 30, 2009 and December 31, 2008.
 
                         
  June 30, 2009  December 31, 2008 
  Fair
  Carrying
     Fair
  Carrying
    
(Dollars in millions)
 Value  Value  Difference  Value  Value  Difference 
 
Earning assets
                        
FFELP loans
 $127,239  $132,306  $(5,067) $107,319  $124,220  $(16,901)
Private Education Loans
  18,035   21,850   (3,815)  14,141   20,582   (6,441)
Other loans
  364   489   (125)  619   729   (110)
Cash and investments
  13,458   13,458   —   8,646   8,646   — 
                         
Total earning assets
  159,096   168,103   (9,007)  130,725   154,177   (23,452)
                         
Interest-bearing liabilities
                        
Short-term borrowings
  47,160   47,332   172   41,608   41,933   325 
Long-term borrowings
  110,827   125,880   15,053   93,462   118,225   24,763 
                         
Total interest-bearing liabilities
  157,987   173,212   15,225   135,070   160,158   25,088 
                         
Derivative financial instruments
                        
Floor Income/Cap contracts
  (1,143)  (1,143)  —   (1,466)  (1,466)  — 
Interest rate swaps
  151   151   —   1,374   1,374   — 
Cross currency interest rate swaps
  2,323   2,323   —   2,116   2,116   — 
Futures contracts
  (2)  (2)  —   (3)  (3)  — 
Other
  (22)  (22)  —   —   —   — 
Other
                        
Residual interest in securitized assets
  1,821   1,821   —   2,200   2,200   — 
                         
Excess of net asset fair value over carrying value
         $6,218          $1,636 
                         


47

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
14.  Commitments and Contingencies
 
On August 3, 2009, the Company received the final audit report of ED’s Office of the Inspector General (“OIG”) related to the Company’s billing practices for special allowance payments. Among other things, the OIG recommended that ED instruct the Company to return approximately $22 million in alleged special allowance overpayments. The Company continues to believe that its practices are consistent with longstanding ED guidance and all applicable rules and regulations and intends to continue disputing these findings. The OIG has audited other industry participants with regard to special allowance payments for loans funded by tax exempt obligations and in certain cases the Secretary of ED has disagreed with the OIG’s recommendations.
 
In the ordinary course of business, the Company and its subsidiaries are defendants in or parties to pending and threatened legal actions and proceedings including actions brought on behalf of various classes of claimants. These actions and proceedings may be based on alleged violations of consumer protection, securities, employment or other laws. In certain of these actions and proceedings, claims for substantial monetary damage are asserted against the Company and its subsidiaries.
 
In the ordinary course of business, the Company and its subsidiaries also are subject to regulatory examinations, information gathering requests, inquiries and investigations. In connection with formal and informal inquiries in these cases, the Company and its subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of the Company’s regulated activities.
 
In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, the Company cannot predict what the eventual outcome of the pending matters will be, what the timing or the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.
 
In accordance with SFAS No. 5, “Accounting for Contingencies,” the Company is required to establish reserves for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, the Company does not establish reserves.
 
Based on current knowledge, no reserves have been established for any pending litigation or regulatory matters. Based on current knowledge, management does not believe that loss contingencies, if any, arising from pending litigation or regulatory matters will have a material adverse effect on the consolidated financial position or liquidity of the Company.
 
15.  Income Taxes
 
For the six months ended June 30, 2009 and 2008, the Company reported an income tax benefit of $78 million and income tax expense of $91 million, respectively, representing effective tax rates of 35 percent and 35 percent, respectively.
 
Accounting for Uncertainty in Income Taxes
 
The unrecognized tax benefits changed from $86 million at December 31, 2008 to $121 million at June 30, 2009, and there was no material change from December 31, 2008 for the accrued interest and penalties. Included in the $121 million are $32 million of unrecognized tax benefits that if recognized, would favorably impact the effective tax rate.


48

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
15.  Income Taxes (Continued)
 
These changes result primarily from adding a new issue that was identified during the first quarter of 2009 while completing the 2008 U.S. federal income tax return as well as adjusting the 2005 and 2006 unrecognized tax benefits to incorporate the net impact of the IRS examination of the Company’s 2005 and 2006 U.S. federal income tax returns. New information was received from the IRS during the first quarter as part of that IRS examination and the examination was ultimately concluded during the second quarter. Several other less significant amounts of uncertain tax benefits were also added during the quarter.
 
16.  Segment Reporting
 
The Company has two primary operating segments as defined in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” — the Lending operating segment and the APG, formerly known as DMO, operating segment. The Lending and APG operating segments meet the quantitative thresholds for reportable segments identified in SFAS No. 131. Accordingly, the results of operations of the Company’s Lending and APG segments are presented below. The Company has smaller operating segments including the Guarantor Servicing, Loan Servicing, and Upromise operating segments, as well as certain other products and services provided to colleges and universities which do not meet the quantitative thresholds identified in SFAS No. 131. Therefore, the results of operations for these operating segments and the revenues and expenses associated with these other products and services are combined with corporate overhead and other corporate activities within the Corporate and Other reportable segment.
 
The management reporting process measures the performance of the Company’s operating segments based on the management structure of the Company as well as the methodology used by management to evaluate performance and allocate resources. Management, including the Company’s chief operating decision makers, evaluates the performance of the Company’s operating segments based on their profitability. As discussed further below, management measures the profitability of the Company’s operating segments based on “Core Earnings” net income. Accordingly, information regarding the Company’s reportable segments is provided based on a “Core Earnings” basis. The Company’s “Core Earnings” performance measures are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. “Core Earnings” net income reflects only current period adjustments to GAAP net income as described below. Unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting. The management reporting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The Company’s operating segments are defined by the products and services they offer or the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. Intersegment revenues and expenses are netted within the appropriate financial statement line items consistent with the income statement presentation provided to management. Changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial information.
 
The Company’s principal operations are located in the United States, and its results of operations and long-lived assets in geographic regions outside of the United States are not significant. In the Lending segment, no individual customer accounted for more than 10 percent of its total revenue during the three months ended June 30, 2009 and 2008. United Student Aid Funds, Inc. (“USA Funds”) is the Company’s largest customer in both the APG and Corporate and Other segments. During the six months ended June 30, 2009 and 2008, USA Funds accounted for 13 percent and 28 percent, respectively, of the aggregate revenues


49

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
16.  Segment Reporting (Continued)
 
generated by the Company’s APG and Corporate and Other segments. No other customers accounted for more than 10 percent of total revenues in those segments for the years mentioned.
 
Lending
 
In the Company’s Lending operating segment, the Company originates and acquires both FFELP loans and Private Education Loans. As of June 30, 2009, the Company managed $188.1 billion of student loans, of which $153.6 billion or 82 percent are federally insured, and has 10 million student and parent customers. In the six months ended June 30, 2009, the Company originated $4 million in mortgage loans which were sold. The Company’s mortgage and other consumer loan portfolio totaled $428 million at June 30, 2009.
 
Private Education Loans consist of two general types:  (1) those that are designed to bridge the gap between the cost of higher education and the amount financed through either capped federally insured loans or the borrowers’ resources, and (2) those that are used to meet the needs of students in alternative learning programs such as career training, distance learning and lifelong learning programs. Most higher education Private Education Loans are made in conjunction with a FFELP loan and as such are marketed through the same channel as FFELP loans by the same sales force. Unlike FFELP loans, Private Education Loans are subject to the full credit risk of the borrower. The Company manages this additional risk through historical risk-performance underwriting strategies, the addition of qualified cosigners and a combination of higher interest rates and loan origination fees that compensate the Company for the higher risk.
 
APG
 
The Company’s APG operating segment provides a wide range of accounts receivable and collections services including student loan default aversion services, defaulted student loan portfolio management services, contingency collections services for student loans and other asset classes, and accounts receivable management and collection for purchased portfolios of receivables that are delinquent or have been charged off by their original creditors, andsub-performingand non-performing mortgage loans. The Company’s APG operating segment serves the student loan marketplace through a broad array of default management services on a contingency fee or otherpay-for-performancebasis to 14 FFELP guarantors and for campus-based programs.
 
In addition to collecting on its own purchased receivables and mortgage loans, the APG operating segment provides receivable management and collection services for federal agencies, credit card clients and other holders of consumer debt.
 
The Company concluded in 2008 that its APG purchased paper business no longer produced a strategic fit, and the Company decided to wind down this business. Due to the continued weakening of the U.S. economy, during the second quarter of 2009, the Company recorded $8 million of impairment related to declines in the fair value of mortgage loans and real estate held by the Company’s mortgage purchased paper subsidiary and $13 million of impairment related to the Company’s non-mortgage purchase paper subsidiary. These impairments are recorded within collections revenue (loss) as they are not considered restructuring expenses.


50

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
16.  Segment Reporting (Continued)
 
Corporate and Other
 
The Company’s Corporate and Other segment includes the aggregate activity of its smaller operating segments, primarily its Guarantor Servicing, Loan Servicing and Upromise operating segments. Corporate and Other also includes several smaller products and services, as well as corporate overhead.
 
In the Guarantor Servicing operating segment, the Company provides a full complement of administrative services to FFELP guarantors including guarantee issuance, account maintenance, and guarantee fulfillment. In the Loan Servicing operating segment, the Company provides a full complement of activities required to service student loans on behalf of lenders who are unrelated to the Company. Such servicing activities generally commence once a loan has been fully disbursed and include sending out payment coupons to borrowers, processing borrower payments, originating and disbursing FFELP Consolidation Loans on behalf of the lender, and other administrative activities required by ED.
 
Upromise markets and administers a consumer savings network and also provides program management, transfer and servicing agent services, and administration services for 529 college-savings plans. The Company’s other products and services include comprehensive financing and loan delivery solutions that it provides to college financial aid offices and students to streamline the financial aid process. Corporate overhead includes all of the typical headquarter functions such as executive management, accounting and finance, human resources and marketing.
 
Measure of Profitability
 
The tables below include the condensed operating results for each of the Company’s reportable segments. Management, including the chief operating decision makers, evaluates the Company on certain performance measures that the Company refers to as “Core Earnings” performance measures for each operating segment. While “Core Earnings” results are not a substitute for reported results under GAAP, the Company relies on “Core Earnings” performance measures to manage each operating segment because it believes these measures provide additional information regarding the operational and performance indicators that are most closely assessed by management.
 
“Core Earnings” performance measures are the primary financial performance measures used by management to develop the Company’s financial plans, track results, and establish corporate performance targets and incentive compensation. Management believes this information provides additional insight into the financial performance of the core business activities of its operating segments. Accordingly, the tables presented below reflect “Core Earnings” operating measures reviewed and utilized by management to manage the business. Reconciliation of the “Core Earnings” segment totals to the Company’s consolidated operating results in accordance with GAAP is also included in the tables below.


51

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
16.  Segment Reporting (Continued)
 
Segment Results and Reconciliations to GAAP
 
                         
  Three Months Ended June 30, 2009 
        Corporate
  Total “Core
     Total
 
(Dollars in millions)
 Lending  APG  and Other  Earnings”  Adjustments(2)  GAAP 
 
Interest income:
                        
FFELP Stafford and Other Student Loans
 $310  $—  $—  $310  $14  $324 
FFELP Consolidation Loans
  394   —   —   394   67   461 
Private Education Loans
  559   —   —   559   (166)  393 
Other loans
  18   —   —   18   —   18 
Cash and investments
  4   —   4   8   (1)  7 
                         
Total interest income
  1,285   —   4   1,289   (86)  1,203 
Total interest expense
  824   5   3   832   (13)  819 
                         
Net interest income (loss)
  461   (5)  1   457   (73)  384 
Less: provisions for loan losses
  402   —   —   402   (124)  278 
                         
Net interest income (loss) after provisions for loan losses
  59   (5)  1   55   51   106 
Contingency fee revenue
  —   73   —   73   —   73 
Collections revenue
  —   22   —   22   —   22 
Guarantor servicing fees
  —   —   25   25   —   25 
Other income (loss)
  360   —   46   406   (481)  (75)
                         
Total other income
  360   95   71   526   (481)  45 
Restructuring expenses
  4   —   —   4   —   4 
Operating expenses
  141   80   85   306   10   316 
                         
Total expenses
  145   80   85   310   10   320 
                         
Income (loss) before income tax expense (benefit)
  274   10   (13)  271   (440)  (169)
Income tax expense (benefit)(1)
  102   4   (5)  101   (147)  (46)
Less: net income attributable to noncontrolling interest
  —   —   —   —   —   — 
                         
Net income (loss) attributable to SLM Corporation
 $172  $6  $(8) $170  $(293) $(123)
                         
Economic Floor Income (net of tax) not included in “Core Earnings”
 $89  $—  $—  $89         
                         
 
 
(1)Income taxes are based on a percentage of net income before tax for each individual reportable segment.
 
(2)“Core Earnings” adjustments to GAAP:
 
                     
  Three Months Ended June 30, 2009 
  Net Impact of
  Net Impact of
     Net Impact
    
  Securitization
  Derivative
  Net Impact of
  of Acquired
    
(Dollars in millions)
 Accounting  Accounting  Floor Income  Intangibles  Total 
 
Net interest income (loss)
 $(230) $67  $90  $—  $(73)
Less: provisions for loan losses
  (124)  —   —   —   (124)
                     
Net interest income (loss) after provisions for loan losses
  (106)  67   90   —   51 
Contingency fee revenue
  —   —   —   —   — 
Collections revenue
  —   —   —   —   — 
Guarantor servicing fees
  —   —   —   —   — 
Other income (loss)
  81   (562)  —   —   (481)
                     
Total other income (loss)
  81   (562)  —   —   (481)
Restructuring expenses
  —   —   —   —   — 
Operating expenses
  —   —   —   10   10 
                     
Total expenses
  —   —   —   10   10 
                     
Total pre-tax “Core Earnings” adjustments to GAAP
 $(25) $(495) $90  $(10)  (440)
                     
Income tax benefit
                  (147)
Less: net income attributable to noncontrolling interest
                  — 
                     
Total “Core Earnings” adjustments to GAAP
                 $(293)
                     
 


52

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
16.  Segment Reporting (Continued)
 
                         
  Three Months Ended June 30, 2008 
        Corporate
  Total “Core
     Total
 
(Dollars in millions)
 Lending  APG  and Other  Earnings”  Adjustments(2)  GAAP 
 
Interest income:
                        
FFELP Stafford and Other Student Loans
 $524  $—  $—  $524  $(26) $498 
FFELP Consolidation Loans
  908   —   —   908   (138)  770 
Private Education Loans
  665   —   —   665   (256)  409 
Other loans
  21   —   —   21   —   21 
Cash and investments
  81   —   5   86   (15)  71 
                         
Total interest income
  2,199   —   5   2,204   (435)  1,769 
Total interest expense
  1,605   7   5   1,617   (251)  1,366 
                         
Net interest income (loss)
  594   (7)  —   587   (184)  403 
Less: provisions for loan losses
  192   —   —   192   (49)  143 
                         
Net interest income (loss) after provisions for loan losses
  402   (7)  —   395   (135)  260 
Contingency fee revenue
  —   84   —   84   —   84 
Collections revenue
  —   27   —   27   (1)  26 
Guarantor servicing fees
  —   —   24   24   —   24 
Other income
  62   —   45   107   322   429 
                         
Total other income
  62   111   69   242   321   563 
Restructuring expenses
  31   5   11   47   —   47 
Operating expenses
  155   110   73   338   16   354 
                         
Total expenses
  186   115   84   385   16   401 
                         
Income (loss) before income tax expense (benefit)
  278   (11)  (15)  252   170   422 
Income tax expense (benefit)(1)
  103   (4)  (6)  93   60   153 
Less: net income attributable to noncontrolling interest
  —   3   —   3   —   3 
                         
Net income (loss) attributable to SLM Corporation
 $175  $(10) $(9) $156  $110  $266 
                         
Economic Floor Income (net of tax) not included in “Core Earnings”
 $22  $—  $—  $22         
                         
 
(1)Income taxes are based on a percentage of net income before tax for each individual reportable segment.
 
(2)“Core Earnings” adjustments to GAAP:
 
                     
  Three Months Ended June 30, 2008 
  Net Impact of
  Net Impact of
     Net Impact
    
  Securitization
  Derivative
  Net Impact of
  of Acquired
    
(Dollars in millions)
 Accounting  Accounting  Floor Income  Intangibles  Total 
 
Net interest income (loss)
 $(254) $89  $(19) $—  $(184)
Less: provisions for loan losses
  (49)  —   —   —   (49)
                     
Net interest income (loss) after provisions for loan losses
  (205)  89   (19)  —   (135)
Contingency fee revenue
  —   —   —   —   — 
Collections revenue (loss)
  (1)  —   —   —   (1)
Guarantor servicing fees
  —   —   —   —   — 
Other income (loss)
  (40)  362   —   —   322 
                     
Total other income (loss)
  (41)  362   —   —   321 
Restructuring expenses
  —   —   —   —   — 
Operating expenses
  1   —   —   15   16 
                     
Total expenses
  1   —   —   15   16 
                     
Total pre-tax “Core Earnings” adjustments to GAAP
 $(247) $451  $(19) $(15)  170 
                     
Income tax expense
                  60 
Less: net income attributable to noncontrolling interest
                  — 
                     
Total “Core Earnings” adjustments to GAAP
                 $110 
                     
 

53

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
16.  Segment Reporting (Continued)
 
                         
  Six Months Ended June 30, 2009 
        Corporate
  Total “Core
     Total
 
(Dollars in millions)
 Lending  APG  and Other  Earnings”  Adjustments(2)  GAAP 
 
Interest income:
                        
FFELP Stafford and Other Student Loans
 $672  $—  $—  $672  $(5) $667 
FFELP Consolidation Loans
  833   —   —   833   117   950 
Private Education Loans
  1,122   —   —   1,122   (342)  780 
Other loans
  35   —   —   35   —   35 
Cash and investments
  6   —   9   15   (2)  13 
                         
Total interest income
  2,668   —   9   2,677   (232)  2,445 
Total interest expense
  1,773   10   8   1,791   55   1,846 
                         
Net interest income (loss)
  895   (10)  1   886   (287)  599 
Less: provisions for loan losses
  751   —   —   751   (223)  528 
                         
Net interest income (loss) after provisions for loan losses
  144   (10)  1   135   (64)  71 
Contingency fee revenue
  —   148   —   148   —   148 
Collections revenue
  —   —   —   —   1   1 
Guarantor servicing fees
  —   —   59   59   —   59 
Other income (loss)
  461   —   96   557   (432)  125 
                         
Total other income
  461   148   155   764   (431)  333 
Restructuring expenses
  5   2   2   9   —   9 
Operating expenses
  272   169   156   597   20   617 
                         
Total expenses
  277   171   158   606   20   626 
                         
Income (loss) before income tax expense (benefit)
  328   (33)  (2)  293   (515)  (222)
Income tax expense (benefit)(1)
  122   (12)  (1)  109   (187)  (78)
Less: net income attributable to noncontrolling interest
  —   —   —   —   —   — 
                         
Net income (loss) attributable to SLM Corporation
 $206  $(21) $(1) $184  $(328) $(144)
                         
Economic Floor Income (net of tax) not included in “Core Earnings”
 $168  $—  $—  $168         
                         
 
 
(1) Income taxes are based on a percentage of net income before tax for each individual reportable segment.
 
(2)“Core Earnings” adjustments to GAAP:
 
                     
  Six Months Ended June 30, 2009 
  Net Impact of
  Net Impact of
     Net Impact
    
  Securitization
  Derivative
  Net Impact of
  of Acquired
    
(Dollars in millions)
 Accounting  Accounting  Floor Income  Intangibles  Total 
 
Net interest income (loss)
 $(473) $17  $169  $—  $(287)
Less: provisions for loan losses
  (223)  —   —   —   (223)
                     
Net interest income (loss) after provisions for loan losses
  (250)  17   169   —   (64)
Contingency fee revenue
  —   —   —   —   — 
Collections revenue
  1   —   —   —   1 
Guarantor servicing fees
  —   —   —   —   — 
Other income (loss)
  26   (458)  —   —   (432)
                     
Total other income (loss)
  27   (458)  —   —   (431)
Restructuring expenses
  —   —   —   —   — 
Operating expenses
  1   —   —   19   20 
                     
Total expenses
  1   —   —   19   20 
                     
Total pre-tax “Core Earnings” adjustments to GAAP
 $(224) $(441) $169  $(19)  (515)
                     
Income tax benefit
                  (187)
Less: net income attributable to noncontrolling interest
                  — 
                     
Total “Core Earnings” adjustments to GAAP
                 $(328)
                     
 

54

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
16.  Segment Reporting (Continued)
 
                         
  Six Months Ended June 30, 2008 
        Corporate
  Total “Core
     Total
 
(Dollars in millions)
 Lending  APG  and Other  Earnings”  Adjustments(2)  GAAP 
 
Interest income:
                        
FFELP Stafford and Other Student Loans
 $1,018  $—  $—  $1,018  $(56) $962 
FFELP Consolidation Loans
  1,896   —   —   1,896   (290)  1,606 
Private Education Loans
  1,415   —   —   1,415   (562)  853 
Other loans
  45   —   —   45   —   45 
Cash and investments
  222   —   11   233   (39)  194 
                         
Total interest income
  4,596   —   11   4,607   (947)  3,660 
Total interest expense
  3,429   14   10   3,453   (472)  2,981 
                         
Net interest income (loss)
  1,167   (14)  1   1,154   (475)  679 
Less: provisions for loan losses
  374   —   —   374   (94)  280 
                         
Net interest income (loss) after provisions for loan losses
  793   (14)  1   780   (381)  399 
Contingency fee revenue
  —   169   —   169   —   169 
Collections revenue
  —   84   —   84   —   84 
Guarantor servicing fees
  —   —   58   58   —   58 
Other income
  106   —   97   203   119   322 
                         
Total other income
  106   253   155   514   119   633 
Restructuring expenses
  46   6   15   67   —   67 
Operating expenses
  318   216   144   678   32   710 
                         
Total expenses
  364   222   159   745   32   777 
                         
Income (loss) before income tax expense (benefit)
  535   17   (3)  549   (294)  255 
Income tax expense (benefit)(1)
  197   6   (1)  202   (112)  90 
Less: net income attributable to noncontrolling interest
  —   3   —   3   —   3 
                         
Net income (loss) attributable to SLM Corporation
 $338  $8  $(2) $344  $(182) $162 
                         
Economic Floor Income (net of tax) not included in “Core Earnings”
 $49  $—  $—  $49         
                         
 
 
(1) Income taxes are based on a percentage of net income before tax for each individual reportable segment.
 
(2)“Core Earnings” adjustments to GAAP:
 
                     
  Six Months Ended June 30, 2008 
  Net Impact of
  Net Impact of
     Net Impact
    
  Securitization
  Derivative
  Net Impact of
  of Acquired
    
(Dollars in millions)
 Accounting  Accounting  Floor Income  Intangibles  Total 
 
Net interest income (loss)
 $(449) $(2) $(24) $—  $(475)
Less: provisions for loan losses
  (94)  —   —   —   (94)
                     
Net interest income (loss) after provisions for loan losses
  (355)  (2)  (24)  —   (381)
Contingency fee revenue
  —   —   —   —   — 
Collections revenue
  —   —   —   —   — 
Guarantor servicing fees
  —   —   —   —   — 
Other income
  30   89   —   —   119 
                     
Total other income
  30   89   —   —   119 
Restructuring expenses
  —   —   —   —   — 
Operating expenses
  1   —   —   31   32 
                     
Total expenses
  1   —   —   31   32 
                     
Total pre-tax “Core Earnings” adjustments to GAAP
 $(326) $87  $(24) $(31)  (294)
                     
Income tax benefit
                  (112)
Less: net income attributable to noncontrolling interest
                  — 
                     
Total “Core Earnings” adjustments to GAAP
                 $(182)
                     

55

 

 
SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2009 and for the three and six months ended
June 30, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

 
16.  Segment Reporting (Continued)
 
Summary of “Core Earnings” Adjustments to GAAP
 
The adjustments required to reconcile from the Company’s “Core Earnings” results to its GAAP results of operations relate to differing treatments for securitization transactions, derivatives, Floor Income, and certain other items that management does not consider in evaluating the Company’s operating results. The following table reflects aggregate adjustments associated with these areas for the three and six months ended June 30, 2009 and 2008.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
(Dollars in millions)
 2009  2008  2009  2008 
 
“Core Earnings” adjustments to GAAP:
                
Net impact of securitization accounting(1)
 $(25) $(247) $(224) $(326)
Net impact of derivative accounting(2)
  (495)  451   (441)  87 
Net impact of Floor Income(3)
  90   (19)  169   (24)
Net impact of acquired intangibles(4)
  (10)  (15)  (19)  (31)
Net tax effect(5)
  147   (60)  187   112 
                 
Total “Core Earnings” adjustments to GAAP
 $(293) $110  $(328) $(182)
                 
 
 
(1)Securitization:  Under GAAP, certain securitization transactions in the Company’s Lending operating segment are accounted for as sales of assets. Under the Company’s “Core Earnings” presentation for the Lending operating segment, the Company presents all securitization transactions on a “Core Earnings” basis as long-term non-recourse financings. The upfront “gains” on sale from securitization transactions as well as ongoing “servicing and securitization revenue” presented in accordance with GAAP are excluded from “Core Earnings” net income and replaced by the interest income, provisions for loan losses, and interest expense as they are earned or incurred on the securitization loans. The Company also excludes transactions with its off-balance sheet trusts from “Core Earnings” net income as they are considered intercompany transactions on a “Core Earnings” basis.
 
(2)Derivative accounting:  “Core Earnings” net income excludes periodic unrealized gains and losses arising primarily in the Company’s Lending operating segment, and to a lesser degree in the Company’s Corporate and Other reportable segment, that are caused primarily by the one-sidedmark-to-marketderivative valuations prescribed by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” on derivatives that do not qualify for “hedge treatment” under GAAP. Under the Company’s “Core Earnings” presentation, the Company recognizes the economic effect of these hedges, which generally results in any cash paid or received being recognized ratably as an expense or revenue over the hedged item’s life.
 
(3)Floor Income:  The timing and amount (if any) of Floor Income earned in the Company’s Lending operating segment is uncertain and in excess of expected spreads. Therefore, the Company only includes such income in “Core Earnings” when it is Fixed Rate Floor Income that is economically hedged. The Company employs derivatives, primarily Floor Income Contracts, to economically hedge Floor Income. As discussed above in “Derivative Accounting,” these derivatives do not qualify as effective accounting hedges, and therefore, under GAAP, they aremarked-to-marketthrough the “gains (losses) on derivative and hedging activities, net” line in the consolidated statement of income with no offsetting gain or loss recorded for the economically hedged items. For “Core Earnings,” the Company reverses the fair value adjustments on the Floor Income Contracts economically hedging Floor Income and includes in income the amortization of net premiums received on contracts economically hedging Fixed Rate Floor Income.
 
(4)Acquired Intangibles:  The Company excludes goodwill and intangible impairment and amortization of acquired intangibles.
 
(5)Net Tax Effect:  Such tax effect is based upon the Company’s “Core Earnings” effective tax rate for the year.


56

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three and six months ended June 30, 2009 and 2008
(Dollars in millions, except per share amounts, unless otherwise noted)
 
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
 
This quarterly report contains forward-looking statements and information based on management’s current expectations as of the date of this document. Statements that are not historical facts, including statements about our beliefs or expectations and statements that assume or are dependent upon future events, are forward-looking statements. Forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the occurrence of any event, change or other circumstances that could give rise to our ability to cost-effectively refinance asset-backed financing facilities due April 2010, (collectively, the “2008 Asset-Backed Financing Facilities”), including any potential foreclosure on the student loans under those facilities following their termination; increased financing costs; limited liquidity; any adverse outcomes in any significant litigation to which we are a party; our derivative counterparties terminating their positions with the Company if permitted by their contracts and the Company substantially incurring additional costs to replace any terminated positions; changes in the terms of student loans and the educational credit marketplace (including changes resulting from new laws, such as any laws enacted to implement the Administration’s 2010 budget proposals as they relate to the Federal Family Education Loan Program (“FFELP”) and regulations and from the implementation of applicable laws and regulations) which, among other things, may change the volume, average term and yields on student loans under the FFELP, may result in loans being originated or refinanced under non-FFELP programs, or may affect the terms upon which banks and others agree to sell FFELP loans to the Company. The Company could be affected by: various liquidity programs being implemented by the federal government; changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; incorrect estimates or assumptions by management in connection with the preparation of our consolidated financial statements; changes in the composition of our Managed FFELP and Private Education Loan portfolios; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments, and in the securitization markets for education loans, which may increase the costs or limit the availability of financings necessary to initiate, purchase or carry education loans; changes in projections of losses from loan defaults; changes in general economic conditions; changes in prepayment rates and credit spreads; and changes in the demand for debt management services and new laws or changes in existing laws that govern debt management services. All forward-looking statements contained in this quarterly report are qualified by these cautionary statements and are made only as of the date of this quarterly report is filed. The Company does not undertake any obligation to update or revise these forward-looking statements to conform the statement to actual results or changes in the Company’s expectations.
 
Definitions for capitalized terms used in this document can be found in the “Glossary” at the end of this document.
 
RECENT DEVELOPMENTS
 
U.S. Department of Education Federal Student Aid Title IV Student Loan Management/Servicing Contract (the “ED Servicing Contract”)
 
During the quarter, ED named Sallie Mae as one of four private sector servicers awarded a servicing contract (the “ED Servicing Contract”) to service new loans and a portion of the approximately $550 billion outstanding federal student loan portfolio. The contract specifically covers the servicing of all types of federally-owned student loans, including the servicing of FFELP loans purchased by ED pursuant to ECASLA. We expect the contract to begin in the second half of August 2009 and span five years with one, five-year renewal option. Beginning in August 2010, the contract will also cover the servicing on new Direct Loans.


57

 

ED has not yet announced its plans for allocating the initial servicing accounts other than that Sallie Mae will continue to service loans put to ED under ECASLA that are on our systems today. Today we have over two million accounts on our system that we expect to be serviced under this contract. Given our cost structure, we expect that this will be profitable and will produce an acceptable risk-adjusted return.
 
Legislative and Regulatory Developments
 
On February 26, 2009, the Administration issued its 2010 budget request to Congress, which included provisions that could impact significantly the FFELP. The President’s budget overview states: “FFEL processors would continue to receive federal subsidies for new loans originated in the2009-2010academic year and prior academic years under the regular FFEL program and the emergency programs established by the Ensuring Continued Access to Student Loans Act of 2008.” The budget proposal must be passed in the Congress, prior to enactment into law.
 
On July 21, 2009, the House Education and Labor Committee approved H.R. 3221, the Student Aid Reform and Fiscal Responsibility Act (“SAFRA”), which would eliminate the FFELP and require that, after July 1, 2010, all new federal student loans be made through the Direct Student Loan Program. It is expected that the full House of Representatives will consider the legislation sometime in September. The Senate Health, Education, Labor and Pensions Committee has not released a timeline for its consideration of the legislation but it is expected that they will begin considering student loan legislation no earlier than September. In addition to the House’s proposal, there are several other reforms that may be considered as the legislation moves forward. These include a possible extension of ECASLA, which expires on July 1, 2010, and the Student Loan Community Proposal, an alternative student loan proposal endorsed by a cross-section of FFELP service providers (including Sallie Mae).
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
A discussion of the Company’s critical accounting policies, which include allowance for loan losses, premium and discount amortization related to our loan portfolio, fair value measurement, securitization and Retained Interest accounting, and derivative accounting can be found in the Company’s Annual Report onForm 10-Kfor the year ended December 31, 2008.
 
Fair Value Measurements
 
On April 9, 2009, the Financial Accounting Standards Board (“FASB”) issued three staff positions regarding fair value measurements and recognition of impairment. Under FASB Staff Position (“FSP”) Financial Accounting Standards (“FAS”)No. 115-2andFAS No. 124-2,“Recognition and Presentation ofOther-Than-TemporaryImpairments,” impairment must be recorded to income for debt securities if there exists a fair value loss and the entity intends to sell the security or it is more likely than not the entity will be required to sell the security before recovery of the loss. Additionally, credit losses must be recorded through income regardless of the impairment determination above. Remaining fair value losses are recorded to other comprehensive income. FSPFAS No. 107-1and APBNo. 28-1,“Interim Disclosures about Fair Value of Financial Instruments,” require interim disclosures of the fair value of financial instruments that were previously only required annually. Finally, FSPFAS No. 157-4,“Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides guidance for determining when a significant decrease in market activity has occurred and when a transaction is not orderly. It further reiterates that prices from inactive markets or disorderly transactions should carry less weight, if any, to the determination of fair value. These standards are effective for the Company beginning April 1, 2009. The adoption of these standards was not material to the Company.
 
Significant assumptions used in fair value measurements including those related to credit and liquidity risk are as follows:
 
  1. Investments — Our investments primarily consist of overnight/weekly maturity instruments with high credit quality counterparties. However, we have considered credit and liquidity risk involving specific


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 instruments. These assumptions have further been validated by the successful maturity of these investments in the period immediately following the end of the reporting period. In the fourth quarter 2008, we recorded an impairment of $8 million related to our investment in the Reserve Primary Fund based on an internal assessment of the collectability of our remaining investment. See “LIQUIDITY AND CAPITAL RESOURCES — Counterparty Exposure” for further discussion.
 
  2. Derivatives — When determining the fair value of derivatives, we take into account counterparty credit risk for positions where we are exposed to the counterparty on a net basis by assessing exposure net of collateral held. The net exposures for each counterparty are adjusted based on market information available for the specific counterparty including spreads from credit default swaps. Additionally, when the counterparty has exposure to the Company related to SLM Corporation derivatives, we fully collateralize the exposure minimizing the adjustment necessary to the derivative valuations for our credit risk. While trusts that contain derivatives are not required to post collateral to counterparties, the credit quality and securitized nature of the trusts minimizes any adjustments for the counterparty’s exposure to the trusts. Adjustments related to credit risk reduced the overall value of our derivatives by $(133) million as of June 30, 2009. We also take into account changes in liquidity when determining the fair value of derivative positions. We adjusted the fair value of certain less liquid positions downward by approximately $(222) million to take into account a significant reduction in liquidity as of June 30, 2009, related primarily to basis swaps indexed to interest rate indices with inactive markets. A major indicator of market inactivity is the widening of the bid/ask spread in these markets. In general, the widening of counterparty credit spreads and reduced liquidity for derivative instruments as indicated by wider bid/ask spreads will reduce the fair value of derivatives. In addition, certain cross-currency interest rate swaps hedging foreign currency denominated reset rate notes in the Company’s on-balance sheet trusts contain extension features that coincide with the remarketing dates of the notes. The valuation of the extension feature requires significant judgment based on internally developed inputs. These swaps were transferred into Level 3 during the first quarter of 2009 due to a change in the assumption regarding successful remarketing. These swaps were carried at $1.4 billion as of June 30, 2009.
 
  3. Residual Interests — We have never sold our Residual Interests. We do not consider our Residual Interests to be liquid, which we take into account when valuing our Residual Interests. We use non-binding broker quotes and industry analyst reports which show changes in the indicative prices of the asset-backed securities tranches immediately senior to the Residual Interest as an indication of potential changes in the discount rate used to value the Residual Interest. We also use the most current prepayment and default rate assumptions to project the cash flows used to value Residual Interests. These assumptions are internally developed and primarily based on analyzing the actual results of loan performance from past periods. See Note 6, “Student Loan Securitization,” to the consolidated financial statements for a discussion of all assumption changes made during the quarter to properly determine the fair value of the Residual Interests, as well as a shock analysis to fair value related to all significant assumptions.
 
  4. Student Loans — Our FFELP loans and Private Education Loans are accounted for at cost or at the lower of cost or fair value if the loan isheld-for-sale.The fair value is disclosed in compliance with Statement of Financial Accounting Standards (“SFAS”) No. 107. For both FFELP loans and Private Education Loans accounted for at cost, fair value is determined by modeling loan level cash flows using stated terms of the assets and internally-developed assumptions to determine aggregate portfolio yield, net present value and average life. The significant assumptions used to project cash flows are prepayment speeds, default rates, cost of funds, and required return on equity. In addition, the Floor Income component of our FFELP loan portfolio is valued through discounted cash flow and option models using both observable market inputs and internally developed inputs. Significant inputs into the models are not generally market observable. They are either derived internally through a combination of historical experience and management’s qualitative expectation of future performance (in the case of prepayment speeds, default rates, and capital assumptions), or are obtained through external broker quotes (as in the case of cost of funds). When possible, market transactions are used to


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 validate the model. In most cases these are either infrequent or not observable. For FFELP loans classified asheld-for-saleand accounted for at the lower of cost or market, the fair value is based on the committed sales price of the various loan purchase programs established by ED.
 
SELECTED FINANCIAL DATA
 
Condensed Statements of Income
 
                                 
  Three Months
     Six Months
    
  Ended
  Increase
  Ended
  Increase
 
  June 30,  (Decrease)  June 30,  (Decrease) 
  2009  2008  $  %  2009  2008  $  % 
 
Net interest income
 $384  $403  $(19)  (5)% $599  $679  $(80)  (12)%
Less: provisions for loan losses
  278   143   135   94   528   280   248   89 
                                 
Net interest income (loss) after provisions for loan losses
  106   260   (154)  (59)  71   399   (328)  (82)
Servicing and securitization revenue (loss)
  87   2   85   4,250   (8)  109   (117)  (107)
Losses on loans and securities, net
  —   (44)  44   100   —   (78)  78   100 
Gains (losses) on derivative and hedging activities, net
  (562)  362   (924)  (255)  (458)  89   (547)  (615)
Contingency fee revenue
  73   84   (11)  (13)  148   169   (21)  (12)
Collections revenue
  22   26   (4)  (15)  1   84   (83)  (99)
Guarantor servicing fees
  25   24   1   4   59   58   1   2 
Other income
  400   109   291   267   591   202   389   193 
Restructuring expenses
  4   47   (43)  (91)  9   67   (58)  (87)
Operating expenses
  316   354   (38)  (11)  617   710   (93)  (13)
                                 
Net income (loss) before income tax benefit
  (169)  422   (591)  (140)  (222)  255   (477)  (187)
Income tax expense (benefit)
  (46)  153   (199)  (130)  (78)  90   (168)  (187)
                                 
Net income (loss)
  (123)  269   (392)  (146)  (144)  165   (309)  (187)
Less: net income attributable to noncontrolling interest
  —   3   (3)  (100)  —   3   (3)  (100)
                                 
Net income (loss) attributable to SLM Corporation
  (123)  266   (389)  (146)  (144)  162   (306)  (189)
Preferred stock dividends
  26   27   (1)  (4)  52   56   (4)  (7)
                                 
Net income (loss) attributable to SLM Corporation common stock
 $(149) $239  $(388)  (162)% $(196) $106  $(302)  (285)%
                                 
Basic earnings (loss) per common share attributable to SLM Corporation common shareholders
 $(.32) $.51  $(.83)  (163)% $(.42) $.23  $(.65)  (283)%
                                 
Diluted earnings (loss) per common share attributable to SLM Corporation common shareholders
 $(.32) $.50  $(.82)  (164)% $(.42) $.23  $(.65)  (283)%
                                 
Dividends per common share attributable to SLM Corporation common shareholders
 $—  $—  $—   —% $—  $—  $—   —%
                                 


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Condensed Balance Sheets
 
                 
        Increase
 
  June 30,
  December 31,
  (Decrease) 
  2009  2008  $  % 
 
Assets
                
FFELP Stafford and Other Student Loans, net
 $44,045  $44,025  $20   —%
FFELP Stafford LoansHeld-for-Sale
  18,159   8,451   9,708   115 
FFELP Consolidation Loans, net
  70,102   71,744   (1,642)  (2)
Private Education Loans, net
  21,851   20,582   1,269   6 
Other loans, net
  489   729   (240)  (33)
Cash and investments
  8,212   5,112   3,100   61 
Restricted cash and investments
  5,246   3,535   1,711   48 
Retained Interest in off-balance sheet securitized loans
  1,821   2,200   (379)  (17)
Goodwill and acquired intangible assets, net
  1,234   1,249   (15)  (1)
Other assets
  10,025   11,141   (1,116)  (10)
                 
Total assets
 $181,184  $168,768  $12,416   7%
                 
Liabilities and Equity
                
Short-term borrowings
 $47,332  $41,933  $5,399   13%
Long-term borrowings
  125,880   118,225   7,655   6 
Other liabilities
  3,120   3,604   (484)  (13)
                 
Total liabilities
  176,332   163,762   12,570   8 
                 
SLM Corporation stockholders’ equity before treasury stock
  6,712   6,855   (143)  (2)
Common stock held in treasury
  1,860   1,856   4   — 
                 
SLM Corporation stockholders’ equity
  4,852   4,999   (147)  (3)
Noncontrolling interest
  —   7   (7)  (100)
                 
Total equity
  4,852   5,006   (154)  (3)
                 
Total liabilities and equity
 $181,184  $168,768  $12,416   7%
                 


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RESULTS OF OPERATIONS
 
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
 
For the three months ended June 30, 2009, net loss attributable to SLM Corporation was $123 million or $.32 diluted loss per common share attributable to SLM Corporation common shareholders, compared to net income of $266 million or $.50 diluted earnings per common share attributable to SLM Corporation common shareholders for the three months ended June 30, 2008. The effective tax rate for those periods was 28 percent and 36 percent, respectively. The movement in the effective tax rate was primarily driven by the impact of concluding, during the three months ended June 30, 2009, the IRS examination of the Company’s 2005 and 2006 U.S. federal income tax returns. For the three months ended June 30, 2009, the Company’s pre-tax loss was $169 million compared to pre-tax income of $422 million in the year-ago quarter. The decrease in pre-tax income of $591 million was primarily due to a net loss on derivative and hedging activities of $562 million in the second quarter of 2009 from a $362 million gain in the second quarter of 2008, partially offset by an increase in gains on debt repurchases.
 
There were no gains on student loan securitizations in either the second quarter of 2009 or the year-ago quarter as the Company did not complete any off-balance sheet securitizations in those periods. Servicing and securitization revenue increased by $85 million from revenue of $2 million in the second quarter of 2008 to $87 million in the second quarter of 2009. This increase was primarily due to a smaller current-quarter unrealizedmark-to-marketloss of $90 million on the Company’s Residual Interests compared to the year-ago second-quarter $192 million unrealizedmark-to-marketloss. See “LIQUIDITY AND CAPITAL RESOURCES — Securitization Activities — Retained Interest in Securitized Receivables” for further discussion of the factors impacting the fair values.
 
Net interest income after provisions for loan losses decreased by $154 million in the second quarter from the year-ago quarter. This decrease was due to a $135 million increase in provisions for loan losses and a $19 million decrease in net interest income. The decrease in net interest income was primarily due to a decrease in the student loan spread and other asset spread, partially offset by a decrease in the 2008 Asset Backed Financing Facilities fees and an $19.8 billion increase in the average balance of on-balance sheet student loans (see “LENDING BUSINESS SEGMENT — Net Interest Income — Net Interest Margin — On-Balance Sheet”). The increase in provisions for loan losses relates primarily to the increase in charge-off expectations on Private Education Loans from the year-ago period, primarily as a result of the continued weakening of the U.S. economy (see “LENDING BUSINESS SEGMENT — Private Education Loan Losses —Private Education Loan Delinquencies and Forbearance” and “— Allowance for Private Education Loan Losses”).
 
In the second quarter of 2009, contingency fee, collections and guarantor servicing fee revenue totaled $120 million, a $14 million decrease from $134 million in the year-ago quarter. This decrease was primarily due to a significantly smaller portfolio in the purchased paper businessesyear-over-year,as a result of winding down these businesses. Offsetting this decrease in revenue was a reduction in impairment recognized on our purchased paper portfolios. In the second quarter of 2009, total impairment of $21 million was comprised of $8 million of impairment related to declines in the fair value of mortgage loans and real estate held by the Company’s mortgage purchased paper subsidiary and $13 million of impairment related to the Company’s non-mortgage purchased paper subsidiary, compared to $58 million of total impairment recorded in the second quarter of 2008 (see “ASSET PERFORMANCE GROUP BUSINESS SEGMENT” and a separate discussion of “Other Income” at the end of this section).
 
There were no losses on sales of loans and securities in the second quarter of 2009, as compared to net losses of $44 million incurred in the year-ago quarter. Prior to the fourth quarter of 2008, these losses were primarily the result of the Company’s repurchase of delinquent Private Education Loans from the Company’s off-balance sheet securitization trusts. When Private Education Loans in the Company’s off-balance sheet securitization trusts that settled before September 30, 2005, became 180 days delinquent, the Company previously exercised its contingent call option to repurchase these loans at par value out of the trusts and recorded a loss for the difference in the par value paid and the fair market value of the loans at the time of


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purchase. The Company does not hold the contingent call option for any trusts that settled after September 30, 2005. In October 2008, the Company decided to no longer exercise its contingent call option.
 
The Company continues to restructure its business in response to the impact of The College Cost Reduction and Access Act of 2007 (“CCRAA”), and current challenges in the capital markets. In conjunction with our restructuring plan, we are refocusing our lending activities, exiting certain customer relationships and product lines, and winding down our debt purchased paper businesses. During 2008, we reduced the run-rate of our operating expenses by 20 percent versus the end of 2007, after adjusting for restructuring costs, growth and other investments. As part of the Company’s cost reduction efforts, restructuring expenses of $4 million and $47 million were recognized in the current quarter and year-ago quarter, respectively. Restructuring expenses from the fourth quarter of 2007 through the second quarter of 2009 totaled $115 million. The majority of these restructuring expenses were severance costs related to the completed and planned elimination of approximately 2,800 positions, or approximately 25 percent of the workforce. We estimate approximately $7 million of additional restructuring expenses associated with our current cost reduction efforts will be incurred and our current restructuring plan will be substantially complete by the end of 2009. During 2009, we will continue to review our business to determine whether there are other opportunities to further streamline the business.
 
Operating expenses, excluding $6 million of reorganization-related asset impairments recognized in the second quarter of 2008, were $315 million in the second quarter of 2009 compared to $348 million in the second quarter of 2008. This decrease was primarily due to the Company’s cost reduction efforts. The amortization of acquired intangibles totaled $10 million and $15 million for the second quarters of 2009 and 2008, respectively.
 
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
 
For the six months ended June 30, 2009, net loss attributable to SLM Corporation was $144 million or $.42 diluted loss per common share attributable to SLM Corporation common shareholders, compared to net income of $162 million or $.23 diluted earnings per common share attributable to SLM Corporation common shareholders for the six months ended June 30, 2008. The effective tax rate for those periods was 35 percent and 35 percent, respectively. For the six months ended June 30, 2009, the Company’s pre-tax loss was $222 million compared to pre-tax income of $255 million in the year-ago period. The decrease in pre-tax income of $477 million was primarily due to a net loss on derivative and hedging activities of $458 million for the six months ended June 30, 2009 from a $89 million gain in the year-ago period, and an increase to provisions for loan losses of $248 million, partially offset by an increase in gains on debt repurchases.
 
There were no gains on student loan securitizations in either the six months ended June 30, 2009 or the year-ago period as the Company did not complete any off-balance sheet securitizations in those periods. Servicing and securitization revenue decreased by $117 million from revenue of $109 million in the six months ended June 30, 2008 to an $8 million loss in the six months ended June 30, 2009. This decrease was primarily due to a larger unrealizedmark-to-marketloss for the six months ended June 30, 2009 of $351 million on the Company’s Residual Interests compared to a year-ago period $280 million unrealizedmark-to-marketloss. See “LIQUIDITY AND CAPITAL RESOURCES — Securitization Activities — Retained Interest in Securitized Receivables” for further discussion of the factors impacting the fair values.
 
Net interest income of $70 million, after provisions for loan losses, decreased by $328 million in the six months ended June 30, 2009 from the year-ago period. This decrease was due to a $248 million increase in provisions for loan losses and an $80 million decrease in net interest income. The decrease in net interest income was primarily due to a decrease in the student loan spread and other asset spread partially offset by a $20 billion increase in the average balance of on-balance sheet student loans (see “LENDING BUSINESS SEGMENT — Net Interest Income —Net Interest Margin — On-Balance Sheet”). The increase in provisions for loan losses relates primarily to increases in charge-off expectations on Private Education Loans primarily as a result of the continued weakening of the U.S. economy (see “LENDING BUSINESS SEGMENT — Private Education Loan Losses —Private Education Loan Delinquencies and Forbearance” and “— Allowance for Private Education Loan Losses”)


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For the six months ended June 30, 2009, contingency fee, collections and guarantor servicing fee revenue totaled $208 million, a $103 million decrease from $311 million in the year-ago period. This decrease was primarily due to a significantly smaller portfolio in the purchased paper businessesyear-over-yearas a result of winding down these businesses. In addition, the decline was the result of $97 million of impairment on our purchased paper portfolios recorded in the six months ended June 30, 2009, comprised of $81 million of impairment related to declines in the fair value of mortgage loans and real estate held by the Company’s mortgage purchased paper subsidiary and $16 million of impairment related to the Company’s non-mortgage purchased paper subsidiary, compared to $81 million of total impairment recorded in the six months ended June 30, 2008 (see “ASSET PERFORMANCE GROUP BUSINESS SEGMENT” and a separate discussion of “Other Income” at the end of this section).
 
There were no losses on sales of loans and securities in the first half of 2009, as compared to net losses of $78 million incurred in the year-ago quarter. Prior to the fourth quarter of 2008, these losses were primarily the result of the Company’s repurchase of delinquent Private Education Loans from the Company’s off-balance sheet securitization trusts. As previously discussed, the Company no longer repurchases these loans.
 
Restructuring expenses of $9 million and $67 million were recognized in the six months ended June 30, 2009 and 2008, respectively, as previously discussed.
 
Operating expenses, excluding $6 million of reorganization-related asset impairments recognized in the six months ended June 30, 2008, were $617 million in the first half of 2009 compared to $703 million in the first half of 2008. This decrease was primarily due to the Company’s cost reduction efforts. The amortization of acquired intangibles totaled $19 million and $31 million for the six months ended June 30, 2009 and 2008, respectively.
 
Other Income
 
The following table summarizes the components of “Other income” in the consolidated statements of income for the three and six months ended June 30, 2009 and 2008.
 
                 
  Three Months
  Six Months
 
  Ended
  Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Gains on debt repurchases
 $325  $21  $389  $21 
Late fees and forbearance fees
  32   34   69   71 
Asset servicing and other transaction fees
  26   26   51   52 
Loan servicing fees
  9   6   19   12 
Foreign currency translation gains (losses)
  (6)  4   34   4 
Other
  14   18   29   42 
                 
Total
 $400  $109  $591  $202 
                 
 
The increase in other income for the three and six months ended June 30, 2009 over the year-ago periods is primarily the result of the gains on debt repurchased. The Company began repurchasing its outstanding debt in the second quarter of 2008; and in the second quarter of 2009, the Company repurchased $1.1 billion face amount of its senior unsecured notes compared to $1.2 billion in the second quarter of 2008. The increase in the gain on debt repurchases between 2009 and 2008 was the result of differences in the characteristics of the debt repurchased and larger unsecured credit spreads in 2009. Since the second quarter of 2008, the Company has repurchased $3.2 billion face amount of its senior unsecured notes in the aggregate, with maturity dates ranging from 2008 to 2014.


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BUSINESS SEGMENTS
 
The results of operations of the Company’s Lending and Asset Performance Group (“APG”) operating segments are presented below. These defined business segments operate in distinct business environments and are considered reportable segments under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” based on quantitative thresholds applied to the Company’s financial statements. In addition, we provide other complementary products and services, including guarantor and student loan servicing, through smaller operating segments that do not meet such thresholds and are aggregated in the Corporate and Other reportable segment for financial reporting purposes.
 
The management reporting process measures the performance of the Company’s operating segments based on the management structure of the Company as well as the methodology used by management to evaluate performance and allocate resources. In accordance with the Rules and Regulations of the Securities and Exchange Commission (“SEC”), we prepare financial statements in accordance with GAAP. In addition to evaluating the Company’s GAAP-based financial information, management, including the Company’s chief operating decision makers, evaluates the performance of the Company’s operating segments based on their profitability on a basis that, as allowed under SFAS No. 131, differs from GAAP. We refer to management’s basis of evaluating our segment results as “Core Earnings” presentations for each business segment and we refer to these performance measures in our presentations with credit rating agencies and lenders. Accordingly, information regarding the Company’s reportable segments is provided herein based on “Core Earnings,” which are discussed in detail below.
 
Our “Core Earnings” are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. “Core Earnings” net income reflects only current period adjustments to GAAP net income as described below. Unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting and as a result, our management reporting is not necessarily comparable with similar information for any other financial institution. The Company’s operating segments are defined by the products and services they offer or the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. Intersegment revenues and expenses are netted within the appropriate financial statement line items consistent with the income statement presentation provided to management. Changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial information.
 
“Core Earnings” are the primary financial performance measures used by management to develop the Company’s financial plans, track results, and establish corporate performance targets. While “Core Earnings” are not a substitute for reported results under GAAP, the Company relies on “Core Earnings” in operating its business because “Core Earnings” permit management to make meaningfulperiod-to-periodcomparisons of the operational and performance indicators that are most closely assessed by management. Management believes this information provides additional insight into the financial performance of the core business activities of our operating segments. Accordingly, the tables presented below reflect “Core Earnings” which is reviewed and utilized by management to manage the business for each of the Company’s reportable segments. A further discussion regarding “Core Earnings” is included under “Limitations of ‘Core Earnings’ ” and “Pre-tax Differences between ‘Core Earnings’ and GAAP by Business Segment.”
 
The “LENDING BUSINESS SEGMENT” section includes all discussion of income and related expenses associated with the net interest margin, the student loan spread and its components, the provisions for loan losses, and other fees earned on our Managed portfolio of student loans. The “APG BUSINESS SEGMENT” section reflects the fees earned and expenses incurred in providing accounts receivable management and collection services. The “CORPORATE AND OTHER BUSINESS SEGMENT” section includes our remaining fee businesses and other corporate expenses that do not pertain directly to the primary operating segments identified above.
 


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  Three Months Ended
 
  June 30,2009 
        Corporate
 
  Lending  APG  and Other 
 
Interest income:
            
FFELP Stafford and Other Student Loans
 $310  $—  $— 
FFELP Consolidation Loans
  394   —   — 
Private Education Loans
  559   —   — 
Other loans
  18   —   — 
Cash and investments
  4   —   4 
             
Total interest income
  1,285   —   4 
Total interest expense
  824   5   3 
             
Net interest income (loss)
  461   (5)  1 
Less: provisions for loan losses
  402   —   — 
             
Net interest income (loss) after provisions for loan losses
  59   (5)  1 
Contingency fee revenue
  —   73   — 
Collections revenue
  —   22   — 
Guarantor servicing fees
  —   —   25 
Other income
  360   —   46 
             
Total other income
  360   95   71 
Restructuring expenses
  4   —   — 
Operating expenses
  141   80   85 
             
Total expenses
  145   80   85 
             
Income (loss) before income tax expense (benefit)
  274   10   (13)
Income tax expense (benefit)(1)
  102   4   (5)
Less: net income attributable to noncontrolling interest
  —   —   — 
             
“Core Earnings” net income (loss) attributable to SLM Corporation
 $172  $6  $(8)
             
Economic Floor Income (net of tax) not included in “Core Earnings”
 $89  $—  $— 
             
 
 
(1)Income taxes are based on a percentage of net income before tax for each individual reportable segment.
 

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  Three Months Ended
 
  June 30, 2008 
        Corporate
 
  Lending  APG  and Other 
 
Interest income:
            
FFELP Stafford and Other Student Loans
 $524  $—  $— 
FFELP Consolidation Loans
  908   —   — 
Private Education Loans
  665   —   — 
Other loans
  21   —   — 
Cash and investments
  81   —   5 
             
Total interest income
  2,199   —   5 
Total interest expense
  1,605   7   5 
             
Net interest income (loss)
  594   (7)  — 
Less: provisions for loan losses
  192   —   — 
             
Net interest income (loss) after provisions for loan losses
  402   (7)  — 
Contingency fee revenue
  —   84   — 
Collections revenue
  —   27   — 
Guarantor servicing fees
  —   —   24 
Other income
  62   —   45 
             
Total other income
  62   111   69 
Restructuring expenses
  31   5   11 
Operating expenses
  155   110   73 
             
Total expenses
  186   115   84 
             
Income (loss) before income tax expense (benefit)
  278   (11)  (15)
Income tax expense (benefit)(1)
  103   (4)  (6)
Less: net income attributable to noncontrolling interest
  —   3   — 
             
“Core Earnings” net income (loss) attributable to SLM Corporation
 $175  $(10) $(9)
             
Economic Floor Income (net of tax) not included in “Core Earnings”
 $22  $—  $— 
             
 
 
(1)Income taxes are based on a percentage of net income before tax for each individual reportable segment.
 

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  Six Months Ended
 
  June 30, 2009 
        Corporate
 
  Lending  APG  and Other 
 
Interest income:
            
FFELP Stafford and Other Student Loans
 $672  $—  $— 
FFELP Consolidation Loans
  833   —   — 
Private Education Loans
  1,122   —   — 
Other loans
  35   —   — 
Cash and investments
  6   —   9 
             
Total interest income
  2,668   —   9 
Total interest expense
  1,773   10   8 
             
Net interest income (loss)
  895   (10)  1 
Less: provisions for loan losses
  751   —   — 
             
Net interest income (loss) after provisions for loan losses
  144   (10)  1 
Contingency fee revenue
  —   148   — 
Collections revenue
  —   —   — 
Guarantor servicing fees
  —   —   59 
Other income
  461   —   96 
             
Total other income
  461   148   155 
Restructuring expenses
  5   2   2 
Operating expenses
  272   169   156 
             
Total expenses
  277   171   158 
             
Income (loss) before income tax expense (benefit)
  328   (33)  (2)
Income tax expense (benefit)(1)
  122   (12)  (1)
Less: net income attributable to noncontrolling interest
  —   —   — 
             
“Core Earnings” net income (loss) attributable to SLM Corporation
 $206  $(21) $(1)
             
Economic Floor Income (net of tax) not included in “Core Earnings”
 $168  $—  $— 
             
 
 
(1)Income taxes are based on a percentage of net income before tax for each individual reportable segment.
 

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  Six Months Ended
 
  June 30, 2008 
        Corporate
 
  Lending  APG  and Other 
 
Interest income:
            
FFELP Stafford and Other Student Loans
 $1,018  $—  $— 
FFELP Consolidation Loans
  1,896   —   — 
Private Education Loans
  1,415   —   — 
Other loans
  45   —   — 
Cash and investments
  222   —   11 
             
Total interest income
  4,596   —   11 
Total interest expense
  3,429   14   10 
             
Net interest income (loss)
  1,167   (14)  1 
Less: provisions for loan losses
  374   —   — 
             
Net interest income (loss) after provisions for loan losses
  793   (14)  1 
Contingency fee revenue
  —   169   — 
Collections revenue
  —   84   — 
Guarantor servicing fees
  —   —   58 
Other income
  106   —   97 
             
Total other income
  106   253   155 
Restructuring expenses
  46   6   15 
Operating expenses
  318   216   144 
             
Total expenses
  364   222   159 
             
Income (loss) before income tax expense (benefit)
  535   17   (3)
Income tax expense (benefit)(1)
  197   6   (1)
Less: net income attributable to noncontrolling interest
  —   3   — 
             
“Core Earnings” net income (loss) attributable to SLM Corporation
 $338  $8  $(2)
             
Economic Floor Income (net of tax) not included in “Core Earnings”
 $49  $—  $— 
             
 
 
(1)Income taxes are based on a percentage of net income before tax for each individual reportable segment.
 
Limitations of “Core Earnings”
 
While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, management believes that “Core Earnings” are an important additional tool for providing a more complete understanding of the Company’s results of operations. Nevertheless, “Core Earnings” are subject to certain general and specific limitations that investors should carefully consider. For example, as stated above, unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting. Our “Core Earnings” are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Unlike GAAP, “Core Earnings” reflect only current period adjustments to GAAP. Accordingly, the Company’s “Core Earnings” presentation does not represent a comprehensive basis of accounting. Investors, therefore, may not compare our Company’s performance with that of other financial services companies based upon “Core Earnings.” “Core Earnings” results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely used by management, the Company’s board of directors, rating agencies and lenders to assess performance.

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Other limitations arise from the specific adjustments that management makes to GAAP results to derive “Core Earnings” results. For example, in reversing the unrealized gains and losses that result from SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” on derivatives that do not qualify for “hedge treatment,” as well as on derivatives that do qualify but are in part ineffective because they are not perfect hedges, we focus on the long-term economic effectiveness of those instruments relative to the underlying hedged item and isolate the effects of interest rate volatility, changing credit spreads and changes in our stock price on the fair value of such instruments during the period. Under GAAP, the effects of these factors on the fair value of the derivative instruments (but not on the underlying hedged item) tend to show more volatility in the short term. While our presentation of our results on a “Core Earnings” basis provides important information regarding the performance of our Managed portfolio, a limitation of this presentation is that we are presenting the ongoing spread income on loans that have been sold to a trust managed by us. While we believe that our “Core Earnings” presentation presents the economic substance of our Managed loan portfolio, it understates earnings volatility from securitization gains. Our “Core Earnings” results exclude certain Floor Income, which is real cash income, from our reported results and therefore may understate earnings in certain periods. Management’s financial planning and valuation of operating results, however, does not take into account Floor Income because of its inherent uncertainty, except when it is Fixed Rate Floor Income that is economically hedged through Floor Income Contracts.
 
Pre-tax differences between “Core Earnings” and GAAP by Business Segment
 
Our “Core Earnings” are the primary financial performance measures used by management to evaluate performance and to allocate resources. Accordingly, financial information is reported to management on a “Core Earnings” basis by reportable segment, as these are the measures used regularly by our chief operating decision makers. Our “Core Earnings” are used in developing our financial plans and tracking results, and also in establishing corporate performance targets and incentive compensation. Management believes this information provides additional insight into the financial performance of the Company’s core business activities. “Core Earnings” net income reflects only current period adjustments to GAAP net income, as described in the more detailed discussion of the differences between “Core Earnings” and GAAP that follows, which includes further detail on each specific adjustment required to reconcile our “Core Earnings” segment presentation to our GAAP earnings.
 
                         
  Three Months Ended June 30, 
  2009  2008 
        Corporate
        Corporate
 
  Lending  APG  and Other  Lending  APG  and Other 
 
“Core Earnings” adjustments to GAAP:
                        
Net impact of securitization accounting
 $(25) $—  $—  $(247) $—  $— 
Net impact of derivative accounting
  (495)  —   —   451   —   — 
Net impact of Floor Income
  90   —   —   (19)  —   — 
Net impact of acquired intangibles
  (3)  (2)  (5)  (5)  (6)  (4)
                         
Total “Core Earnings” adjustments to GAAP
 $(433) $(2) $(5) $180  $(6) $(4)
                         
 
                         
  Six Months Ended June 30, 
  2009  2008 
        Corporate
        Corporate
 
  Lending  APG  and Other  Lending  APG  and Other 
 
“Core Earnings” adjustments to GAAP:
                        
Net impact of securitization accounting
 $(224) $—  $—  $(326) $—  $— 
Net impact of derivative accounting
  (441)  —   —   87   —   — 
Net impact of Floor Income
  169   —   —   (24)  —   — 
Net impact of acquired intangibles
  (6)  (3)  (10)  (10)  (11)  (10)
                         
Total “Core Earnings” adjustments to GAAP
 $(502) $(3) $(10) $(273) $(11) $(10)
                         


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1) Securitization Accounting:  Under GAAP, certain securitization transactions in our Lending operating segment are accounted for as sales of assets. Under “Core Earnings” for the Lending operating segment, we present all securitization transactions on a “Core Earnings” basis as long-term non-recourse financings. The upfront “gains” on sale from securitization transactions, as well as ongoing “servicing and securitization revenue” presented in accordance with GAAP, are excluded from “Core Earnings” and are replaced by interest income, provisions for loan losses, and interest expense as earned or incurred on the securitization loans. We also exclude transactions with our off-balance sheet trusts from “Core Earnings” as they are considered intercompany transactions on a “Core Earnings” basis.
 
The following table summarizes the securitization adjustments in our Lending operating segment for the three and six months ended June 30, 2009 and 2008.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
“Core Earnings” securitization adjustments:
                
Net interest income on securitized loans, before provisions for loan losses and before intercompany transactions
 $(236) $(256) $(438) $(449)
Provisions for loan losses
  124   49   222   93 
                 
Net interest income on securitized loans, after provisions for loan losses, before intercompany transactions
  (112)  (207)  (216)  (356)
Intercompany transactions with off-balance sheet trusts
  —   (42)  —   (79)
                 
Net interest income on securitized loans, after provisions for loan losses
  (112)  (249)  (216)  (435)
Servicing and securitization revenue
  87   2   (8)  109 
                 
Total “Core Earnings” securitization adjustments(1)
 $(25) $(247) $(224) $(326)
                 
 
 
(1)Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” net income to arrive at GAAP net income.
 
“Intercompany transactions with off-balance sheet trusts” in the above table relate primarily to losses that result from the repurchase of delinquent loans from our off-balance sheet securitization trusts. When Private Education Loans in our securitization trusts settling before September 30, 2005 became 180 days delinquent, we previously exercised our contingent call option to repurchase these loans at par value out of the trust and recorded a loss for the difference in the par value paid and the fair market value of the loan at the time of purchase. We do not hold the contingent call option for any trusts settled after September 30, 2005. In October 2008, the Company decided to no longer exercise its contingent call option.
 
2) Derivative Accounting:  “Core Earnings” exclude periodic unrealized gains and losses that are caused primarily by the one-sidedmark-to-marketderivative valuations prescribed by SFAS No. 133 on derivatives that do not qualify for “hedge treatment” under GAAP. These unrealized gains and losses occur in our Lending operating segment. In our “Core Earnings” presentation, we recognize the economic effect of these hedges, which generally results in any cash paid or received being recognized ratably as an expense or revenue over the hedged item’s life.
 
SFAS No. 133 requires that changes in the fair value of derivative instruments be recognized currently in earnings unless specific hedge accounting criteria, as specified by SFAS No. 133, are met. We believe that our derivatives are effective economic hedges, and as such, are a critical element of our interest rate risk management strategy. However, some of our derivatives, primarily Floor Income Contracts and certain basis swaps, do not qualify for “hedge treatment” as defined by SFAS No. 133, and the stand-alone derivative must bemarked-to-marketin the income statement with no consideration for the corresponding change in fair value of the hedged item. The gains and losses described in “Gains (losses) on derivative and hedging activities, net” are primarily caused by interest rate and foreign currency exchange rate volatility, and changing credit spreads during the period as well as the volume and term of derivatives not receiving hedge treatment.


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Our Floor Income Contracts are written options that must meet more stringent requirements than other hedging relationships to achieve hedge effectiveness under SFAS No. 133. Specifically, our Floor Income Contracts do not qualify for hedge accounting treatment because the pay down of principal of the student loans underlying the Floor Income embedded in those student loans does not exactly match the change in the notional amount of our written Floor Income Contracts. Under SFAS No. 133, the upfront payment is deemed a liability and changes in fair value are recorded through income throughout the life of the contract. The change in the value of Floor Income Contracts is primarily caused by changing interest rates that cause the amount of Floor Income earned on the underlying student loans and paid to the counterparties to vary. This is economically offset by the change in value of the student loan portfolio, including our Retained Interests, earning Floor Income but that offsetting change in value is not recognized under SFAS No. 133. We believe the Floor Income Contracts are economic hedges because they effectively fix the amount of Floor Income earned over the contract period, thus eliminating the timing and uncertainty that changes in interest rates can have on Floor Income for that period. Prior to SFAS No. 133, we accounted for Floor Income Contracts as hedges and amortized the upfront cash compensation ratably over the lives of the contracts.
 
Basis swaps are used to convert floating rate debt from one floating interest rate index to another to better match the interest rate characteristics of the assets financed by that debt. We primarily use basis swaps to change the index and reset frequency of our floating rate debt to better match the cash flows of our student loan assets that are primarily indexed to a commercial paper, Prime or Treasury bill index. In addition, we use basis swaps to convert debt indexed to the Consumer Price Index to three-month month LIBOR debt. SFAS No. 133 requires that when using basis swaps, the change in the cash flows of the hedge effectively offset both the change in the cash flows of the asset and the change in the cash flows of the liability. Our basis swaps hedge variable interest rate risk; however, they generally do not meet this effectiveness test because the index of the swap does not exactly match the index of the hedged assets as required by SFAS No. 133. Additionally, some of our FFELP loans can earn at either a variable or a fixed interest rate depending on market interest rates. We also have basis swaps that do not meet the SFAS No. 133 effectiveness test that economically hedge off-balance sheet instruments. As a result, under GAAP these swaps are recorded at fair value with changes in fair value reflected currently in the income statement.
 
The table below quantifies the adjustments for derivative accounting under SFAS No. 133 on our net income for the three and six months ended June 30, 2009 and 2008, when compared with the accounting principles employed in all years prior to the SFAS No. 133 implementation.
 
                 
  Three Months
  June 30,
 
  Ended
  Ended
 
  June 30,  Six Months 
  2009  2008  2009  2008 
 
“Core Earnings” derivative adjustments:
                
Gains (losses) on derivative and hedging activities, net, included in other income(1)
 $(562) $362  $(458) $89 
Less: Realized (gains) losses on derivative and hedging activities, net(1)
  78   90   2   (1)
                 
Unrealized gains (losses) on derivative and hedging activities, net(1)
  (484)  452   (456)  88 
Other pre-SFAS No. 133 accounting adjustments
  (11)  (1)  15   (1)
                 
Total net impact of SFAS No. 133 derivative accounting(2)
 $(495) $451  $(441) $87 
                 
 
 
(1)See “Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” below for a detailed breakdown of the components of both the realized and unrealized losses on derivative and hedging activities.
(2)Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” net income to arrive at GAAP net income.
 
Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities
 
SFAS No. 133 requires net settlement income/expense on derivatives and realized gains/losses related to derivative dispositions (collectively referred to as “realized gains (losses) on derivative and hedging activities”) that do not qualify as hedges under SFAS No. 133 to be recorded in a separate income statement line item


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below net interest income. The table below summarizes the realized losses on derivative and hedging activities, and the associated reclassification on a “Core Earnings” basis for the three and six months ended June 30, 2009 and 2008.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Reclassification of realized gains (losses) on derivative and hedging activities:
                
Net settlement expense on Floor Income Contracts reclassified to net interest income
 $(171) $(175) $(311) $(315)
Net settlement income (expense) on interest rate swaps reclassified to net interest income
  95   86   324   317 
Foreign exchange derivatives gains (losses) reclassified to other income
  (1)  (5)  (14)  (5)
Net realized gains (losses) on terminated derivative contracts reclassified to other income
  (1)  4   (1)  4 
                 
Total reclassifications of realized (gains) losses on derivative and hedging activities
  (78)  (90)  (2)  1 
Add: Unrealized gains (losses) on derivative and hedging activities, net(1)
  (484)  452   (456)  88 
                 
Gains (losses) on derivative and hedging activities, net
 $(562) $362  $(458) $89 
                 
 
 
(1)“Unrealized gains (losses) on derivative and hedging activities, net” is comprised of the following unrealizedmark-to-marketgains (losses):
 
                 
  Three Months
  Six Months
 
  Ended
  Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Floor Income Contracts
 $236  $569  $402  $274 
Basis swaps
  (217)  (157)  (532)  (289)
Foreign currency hedges
  (361)  44   (280)  103 
Other
  (142)  (4)  (46)  — 
                 
Total unrealized gains (losses) on derivative and hedging activities, net
 $(484) $452  $(456) $88 
                 
 
Unrealized gains and losses on Floor Income Contracts are primarily caused by changes in interest rates and the forward interest rate curve. In general, an increase in interest rates, or a steepening of the forward interest rate curve, results in an unrealized gain and vice versa. Unrealized gains and losses on basis swaps result from changes in the spread between indices and on changes in the forward interest rate curves that impact basis swaps hedging repricing risk between quarterly reset debt and daily reset assets. Unrealized gains (losses) on foreign currency hedges are primarily the result of ineffectiveness on cross-currency interest rate swaps hedging foreign currency denominated debt related to differences between forward and spot foreign currency exchange rates.
 
3) Floor Income:  The timing and amount (if any) of Floor Income earned in our Lending operating segment is uncertain and in excess of expected spreads. Therefore, we only include such income in “Core Earnings” when it is Fixed Rate Floor Income that is economically hedged. We employ derivatives, primarily Floor Income Contracts, to economically hedge Floor Income. As discussed above in “Derivative Accounting,” these derivatives do not qualify as effective accounting hedges, and therefore, under GAAP, they aremarked-to-marketthrough the “gains (losses) on derivative and hedging activities, net” line in the consolidated statement of income with no offsetting gain or loss recorded for the economically hedged items. For “Core Earnings,” we reverse the fair value adjustments on the Floor Income Contracts economically hedging Floor Income and include in income the amortization of net premiums received on contracts economically hedging Fixed Rate Floor Income.


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The following table summarizes the Floor Income adjustments in our Lending operating segment for the three and six months ended June 30, 2009 and 2008.
 
                 
  Three Months
  Six Months
 
  Ended
  Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
“Core Earnings” Floor Income adjustments:
                
Floor Income earned on Managed loans, net of payments on Floor Income Contracts
 $120  $25  $227  $58 
Amortization of net premiums on Floor Income Contracts and futures in net interest income
  (30)  (44)  (58)  (82)
                 
Total “Core Earnings” Floor Income adjustments(1)(2)
 $90  $(19) $169  $(24)
                 
 
 
(1)Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” net income to arrive at GAAP net income.
(2)The following table summarizes the amount of Economic Floor Income earned during the three and six months ended June 30, 2009 and 2008 that is not included in “Core Earnings” net income:
 
                 
     Six Months
 
  Three Months Ended
  Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Floor Income earned on Managed loans, net of payments on Floor Income Contracts, not included in “Core Earnings”
 $120  $25  $227  $58 
Amortization of net premiums on Variable Rate Floor Income Contracts not included in “Core Earnings”
  21   10   40   20 
Amortization of net premiums on Fixed Rate Floor Income Contracts included in “Core Earnings”
  30   44   58   82 
                 
Total Economic Floor Income earned
  171   79   325   160 
Less: Amortization of net premiums on Fixed Rate Floor Income Contracts included in “Core Earnings”
  (30)  (44)  (58)  (82)
                 
Total Economic Floor Income earned, not included in “Core Earnings”
 $141  $35  $267  $78 
                 
 
4) Acquired Intangibles:  Our “Core Earnings” exclude goodwill and intangible impairment and the amortization of acquired intangibles. These amounts totaled $10 million and $15 million, respectively, for the three months ended June 30, 2009 and 2008, and $19 million and $31 million, respectively, for the six months ended June 30, 2009 and 2008.
 
LENDING BUSINESS SEGMENT
 
In our Lending business segment, we originate and acquire federally guaranteed student loans and Private Education Loans, which are not federally guaranteed. Typically a Private Education Loan is made in conjunction with a FFELP Stafford loan and as a result is marketed through the same marketing channels as FFELP loans. While FFELP loans and Private Education Loans have different overall risk profiles due to the federal guarantee of the FFELP loans, they currently share many of the same characteristics such as similar repayment terms, the same marketing channel and sales force, and are originated and serviced on the same servicing platform. Finally, where possible, the borrower receives a single bill for both FFELP and Private Education Loans.
 
On a Managed Basis, the Company had $113.9 billion, $125.5 billion and $127.2 billion as of June 30, 2009, March 31, 2009 and December 31, 2008, respectively, of FFELP loans indexed to three-month financial commercial paper rate (“CP”) funded with debt indexed to LIBOR. Due to the unintended consequences of government actions in other areas of the capital markets and limited issuances of qualifying financial commercial paper, the historic relationship between CP and LIBOR has been broken. For the fourth quarter of 2008, ED announced that for purposes of calculating the FFELP loan index from October 27, 2008 to the end of the fourth quarter, the Federal Reserve’s Commercial Paper Funding Facility (“CPFF”) rates would be


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used for those days in which no CP was available. This resulted in a CP/LIBOR spread of 21 basis points in the fourth quarter of 2008. The CP/LIBOR spread would have been 62 basis points in the fourth quarter of 2008 if ED had not addressed this issue by using the CPFF rates. ED has decided that no such correction was required for the first and second quarters of 2009. This resulted in a CP/LIBOR spread of 52 basis points and 45 basis points in the first and second quarters of 2009, respectively, compared to the CP/LIBOR spread of 21 basis points in the fourth quarter of 2008 and the historic average spread through the third quarter of 2008 of approximately 10 basis points.
 
“Core Earnings” net interest income would have been $139 million and $105 million higher in the first and second quarters of 2009, respectively, at a historical CP/LIBOR spread of 10 basis points. Because of the low interest rate environment, the Company earned additional Economic Floor Income not included in “Core Earnings” of $141 million in the second quarter of 2009 compared to $126 million in the first quarter of 2009. Although we exclude these amounts from our “Core Earnings” presentation, the levels earned in both the first and second quarters of 2009 can be viewed as direct and significant offsets to the CP/LIBOR basis exposure in low interest rate environments where we earn Floor Income.
 
Additionally, the index paid on borrowings under ED’s Participation Program is based on the prior quarter’s CP rates, whereas the index earned on the underlying loans is based on the current quarter’s CP rates. The sharp decline in CP rates during the first and second quarters of 2009 resulted in $40 million and $13 million of higher interest expense in the first and second quarters of 2009, respectively.
 
The following table summarizes the “Core Earnings” results of operations for our Lending business segment.
 
                         
  Three Months
  Increase
  Six Months
  Increase
 
  Ended
  (Decrease)  Ended
  (Decrease) 
  June 30,  2009 vs.
  June 30,  2009 vs.
 
  2009  2008  2008  2009  2008  2008 
 
“Core Earnings” interest income:
                        
FFELP Stafford and Other Student Loans
 $310  $524   (41)% $672  $1,018   (34)%
FFELP Consolidation Loans
  394   908   (57)  833   1,896   (56)
Private Education Loans
  559   665   (16)  1,122   1,415   (21)
Other loans
  18   21   (14)  35   45   (22)
Cash and investments
  4   81   (95)  6   222   (97)
                         
Total “Core Earnings” interest income
  1,285   2,199   (42)  2,668   4,596   (42)
Total “Core Earnings” interest expense
  824   1,605   (49)  1,773   3,429   (48)
                         
Net “Core Earnings” interest income
  461   594   (22)  895   1,167   (23)
Less: provisions for loan losses
  402   192   109   751   374   101 
                         
Net “Core Earnings” interest income after provisions for loan losses
  59   402   (85)  144   793   (82)
Other income
  360   62   481   461   106   335 
Restructuring expenses
  4   31   (87)  5   46   (89)
Operating expenses
  141   155   (9)  272   318   (14)
                         
Total expenses
  145   186   (22)  277   364   (24)
                         
Income before income taxes and minority interest in net earnings of subsidiaries
  274   278   (1)  328   535   (39)
Income tax expense
  102   103   (1)  122   197   (38)
                         
“Core Earnings” net income
 $172  $175   (2)% $206  $338   (39)%
                         
Economic Floor Income (net of tax) not included in “Core Earnings”
 $89  $22   305% $168  $49   243%
                         


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Net Interest Income
 
Changes to net interest income are primarily due to fluctuations in the student loan and other asset spread discussed below, the growth of our student loan portfolio, and changes in the level of cash and investments we hold on our balance sheet for liquidity purposes.
 
Average Balance Sheets — On-Balance Sheet
 
The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities for the three and six months ended June 30, 2009 and 2008. This table reflects the net interest margin for the entire Company for our on-balance sheet assets. It is included in the Lending business segment discussion because this segment includes substantially all interest-earning assets and interest-bearing liabilities.
 
                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2009  2008  2009  2008 
  Balance  Rate  Balance  Rate  Balance  Rate  Balance  Rate 
 
Average Assets
                                
FFELP Stafford and Other Student Loans
 $60,120   2.16% $41,666   4.80% $57,913   2.32% $40,008   4.84%
FFELP Consolidation Loans
  70,456   2.62   73,509   4.21   70,881   2.70   73,654   4.39 
Private Education Loans
  23,012   6.85   18,573   8.86   22,842   6.89   17,882   9.59 
Other loans
  630   11.76   1,018   8.43   669   10.51   1,106   8.13 
Cash and investments
  10,383   .27   9,076   3.13   8,904   .29   10,670   3.66 
                                 
Total interest-earning assets
  164,601   2.93%  143,842   4.94%  161,209   3.06%  143,320   5.14%
                                 
Non-interest-earning assets
  8,898       10,391       9,181       9,969     
                                 
Total assets
 $173,499      $154,233      $170,390      $153,289     
                                 
Average Liabilities and Equity
Short-term borrowings
 $44,550   1.99% $35,494   4.85% $44,198   2.48% $35,735   4.81%
Long-term borrowings
  120,073   2.00   109,351   3.45   117,167   2.24   108,508   3.94 
                                 
Total interest-bearing liabilities
  164,623   2.00%  144,845   3.79%  161,365   2.31%  144,243   4.16%
                                 
Non-interest-bearing liabilities
  3,799       3,888       3,894       3,671     
Equity
  5,077       5,500       5,131       5,375     
                                 
Total liabilities and equity
 $173,499      $154,233      $170,390      $153,289     
                                 
Net interest margin
      .94%      1.13%      .75%      .95%
                                 


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Rate/Volume Analysis — On-Balance Sheet
 
The following rate/volume analysis illustrates the relative contribution of changes in interest rates and asset volumes.
 
             
     Increase
 
     (Decrease)
 
     Attributable to
 
  Increase
  Change in 
  (Decrease)  Rate  Volume 
 
Three Months Ended June 30, 2009 vs. 2008
            
Interest income
 $(565) $(859) $294 
Interest expense
  (547)  (752)  205 
             
Net interest income
 $(18) $(107) $89 
             
Six Months Ended June 30, 2009 vs. 2008
            
Interest income
 $(1,215) $(1,760) $545 
Interest expense
  (1,135)  (1,498)  363 
             
Net interest income
 $(80) $(262) $182 
             
 
Net Interest Margin — On-Balance Sheet
 
The following table reflects the net interest margin of our on-balance sheet interest-earning assets, before provisions for loan losses. (Certain percentages do not add or subtract down as they are based on average balances.)
 
                 
  Three Months
  Six Months
 
  Ended
  Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Student loan spread(1)(2)
  1.32%  1.52%  1.14%  1.25%
Other asset spread(1)(3)
  (2.08)  .28   (2.12)  .14 
                 
Net interest margin, before the impact of 2008 Asset-Backed Financing Facilities fees(1)
  1.10   1.44   .95   1.16 
Less: 2008 Asset-Backed Financing Facilities fees
  (.16)  (.31)  (.20)  (.21)
                 
Net interest margin
  .94%  1.13%  .75%  .95%
                 
                 
                 
                
(1)  Before commitment and liquidity fees associated with the 2008 Asset-Backed Financing Facilities, which are referred to as the “2008 Asset-Backed Financing Facilities fees” (see “LIQUIDITY AND CAPITAL RESOURCES — Additional Funding for General Corporate Purposes —Asset-Backed Financing Facilities” for a further discussion).
(2)  Composition of student loan spread:
Student loan yield, before Floor Income
  3.21%  5.54%  3.38%  5.83%
Gross Floor Income
  .56   .40   .53   .38 
Consolidation Loan Rebate Fees
  (.47)  (.57)  (.49)  (.58)
Repayment Borrower Benefits
  (.09)  (.12)  (.09)  (.12)
Premium and discount amortization
  (.14)  (.21)  (.14)  (.28)
                 
Student loan net yield
  3.07   5.04   3.19   5.23 
Student loan cost of funds
  (1.75)  (3.52)  (2.05)  (3.98)
                 
Student loan spread, before 2008 Asset-Backed Financing Facilities fees
  1.32%  1.52%  1.14%  1.25%
                 
(3)  Comprised of investments, cash and other loans.
 
     Student Loan Spread — On-Balance Sheet
 
The student loan spread is impacted by changes in its various components, as reflected in footnote (2) to the“Net Interest Margin — On-Balance Sheet”table above. Gross Floor Income is impacted by interest rates and the percentage of the FFELP portfolio eligible to earn Floor Income. Floor Income Contracts used to


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economically hedge Gross Floor Income do not qualify as SFAS No. 133 hedges and, as a result, the net settlements on such contracts are not recorded in net interest margin but rather in the “gains (losses) on derivative and hedging activities, net” line in the consolidated statements of income. The spread impact from Consolidation Loan Rebate Fees fluctuates as a function of the percentage of FFELP Consolidation Loans on our balance sheet. Repayment Borrower Benefits are generally impacted by the terms of the Repayment Borrower Benefits being offered as well as the payment behavior of the underlying loans. Premium and discount amortization is generally impacted by the prices previously paid for loans and amounts capitalized related to such purchases or originations. Premium and discount amortization is also impacted by prepayment behavior of the underlying loans.
 
The student loan spread, before 2008 Asset-Backed Financing Facilities fees, for the second quarter of 2009 decreased 20 basis points from the year-ago quarter. This decrease was primarily due to an increase in the Company’s cost of funds as discussed below. This decrease was partially offset by an increase in Floor Income resulting from a decrease in interest rates during the quarter.
 
The cost of funds for on-balance sheet student loans excludes the impact of basis swaps that are intended to economically hedge the re-pricing and basis mismatch between our funding and student loan asset indices, but do not receive hedge accounting treatment under SFAS No. 133. We use basis swaps to manage the basis risk associated with our interest rate sensitive assets and liabilities. These swaps generally do not qualify as accounting hedges, and as a result, are required to be accounted for in the “gains (losses) on derivatives and hedging activities, net” line in the consolidated statements of income, as opposed to being accounted for in interest expense. As a result, these basis swaps are not considered in the calculation of the cost of funds in the table above and therefore, in times of volatile movements of interest rates like those experienced in 2008 and 2009, the student loan spread can be volatile. See “ ‘Core Earnings’ Net Interest Margin” in the following table, which reflects these basis swaps in interest expense and demonstrates the economic hedge effectiveness of these basis swaps.
 
Other Asset Spread — On-Balance Sheet
 
The other asset spread is generated from cash and investments (both restricted and unrestricted) primarily in our liquidity portfolio and other loans. The Company invests its liquidity portfolio primarily in short-term securities with maturities of one week or less in order to manage counterparty credit risk and maintain available cash balances. The other asset spread for the second quarter of 2009 decreased 236 basis points from the year-ago quarter. Changes in the other asset spread primarily relate to differences in the index basis and reset frequency between the asset indices and funding indices. A portion of this risk is hedged with derivatives that do not receive hedge accounting treatment under SFAS No. 133 and will impact the other asset spread in a similar fashion as the impact to the on-balance sheet student loan spread as discussed above. In volatile interest rate environments, these spreads may move significantly from period to period and differ from the“‘Core Earnings’ Basis Other Asset Spread” discussed below.
 
Net Interest Margin — On-Balance Sheet
 
The net interest margin, before 2008 Asset-Backed Financing Facilities fees, for the second quarter of 2009 decreased 34 basis points from the year-ago quarter. This change primarily relates to the previously discussed changes in the on-balance sheet student loan and other asset spreads. The student loan portfolio as a percentage of the overall interest-earning asset portfolio did not change substantially between the periods.
 
See “LIQUIDITY AND CAPITAL RESOURCES— Additional Funding Sources for General Corporate Purposes — Asset-Backed Financing Facilities” for a discussion of the 2008 Asset-Backed Financing Facilities fees and related extensions.
 
“Core Earnings” Net Interest Margin
 
The following table analyzes the earnings from our portfolio of Managed interest-earning assets on a “Core Earnings” basis (see “BUSINESS SEGMENTS — Pre-tax Differences between ‘Core Earnings’ and GAAP”). The “ ‘Core Earnings’ Net Interest Margin” presentation and certain components used in the


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calculation differ from the “Net Interest Margin — On-Balance Sheet” presentation. The “Core Earnings” presentation, when compared to our on-balance sheet presentation, is different in that it:
 
  • Includes the net interest margin related to our off-balance sheet student loan securitization trusts. This includes any related fees or costs such as the Consolidation Loan Rebate Fees, premium/discount amortization and Repayment Borrower Benefits yield adjustments;
 
  • Includes the reclassification of certain derivative net settlement amounts. The net settlements on certain derivatives that do not qualify as SFAS No. 133 hedges are recorded as part of the “gain (loss) on derivative and hedging activities, net” line in the consolidated statements of income and are therefore not recognized in the on-balance sheet student loan spread. Under this presentation, these gains and losses are reclassified to the income statement line item of the economically hedged item. For our “Core Earnings” net interest margin, this would primarily include: (a) reclassifying the net settlement amounts related to our written Floor Income Contracts to student loan interest income and (b) reclassifying the net settlement amounts related to certain of our basis swaps to debt interest expense;
 
  • Excludes unhedged Floor Income and hedged Variable Rate Floor Income earned on the Managed student loan portfolio; and
 
  • Includes the amortization of upfront payments on Fixed Rate Floor Income Contracts in student loan income that we believe are economically hedging the Floor Income.
 
The following table reflects the “Core Earnings” net interest margin, before provisions for loan losses. (Certain percentages do not add or subtract down as they are based on average balances.)
 
                 
  Three Months
  Six Months
 
  Ended
  Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
“Core Earnings” basis student loan spread(1):
                
FFELP loan spread
  .39%  .87%  .38%  .73%
Private Education Loan spread(2)
  4.50   5.08   4.58   5.23 
                 
Total “Core Earnings” basis student loan spread(3)
  1.17   1.65   1.19   1.56 
“Core Earnings” basis other asset spread(1)(4)
  (.91)  (.25)  (1.01)  (.21)
                 
“Core Earnings” net interest margin, before 2008 Asset-Backed Financing Facilities fees(1)
  1.04   1.52   1.06   1.42 
Less: 2008 Asset-Backed Financing Facilities fees
  (.13)  (.24)  (.16)  (.16)
                 
“Core Earnings” net interest margin
  .91%  1.28%  .90%  1.26%
                 
                 
                
(1) Before commitment and liquidity fees associated with the 2008 Asset-Backed Financing Facilities, which are referred to as the “2008 Asset-Backed Financing Facilities fees” (see “LIQUIDITY AND CAPITAL RESOURCES — Additional Funding for General Corporate Purposes —Asset-Backed Financing Facilities” for a further discussion).
                 
(2)  “Core Earnings” basis Private Education Loan Spread, before 2008 Asset-Backed Financing Facilities fees and after provision for loan losses
  .47%  3.02%  .88%  3.15%
                 
(3) Composition of “Core Earnings” basis student loan spread:
                
“Core Earnings” basis student loan yield
  3.36%  5.75%  3.54%  6.06 
Consolidation Loan Rebate Fees
  (.47)  (.54)  (.48)  (.55)
Repayment Borrower Benefits
  (.09)  (.12)  (.09)  (.12)
Premium and discount amortization
  (.12)  (.18)  (.13)  (.27)
                 
“Core Earnings” basis student loan net yield
  2.68   4.91   2.84   5.12 
“Core Earnings” basis student loan cost of funds
  (1.51)  (3.26)  (1.65)  (3.56)
                 
“Core Earnings” basis student loan spread, before 2008 Asset-Backed Financing Facilities fees
  1.17%  1.65%  1.19%  1.56%
                 
(4) Comprised of investments, cash and other loans
                
(5) The average balances of our Managed interest-earning assets for the respective periods are:
                
FFELP loans
 $152,482  $140,033  $150,960  $138,891 
Private Education Loans
  36,008   31,890   35,913   31,323 
                 
Total student loans
  188,490   171,923   186,873   170,214 
Other interest-earning assets
  12,336   12,427   10,987   14,211 
                 
Total Managed interest-earning assets
 $200,826  $184,350  $197,860  $184,425 
                 


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“Core Earnings” Basis Student Loan Spread
 
The “Core Earnings” basis student loan spread, before the 2008 Asset-Backed Financing Facilities fees, for the second quarter of 2009 decreased 48 basis points from the year-ago quarter. The “Core Earnings” basis student loan spread was negatively impacted by an increase in the Company’s cost of funds primarily resulting from both a 40 basis points widening of the CP/LIBOR spread between the current and year-ago quarter, and an increase in the credit spreads on the Company’s debt issued during the last year due to the current credit environment.
 
The “Core Earnings” basis FFELP loan spread for the second quarter of 2009 declined from the year-ago quarter primarily as a result of the increase in the cost of funds previously discussed, as well as the mix of the FFELP portfolio shifting towards loans originated subsequent to October 1, 2007 which have lower yields as a result of the CCRAA. The “Core Earnings” basis Private Education Loan spread before provision for loan losses for the second quarter of 2009 was negatively impacted by the increase in the cost of funds discussed previously. The changes in the “Core Earnings” basis Private Education Loan spread after provision for loan losses for all periods presented was primarily due to the timing and amount of provision associated with our allowance for Private Education Loan Losses as discussed below (see “Private Education Loan Losses — Allowance for Private Education Loan Losses”).
 
“Core Earnings” Basis Other Asset Spread
 
The “Core Earnings” basis other asset spread is generated from cash and investments (both restricted and unrestricted) primarily in our liquidity portfolio, and other loans. The Company invests its liquidity portfolio primarily in short-term securities with maturities of one week or less in order to manage counterparty credit risk and maintain available cash balances. The “Core Earnings” basis other asset spread for the second quarter of 2009 decreased 66 basis points from the year-ago quarter. Changes in this spread primarily relate to differences between the index basis and reset frequency of the asset indices and funding indices. In volatile interest rate environments, the asset and debt reset frequencies will lag each other. In addition, the current steepness of the yield curve is negatively impacting this spread. Changes in this spread are also a result of the increase in our cost of funds as previously discussed.
 
“Core Earnings” Net Interest Margin
 
The “Core Earnings” net interest margin, before the 2008 Asset-Backed Financing Facilities fees, for the second quarter of 2009 decreased 48 basis points from the year-ago quarter. This change primarily relates to the previously discussed changes in the “Core Earnings” basis student loan and other asset spreads. The Managed student loan portfolio as a percentage of the overall interest-earning asset portfolio did not change substantially between the periods.
 
See “LIQUIDITY AND CAPITAL RESOURCES — Additional Funding Sources for General Corporate Purposes —Asset-Backed Financing Facilities” for a discussion of the 2008 Asset-Backed Financing Facilities fees and related extensions.


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Summary of our Managed Student Loan Portfolio
 
The following tables summarize the components of our Managed student loan portfolio and show the changing composition of our portfolio.
 
Ending Managed Student Loan Balances, net
 
                     
  June 30, 2009 
  FFELP
  FFELP
     Private
    
  Stafford and
  Consolidation
  Total
  Education
    
  Other(1)  Loans  FFELP  Loans  Total 
 
On-balance sheet:
                    
In-school
 $21,588  $—  $21,588  $6,962  $28,550 
Grace and repayment
  39,568   68,928   108,496   16,484   124,980 
                     
Total on-balance sheet, gross
  61,156   68,928   130,084   23,446   153,530 
On-balance sheet unamortized premium (discount)
  1,151   1,224   2,375   (536)  1,839 
On-balance sheet receivable for partially charged-off loans
  —   —   —   338   338 
On-balance sheet allowance for losses
  (103)  (50)  (153)  (1,397)  (1,550)
                     
Total on-balance sheet, net
  62,204   70,102   132,306   21,851   154,157 
                     
Off-balance sheet:
                    
In-school
  313   —   313   981   1,294 
Grace and repayment
  5,733   14,736   20,469   12,391   32,860 
                     
Total off-balance sheet, gross
  6,046   14,736   20,782   13,372   34,154 
Off-balance sheet unamortized premium (discount)
  141   444   585   (355)  230 
Off-balance sheet receivable for partially charged-off loans
  —   —   —   148   148 
Off-balance sheet allowance for losses
  (17)  (10)  (27)  (544)  (571)
                     
Total off-balance sheet, net
  6,170   15,170   21,340   12,621   33,961 
                     
Total Managed
 $68,374  $85,272  $153,646  $34,472  $188,118 
                     
% of on-balance sheet FFELP
  47%  53%  100%        
% of Managed FFELP
  45%  55%  100%        
% of total
  36%  46%  82%  18%  100%
 
 
(1)FFELP category is primarily Stafford loans, but also includes federally insured PLUS and HEAL loans.
 


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  December 31, 2008 
  FFELP
  FFELP
     Private
    
  Stafford and
  Consolidation
  Total
  Education
    
  Other(1)  Loans  FFELP  Loans  Total 
 
On-balance sheet:
                    
In-school
 $18,961  $—  $18,961  $7,972  $26,933 
Grace and repayment
  32,455   70,511   102,966   14,231   117,197 
                     
Total on-balance sheet, gross
  51,416   70,511   121,927   22,203   144,130 
On-balance sheet unamortized premium (discount)
  1,151   1,280   2,431   (535)  1,896 
On-balance sheet receivable for partially charged-off loans
  —   —   —   222   222 
On-balance sheet allowance for losses
  (91)  (47)  (138)  (1,308)  (1,446)
                     
Total on-balance sheet, net
  52,476   71,744   124,220   20,582   144,802 
                     
Off-balance sheet:
                    
In-school
  473   —   473   1,629   2,102 
Grace and repayment
  6,583   15,078   21,661   12,062   33,723 
                     
Total off-balance sheet, gross
  7,056   15,078   22,134   13,691   35,825 
Off-balance sheet unamortized premium (discount)
  105   462   567   (361)  206 
Off-balance sheet receivable for partially charged-off loans
  —   —   —   92   92 
Off-balance sheet allowance for losses
  (18)  (9)  (27)  (505)  (532)
                     
Total off-balance sheet, net
  7,143   15,531   22,674   12,917   35,591 
                     
Total Managed
 $59,619  $87,275  $146,894  $33,499  $180,393 
                     
% of on-balance sheet FFELP
  42%  58%  100%        
% of Managed FFELP
  41%  59%  100%        
% of total
  33%  48%  81%  19%  100%
 
 
(1)FFELP category is primarily Stafford loans, but also includes federally insured PLUS and HEAL loans.
 
Student Loan Average Balances (net of unamortized premium/discount)
 
The following tables summarize the components of our Managed student loan portfolio and show the changing composition of our portfolio.
 
                     
  Three Months Ended June 30, 2009 
  FFELP
  FFELP
     Private
    
  Stafford and
  Consolidation
  Total
  Education
    
  Other(1)  Loans  FFELP  Loans  Total 
 
On-balance sheet
 $60,120  $70,456  $130,576  $23,012  $153,588 
Off-balance sheet
  6,661   15,245   21,906   12,996   34,902 
                     
Total Managed
 $66,781  $85,701  $152,482  $36,008  $188,490 
                     
% of on-balance sheet FFELP
  46%  54%  100%        
% of Managed FFELP
  44%  56%  100%        
% of total
  35%  46%  81%  19%  100%
 
 
(1) FFELP category is primarily Stafford loans, but also includes federally insured PLUS and HEAL loans.
 

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  Three Months Ended June 30, 2008 
  FFELP
  FFELP
     Private
    
  Stafford and
  Consolidation
  Total
  Education
    
  Other(1)  Loans  FFELP  Loans  Total 
 
On-balance sheet
 $41,666  $73,509  $115,175  $18,573  $133,748 
Off-balance sheet
  8,736   16,122   24,858   13,317   38,175 
                     
Total Managed
 $50,402  $89,631  $140,033  $31,890  $171,923 
                     
% of on-balance sheet FFELP
  36%  64%  100%        
% of Managed FFELP
  36%  64%  100%        
% of total
  29%  52%  81%  19%  100%
 
                     
  Six Months Ended June 30, 2009 
  FFELP
  FFELP
     Private
    
  Stafford and
  Consolidation
  Total
  Education
    
  Other(1)  Loans  FFELP  Loans  Total 
 
On-balance sheet
 $57,913  $70,881  $128,794  $22,842  $151,636 
Off-balance sheet
  6,828   15,338   22,166   13,071   35,237 
                     
Total Managed
 $64,741  $86,219  $150,960  $35,913  $186,873 
                     
% of on-balance sheet FFELP
  45%  55%  100%        
% of Managed FFELP
  43%  57%  100%        
% of total
  35%  46%  81%  19%  100%
 
                     
  Six Months Ended June 30, 2008 
  FFELP
  FFELP
     Private
    
  Stafford and
  Consolidation
  Total
  Education
    
  Other(1)  Loans  FFELP  Loans  Total 
 
On-balance sheet
 $40,008  $73,654  $113,662  $17,882  $131,544 
Off-balance sheet
  8,998   16,231   25,229   13,441   38,670 
                     
Total Managed
 $49,006  $89,885  $138,891  $31,323  $170,214 
                     
% of on-balance sheet FFELP
  35%  65%  100%        
% of Managed FFELP
  35%  65%  100%        
% of total
  29%  53%  82%  18%  100%
 
 
(1) FFELP category is primarily Stafford loans, but also includes federally insured PLUS and HEAL loans.

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Floor Income — Managed Basis
 
The following table analyzes the ability of the FFELP loans in our Managed portfolio to earn Floor Income after June 30, 2009 and 2008, based on interest rates as of those dates.
 
                         
  June 30, 2009  June 30, 2008 
  Fixed
  Variable
     Fixed
  Variable
    
  Borrower
  Borrower
     Borrower
  Borrower
    
(Dollars in billions)
 Rate  Rate  Total  Rate  Rate  Total 
 
Student loans eligible to earn Floor Income:
                        
On-balance sheet student loans
 $113.5  $15.7  $129.2  $97.1  $16.0  $113.1 
Off-balance sheet student loans
  14.7   6.0   20.7   15.5   8.3   23.8 
                         
Managed student loans eligible to earn Floor Income
  128.2   21.7   149.9   112.6   24.3   136.9 
Less: post-March 31, 2006 disbursed loans required to rebate Floor Income
  (74.0)  (1.3)  (75.3)  (55.5)  (1.4)  (56.9)
Less: economically hedged Floor Income Contracts
  (30.0)  —   (30.0)  (25.8)  —   (25.8)
                         
Net Managed student loans eligible to earn Floor Income
 $24.2  $20.4  $44.6  $31.3  $22.9  $54.2 
                         
Net Managed student loans earning Floor Income
 $16.7  $1.6  $18.3  $0.5  $0.1  $0.6 
                         
 
We have sold Floor Income Contracts to hedge the potential Floor Income from specifically identified pools of FFELP Consolidation Loans that are eligible to earn Floor Income.
 
The following table presents a projection of the average Managed balance of FFELP Consolidation Loans for which Fixed Rate Floor Income has already been economically hedged through Floor Income Contracts for the period from April 1, 2009 to June 30, 2013. These loans are both on-balance sheet and off-balance sheet, and the related hedges do not qualify under SFAS No. 133 accounting as effective hedges.
 
                     
  July 1, 2009 to
             
(Dollars in billions)
 December 31, 2009  2010  2011  2012  2013 
 
Average balance of FFELP Consolidation Loans whose Floor Income is economically hedged (Managed Basis)
 $21  $19  $17  $16  $5 
                     
 
Private Education Loan Losses
 
On-Balance Sheet versus Managed Basis Presentation
 
All Private Education Loans are initially acquired on-balance sheet. The securitization of Private Education Loans prior to 2009 has been accounted for off-balance sheet under SFAS No. 140. For our Managed Basis presentation in the table below, when loans are securitized, we reduce the on-balance sheet allowance for loan losses for amounts previously provided and then increase the allowance for loan losses for these loans off-balance sheet, with the total of both on-balance sheet and off-balance sheet being the Managed Basis allowance for loan losses.
 
When Private Education Loans in our securitized trusts settling before September 30, 2005, became 180 days delinquent, we previously exercised our contingent call option to repurchase these loans at par value out of the trust and recorded a loss for the difference in the par value paid and the fair market value of the loan at the time of purchase. We account for these loans in accordance with the American Institute of Certified Public Accountants’ (“AICPA”) Statement of Position (“SOP”)03-3,“Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” Revenue is recognized over the anticipated remaining life of the loan based upon the amount and timing of anticipated cash flows. Beginning in October 2008, the Company decided to no longer exercise its contingent call option. On a Managed Basis, the losses recorded under GAAP for loans


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repurchased at day 180 were reversed and the full amount is charged-off at day 212 of delinquency. We do not hold the contingent call option for any trusts settled after September 30, 2005.
 
When measured as a percentage of ending loans in repayment, the off-balance sheet allowance for loan losses percentage is lower than the on-balance sheet percentage because of the different mix and aging of loans on-balance sheet and off-balance sheet.
 
Private Education Loan Delinquencies and Forbearance
 
The tables below present our Private Education Loan delinquency trends as of June 30, 2009 and 2008. Delinquencies have the potential to adversely impact earnings as they are an initial indication of the borrower’s potential to possibly default and as a result command a higher loan loss reserve than loans in current status. Delinquent loans also require increased servicing and collection efforts, resulting in higher operating costs.
 
                 
  On-Balance Sheet Private Education
 
  Loan Delinquencies 
  June 30,
  June 30,
 
  2009  2008 
  Balance  %  Balance  % 
 
Loans in-school/grace/deferment(1)
 $10,355      $9,662     
Loans in forbearance(2)
  945       1,178     
Loans in repayment and percentage of each status:
                
Loans current
  10,294   84.8%  7,720   89.7%
Loans delinquent31-60 days(3)
  504   4.2   326   3.8 
Loans delinquent61-90 days(3)
  335   2.7   210   2.4 
Loans delinquent greater than 90 days(3)
  1,013   8.3   353   4.1 
                 
Total Private Education Loans in repayment
  12,146   100%  8,609   100%
                 
Total Private Education Loans, gross
  23,446       19,449     
Private Education Loan unamortized discount
  (537)      (508)    
                 
Total Private Education Loans
  22,909       18,941     
Private Education Loan receivable for partially charged-off loans
  338       159     
Private Education Loan allowance for losses
  (1,396)      (1,129)    
                 
Private Education Loans, net
 $21,851      $17,971     
                 
Percentage of Private Education Loans in repayment
      51.8%      44.3%
                 
Delinquencies as a percentage of Private Education Loans in repayment
      15.2%      10.3%
                 
Loans in forbearance as a percentage of loans in repayment and forbearance
      7.2%      12.0%
                 
 
 
(1)Loans for borrowers who may be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation.
 
(2)Loans for borrowers who have used their allowable deferment time or do not qualify for deferment, and need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors, consistent with the established loan program servicing policies and procedures.
 
(3)The period of delinquency is based on the number of days scheduled payments are contractually past due.
 


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  Off-Balance Sheet Private Education
 
  Loan Delinquencies 
  June 30,
  June 30,
 
  2009  2008 
  Balance  %  Balance  % 
 
Loans in-school/grace/deferment(1)
 $2,974      $4,159     
Loans in forbearance(2)
  583       1,339     
Loans in repayment and percentage of each status:
                
Loans current
  8,874   90.4%  7,871   95.1%
Loans delinquent31-60 days(3)
  261   2.7   178   2.2 
Loans delinquent61-90 days(3)
  174   1.8   102   1.2 
Loans delinquent greater than 90 days(3)
  505   5.1   124   1.5 
                 
Total Private Education Loans in repayment
  9,814   100%  8,275   100%
                 
Total Private Education Loans, gross
  13,371       13,773     
Private Education Loan unamortized discount
  (355)      (356)    
                 
Total Private Education Loans
  13,016       13,417     
Private Education Loan receivable for partially charged-off loans
  149       58     
Private Education Loan allowance for losses
  (544)      (377)    
                 
Private Education Loans, net
 $12,621      $13,098     
                 
Percentage of Private Education Loans in repayment
      73.4%      60.1%
                 
Delinquencies as a percentage of Private Education Loans in repayment
      9.6%      4.9%
                 
Loans in forbearance as a percentage of loans in repayment and forbearance
      5.6%      13.9%
                 
 
                 
  Managed Basis Private Education
 
  Loan Delinquencies 
  June 30,
  June 30,
 
  2009  2008 
  Balance  %  Balance  % 
 
Loans in-school/grace/deferment(1)
 $13,329      $13,821     
Loans in forbearance(2)
  1,528       2,517     
Loans in repayment and percentage of each status:
                
Loans current
  19,168   87.3%  15,591   92.3%
Loans delinquent31-60 days(3)
  765   3.5   504   3.0 
Loans delinquent61-90 days(3)
  509   2.3   312   1.9 
Loans delinquent greater than 90 days(3)
  1,518   6.9   477   2.8 
                 
Total Private Education Loans in repayment
  21,960   100%  16,884   100%
                 
Total Private Education Loans, gross
  36,817       33,222     
Private Education Loan unamortized discount
  (892)      (864)    
                 
Total Private Education Loans
  35,925       32,358     
Private Education Loan receivable for partially charged-off loans
  487       217     
Private Education Loan allowance for losses
  (1,940)      (1,506)    
                 
Private Education Loans, net
 $34,472      $31,069     
                 
Percentage of Private Education Loans in repayment
      59.7%      50.8%
                 
Delinquencies as a percentage of Private Education Loans in repayment
      12.7%      7.7%
                 
Loans in forbearance as a percentage of loans in repayment and forbearance
      6.5%      13.0%
                 
 
 
(1)Loans for borrowers who may be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation.
 
(2)Loans for borrowers who have used their allowable deferment time or do not qualify for deferment, and need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors, consistent with the established loan program servicing policies and procedures.
 
(3)The period of delinquency is based on the number of days scheduled payments are contractually past due.

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Allowance for Private Education Loan Losses
 
The following table summarizes changes in the allowance for Private Education Loan losses for the three and six months ended June 30, 2009 and 2008.
 
                         
  Activity in Allowance for Private Education Loan Losses 
  On-Balance Sheet
  Off-Balance Sheet
  Managed Basis
 
  Three Months Ended  Three Months Ended  Three Months Ended 
  June 30,
  June 30,
  June 30,
  June 30,
  June 30,
  June 30,
 
  2009  2008  2009  2008  2009  2008 
 
Allowance at beginning of period
 $1,384  $1,074  $539  $373  $1,923  $1,447 
Provision for Private Education
                        
Loan losses
  242   120   120   43   362   163 
Charge-offs
  (239)  (73)  (116)  (40)  (355)  (113)
Reclassification of interest reserve(1)
  9   8   1   1   10   9 
                         
Allowance at end of period
 $1,396  $1,129  $544  $377  $1,940  $1,506 
                         
Charge-offs as a percentage of average loans in repayment (annualized)
  8.2%  3.6%  4.8%  2.1%  6.7%  2.9%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)
  7.6%  3.2%  4.6%  1.8%  6.3%  2.5%
Allowance as a percentage of the ending total loan balance
  5.9%  5.8%  4.0%  2.7%  5.2%  4.5%
Allowance as a percentage of ending loans in repayment
  11.5%  13.1%  5.5%  4.6%  8.8%  8.9%
Average coverage of charge-offs (annualized)
  1.5   3.9   1.2   2.3   1.4   3.3 
Ending total loans(2)
 $23,784  $19,608  $13,520  $13,831  $37,304  $33,439 
Average loans in repayment
 $11,700  $7,992  $9,630  $7,811  $21,330  $15,803 
Ending loans in repayment
 $12,146  $8,609  $9,814  $8,275  $21,960  $16,884 
 
 
(1)Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.
 
(2)Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans.
 


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  Activity in Allowance for Private Education Loan Losses 
  On-Balance Sheet
  Off-Balance Sheet
  Managed Basis
 
  Six Months Ended  Six Months Ended  Six Months Ended 
  June 30,
  June 30,
  June 30,
  June 30,
  June 30,
  June 30,
 
  2009  2008  2009  2008  2009  2008 
 
Allowance at beginning of period
 $1,308  $1,004  $505  $362  $1,813  $1,366 
Provision for Private Education
                        
Loan losses
  445   238   214   85   659   323 
Charge-offs
  (378)  (129)  (179)  (73)  (557)  (202)
Reclassification of interest reserve(1)
  21   16   4   3   25   19 
                         
Allowance at end of period
 $1,396  $1,129  $544  $377  $1,940  $1,506 
                         
Charge-offs as a percentage of average loans in repayment (annualized)
  6.7%  3.5%  3.8%  1.9%  5.4%  2.7%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)
  6.2%  3.0%  3.6%  1.6%  5.0%  2.3%
Allowance as a percentage of the ending total loan balance
  5.9%  5.8%  4.0%  2.7%  5.2%  4.5%
Allowance as a percentage of ending loans in repayment
  11.5%  13.1%  5.5%  4.6%  8.8%  8.9%
Average coverage of charge-offs (annualized)
  1.8   4.3   1.5   2.6   1.7   3.7 
Ending total loans(2)
 $23,784  $19,608  $13,520  $13,831  $37,304  $33,439 
Average loans in repayment
 $11,405  $7,544  $9,522  $7,638  $20,927  $15,182 
Ending loans in repayment
 $12,146  $8,609  $9,814  $8,275  $21,960  $16,884 
 
 
(1)Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.
 
(2)Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans.

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The following table provides the detail for our traditional and non-traditional Managed Private Education Loans at June 30, 2009 and 2008.
 
                         
  June 30, 2009  June 30, 2008 
     Non-
        Non-
    
  Traditional  Traditional  Total  Traditional  Traditional  Total 
 
Ending total loans(1)
 $32,326  $4,978  $37,304  $28,452  $4,987  $33,439 
Ending loans in repayment
  18,980   2,980   21,960   14,433   2,451   16,884 
Private Education Loan allowance for losses
  967   973   1,940   574   932   1,506 
Charge-offs as a percentage of average loans in repayment (annualized)
  3.9%  24.0%  6.7%  1.4%  11.5%  2.9%
Allowance as a percentage of ending total loan balance
  3.0%  19.6%  5.2%  2.0%  18.7%  4.5%
Allowance as a percentage of ending loans in repayment
  5.1%  32.7%  8.8%  4.0%  38.0%  8.9%
Average coverage of charge-offs (annualized)
  1.4   1.4   1.4   3.1   3.5   3.3 
Delinquencies as a percentage of Private Education Loans in repayment
  9.5%  33.5%  12.7%  4.9%  24.0%  7.7%
Delinquencies greater than 90 days as a percentage of Private Education Loans in repayment
  4.8%  20.6%  6.9%  1.6%  9.8%  2.8%
Loans in forbearance as a percentage of loans in repayment and forbearance
  6.1%  8.9%  6.5%  12.0%  18.5%  13.0%
 
 
(1)Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans.
 
Managed provision expense was $163 million in the second quarter of 2008, $297 million in the first quarter of 2009 and $362 million in the second quarter of 2009. The increase in provision expense from the year-ago period relates primarily to an increase in charge-off expectations as a result of the continued weakening of the U.S. economy. Provision expense remained elevated in the second quarter of 2009 compared to the first quarter of 2009 due to the continued uncertainty of the U.S. economy. The Private Education Loan portfolio had experienced a significant increase in delinquencies through the first quarter of 2009; however, delinquencies declined from the first quarter of 2009 to the second quarter of 2009. The Company expects a continued increase in charge-off levels in the near term. This increase in charge-off levels was generally anticipated and was previously reflected in our allowance for loan losses as of March 31, 2009 and December 31, 2008. Managed delinquencies as a percentage of Private Education Loans in repayment decreased from 13.4 percent as of March 31, 2009 to 12.7 percent as of June 30, 2009. Managed Private Education Loans in forbearance as a percentage of loans in repayment and forbearance decreased from 6.7 percent as of March 31, 2009 to 6.5 percent at June 30, 2009. On ayear-over-yearbasis, overall delinquencies as a percentage of loans in repayment increased from 7.7 percent to 12.7 percent, while forbearances decreased from 13.0 percent to 6.5 percent.
 
Borrowers use the proceeds of Private Education Loans to obtain higher education, which increases the likelihood of obtaining employment at higher income levels than would be available without the additional education. As a result, borrowers’ repayment capability is expected to improve between the time the loan is made and the time they enter the post-education work force. Consistent with FFELP loans, we generally allow the loan repayment period on higher education Private Education Loans to begin six months after the borrower graduates (or “grace period”). This provides the borrower time after graduation to obtain a job to service the debt. For borrowers that need more time or experience hardships, we offer periods of forbearance similar to that provided to borrowers in the FFELP.
 
Forbearance involves granting the borrower a temporary cessation of payments (or temporary acceptance of smaller than scheduled payments) for a specified period of time. Using forbearance in this manner


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effectively extends the original term of the loan. Forbearance does not grant any reduction in the total repayment obligation (principal or interest). While a loan is in forbearance status, interest continues to accrue and is capitalized to principal when the loan re-enters repayment status. Our forbearance policies include limits on the number of forbearance months granted consecutively and limits on the total number of forbearance months granted over the life of the loan. In some instances, we require good-faith payments before granting the forbearance. Exceptions to forbearance policies are permitted when such exceptions are judged to increase the likelihood of ultimate collection of the loan. Forbearance as a collection tool is used most effectively when applied based on a borrower’s unique situation, including assumptions based on historical information and judgments. We combine borrower information with a risk-based segmentation model to assist in our decision making as to who will be granted forbearance based on our expectation as to a borrower’s ability and willingness to repay their obligation. This strategy is aimed at mitigating the overall risk of the portfolio as well as encouraging cash resolution of delinquent loans.
 
Forbearance may be granted to borrowers who are exiting their grace period to provide additional time to obtain employment and income to support their obligations, or to current borrowers who are faced with a hardship and request forbearance time to provide temporary payment relief. In these circumstances, a borrower’s loan is placed into a forbearance status in limited monthly increments and is reflected in the forbearance status at month-end during this time. At the end of their granted forbearance period, the borrower will enter repayment status as current and is expected to begin making their scheduled monthly payments on a go-forward basis.
 
Forbearance may also be granted to borrowers who are delinquent in their payments. In these circumstances, the forbearance cures the delinquency and the borrower is returned to a current repayment status. In more limited instances, delinquent borrowers will also be granted additional forbearance time. As we have obtained further experience about the effectiveness of forbearance, we have reduced the amount of time a loan will spend in forbearance, thereby increasing our ongoing contact with the borrower to encourage consistent repayment behavior once the loan is returned to a current repayment status. As a result, the balance of loans in a forbearance status as of month end has decreased over the course of 2008 and 2009, while the monthly average amount of loans granted forbearance in the second quarter of 2009 was consistent with the year-ago quarter at 5 percent of loans in repayment and forbearance. As of June 30, 2009, 2 percent of loans in current status were delinquent as of the end of the prior month, but were granted a forbearance that made them current during June. The majority of these borrowers would have previously received a forbearance which resulted in their loan being reflected in the forbearance status at month end, and eventually entering repayment status as current at the end of the forbearance period. These borrowers are now being placed in repayment status earlier than they previously would have been.


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The table below reflects the historical effectiveness of using forbearance. Our experience has shown that three years after being granted forbearance for the first time, over 70 percent of the loans are current, paid in full, or receiving an in-school grace or deferment, and 13 percent have defaulted. The default experience associated with loans which utilize forbearance is considered in our allowance for loan losses.
 
             
Tracking by First Time in Forbearance Compared to All Loans Entering Repayment 
  Status distribution
     Status distribution
 
  36 months after
  Status distribution
  36 months after
 
  being granted
  36 months after
  entering repayment for
 
  forbearance for the
  entering repayment
  loans never entering
 
  first time  (all loans)  forbearance 
 
In-school/grace/deferment
  8.1%  8.0%  2.6%
Current
  53.8   59.0   65.2 
Delinquent31-60 days
  3.2   2.0   .4 
Delinquent61-90 days
  1.8   1.0   .2 
Delinquent greater than 90 days
  3.6   2.2   .3 
Forbearance
  6.6   4.6   — 
Defaulted
  13.0   6.8   4.9 
Paid
  9.9   16.4   26.4 
             
Total
  100%  100%  100%
             
 
The tables below show the composition and status of the Managed Private Education Loan portfolio aged by number of months in active repayment status (months for which a scheduled monthly payment was due). As indicated in the tables, the percentage of loans in forbearance decreases the longer the loans have been in active repayment status. At June 30, 2009, loans in forbearance status as a percentage of loans in repayment and forbearance are 8.5 percent for loans that have been in active repayment status for less than 25 months. The percentage drops to 2.0 percent for loans that have been in active repayment status for more than 48 months. Approximately 88 percent of our Managed Private Education Loans in forbearance status have been in active repayment status less than 25 months.
 
                     
  Monthly Scheduled Payments Due  Not Yet in
    
June 30, 2009
 0 to 24  25 to 48  More than 48  Repayment  Total 
 
Loans in-school/grace/deferment
 $—  $—  $—  $13,329  $13,329 
Loans in forbearance
  1,349   125   54   —   1,528 
Loans in repayment — current
  12,238   4,403   2,527   —   19,168 
Loans in repayment — delinquent31-60 days
  612   103   50   —   765 
Loans in repayment — delinquent61-90 days
  420   60   29   —   509 
Loans in repayment — delinquent greater than 90 days
  1,304   147   67   —   1,518 
                     
Total
 $15,923  $4,838  $2,727  $13,329   36,817 
                     
Unamortized discount
                  (892)
Receivable for partially charged-off loans
                  487 
Allowance for loan losses
                  (1,940)
                     
Total Managed Private Education Loans, net
                 $34,472 
                     
Loans in forbearance as a percentage of loans in repayment and forbearance
  8.5%  2.6%  2.0%  —%  6.5%
                     
 


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  Monthly Scheduled Payments Due  Not Yet in
    
June 30, 2008
 0 to 24  25 to 48  More than 48  Repayment  Total 
 
Loans in-school/grace/deferment
 $—  $—  $—  $13,821  $13,821 
Loans in forbearance
  2,342   125   50   —   2,517 
Loans in repayment — current
  10,632   3,124   1,835   —   15,591 
Loans in repayment — delinquent31-60 days
  415   58   31   —   504 
Loans in repayment — delinquent61-90 days
  264   31   17   —   312 
Loans in repayment — delinquent greater than 90 days
  394   51   32   —   477 
                     
Total
 $14,047  $3,389  $1,965  $13,821   33,222 
                     
Unamortized discount
                  (864)
Receivable for partially charged-off loans
                  217 
Allowance for loan losses
                  (1,506)
                     
Total Managed Private Education Loans, net
                 $31,069 
                     
Loans in forbearance as a percentage of loans in repayment and forbearance
  16.7%  3.7%  2.5%  —%  13.0%
                     
 
The table below stratifies the portfolio of Managed Private Education Loans in forbearance status as of the dates indicated by the cumulative number of months the borrower has used forbearance. As detailed in the table below, 6 percent of loans currently in forbearance have cumulative forbearance of more than 24 months.
 
                 
  June 30, 2009  June 30, 2008 
  Forbearance
  % of
  Forbearance
  % of
 
Cumulative number of months borrower has used forbearance
 Balance  Total  Balance  Total 
 
Up to 12 months
 $1,031   68% $1,643   65%
13 to 24 months
  403   26   736   29 
More than 24 months
  94   6   138   6 
                 
Total
 $1,528   100% $2,517   100%
                 

92

 

FFELP Loan Losses
 
FFELP Delinquencies and Forbearance
 
The tables below present our FFELP loan delinquency trends as of June 30, 2009 and 2008. Delinquencies have the potential to adversely impact earnings as they are an initial indication of the borrower’s potential to possibly default and as a result command a higher loan loss reserve than loans in current status. Delinquent loans also require increased servicing and collection efforts, resulting in higher operating costs.
 
                 
  On-Balance Sheet FFELP
 
  Loan Delinquencies 
  June 30, 2009  June 30, 2008 
  Balance  %  Balance  % 
 
Loans in-school/grace/deferment(1)
 $46,644      $35,136     
Loans in forbearance(2)
  13,428       12,245     
Loans in repayment and percentage of each status:
                
Loans current
  58,746   83.9%  57,046   85.5%
Loans delinquent31-60 days(3)
  3,996   5.7   3,573   5.4 
Loans delinquent61-90 days(3)
  1,959   2.8   1,662   2.5 
Loans delinquent greater than 90 days(3)
  5,311   7.6   4,406   6.6 
                 
Total FFELP loans in repayment
  70,012   100%  66,687   100%
                 
Total FFELP loans, gross
  130,084       114,068     
FFELP loan unamortized premium
  2,375       2,347     
                 
Total FFELP loans
  132,459       116,415     
FFELP loan allowance for losses
  (153)      (97)    
                 
FFELP loans, net
 $132,306      $116,318     
                 
Percentage of FFELP loans in repayment
      53.8%      58.5%
                 
Delinquencies as a percentage of FFELP loans in repayment
      16.1%      14.5%
                 
FFELP loans in forbearance as a percentage of loans in repayment and forbearance
      16.1%      15.5%
                 
 
 
(1)Loans for borrowers who may be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as, loans for borrowers who have requested extension of grace period during employment transition or who have temporarily ceased making full payments due to hardship or other factors.
 
(2)Loans for borrowers who have used their allowable deferment time or do not qualify for deferment, and need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors, consistent with the established loan program servicing policies and procedures.
 
(3)The period of delinquency is based on the number of days scheduled payments are contractually past due.
 


93

 

                 
  Off-Balance Sheet FFELP
 
  Loan Delinquencies 
  June 30, 2009  June 30, 2008 
  Balance  %  Balance  % 
 
Loans in-school/grace/deferment(1)
 $3,799      $4,520     
Loans in forbearance(2)
  2,834       3,084     
Loans in repayment and percentage of each status:
                
Loans current
  11,840   83.7%  13,413   82.0%
Loans delinquent31-60 days(3)
  778   5.5   958   5.8 
Loans delinquent61-90 days(3)
  396   2.8   473   2.9 
Loans delinquent greater than 90 days(3)
  1,135   8.0   1,521   9.3 
                 
Total FFELP loans in repayment
  14,149   100%  16,365   100%
                 
Total FFELP loans, gross
  20,782       23,969     
FFELP loan unamortized premium
  586       574     
                 
Total FFELP loans
  21,368       24,543     
FFELP loan allowance for losses
  (28)      (26)    
                 
FFELP loans, net
 $21,340      $24,517     
                 
Percentage of FFELP loans in repayment
      68.1%      68.3%
                 
Delinquencies as a percentage of FFELP loans in repayment
      16.3%      18.0%
                 
FFELP loans in forbearance as a percentage of loans in repayment and forbearance
      16.7%      15.9%
                 
 
                 
  Managed Basis FFELP
 
  Loan Delinquencies 
  June 30, 2009  June 30, 2008 
  Balance  %  Balance  % 
 
Loans in-school/grace/deferment(1)
 $50,443      $39,656     
Loans in forbearance(2)
  16,262       15,329     
Loans in repayment and percentage of each status:
                
Loans current
  70,586   83.9%  70,459   84.8%
Loans delinquent31-60 days(3)
  4,774   5.7   4,531   5.5 
Loans delinquent61-90 days(3)
  2,355   2.8   2,135   2.6 
Loans delinquent greater than 90 days(3)
  6,446   7.6   5,927   7.1 
                 
Total FFELP loans in repayment
  84,161   100%  83,052   100%
                 
Total FFELP loans, gross
  150,866       138,037     
FFELP loan unamortized premium
  2,961       2,921     
                 
Total FFELP loans
  153,827       140,958     
FFELP loan allowance for losses
  (181)      (123)    
                 
FFELP loans, net
 $153,646      $140,835     
                 
Percentage of FFELP loans in repayment
      55.8%      60.2%
                 
Delinquencies as a percentage of FFELP loans in repayment
      16.1%      15.2%
                 
FFELP loans in forbearance as a percentage of loans in repayment and forbearance
      16.2%      15.6%
                 
 
 
(1)Loans for borrowers who may be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as, loans for borrowers who have requested extension of grace period during employment transition or who have temporarily ceased making full payments due to hardship or other factors.
 
(2)Loans for borrowers who have used their allowable deferment time or do not qualify for deferment, and need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors, consistent with the established loan program servicing policies and procedures.
 
(3)The period of delinquency is based on the number of days scheduled payments are contractually past due.

94

 

Allowance for FFELP Loan Losses
 
The provision for FFELP loan losses represents the periodic expense of maintaining an allowance sufficient to absorb incurred Risk Sharing losses in the portfolio of FFELP loans.
 
The following table summarizes changes in the allowance for FFELP loan losses for the three and six months ended June 30, 2009 and 2008.
 
                         
  Activity in Allowance for FFELP Loan Losses 
  On-Balance Sheet
  Off-Balance Sheet
  Managed Basis
 
  Three Months Ended  Three Months Ended  Three Months Ended 
  June 30,
  June 30,
  June 30,
  June 30,
  June 30,
  June 30,
 
  2009  2008  2009  2008  2009  2008 
 
Allowance at beginning of period
 $153  $94  $28  $27  $181  $121 
Provision for FFELP loan losses
  25   19   4   6   29   25 
Charge-offs
  (25)  (16)  (4)  (7)  (29)  (23)
Student loan sales and securitization activity
  —   —   —   —   —   — 
                         
Allowance at end of period
 $153  $97  $28  $26  $181  $123 
                         
Charge-offs as a percentage of average loans in repayment (annualized)
  .1%  .1%  .1%  .2%  .1%  .1%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)
  .1%  .1%  .1%  .1%  .1%  .1%
Allowance as a percentage of the ending total loan balance
  .1%  .1%  .1%  .1%  .1%  .1%
Allowance as a percentage of ending loans in repayment
  .2%  .1%  .2%  .2%  .2%  .1%
Average coverage of charge-offs (annualized)
  1.5   1.5   1.7   .9   1.6   1.3 
Ending total loans, gross
 $130,084  $114,068  $20,782  $23,969  $150,866  $138,037 
Average loans in repayment
 $68,658  $65,967  $14,441  $16,574  $83,099  $82,541 
Ending loans in repayment
 $70,012  $66,687  $14,149  $16,365  $84,161  $83,052 
 


95

 

                         
  Activity in Allowance for FFELP Loan Losses 
  On-Balance Sheet
  Off-Balance Sheet
  Managed Basis
 
  Six Months Ended  Six Months Ended  Six Months Ended 
  June 30,
  June 30,
  June 30,
  June 30,
  June 30,
  June 30,
 
  2009  2008  2009  2008  2009  2008 
 
Allowance at beginning of period
 $138  $89  $27  $29  $165  $118 
Provision for FFELP loan losses
  60   35   9   9   69   44 
Charge-offs
  (44)  (27)  (8)  (12)  (52)  (39)
Student loan sales and securitization activity
  (1)  —   —   —   (1)  — 
                         
Allowance at end of period
 $153  $97  $28  $26  $181  $123 
                         
Charge-offs as a percentage of average loans in repayment (annualized)
  .1%  .1%  .1%  .1%  .1%  .1%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)
  .1%  .1%  .1%  .1%  .1%  .1%
Allowance as a percentage of the ending total loan balance
  .1%  .1%  .1%  .1%  .1%  .1%
Allowance as a percentage of ending loans in repayment
  .2%  .1%  .2%  .2%  .2%  .1%
Average coverage of charge-offs (annualized)
  1.7   1.8   1.6   1.0   1.7   1.6 
Ending total loans, gross
 $130,084  $114,068  $20,782  $23,969  $150,866  $138,037 
Average loans in repayment
 $68,950  $65,102  $14,670  $16,647  $83,620  $81,749 
Ending loans in repayment
 $70,012  $66,687  $14,149  $16,365  $84,161  $83,052 
 
Total Provisions for Loan Losses
 
The following tables summarize the total provisions for loan losses on both an on-balance sheet basis and a Managed Basis for the three and six months ended June 30, 2009 and 2008.
 
Total on-balance sheet loan provisions
 
                 
  Three Months
  Six Months
 
  Ended
  Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Private Education Loans
 $242  $120  $445  $238 
FFELP Loans
  25   19   60   35 
Mortgage and consumer loans
  11   4   23   7 
                 
Total on-balance sheet provisions for loan losses
 $278  $143  $528  $280 
                 

96

 

Total Managed Basis loan provisions
 
                 
  Three Months
  Six Months
 
  Ended
  Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Private Education Loans
 $362  $163  $659  $323 
FFELP Loans
  29   25   69   44 
Mortgage and consumer loans
  11   4   23   7 
                 
Total Managed Basis provisions for loan losses
 $402  $192  $751  $374 
                 
 
Provision expense for Private Education Loans was previously discussed above (see “Private Education Loan Losses— Allowance for Private Education Loan Losses”).
 
Provision expense for FFELP loans has increased for the three and six months ended June 30, 2009 versus the three and six months ended June 30, 2008 as a result of an expected increase in FFELP loan charge-offs arising from the continued weakening of the U.S. economy.
 
Total Loan Charge-offs
 
The following tables summarize the total loan charge-offs on both an on-balance sheet basis and a Managed Basis for the three and six months ended June 30, 2009 and 2008.
 
Total on-balance sheet loan charge-offs
 
                 
  Three Months
  Six Months
 
  Ended
  Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Private Education Loans
 $239  $73  $378  $129 
FFELP Loans
  25   16   44   27 
Mortgage and consumer loans
  8   2   13   7 
                 
Total on-balance sheet loan net charge-offs
 $272  $91  $435  $163 
                 
 
Total Managed loan charge-offs
 
                 
  Three Months
  Six Months
 
  Ended
  Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Private Education Loans
 $355  $113  $557  $202 
FFELP Loans
  29   23   52   39 
Mortgage and consumer loans
  8   2   13   7 
                 
Total Managed loan charge-offs
 $392  $138  $622  $248 
                 
 
The increase in charge-offs on FFELP loans for the periods presented is the result of the impact of the weakening U.S. economy and to higher loan balances. See “Private Education Loan Losses — Allowance for Private Education Loan Losses,” above, for a discussion of charge-offs related to our Private Education Loans.


97

 

Receivable for Partially Charged-Off Loans
 
The Company charges off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged off loans.” If actual periodic recoveries are less than expected, the difference is charged off and immediately included in provision expense.
 
The following tables summarize the activity in the receivable for partially charged-off loans (see “Allowance for Private Education Loan Losses” below for a further discussion) for the three and six months ended June 30, 2009 and 2008.
 
                         
  Activity in Receivable for Partially Charged-Off Loans 
  On-balance sheet
  Off-balance sheet
  Managed Basis
 
  Three Months Ended  Three Months Ended  Three Months Ended 
  June 30,
  June 30,
  June 30,
  June 30,
  June 30,
  June 30,
 
  2009  2008  2009  2008  2009  2008 
 
Receivable at beginning of period
 $265.3  $134.9  $108.5  $41.2  $373.8  $176.1 
Expected future recoveries of current period defaults
  82.3   32.4   44.4   18.9   126.7   51.3 
Recoveries
  (9.2)  (8.4)  (4.5)  (2.1)  (13.7)  (10.5)
                         
Receivable at end of period
 $338.4  $158.9  $148.4  $58.0  $486.8  $216.9 
                         
 
                         
  Activity in Receivable for Partially Charged-Off Loans 
  On-balance sheet
  Off-balance sheet
  Managed Basis
 
  Six Months Ended  Six Months Ended  Six Months Ended 
  June 30,
  June 30,
  June 30,
  June 30,
  June 30,
  June 30,
 
  2009  2008  2009  2008  2009  2008 
 
Receivable at beginning of period
 $222.4  $118.0  $91.1  $27.6  $313.5  $145.6 
Expected future recoveries of current period defaults
  135.3   59.2   64.0   34.3   199.3   93.5 
Recoveries
  (19.3)  (18.3)  (6.7)  (3.9)  (26.0)  (22.2)
                         
Receivable at end of period
 $338.4  $158.9  $148.4  $58.0  $486.8  $216.9 
                         
 
Student Loan Acquisitions
 
The following tables summarize the components of our student loan acquisition activity for the three and six months ended June 30, 2009 and 2008.
 
             
  Three Months Ended
 
  June 30, 2009 
  FFELP  Private  Total 
 
Internal lending brands and Lender Partners
 $4,102  $494  $4,596 
Other commitment clients
  123   —   123 
Spot purchases
  871   —   871 
Consolidations from third parties
  —   —   — 
Consolidations andclean-upcalls of off-balance sheet securitized loans
  426   1   427 
Capitalized interest, premiums and discounts
  641   239   880 
             
Total on-balance sheet student loan acquisitions
  6,163   734   6,897 
Consolidations andclean-upcalls of off-balance sheet securitized loans
  (426)  (1)  (427)
Capitalized interest, premiums and discounts — off-balance sheet securitized trusts
  86   127   213 
             
Total Managed student loan acquisitions
 $5,823  $860  $6,683 
             
 


98

 

             
  Three Months Ended
 
  June 30, 2008 
  FFELP  Private  Total 
 
Internal lending brands and Lender Partners
 $3,361  $1,117  $4,478 
Other commitment clients
  259   —   259 
Spot purchases
  133   —   133 
Consolidations from third parties
  11   55   66 
Consolidations andclean-upcalls of off-balance sheet securitized loans
  12   76   88 
Capitalized interest, premiums and discounts
  588   219   807 
             
Total on-balance sheet student loan acquisitions
  4,364   1,467   5,831 
Consolidations andclean-upcalls of off-balance sheet securitized loans
  (12)  (76)  (88)
Capitalized interest, premiums and discounts — off-balance sheet securitized trusts
  121   197   318 
             
Total Managed student loan acquisitions
 $4,473  $1,588  $6,061 
             
 
             
  Six Months Ended
 
  June 30, 2009 
  FFELP  Private  Total 
 
Internal lending brands and Lender Partners
 $11,207  $1,894  $13,101 
Other commitment clients
  203   —   203 
Spot purchases
  985   —   985 
Consolidations from third parties
  —   —   — 
Consolidations andclean-upcalls of off-balance sheet securitized loans
  1,954   667   2,621 
Capitalized interest, premiums and discounts
  1,206   433   1,639 
             
Total on-balance sheet student loan acquisitions
  15,555   2,994   18,549 
Consolidations andclean-upcalls of off-balance sheet securitized loans
  (1,954)  (667)  (2,621)
Capitalized interest, premiums and discounts — off-balance sheet securitized trusts
  175   244   419 
             
Total Managed student loan acquisitions
 $13,776  $2,571  $16,347 
             
 
             
  Six Months Ended
 
  June 30, 2008 
  FFELP  Private  Total 
 
Internal lending brands and Lender Partners
 $9,022  $3,416  $12,438 
Other commitment clients
  444   —   444 
Spot purchases
  155   —   155 
Consolidations from third parties
  461   146   607 
Consolidations andclean-upcalls of off-balance sheet securitized loans
  120   245   365 
Capitalized interest, premiums and discounts
  1,130   383   1,513 
             
Total on-balance sheet student loan acquisitions
  11,332   4,190   15,522 
Consolidations andclean-upcalls of off-balance sheet securitized loans
  (120)  (245)  (365)
Capitalized interest, premiums and discounts — off-balance sheet securitized trusts
  219   354   573 
             
Total Managed student loan acquisitions
 $11,431  $4,299  $15,730 
             

99

 

Total On-Balance Sheet Assets — Lending Business Segment
 
The following table includes on-balance sheet asset information for our Lending business segment.
 
         
  June 30,
  December 31,
 
  2009  2008 
 
FFELP Stafford and Other Student Loans, net
 $44,045  $44,025 
FFELP Stafford LoansHeld-for-Sale
  18,159   8,451 
FFELP Consolidation Loans, net
  70,102   71,744 
Private Education Loans, net
  21,851   20,582 
Other loans, net
  489   729 
Investments(1)
  13,202   8,445 
Retained Interest in off-balance sheet securitized loans
  1,821   2,200 
Other(2)
  9,179   9,947 
         
Total assets
 $178,848  $166,123 
         
 
 
(1)Investments include cash and cash equivalents, short and long-term investments, restricted cash and investments, leveraged leases, and municipal bonds.
 
(2)Other assets include accrued interest receivable, goodwill and acquired intangible assets, and other non-interest earning assets.
 
Loan Originations
 
The Company originates loans under its own brand names, which we refer to as internal lending brands, and also through Lender Partners under forward contracts to purchase loans at contractual prices.
 
Our FFELP internal brand originations were up sharply in the second quarter of 2009, increasing 76 percent from the year-ago quarter. Our FFELP Lender Partner originations declined 30 percent over the same period. A number of these Lender Partners, including some of our largest originators, have converted to third-party servicing arrangements in which we service loans on their behalf.
 
Private Education Loan originations declined 57 percent from the year-ago period to $.4 billion in the quarter ended June 30, 2009, as a result of our current lending policies and withdrawal from certain markets.
 
At June 30, 2009, the Company was committed to purchase $1.3 billion of loans originated by our Lender Partners ($.6 billion of FFELP loans and $.7 billion of Private Education Loans). Approximately $.3 billion of these FFELP loans were originated prior to CCRAA. Approximately $.2 billion of these FFELP loans are eligible for ED’s Purchase and Participation Programs (see “LIQUIDITY AND CAPITAL RESOURCES — ED Funding Programs”).


100

 

The following tables summarize our loan originations by type of loan and source.
 
                 
  Three Months
  Six Months
 
  Ended
  Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Loan Originations — Internal lending brands
                
Stafford
 $3,008  $1,650  $7,932  $4,509 
PLUS
  162   127   759   673 
GradPLUS
  160   113   436   307 
                 
Total FFELP
  3,330   1,890   9,127   5,489 
Private Education Loans
  372   854   1,728   3,078 
                 
Total
 $3,702  $2,744  $10,855  $8,567 
                 
 
                 
  Three Months
  Six Months
 
  Ended
  Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Loan Originations — Lender Partners
                
Stafford
 $ 351  $513  $1,126  $2,621 
PLUS
  16   18   66   290 
GradPLUS
  9   5   26   47 
                 
Total FFELP
  376   536   1,218   2,958 
Private Education Loans
  15   37   174   291 
                 
Total
 $391  $573  $1,392  $3,249 
                 


101

 

Student Loan Activity
 
The following tables summarize the activity in our on-balance sheet, off-balance sheet and Managed portfolios of FFELP loans and Private Education Loans and highlight the effects of Consolidation Loan activity on our FFELP loan portfolios.
 
                     
  On-Balance Sheet
 
  Three Months Ended June 30, 2009 
           Total
    
  FFELP
  FFELP
     Private
  Total On-
 
  Stafford and
  Consolidation
  Total
  Education
  Balance Sheet
 
  Other(1)  Loans  FFELP  Loans  Portfolio 
 
Beginning balance
 $57,844  $70,885  $128,729  $21,645  $150,374 
Net consolidations:
                    
Incremental consolidations from third parties
  —   —   —   —   — 
Consolidations to third parties
  (163)  (73)  (236)  1   (235)
                     
Net consolidations
  (163)  (73)  (236)  1   (235)
Acquisitions
  5,456   281   5,737   733   6,470 
                     
Net acquisitions
  5,293   208   5,501   734   6,235 
                     
Internal consolidations(2)
  —   —   —   —   — 
Securitization-related(3)
  425   —   425   —   425 
Repayments/claims/resales/other
  (1,358)  (991)  (2,349)  (528)  (2,877)
                     
Ending balance
 $62,204  $70,102  $132,306  $21,851  $154,157 
                     
 
                     
  Off-Balance Sheet
 
  Three Months Ended June 30, 2009 
           Total
    
  FFELP
  FFELP
     Private
  Total Off-
 
  Stafford and
  Consolidation
  Total
  Education
  Balance Sheet
 
  Other(1)  Loans  FFELP  Loans  Portfolio 
 
Beginning balance
 $6,846  $15,343  $22,189  $12,772  $34,961 
Net consolidations:
                    
Incremental consolidations from third parties
  —   —   —   —   — 
Consolidations to third parties
  (72)  (17)  (89)  (5)  (94)
                     
Net consolidations
  (72)  (17)  (89)  (5)  (94)
Acquisitions
  36   50   86   127   213 
                     
Net acquisitions
  (36)  33   (3)  122   119 
                     
Internal consolidations(2)
  —   —   —   —   — 
Securitization-related(3)
  (425)  —   (425)  —   (425)
Repayments/claims/resales/other
  (215)  (206)  (421)  (273)  (694)
                     
Ending balance
 $6,170  $15,170  $21,340  $12,621  $33,961 
                     
 
                     
  Managed Portfolio
 
  Three Months Ended June 30, 2009 
           Total
    
  FFELP
  FFELP
     Private
  Total
 
  Stafford and
  Consolidation
  Total
  Education
  Managed Basis
 
  Other(1)  Loans  FFELP  Loans  Portfolio 
 
Beginning balance
 $64,690  $86,228  $150,918  $34,417  $185,335 
Net consolidations:
                    
Incremental consolidations from third parties
  —   —   —   —   — 
Consolidations to third parties
  (235)  (90)  (325)  (4)  (329)
                     
Net consolidations
  (235)  (90)  (325)  (4)  (329)
Acquisitions
  5,492   331   5,823   860   6,683 
                     
Net acquisitions
  5,257   241   5,498   856   6,354 
                     
Internal consolidations(2)
  —   —   —   —   — 
Securitization-related(3)
  —   —   —   —   — 
Repayments/claims/resales/other
  (1,573)  (1,197)  (2,770)  (801)  (3,571)
                     
Ending balance(4)
 $68,374  $85,272  $153,646  $34,472  $188,118 
                     
Total Managed Acquisitions(5)
 $5,492  $331  $5,823  $860  $6,683 
                     
 
 
(1)FFELP category is primarily Stafford loans and also includes PLUS and HEAL loans.
 
(2)Represents loans that we either own on-balance sheet or loans that we consolidated from our off-balance sheet securitization trusts.
 
(3)Represents loans within securitization trusts that we are required to consolidate under GAAP once the trusts’ loan balances are below theclean-upcall threshold.
 
(4)As of June 30, 2009, the ending balance includes $23.9 billion of FFELP Stafford and Other Loans and $2.6 billion of FFELP Consolidation Loans disbursed on or after October 1, 2007, which are impacted by CCRAA legislation.
 
(5)The Total Managed Acquisitions line includes incremental consolidations from third parties and acquisitions.


102

 

                     
  On-Balance Sheet
 
  Three Months Ended June 30, 2008 
           Total
    
  FFELP
  FFELP
     Private
  Total On-
 
  Stafford and
  Consolidation
  Total
  Education
  Balance Sheet
 
  Other(1)  Loans  FFELP  Loans  Portfolio 
 
Beginning balance
 $40,168  $73,868  $114,036  $16,977  $131,013 
Net consolidations:
                    
Incremental consolidations from third parties
  —   11   11   55   66 
Consolidations to third parties
  (100)  (51)  (151)  (9)  (160)
                     
Net consolidations
  (100)  (40)  (140)  46   (94)
Acquisitions
  4,003   338   4,341   1,336   5,677 
                     
Net acquisitions
  3,903   298   4,201   1,382   5,583 
                     
Internal consolidations(2)
  (32)  36   4   67   71 
Repayments/claims/resales/other
  (892)  (1,031)  (1,923)  (455)  (2,378)
                     
Ending balance
 $43,147  $73,171  $116,318  $17,971  $134,289 
                     
 
                     
  Off-Balance Sheet
 
  Three Months Ended June 30, 2008 
           Total
    
  FFELP
  FFELP
     Private
  Total Off-
 
  Stafford and
  Consolidation
  Total
  Education
  Balance Sheet
 
  Other(1)  Loans  FFELP  Loans  Portfolio 
 
Beginning balance
 $9,011  $16,237  $25,248  $13,214  $38,462 
Net consolidations:
                    
Incremental consolidations from third parties
  —   —   —   —   — 
Consolidations to third parties
  (30)  (9)  (39)  (12)  (51)
                     
Net consolidations
  (30)  (9)  (39)  (12)  (51)
Acquisitions
  73   48   121   197   318 
                     
Net acquisitions
  43   39   82   185   267 
                     
Internal consolidations(2)
  (2)  (2)  (4)  (67)  (71)
Repayments/claims/resales/other
  (577)  (232)  (809)  (234)  (1,043)
                     
Ending balance
 $8,475  $16,042  $24,517  $13,098  $37,615 
                     
 
                     
  Managed Portfolio
 
  Three Months Ended June 30, 2008 
           Total
    
  FFELP
  FFELP
     Private
  Total
 
  Stafford and
  Consolidation
  Total
  Education
  Managed Basis
 
  Other(1)  Loans  FFELP  Loans  Portfolio 
 
Beginning balance
 $49,179  $90,105  $139,284  $30,191  $169,475 
Net consolidations:
                    
Incremental consolidations from third parties
  —   11   11   55   66 
Consolidations to third parties
  (130)  (60)  (190)  (21)  (211)
                     
Net consolidations
  (130)  (49)  (179)  34   (145)
Acquisitions
  4,076   386   4,462   1,533   5,995 
                     
Net acquisitions
  3,946   337   4,283   1,567   5,850 
                     
Internal consolidations(2)
  (34)  34   —   —   — 
Repayments/claims/resales/other
  (1,469)  (1,263)  (2,732)  (689)  (3,421)
                     
Ending balance(3)
 $51,622  $89,213  $140,835  $31,069  $171,904 
                     
Total Managed Acquisitions(4)
 $4,076  $397  $4,473  $1,588  $6,061 
                     
 
 
(1)FFELP category is primarily Stafford loans and also includes PLUS and HEAL loans.
 
(2)Represents loans that we either own on-balance sheet or loans that we consolidated from our off-balance sheet securitization trusts.
 
(3)As of June 30, 2008, the ending balance includes $5.5 billion of FFELP Stafford and Other Loans and $2.7 billion of FFELP Consolidation Loans disbursed on or after October 1, 2007, which are impacted by CCRAA legislation.
 
(4)The Total Managed Acquisitions line includes incremental consolidations from third parties and acquisitions.


103

 

                     
  On-Balance Sheet
 
  Six Months Ended June 30, 2009 
           Total
    
  FFELP
  FFELP
     Private
  Total On-
 
  Stafford and
  Consolidation
  Total
  Education
  Balance Sheet
 
  Other(1)  Loans  FFELP  Loans  Portfolio 
 
Beginning balance
 $52,476  $71,744  $124,220  $20,582  $144,802 
Net consolidations:
                    
Incremental consolidations from third parties
  —   —   —   —   — 
Consolidations to third parties
  (406)  (194)  (600)  (3)  (603)
                     
Net consolidations
  (406)  (194)  (600)  (3)  (603)
Acquisitions
  13,046   555   13,601   2,327   15,928 
                     
Net acquisitions
  12,640   361   13,001   2,324   15,325 
                     
Internal consolidations(2)
  —   —   —   —   — 
Securitization-related(3)
  425   —   425   —   425 
Repayments/claims/resales/other
  (3,337)  (2,003)  (5,340)  (1,055)  (6,395)
                     
Ending balance
 $62,204  $70,102  $132,306  $21,851  $154,157 
                     
 
                     
  Off-Balance Sheet
 
  Six Months Ended June 30, 2009 
           Total
    
  FFELP
  FFELP
     Private
  Total Off-
 
  Stafford and
  Consolidation
  Total
  Education
  Balance Sheet
 
  Other(1)  Loans  FFELP  Loans  Portfolio 
 
Beginning balance
 $7,143  $15,531  $22,674  $12,917  $35,591 
Net consolidations:
                    
Incremental consolidations from third parties
  —   —   —   —   — 
Consolidations to third parties
  (182)  (43)  (225)  (8)  (233)
                     
Net consolidations
  (182)  (43)  (225)  (8)  (233)
Acquisitions
  77   98   175   244   419 
                     
Net acquisitions
  (105)  55   (50)  236   186 
                     
Internal consolidations(2)
  —   —   —   —   — 
Securitization-related(3)
  (425)  —   (425)  —   (425)
Repayments/claims/resales/other
  (443)  (416)  (859)  (532)  (1,391)
                     
Ending balance
 $6,170  $15,170  $21,340  $12,621  $33,961 
                     
 
                     
  Managed Portfolio
 
  Six Months Ended June 30, 2009 
           Total
    
  FFELP
  FFELP
     Private
  Total
 
  Stafford and
  Consolidation
  Total
  Education
  Managed Basis
 
  Other(1)  Loans  FFELP  Loans  Portfolio 
 
Beginning balance
 $59,619  $87,275  $146,894  $33,499  $180,393 
Net consolidations:
                    
Incremental consolidations from third parties
  —   —   —   —   — 
Consolidations to third parties
  (588)  (237)  (825)  (11)  (836)
                     
Net consolidations
  (588)  (237)  (825)  (11)  (836)
Acquisitions
  13,123   653   13,776   2,571   16,347 
                     
Net acquisitions
  12,535   416   12,951   2,560   15,511 
                     
Internal consolidations(2)
  —   —   —   —   — 
Securitization-related(3)
  —   —   —   —   — 
Repayments/claims/resales/other
  (3,780)  (2,419)  (6,199)  (1,587)  (7,786)
                     
Ending balance(4)
 $68,374  $85,272  $153,646  $34,472  $188,118 
                     
Total Managed Acquisitions(5)
 $13,123  $653  $13,776  $2,571  $16,347 
                     
 
 
(1)FFELP category is primarily Stafford loans and also includes PLUS and HEAL loans.
 
(2)Represents loans that we either own on-balance sheet or loans that we consolidated from our off-balance sheet securitization trusts.
 
(3)Represents loans within securitization trusts that we are required to consolidate under GAAP once the trusts’ loan balances are below theclean-upcall threshold.
 
(4)As of June 30, 2009, the ending balance includes $23.9 billion of FFELP Stafford and Other Loans and $2.6 billion of FFELP Consolidation Loans disbursed on or after October 1, 2007, which are impacted by CCRAA legislation.
 
(5)The Total Managed Acquisitions line includes incremental consolidations from third parties and acquisitions.


104

 

                     
  On-Balance Sheet
 
  Six Months Ended June 30, 2008 
           Total
    
  FFELP
  FFELP
     Private
  Total On-
 
  Stafford and
  Consolidation
  Total
  Education
  Balance Sheet
 
  Other(1)  Loans  FFELP  Loans  Portfolio 
 
Beginning balance
 $35,726  $73,609  $109,335  $14,818  $124,153 
Net consolidations:
                    
Incremental consolidations from third parties
  —   461   461   146   607 
Consolidations to third parties
  (341)  (122)  (463)  (25)  (488)
                     
Net consolidations
  (341)  339   (2)  121   119 
Acquisitions
  10,061   690   10,751   3,799   14,550 
                     
Net acquisitions
  9,720   1,029   10,749   3,920   14,669 
                     
Internal consolidations(2)
  (409)  529   120   225   345 
Repayments/claims/resales/other
  (1,890)  (1,996)  (3,886)  (992)  (4,878)
                     
Ending balance
 $43,147  $73,171  $116,318  $17,971  $134,289 
                     
 
                     
  Off-Balance Sheet
 
  Six Months Ended June 30, 2008 
           Total
    
  FFELP
  FFELP
     Private
  Total Off-
 
  Stafford and
  Consolidation
  Total
  Education
  Balance Sheet
 
  Other(1)  Loans  FFELP  Loans  Portfolio 
 
Beginning balance
 $9,472  $16,441  $25,913  $13,510  $39,423 
Net consolidations:
                    
Incremental consolidations from third parties
  —   —   —   —   — 
Consolidations to third parties
  (82)  (23)  (105)  (43)  (148)
                     
Net consolidations
  (82)  (23)  (105)  (43)  (148)
Acquisitions
  122   97   219   354   573 
                     
Net acquisitions
  40   74   114   311   425 
                     
Internal consolidations(2)
  (84)  (36)  (120)  (225)  (345)
Repayments/claims/resales/other
  (953)  (437)  (1,390)  (498)  (1,888)
                     
Ending balance
 $8,475  $16,042  $24,517  $13,098  $37,615 
                     
 
                     
  Managed Portfolio
 
  Six Months Ended June 30, 2008 
           Total
    
  FFELP
  FFELP
     Private
  Total
 
  Stafford and
  Consolidation
  Total
  Education
  Managed Basis
 
  Other(1)  Loans  FFELP  Loans  Portfolio 
 
Beginning balance
 $45,198  $90,050  $135,248  $28,328  $163,576 
Net consolidations:
                    
Incremental consolidations from third parties
  —   461   461   146   607 
Consolidations to third parties
  (423)  (145)  (568)  (68)  (636)
                     
Net consolidations
  (423)  316   (107)  78   (29)
Acquisitions
  10,183   787   10,970   4,153   15,123 
                     
Net acquisitions
  9,760   1,103   10,863   4,231   15,094 
                     
Internal consolidations(2)
  (493)  493   —   —   — 
Repayments/claims/resales/other
  (2,843)  (2,433)  (5,276)  (1,490)  (6,766)
                     
Ending balance(3)
 $51,622  $89,213  $140,835  $31,069  $171,904 
                     
Total Managed Acquisitions(4)
 $10,183  $1,248  $11,431  $4,299  $15,730 
                     
 
 
(1)FFELP category is primarily Stafford loans and also includes PLUS and HEAL loans.
 
(2)Represents loans that we either own on-balance sheet or loans that we consolidated from our off-balance sheet securitization trusts.
 
(3)As of June 30, 2008, the ending balance includes $5.5 billion of FFELP Stafford and Other Loans and $2.7 billion of FFELP Consolidation Loans disbursed on or after October 1, 2007, which are impacted by CCRAA legislation.
 
(4)The Total Managed Acquisitions line includes incremental consolidations from third parties and acquisitions.


105

 

Other Income — Lending Business Segment
 
The following table summarizes the components of “Core Earnings” other income, net, for our Lending business segment for the three and six months ended June 30, 2009 and 2008.
 
                 
  Three Months
  Six Months
 
  Ended
  Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Gains on debt repurchases
 $325  $21  $389  $21 
Late fees and forbearance fees
  32   34   69   71 
Gains (losses) on sales of loans and securities, net
  —   1   —   1 
Other
  3   6   3   13 
                 
Total other income, net
 $360  $62  $461  $106 
                 
 
The Company repurchased $1.1 billion and $1.2 billion face amount of its unsecured debt in the three months ended June 30, 2009 and 2008, respectively. The increase in the gain on debt repurchases between 2009 and 2008 was the result of differences in the characteristics of the debt repurchased and larger unsecured credit spreads in 2009. Since the second quarter of 2008, the Company has repurchased $3.2 billion face amount of its senior unsecured notes in the aggregate, with maturity dates ranging from 2008 to 2014.
 
Operating Expense — Lending Business Segment
 
The following table summarizes the components of operating expenses for our Lending business segment for the three and six months ended June 30, 2009 and 2008.
 
                 
  Three Months
  Six Months
 
  Ended
  Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Sales and originations
 $54  $64  $103  $138 
Servicing
  59   58   115   122 
Corporate overhead
  28   33   54   58 
                 
Total operating expenses
 $141  $155  $272  $318 
                 
 
Operating expenses for our Lending business segment include costs incurred to acquire student loans and service our Managed student loan portfolio, as well as other general and administrative expenses. For the three months ended June 30, 2009 and 2008, operating expenses for the Lending business segment, excluding $4 million in other reorganization-related asset impairments recognized in the second quarter of 2008, totaled $141 million and $151 million, respectively. The decrease in operating expenses for the second quarter of 2009 versus the year-ago quarter was primarily due to the Company’s cost reduction efforts.


106

 

ASSET PERFORMANCE GROUP (“APG”) BUSINESS SEGMENT
 
The following table includes the “Core Earnings” results of operations for our APG business segment.
 
                 
  Three Months Ended June 30, 2009 
  Purchased
  Purchased
       
  Paper-
  Paper-
       
  Non-
  Mortgage/
  Contingency
    
  Mortgage  Properties  & Other  Total APG 
 
Contingency fee income
 $—  $—  $73  $73 
Collections revenue (loss)
  24   (2)  —   22 
                 
Total income (loss)
  24   (2)  73   95 
Restructuring expenses
  (1)  1   —   — 
Operating expenses
  33   7   40   80 
                 
Total expenses
  32   8   40   80 
Net interest expense
  2   1   2   5 
                 
Income (loss) before income tax expense (benefit) and noncontrolling interest
  (10)  (11)  31   10 
Income tax expense (benefit)
  (3)  (4)  11   4 
                 
Income (loss) before noncontrolling interest
  (7)  (7)  20   6 
Noncontrolling interest
  —   —   —   — 
                 
“Core Earnings” net income (loss)
 $(7) $(7) $20  $6 
                 
 
                 
  Three Months Ended June 30, 2008 
  Purchased
  Purchased
       
  Paper-
  Paper-
       
  Non-
  Mortgage/
  Contingency
    
  Mortgage  Properties  & Other  Total APG 
 
Contingency fee income
 $3  $—  $81  $84 
Collections revenue (loss)
  57   (30)  —   27 
                 
Total income (loss)
  60   (30)  81   111 
Restructuring expenses
  1   —   4   5 
Operating expenses
  51   10   49   110 
                 
Total expenses
  52   10   53   115 
Net interest expense
  4   1   2   7 
                 
Income (loss) before income tax expense (benefit) and noncontrolling interest
  4   (41)  26   (11)
Income tax expense (benefit)
  1   (15)  10   (4)
                 
Income (loss) before noncontrolling interest
  3   (26)  16   (7)
Noncontrolling interest
  3   —   —   3 
                 
“Core Earnings” net income (loss)
 $—  $(26) $16  $(10)
                 
 


107

 

                 
  Six Months Ended June 30, 2009 
  Purchased
  Purchased
       
  Paper-
  Paper-
       
  Non-
  Mortgage/
  Contingency
    
  Mortgage  Properties  & Other  Total APG 
 
Contingency fee income
 $2  $—  $146  $148 
Collections revenue (loss)
  67   (67)  —   — 
                 
Total income (loss)
  69   (67)  146   148 
Restructuring expenses
  —   2   —   2 
Operating expenses
  73   13   83   169 
                 
Total expenses
  73   15   83   171 
Net interest expense
  5   2   3   10 
                 
Income (loss) before income tax expense (benefit) and noncontrolling interest
  (9)  (84)  60   (33)
Income tax expense (benefit)
  (3)  (31)  22   (12)
                 
Income (loss) before noncontrolling interest
  (6)  (53)  38   (21)
Noncontrolling interest
  —   —   —   — 
                 
“Core Earnings” net income (loss)
 $(6) $(53) $38  $(21)
                 
 
                 
  Six Months Ended June 30, 2008 
  Purchased
  Purchased
       
  Paper-
  Paper-
       
  Non-
  Mortgage/
  Contingency
    
  Mortgage  Properties  & Other  Total APG 
 
Contingency fee income
 $6  $—  $163  $169 
Collections revenue (loss)
  109   (25)  —   84 
                 
Total income (loss)
  115   (25)  163   253 
Restructuring expenses
  1   —   5   6 
Operating expenses
  104   19   93   216 
                 
Total expenses
  105   19   98   222 
Net interest expense
  7   3   4   14 
                 
Income (loss) before income tax expense (benefit) and noncontrolling interest
  3   (47)  61   17 
Income tax expense (benefit)
  1   (17)  22   6 
                 
Income (loss) before noncontrolling interest
  2   (30)  39   11 
Noncontrolling interest
  3   —   —   3 
                 
“Core Earnings” net income (loss)
 $(1) $(30) $39  $8 
                 
 
The Company has concluded that its APG purchased paper businesses are no longer a strategic fit. The Company sold its international Purchased Paper — Non-Mortgage business in the first quarter of 2009. The Company continues to wind down the domestic side of its Purchased Paper — Non-Mortgage and Purchased Paper — Mortgage/Properties businesses. The Company will continue to consider opportunities to sell these businesses at acceptable prices in the future.
 
The Company’s domestic Purchased Paper — Non-Mortgage business has certain forward purchase obligations under which the Company was committed to buy purchased paper through April 2009. The Company will not buy any additional purchased paper in excess of these obligations. The Company recognized $13 million and $7 million of impairment in the second quarter of 2009 and 2008, respectively. The total impairment for the year ended December 31, 2008 was $55 million.

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The Company’s Purchased Paper — Mortgage/Properties business has not purchased any new mortgage/property assets since March 2008 and will work-out and liquidate its portfolio as quickly and economically as possible. During 2009, real estate values continued to decline as a result of the weakening U.S. economy and expected future resolution time-frames were extended. As a result, the Company recorded impairment of $8 million and $51 million in the second quarter of 2009 and 2008, respectively. The total impairment for the year ended December 31, 2008 was $262 million.
 
Purchased Paper — Non-Mortgage
 
                 
  Three Months
  Six Months
 
  Ended
  Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Face value of purchases for the period
 $2  $1,349  $390  $2,878 
Purchase price for the period
  1   125   30   268 
Purchase price as a percentage of face value purchased
  32.1%  9.3%  7.6%  9.3%
Gross Cash Collections (“GCC”)
 $87  $172  $243  $331 
Collections revenue (loss)
  24   57   67   109 
Collections revenue (loss) as a percentage of GCC
  28%  33%  28%  33%
Carrying value of purchased paper
 $418  $633  $418  $633 
 
Purchased Paper — Mortgage/Properties
 
                 
  Three Months
  Six Months
 
  Ended
  Ended
 
  June 30,  June 30, 
  2009  2008  2009  2008 
 
Face value of purchases for the period
 $—  $—  $—  $39 
Collections revenue (loss), net of impairments
  (2)  (30)  (67)  (25)
Collateral value of purchases
  —   —   —   29 
Purchase price for the period
  —   —   —   19 
Purchase price as a percentage of collateral fair value
  —%  —%  —%  66%
Carrying value of purchased paper
 $437  $1,013  $437  $1,013 
Carrying value of purchased paper as a percentage of collateral fair value
  68%  77%  68%  77%
 
The carrying value of purchased paper (the basis we carry on our balance sheet) as a percentage of collateral fair value has decreased in the second quarter of 2009 as a result of the impairment recognized this quarter.
 
Contingency Inventory
 
The following table presents the outstanding inventory of receivables that are currently being serviced through our APG business segment.
 
             
  June 30,
  December 31,
  June 30,
 
  2009  2008  2008 
 
Contingency:
            
Student loans
 $9,182  $8,498  $8,730 
Other
  1,140   1,752   1,692 
             
Total
 $10,322  $10,250  $10,422 
             


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Operating Expenses — APG Business Segment
 
For the quarters ended June 30, 2009 and 2008, operating expenses for the APG business segment, excluding $1 million in other reorganization-related asset impairments recognized in the second quarter of 2008, totaled $80 million and $109 million, respectively. The decrease in operating expenses from the year-ago quarter was primarily due to the Company’s continued cost reduction efforts and the reduction in the purchased paper portfolios.
 
Total On-Balance Sheet Assets — APG Business Segment
 
At June 30, 2009 and December 31, 2008, the APG business segment had total assets of $1.5 billion and $2.1 billion, respectively.
 
CORPORATE AND OTHER BUSINESS SEGMENT
 
The following table includes “Core Earnings” results of operations for our Corporate and Other business segment.
 
                         
        % Increase
        % Increase
 
  Three Months
  (Decrease)  Six Months
  (Decrease) 
  Ended June 30,  2009 vs.
  Ended June 30,  2009 vs.
 
  2009  2008  2008  2009  2008  2008 
 
Net interest income after provisions for loan losses
 $1  $—   100% $1  $1   — 
Guarantor servicing fees
  25   24   4   59   58   2 
Loan servicing fees
  9   5   80   19   11   73 
Upromise
  26   26   —   51   52   (2)
Other
  11   14   (21)  26   34   (24)
                         
Total other income
  71   69   3   155   155   — 
Restructuring expenses
  —   11   (100)  2   15   (87)
Operating expenses
  85   73   16   156   144   8 
                         
Total expenses
  85   84   1   158   159   (1)
                         
Loss before income tax expense
  (13)  (15)  (13)  (2)  (3)  (33)
Income tax benefit
  (5)  (6)  (17)  (1)  (1)  — 
                         
“Core Earnings” net loss
 $(8) $(9)  (11)% $(1) $(2)  (50)%
                         
 
United Student Aid Funds, Inc. (“USA Funds”), the nation’s largest guarantee agency, accounted for 84 percent and 86 percent, respectively, of guarantor servicing fees and 1 percent and 12 percent, respectively, of revenues associated with other products and services for the quarters ended June 30, 2009 and 2008.
 
Operating Expenses — Corporate and Other Business Segment
 
The following table summarizes the components of operating expenses for our Corporate and Other business segment for the three and six months ended June 30, 2009 and 2008.
 
                 
  Three Months
  Six Months
 
  Ended June 30,  Ended June 30, 
  2009  2008  2009  2008 
 
Operating expenses
 $26  $20  $48  $43 
Upromise
  22   24   44   47 
General and administrative expenses
  37   29   64   54 
                 
Total operating expenses
 $85  $73  $156  $144 
                 


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Operating expenses for our Corporate and Other business segment include direct costs incurred to service loans for unrelated third parties, perform guarantor servicing on behalf of guarantor agencies, operate our Upromise subsidiary, as well as information technology expenses related to these functions. Operating expenses also include unallocated corporate overhead expenses for centralized headquarters functions. The increase in operating expenses for the second quarter of 2009 versus the year-ago quarter was primarily the result ofstart-upcosts related to the ED Servicing Contract awarded to the Company on June 17, 2009 to service FFELP loans that will be put to ED and future Direct Loan Servicing.
 
Total On-Balance Sheet Assets — Corporate and Other Business Segment
 
At June 30, 2009 and December 31, 2008, the Corporate and Other business segment had total assets of $794 million and $685 million, respectively.
 
LIQUIDITY AND CAPITAL RESOURCES
 
The following “LIQUIDITY AND CAPITAL RESOURCES” discussion concentrates on our Lending business segment. Our APG contingency collections and Corporate and Other business segments are not capital intensive businesses and, as such, a minimal amount of debt capital is allocated to these segments.
 
Historically, we funded new loan originations with a combination of term unsecured debt and student loan asset-backed securities. Following the Proposed Merger announcement in April 2007, we temporarily suspended issuance of unsecured debt and began funding loan originations primarily through the issuance of student loan asset-backed securities and short-term secured student loan financing facilities. In June 2008, the Company re-entered the corporate bond market with a $2.5 billion issue of10-yearsenior unsecured notes. In August 2008, we began funding new FFELP Stafford and PLUS student loan originations for AY2008-2009pursuant to ED’s Loan Participation Program. During the fourth quarter of 2008, the Company began retaining its Private Education Loan originations in its banking subsidiary, Sallie Mae Bank, and funding these assets with term bank deposits. In May 2009, we began using the ED Conduit Program. We discuss these liquidity sources below.
 
In the near term, we expect to continue to use ED’s Purchase and Participation Programs to fund future FFELP Stafford and PLUS loan originations and to use deposits at Sallie Mae Bank to fund Private Education Loan originations. We plan to use term asset-backed securities, asset-backed financing facilities, cash flows provided by earnings and repayment of principal on our unencumbered student loan assets, as well as other sources, to refinance maturing debt and provide cash for operations and other needs.
 
ED Funding Programs
 
In August 2008, ED implemented the Loan Purchase Commitment Program (“Purchase Program”) and the Loan Purchase Participation Program (“Participation Program”) pursuant to ECASLA. Under the Purchase Program, ED purchases eligible FFELP loans at a price equal to the sum of (i) par value, (ii) accrued interest, (iii) the one-percent origination fee paid to ED, and (iv) a fixed amount of $75 per loan. Under the Participation Program, ED provides short-term liquidity to FFELP lenders by purchasing participation interests in pools of FFELP loans. FFELP lenders are charged at a rate of commercial paper plus 0.50 percent on the principal amount of participation interests outstanding. AY 2008-2009loans funded under the Participation Program must be either refinanced by the lender or sold to ED pursuant to the Participation Program under identical economies to the Purchase Program prior to its expiration on September 30, 2009, or shortly thereafter. Given the state of the credit markets, we currently expect to sell all of the loans we fund under the Participation Program to ED on or before the program’s expiration date. Loans eligible for the Participation or Purchase Programs were originally limited to FFELP Stafford or PLUS, first disbursed on or after May 1, 2008 but no later than July 1, 2009, with no ongoing borrower benefits, other than permitted rate reductions of 0.25 percent for automatic payment processing. On October 7, 2008, legislation was enacted extending ED’s authority to address FFELP Stafford and PLUS loans made for AY’s2009-2010,and allowing for the extension of ED’s Purchase and Participation Programs from September 30, 2009 to September 30, 2010. On November 8, 2008, ED formally announced new purchase and participation programs which cover eligible


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loans originated for the AY2009-2010.On January 15, 2009, ED announced that the terms of the programs for AY2009-2010will replicate in all material respects the terms of the programs for AY2008-2009.The Company applied for these AY2009-2010funding programs in June 2009 and its participation was approved on July 31, 2009.
 
On August 14, 2008, the Company received its initial advance under the Participation Program. As of June 30, 2009, the Company had $17.2 billion of advances outstanding under the Participation Program.
 
Also pursuant to ECASLA, on January 15, 2009, ED published summary terms under which it will purchase eligible FFELP Stafford and PLUS loans from a conduit vehicle established to provide funding for eligible student lenders (the “ED Conduit Program”). Loans eligible for the ED Conduit Program must be first disbursed on or after October 1, 2003, but not later than July 1, 2009, and fully disbursed before September 30, 2009, and meet certain other requirements including with respect to borrower benefits. The ED Conduit was launched on May 11, 2009. Funding for the ED Conduit Program is provided by the capital markets at a cost based on market rates, with the Company being advanced 97 percent of the student loan face amount. The ED Conduit Program has a term of five years and will expire on January 19, 2014. The Student Loan Short-Term Notes (“SLST Notes”), issued by the ED Conduit, are supported by a combination of i) Funding Notes backed by FFELP student loans, ii) the Liquidity Agreement with the Federal Financing Bank (“FFB”), and iii) the Put Agreement provided by ED. If the conduit does not have sufficient funds to pay all SLST Notes, then those SLST Notes will be repaid with funds from the FFB. The FFB will hold the notes for a short period of time and, if at the end of that time, the SLST Notes still cannot be paid off, the underlying FFELP loans that serve as collateral to the ED Conduit will be sold to ED through the Put Agreement at a price of 97% of the face amount of the loans. Approximately $15.5 billion of our Stafford and PLUS loans (excluding loans currently in the Participation Program) are eligible for funding under the ED Conduit Program. As of June 30, 2009, $11.4 billion of these assets have been funded through this program with a weighted average issuance cost of approximately .74 percent.
 
Additional Funding Sources for General Corporate Purposes
 
The Company has encountered many challenges to its business model over the course of the last several years. In order to continue to meet our mission of providing access to higher education, we have worked with Congress, ED and the Treasury Department to find solutions to those challenges that have been created by market conditions.
 
In addition to funding FFELP loans through ED’s Participation and Purchase Programs and the ED Conduit Program, the Company employs other financing sources for general corporate purposes, which includes originating Private Education Loans, repurchases and repayments of unsecured debt obligations.
 
Secured borrowings, including securitizations, asset-backed commercial paper (“ABCP”) borrowings and indentured trusts, comprised 80 percent of our Managed debt outstanding at June 30, 2009 versus 76 percent at June 30, 2008.
 
Sallie Mae Bank
 
During the fourth quarter of 2008, Sallie Mae Bank, our Utah banking subsidiary, began expanding its deposit base to fund new Private Education Loan originations. Sallie Mae Bank raises deposits primarily through intermediaries in the retail brokered CD market. In the second quarter of 2009, Sallie Mae Bank raised $3.4 billion of term bank deposits with a weighted average life of 3.2 years and a weighted average fixed cost of approximately 3.16 percent. As of June 30, 2009, total term bank deposits were $6.1 billion. As of June 30, 2009, $3.7 billion of Private Education Loans were held at Sallie Mae Bank. We ultimately expect to raise long-term financing, through Private Education Loan securitizations or otherwise, to fund these loans. In the near term, we expect Sallie Mae Bank to continue to fund newly originated Private Education Loans through term bank deposits.


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ABS Transactions
 
On January 6, 2009, we closed a $1.5 billion 12.5 year asset-backed securities (“ABS”) based facility. This facility is used to provide up to $1.5 billion term financing for Private Education Loans. The fully-utilized cost of financing obtained under this facility is expected to be LIBOR plus 5.75 percent. In connection with this facility, we completed one Private Education Loan term ABS transaction totaling $1.5 billion in the first quarter of 2009. The net funding received under the asset-backed securities based facility for this issuance was $1.1 billion.
 
In April 2009, we completed three FFELP term ABS transactions totaling $5.1 billion. The FFELP transactions were both public and private transactions composed primarily of FFELP consolidation loans which were not eligible for the ED Conduit Program or the Term Asset-Backed Securities Loan Facility (“TALF”) discussed below. Although we have demonstrated our access to the ABS market in 2009 and we expect ABS financing to remain a primary source of funding over the long term, we expect our transaction volumes to be more limited and pricing less favorable than prior to the credit market dislocation that began in the summer of 2007, with significantly reduced opportunities to place subordinated tranches of ABS with investors. At present, we are unable to predict when market conditions will allow for more regular, reliable and cost-effective access to the term ABS market. In May 2009, we completed a $2.6 billion Private Education Loan term ABS issue. In July 2009, we completed a $1.1 billion Private Education Loan term ABS issue. These transactions were private placements and TALF-eligible. See “Term Asset-Backed Securities Loan Facility (“TALF”)” below for additional details.
 
Asset-Backed Financing Facilities
 
During the first quarter of 2008, the Company entered into three new asset-backed financing facilities (the “2008 Asset-Backed Financing Facilities”): (i) a $26.0 billion FFELP student loan ABCP conduit facility (the “2008 FFELP ABCP Facility”); (ii) a $5.9 billion Private Education Loan ABCP conduit facility (the “2008 Private Education Loan ABCP Facility”) (collectively, the “2008 ABCP Facilities”); and (iii) a $2.0 billion secured FFELP loan facility (the “2008 Asset-Backed Loan Facility”). The initial term of the 2008 Asset-Backed Financing Facilities was 364 days. The underlying cost of borrowing under the 2008 ABCP Facilities was approximately LIBOR plus 0.68 percent for the FFELP loan facilities and LIBOR plus 1.55 percent for the Private Education Loan facility, excluding up-front and unused commitment fees. All-in pricing on the 2008 ABCP Facilities varies based on usage. For the full year 2008, the combined, all-in cost of borrowings related to the 2008 Asset-Backed Financing Facilities, including amortized up-front fees and unused commitment fees, was three-month LIBOR plus 2.47 percent. The primary use of the 2008 Asset-Backed Financing Facilities was to refinance comparable ABCP facilities incurred in connection with the Proposed Merger, with the expectation that outstanding balances under the 2008 Asset-Backed Financing Facilities would be reduced through securitization of the underlying student loan collateral in the term ABS market.
 
On February 2, 2009, the Company extended the maturity date of the 2008 ABCP Facilities from February 28, 2009 to April 28, 2009 for a $61 million upfront fee. The other terms of the facilities remained materially unchanged.
 
On February 27, 2009, the Company extended the maturity date of the 2008 Asset-Backed Loan Facility from February 28, 2009 to April 28, 2009 for a $4 million upfront fee. The other terms of this facility remained materially unchanged.
 
On April 24, 2009, the Company extended the maturity of $21.8 billion of the 2008 FFELP ABCP Facility for one year to April, 23, 2010. The Company also extended its 2008 Asset-Backed Loan Facility in the amount of $1.5 billion. The 2008 Asset-Backed Loan Facility matured on June 26, 2009 and was paid in full. A total of $86 million in fees were paid related to these extensions. The 2008 Private Education Loan ABCP Facility was paid off and terminated on April 24, 2009. The stated borrowing rate of the 2008 FFELP ABCP Facility is the applicable funding rate plus 130 basis points excluding upfront fees. The applicable funding rate generally will be either a LIBOR or commercial paper rate. The terms of the 2008 FFELP ABCP Facility call for an increase in the applicable funding spread to 300 basis points if the outstanding borrowing


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amount is not reduced to $15.2 billion and $10.9 billion as of June 30, 2009 and September 30, 2009, respectively. If the Company does not negotiate an extension or pay off all outstanding amounts of the 2008 FFELP ABCP Facility at maturity, the facility will extend by 90 days with the interest rate generally increasing to LIBOR plus 250 basis points to 550 basis points over the 90 day period. The other terms of the facilities remained materially unchanged.
 
The maximum amount the Company may borrow under the 2008 FFELP ABCP Facility is limited based on certain factors, including market conditions and the fair value of student loans in the facility. As of June 30, 2009, the maximum borrowing amount was approximately $14.8 billion under the 2008 FFELP ABCP Facility. Funding under the 2008 FFELP ABCP Facility is subject to usual and customary conditions. The 2008 FFELP ABCP Facility is subject to termination under certain circumstances, including the Company’s failure to comply with the principal financial covenants in its unsecured revolving credit facilities.
 
Borrowings under the 2008 FFELP ABCP Facility are nonrecourse to the Company. As of June 30, 2009, the Company had $12.5 billion outstanding in connection with the 2008 FFELP ABCP Facility. The book basis of the assets securing this facility as of June 30, 2009 was $14.2 billion.
 
Term Asset-Backed Securities Loan Facility (“TALF”)
 
On February 6, 2009, the Federal Reserve Bank of New York published proposed terms for a program designed to facilitate renewed issuance of consumer and small business ABS at lower interest rate spreads. TALF was initiated on March 17, 2009 and currently provides investors with funding of up to five years for eligible ABS rated by two or more rating agencies in the highest investment-grade rating category. Eligible ABS include ‘AAA’ rated student loan ABS backed by FFELP and private student loans first disbursed since May 1, 2007. As of June 30, 2009, we had approximately $12.7 billion book basis ($13.4 billion face amount) of student loans eligible to serve as collateral for ABS funded under TALF; this amount does not include loans eligible for ECASLA financing programs. The Federal Reserve Bank launched the TALF program on March 3, 2009. While TALF has improved our access to and reduced our cost of ABS funding relative to 2009 pre-TALF levels, we are unable to predict, at this time, the full impact TALF will ultimately have on our funding activities.
 
On May 5, 2009, we priced a $2.6 billion Private Education Loan securitization which closed on May 12, 2009. The issue bears a coupon of 1-month LIBOR plus 6.0 percent and is callable at the issuer’s option at 93 percent of the outstanding balance of the ABS between November 15, 2011 and April 15, 2012. If the issue is called on November 15, 2011, we expect the effective cost of the bond financing will be approximately 1-month LIBOR plus 3.7 percent. This transaction was TALF-eligible.
 
On July 2, 2009, we priced a $1.1 billion Private Education Loan securitization which closed on July 14, 2009. The issue bears a coupon of Prime plus 1.25 percent and is callable at the issuer’s option at 94 percent of the outstanding balance of the ABS between January 15, 2012 and June 15, 2012. If the issue is called on January 15, 2012, we expect the effective cost of the bond financing will be approximately Prime minus 0.71 percent. This transaction was TALF-eligible.
 
Auction Rate Securities
 
At June 30, 2009, we had $3.3 billion of taxable and $1.3 billion of tax-exempt auction rate securities outstanding in securitizations and indentured trusts, respectively, on a Managed Basis. Since February 2008, an imbalance of supply and demand in the auction rate securities market as a whole led to failures of the auctions pursuant to which certain of our auction rate securities’ interest rates are set. As a result, all of the Company’s auction rate securities as of June 30, 2009 bore interest at the maximum rate allowable under their terms. The maximum allowable interest rate on our $3.3 billion of taxable auction rate securities is generally LIBOR plus 1.50 percent. The maximum allowable interest rate on many of the Company’s $1.3 billion of tax-exempt auction rate securities is a formula driven rate, which produced various maximum rates up to 3.40 percent during the second quarter of 2009.


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Reset Rate Notes
 
Certain tranches of our term ABS are reset rate notes. Reset rate notes are subject to periodic remarketing, at which time the interest rates on the reset rate notes are reset. The Company also has the option to repurchase the reset rate note prior to a failed remarketing and hold it as an investment until such time it can be remarketed. In the event a reset rate note cannot be remarketed on its remarketing date, and is not repurchased, the interest rate generally steps up to and remains at LIBOR plus 0.75 percent, until such time as the bonds are successfully remarketed or repurchased. The Company’s repurchase of a reset rate note requires additional funding, the availability and pricing of which may be less favorable to the Company than it was at the time the reset rate note was originally issued. Unlike the repurchase of a reset rate note, the occurrence of a failed remarketing does not require additional funding. As a result of the ongoing dislocation in the capital markets, at June 30, 2009, $1.5 billion of our reset rate notes bore interest at, or were swapped to LIBOR plus 0.75 percent due to a failed remarketing. Until capital markets conditions improve, it is possible additional reset rate notes will experience failed remarketings. As of June 30, 2009, on a Managed Basis, the Company had $2.5 billion and $2.5 billion of reset rate notes due to be remarketed in 2009 and 2010, respectively, and an additional $8.5 billion to be remarketed thereafter.
 
Primary Sources of Liquidity and Available Capacity
 
We expect to fund our ongoing liquidity needs, including the origination of new loans and the repayment of $2.6 billion of the senior unsecured notes maturing in the remainder of 2009, through our current cash and investment portfolio, cash flow provided by earnings and repayment of principal on unencumbered student loan assets, the liquidity facilities made available by ED, TALF, the 2008 Asset-Backed Financing Facilities, the issuance of term ABS, term bank deposits, and, to a lesser extent, if possible, unsecured debt and other sources.
 
To supplement our funding sources, we maintained an additional $3.5 billion in unsecured revolving credit facilities as of June 30, 2009; $1.9 billion of our unsecured revolving facilities matures in October 2010 and $1.6 billion matures in October 2011. These figures do not include a $215 million commitment from a subsidiary of Lehman Brothers Holdings Inc. On April 24, 2009, in conjunction with the extension of the 2008 ABCP Facilities, a $1.4 billion revolving credit facility maturing in October 2009 was retired and a $1.9 billion revolving credit facility maturing in October 2011 was reduced to $1.6 billion. The principal financial covenants in the unsecured revolving credit facilities require the Company to maintain tangible net worth of at least $1.38 billion at all times. Consolidated tangible net worth as calculated for purposes of this covenant was $2.9 billion as of June 30, 2009. The covenants also require the Company to meet either a minimum interest coverage ratio or a minimum net adjusted revenue test based on the four preceding quarters’ adjusted “Core Earnings” financial performance. The Company was compliant with both of the minimum interest coverage ratio and the minimum net adjusted revenue tests as of the quarter ended June 30, 2009. In the past, we have not relied upon our unsecured revolving credit facilities as a primary source of liquidity. Although we have never borrowed under these facilities, they are available to be drawn upon for general corporate purposes.
 
During the quarter, the Company completed several new financing transactions and acquired new financing sources. Combined, this activity generated excess liquidity which was used to repurchase $1.1 billion of the Company’s senior unsecured notes, generating a pre-tax gain of $325 million.


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The following table details our primary sources of primary and stand-by liquidity and the available capacity at June 30, 2009 and December 31, 2008.
 
         
  June 30, 2009
  December 31, 2008
 
  Available Capacity  Available Capacity 
 
Sources of primary liquidity available for new FFELP Stafford and PLUS loan originations:
        
ED Purchase and Participation Programs(1)
  Unlimited(1)  Unlimited(1)
Sources of primary liquidity for general corporate purposes:
        
Unrestricted cash and liquid investments:
        
Cash and cash equivalents
 $6,140  $4,070 
U.S. Treasury-backed securities
  —   — 
Commercial paper and asset-backed commercial paper
  1,050   801 
Certificates of deposit
  —   — 
Other(2)
  152   133 
         
Total unrestricted cash and liquid investments(3)(4)(5)
  7,342   5,004 
Unused commercial paper and bank lines of credit(6)
  3,485   5,192 
2008 FFELP ABCP Facilities
  2,294   807 
2008 Private Education Loan ABCP Facility
  —   332 
         
Total sources of primary liquidity for general corporate purposes
  13,121   11,335 
Sources of stand-by liquidity:
        
Unencumbered FFELP loans(7)
  3,110   5,222 
         
Total sources of primary and stand-by liquidity for general corporate purposes(8)
 $16,231  $16,557 
         
 
 
(1)The ED Purchase and Participation Programs provide unlimited funding for eligible FFELP Stafford and PLUS loans made by the Company for the academic years2008-2009and2009-2010.See “ED Funding Programs” discussed earlier in this section.
 
(2)At June 30, 2009 and December 31, 2008, includes $42 million and $97 million, respectively, due from The Reserve Primary Fund (see “Counterparty Exposure” below).
 
(3)At June 30, 2009 and December 31, 2008, excludes $27 million and $26 million, respectively, of investments pledged as collateral related to certain derivative positions and $843 million and $82 million, respectively, of other non-liquid investments, classified as cash and investments on our balance sheet in accordance with GAAP.
 
(4)At June 30, 2009 and December 31, 2008, includes $0 and $1.6 billion, respectively, of cash collateral pledged by derivative counterparties and held by the Company in unrestricted cash.
 
(5)At June 30, 2009 and December 31, 2008, includes $3.5 billion and $1.1 billion, respectively, of cash and liquid investments at Sallie Mae Bank, which Sallie Mae Bank is not authorized to dividend to the Company without FDIC approval. This cash will be used primarily to originate or acquire student loans.
 
(6)At June 30, 2009 and December 31, 2008, excludes commitments of $215 million and $308 million, respectively, from Lehman Brothers Bank, FSB, a subsidiary of Lehman Brothers Holdings Inc. Lehman Brothers Holdings Inc. declared bankruptcy on September 15, 2008.
 
(7)The balance at June 30, 2009 and December 31, 2008 included approximately $687 million and $241 million, respectively, of unencumbered FFELP loans qualified to be financed by ED’s Participation Program. Additionally, at June 30, 2009, $1.1 billion of loans qualified to be financed in the ED Conduit Program.
 
(8)General corporate purposes primarily include originating Private Education Loans and repaying unsecured debt as it matures.
 
In addition to the assets listed in the table above, we hold on-balance sheet a number of other unencumbered assets, consisting primarily of Private Education Loans, Retained Interests and other assets. At June 30, 2009, we had a total of $36.6 billion of unencumbered assets, including goodwill and acquired intangibles. Student loans, net, comprised $19.2 billion of this unencumbered asset total.
 
Counterparty Exposure
 
As of June 30, 2009, the Company had certain exposures to counterparties impacted by the ongoing credit market dislocation. Counterparty exposure related to financial instruments arises from the risk that a lending, investment or derivative counterparty will not be able to meet its obligations to the Company.


116

 

Lehman Brothers Bank, FSB, a subsidiary of Lehman Brothers Holdings Inc., is a party to the Company’s unsecured revolving credit facilities under which they provide the Company with a $215 million commitment as of June 30, 2009. Lehman Brothers Holdings Inc. declared bankruptcy on September 15, 2008. The Company is operating under the assumption that the lending commitment of Lehman Brothers Bank, FSB, will not be honored if drawn upon.
 
To provide liquidity for future cash needs, SLM invests in high quality money market investments. At June 30, 2009, the Company had investments of $42 million with The Reserve Primary Fund (“The Fund”). In September 2008, the Company requested redemption of all monies invested in The Fund prior to The Fund’s announcement that it suspended distributions as a result of The Fund’s exposure to Lehman Brothers Holdings Inc.’s bankruptcy filing and The Fund’s net asset value being below one dollar per share. The Company was originally informed by The Fund that the Company would receive its entire investment amount. Subsequently, the SEC granted The Fund an indefinite extension to pay distributions as The Fund is being liquidated. The Company has received, to date, a total of $450 million of an initial investment of $500 million from The Fund. The Company anticipates further delay of remaining distributions and a potential loss on its investments, even though the Company is legally entitled to receive 100 percent of its remaining investment amount. In the fourth quarter of 2008, we recorded an impairment of $8 million related to our investment in the Fund.
 
Protection against counterparty risk in derivative transactions is generally provided by the International Swaps and Derivatives Association, Inc. (“ISDA”) Credit Support Annexes (“CSAs”). CSAs require a counterparty to post collateral if a potential default would expose the other party to a loss. The Company is a party to derivative contracts for its corporate purposes and also within its securitization trusts. The Company has CSAs and collateral requirements with all of its corporate derivative counterparties requiring collateral to be exchanged based on the net fair value of derivatives with each counterparty above a threshold. Additionally, credit downgrades below a preset level can eliminate this threshold. The Company’s securitization trusts require collateral in all cases if the counterparty’s credit rating is withdrawn or downgraded below a certain level. If the counterparty does not post the required collateral or is downgraded further, the counterparty must find a suitable replacement counterparty or provide the trust with a letter of credit or a guaranty from an entity that has the required credit ratings. Failure to post the collateral or find a replacement counterparty could result in a termination event under the derivative contract. The Company considers counterparties’ credit risk when determining the fair value of derivative positions on its exposure net of collateral. Securitizations involving foreign currency notes issued after November 2005 also require the counterparty to post collateral to the trust based on the fair value of the derivative regardless of credit rating. The trusts are not required to post collateral to the counterparties. If we were unable to collect from a counterparty related to SLM Corporation and on-balance sheet trust derivatives, we would have a loss equal to the amount the derivative is recorded on our balance sheet. If we were unable to collect from a counterparty related to an off-balance sheet trust derivative, the value of our Residual Interest on our balance sheet would be reduced through earnings.
 
The Company has liquidity exposure related to collateral movements between SLM Corporation and its derivative counterparties. The collateral movements can increase or decrease our primary liquidity depending on the nature of the collateral (whether cash or securities), and on movements in the value of the derivatives, which are primarily impacted by changes in interest rate and foreign exchange rates. These movements may require the Company to return cash collateral posted or may require the Company to access primary liquidity to post collateral to counterparties. In May 2009, following the reduction of SLM’s ratings by Moody’s Investor Service to below investment grade, we were required to segregate the majority of our collateral position and categorize the cash as restricted on our balance sheet. As of June 30, 2009, the Company did not hold any cash collateral in unrestricted cash accounts.


117

 

The table below highlights exposure related to our derivative counterparties at June 30, 2009.
 
             
     On-Balance Sheet
  Off-Balance Sheet
 
  SLM Corporation
  Securitizations
  Securitizations
 
  Contracts  Contracts  Contracts 
 
Exposure, net of collateral
 $221  $1,154  $600 
Percent of exposure to counterparties with credit ratings below S&P AA- or Moody’s Aa3
  68%  39%  34%
Percent of exposure to counterparties with credit ratings below S&P A- or Moody’s A3
  0%  0%  0%
 
Managed Borrowings
 
The following tables present the ending balances of our Managed borrowings at June 30, 2009 and 2008, and the average balances and average interest rates of our Managed borrowings for the three and six months ended June 30, 2009 and 2008. The average interest rates include derivatives that are economically hedging the underlying debt but do not qualify for hedge accounting treatment under SFAS No. 133. (See “BUSINESS SEGMENTS — Pre-tax Differences between ‘Core Earnings’ and GAAP by Business Segment — Derivative Accounting —Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities.”)
 
Ending Balances
 
                         
  As of June 30, 
  2009  2008 
  Ending Balance  Ending Balance 
        Total
        Total
 
  Short
  Long
  Managed
  Short
  Long
  Managed
 
  Term  Term  Basis  Term  Term  Basis 
 
Unsecured borrowings
 $4,249  $28,416  $32,665  $7,557  $34,167  $41,724 
Term bank deposits
  901   5,199   6,100   617   —   617 
Indentured trusts (on-balance sheet)
  8   1,761   1,769   73   2,310   2,383 
ABCP borrowings (on-balance sheet)(1)
  12,476   —   12,476   26,273   —   26,273 
ED Participation Program facility (on-balance sheet)(2)
  17,236   —   17,236   —   —   — 
ED Conduit Program facility (on-balance sheet)
  11,095   —   11,095   —   —   — 
Securitizations (on-balance sheet)
  —   87,386   87,386   —   76,309   76,309 
Securitizations (off-balance sheet)
  —   35,211   35,211   —   39,741   39,741 
Other
  1,358   —   1,358   2,668   —   2,668 
                         
Total
 $47,323  $157,973  $205,296  $37,188  $152,527  $189,715 
                         
 
 
(1)Includes $0 and $2.0 billion outstanding in the 2008 Asset-Backed Loan Facility at June 30, 2009 and 2008, respectively.
 
(2)The Company has the option of paying off this amount with cash or by putting the loans to ED as previously discussed.


118

 

 
Average Balances
 
                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2009  2008  2009  2008 
  Average
  Average
  Average
  Average
  Average
  Average
  Average
  Average
 
  Balance  Rate  Balance  Rate  Balance  Rate  Balance  Rate 
 
Unsecured borrowings
 $33,159   1.97% $39,629   3.44% $34,290   2.13% $41,302   3.78%
Term bank deposits
  4,522   3.61   683   4.11   3,630   3.73   572   4.32 
Indentured trusts (on-balance sheet)
  1,870   1.11   2,424   3.88   1,921   1.29   2,478   4.37 
ABCP Borrowings(on-balance sheet)(1)
  20,040   2.97   25,385   5.45   22,643   3.06   25,633   5.26 
ED Participation Program facility (on-balance sheet)
  15,990   1.26   —   —   13,569   2.03   —   — 
ED Conduit Program facility (on-balance sheet)
  2,757   .74   —   —   1,386   .74   —   — 
Securitizations (on-balance sheet)
  85,419   1.57   74,127   3.12   82,806   1.62   71,938   3.36 
Securitizations (off-balance sheet)
  35,944   .95   40,416   3.14   36,367   1.08   40,942   3.49 
Other
  866   .19   2,597   2.15   1,120   .48   2,320   2.67 
                                 
Total
 $200,567   1.66% $185,261   3.51% $197,732   1.83% $185,185   3.75%
                                 
 
 
(1)Includes the 2008 Asset-Backed Loan Facility.
 
Unsecured On-Balance Sheet Financing Activities
 
The following table presents the senior unsecured credit ratings assigned by major rating agencies as of August 4, 2009.
 
             
  Moody’s  S&P  Fitch 
 
Short-term unsecured debt
  Not Prime   A-3(1)  F3(1)
Long-term senior unsecured debt
  Ba1   BBB-(1)  BBB(1)
 
 
(1)Under review for potential downgrade.
 
The table below presents our unsecured on-balance sheet funding by funding source for the three and six months ended June 30, 2009 and 2008.
 
                         
  Debt Issued For
  Debt Issued For
    
  the Three Months
  the Six Months
    
  Ended
  Ended
  Outstanding at
 
  June 30,  June 30,  June 30, 
  2009  2008  2009  2008  2009  2008 
 
Retail notes
 $—  $—  $—  $—  $3,691  $4,135 
Foreign currency denominated notes(1)
  —   —   —   —   10,236   12,797 
Extendible notes
  —   —   —   —   21   2,445 
Global notes (Institutional)
  —   2,437   —   2,437   18,131   21,750 
Medium-term notes (Institutional)
  —   —   —   —   586   597 
                         
Total unsecured corporate borrowings
  —   2,437   —   2,437   32,665   41,724 
Term bank deposits
  3,375   241   4,531   703   6,100   617 
                         
Total
 $3,375  $2,678  $4,531  $3,140  $38,765  $42,341 
                         
 
 
(1)All foreign currency denominated notes are hedged using derivatives that exchange the foreign denomination for U.S. dollars.


119

 

 
Securitization Activities
 
Securitization Program
 
The following table summarizes our securitization activity for the three and six months ended June 30, 2009 and 2008. Those securitizations listed as sales are off-balance sheet transactions and those listed as financings remain on-balance sheet.
 
                                 
  Three Months Ended June 30, 
  2009  2008 
     Loan
           Loan
       
  No. of
  Amount
  Pre-Tax
     No. of
  Amount
  Pre-Tax
    
  Transactions  Securitized  Gain  Gain%  Transactions  Securitized  Gain  Gain% 
 
Securitizations — sales:
                                
FFELP Stafford/PLUS loans
  —  $—  $—   —%  —  $—  $—   —%
FFELP Consolidation Loans
  —   —   —   —   —   —   —   — 
Private Education Loans
  —   —   —   —   —   —   —   — 
                                 
Total securitizations — sales
  —   —  $—   —%  —   —  $—   —%
                                 
Securitizations — financings:
                                
FFELP Stafford/PLUS loans(1)
  —   —           3   7,125         
FFELP Consolidation Loans(1)
  2   4,524           —   —         
Private Education Loans(1)
  1   3,527           —   —         
                                 
Total securitizations — financings
  3   8,051           3   7,125         
                                 
Total securitizations
  3  $8,051           3  $7,125         
                                 
 
                                 
  Six Months Ended June 30, 
  2009  2008 
     Loan
           Loan
       
  No. of
  Amount
  Pre-Tax
     No. of
  Amount
  Pre-Tax
    
  Transactions  Securitized  Gain  Gain%  Transactions  Securitized  Gain  Gain% 
 
Securitizations — sales:
                                
FFELP Stafford/PLUS loans
  —  $—  $—   —%  —  $—  $—   —%
FFELP Consolidation Loans
  —   —   —   —   —   —   —   — 
Private Education Loans
  —   —   —   —   —   —   —   — 
                                 
Total securitizations — sales
  —   —  $—   —%  —   —  $—   —%
                                 
Securitizations — financings:
                                
FFELP Stafford/PLUS loans(1)
                  6   11,825         
FFELP Consolidation Loans(1)
  2   4,524           —   —         
Private Education Loans(1)
  2   6,419           —   —         
                                 
Total securitizations — financings
  4   10,943           6   11,825         
                                 
Total securitizations
  4  $10,943           6  $11,825         
                                 
 
 
(1)In certain securitizations there are terms within the deal structure that result in such securitizations not qualifying for sale treatment and accordingly, they are accounted for on-balance sheet as variable interest entities (“VIEs”). Terms that prevent sale treatment include: (1) allowing the Company to hold certain rights that can affect the remarketing of certain bonds, (2) allowing the trust to enter into interest rate cap agreements after initial settlement of the securitization, which do not relate to the reissuance of third-party beneficial interests or (3) allowing the Company to hold an unconditional call option related to a certain percentage of the securitized assets.


120

 

 
Retained Interest in Securitized Receivables
 
The following tables summarize the fair value of the Company’s Residual Interests, included in the Company’s Retained Interest (and the assumptions used to value such Residual Interests), along with the underlying off-balance sheet student loans that relate to those securitizations in transactions that were treated as sales as of June 30, 2009, December 31, 2008 and June 30, 2008.
 
                 
  As of June 30, 2009 
  FFELP
  Consolidation
  Private
    
  Stafford and
  Loan
  Education
    
  PLUS  Trusts(1)  Loan Trusts  Total 
 
Fair value of Residual Interests(2)
 $272  $721  $827  $1,820 
Underlying securitized loan balance
  6,046   14,736   13,372   34,154 
Weighted average life
  3.1 yrs.   8.0 yrs.   6.4 yrs.     
Prepayment speed (annual rate)(3)
                
Interim status
  0%  N/A   0%    
Repayment status
  2-19%  1-6%  2-15%    
Life of loan — repayment status
  12%  4%  6%    
Expected remaining credit losses (% of outstanding student loan principal)(4)
  .10%  .22%  5.76%    
Residual cash flows discount rate
  11.5%  13.0%  32.4%    
 
                 
  As of December 31, 2008 
  FFELP
  Consolidation
  Private
    
  Stafford and
  Loan
  Education
    
  PLUS  Trusts(1)  Loan Trusts  Total 
 
Fair value of Residual Interests(2)
 $250  $918  $1,032  $2,200 
Underlying securitized loan balance
  7,057   15,077   13,690   35,824 
Weighted average life
  3.0 yrs.   8.1 yrs.   6.4 yrs.     
Prepayment speed (annual rate)(3)
                
Interim status
  0%  N/A   0%    
Repayment status
  2-19%  1-6%  2-15%    
Life of loan — repayment status
  12%  4%  6%    
Expected remaining credit losses (% of outstanding student loan principal)(4)
  .11%  .23%  5.22%    
Residual cash flows discount rate
  13.1%  11.9%  26.3%    
 
                 
  As of June 30, 2008 
  FFELP
  Consolidation
  Private
    
  Stafford and
  Loan
  Education
    
  PLUS  Trusts(1)  Loan Trusts  Total 
 
Fair value of Residual Interests(2)
 $410  $619  $1,516  $2,545 
Underlying securitized loan balance
  8,383   15,586   13,773   37,742 
Weighted average life
  2.8 yrs.   7.3 yrs.   6.6 yrs.     
Prepayment speed (annual rate)(3)
                
Interim status
  0%  N/A   0%    
Repayment status
  0-30%  3-8%  1-30%    
Life of loan — repayment status
  17%  6%  9%    
Expected remaining credit losses (% of outstanding student loan principal)(4)
  .10%  .20%  5.36%    
Residual cash flows discount rate
  12.0%  10.0%  16.4%    
 
 
(1)Includes $529 million, $762 million, and $295 million related to the fair value of the Embedded Floor Income as of June 30, 2009, December 31, 2008, and June 30, 2008, respectively. Changes in the fair value of the Embedded Floor Income are primarily due to changes in the interest rates and the paydown of the underlying loans.
 
(2)The Company had no unrealized gains (pre-tax) in accumulated other comprehensive income that related to the Retained Interests for any of the periods presented.
 
(3)The Company uses CPR curves for Residual Interest valuations that are based on seasoning (the number of months since entering repayment). Under this methodology, a different CPR is applied to each year of a loan’s seasoning. Repayment status CPR used is based on the number of months since first entering repayment (seasoning). Life of loan CPR is related to repayment status only and does not include the impact of the loan while in interim status. The CPR assumption used for all periods includes the impact of projected defaults.
 
(4)Remaining expected credit losses as of the respective balance sheet date.


121

 

 
Off-Balance Sheet Net Assets
 
The following table summarizes our off-balance sheet net assets at June 30, 2009 and December 31, 2008 on a basis equivalent to our GAAP on-balance sheet trusts, which presents the assets and liabilities in the off-balance sheet trusts as if they were being accounted for on-balance sheet rather than off-balance sheet. This presentation, therefore, includes a theoretical calculation of the premiums on student loans, the allowance for loan losses, and the discounts and deferred financing costs on the debt. However, this presentation does not include any impact of accounting under SFAS No. 133 or SFAS No. 52 for trust derivatives or foreign currency denominated debt. This presentation is not, nor is it intended to be, a liquidation basis of accounting. (See also “LENDING BUSINESS SEGMENT — Summary of our Managed Student Loan Portfolio — Ending Managed Student Loan Balances, net” and “LIQUIDITY AND CAPITAL RESOURCES — Managed Borrowings —Ending Balances” earlier in this section.)
 
         
  June 30,
  December 31,
 
  2009  2008 
 
Off-Balance Sheet Assets:
        
Total student loans, net
 $33,946  $35,591 
Restricted cash and investments
  1,198   1,557 
Accrued interest receivable
  711   937 
         
Total off-balance sheet assets
  35,855   38,085 
Off-Balance Sheet Liabilities:
        
Debt, par value
  35,188   37,228 
Debt, unamortized discount and deferred issuance costs
  (51)  (69)
         
Total debt
  35,137   37,159 
Accrued interest payable
  55   166 
         
Total off-balance sheet liabilities
  35,192   37,325 
         
Off-Balance Sheet Net Assets
 $663  $760 
         
 
Servicing and Securitization Revenue
 
Servicing and securitization revenue, the ongoing revenue from securitized loan pools accounted for off-balance sheet as Qualifying Special Purpose Entities (“QSPEs”), includes the interest earned on the Residual Interest asset and the revenue we receive for servicing the loans in the securitization trusts. Interest income recognized on the Residual Interest is based on our anticipated yield determined by estimating future cash flows each quarter.


122

 

The following table summarizes the components of servicing and securitization revenue for the three and six months ended June 30, 2009 and 2008.
 
                 
  Three Months Ended  Six Months Ended 
  June 30,
  June 30,
  June 30,
  June 30,
 
  2009  2008  2009  2008 
 
Servicing revenue
 $57  $63  $116  $127 
Securitization revenue, before net Embedded Floor Income, impairment and unrealized fair value adjustment
  79   76   159   161 
                 
Servicing and securitization revenue, before net Embedded Floor Income, impairment and unrealized fair value adjustment
  136   139   275   288 
Embedded Floor Income
  84   74   157   136 
Less: Floor Income previously recognized in gain calculation
  (54)  (19)  (100)  (35)
                 
Net Embedded Floor Income
  30   55   57   101 
                 
Servicing and securitization revenue, before impairment and unrealized fair value adjustment
  166   194   332   389 
Unrealized fair value adjustment
  (90)  (192)  (351)  (280)
Gain on consolidation of off-balance sheet trusts
  11   —   11   — 
Retained Interest impairment
  —   —   —   — 
                 
Total servicing and securitization revenue (loss)
 $87  $2  $(8) $109 
                 
Average off-balance sheet student loans
 $34,902  $38,175  $35,238  $38,669 
                 
Average balance of Retained Interest
 $1,875  $2,716  $2,006  $2,844 
                 
Servicing and securitization revenue as a percentage of the average balance of off-balance sheet student loans (annualized)
  1.01%  .02%  (.04)%  .57%
                 
 
Servicing and securitization revenue is primarily driven by the average balance of off-balance sheet student loans, the amount of and the difference in the timing of Embedded Floor Income recognition on off-balance sheet student loans and the unrealized fair value adjustments.
 
The Company recorded net unrealizedmark-to-marketlosses of $90 million and $192 million in the second quarter of 2009 and second quarter of 2008, respectively, related to the Residual Interest.
 
As of June 30, 2009, the Company did not change any significant assumptions compared to those used as of March 31, 2009, to determine the fair value of the Residual Interests. The $90 million unrealizedmark-to-marketloss in the second quarter of 2009 was primarily a result of an increase in forward interest rates which resulted in a higher discount rate used to value the Residual Interests as well as a reduction in the fair value of the Embedded Fixed Rate Floor Income.
 
The $192 millionmark-to-marketloss in the second quarter of 2008 was primarily related to increases in forward interest rates during the quarter reducing the value of Embedded Fixed Rate Floor Income ($137 million decrease) and increasing the discount rate used to value the Residual Interests ($57 million decrease). Additionally, the Company increased the spread to LIBOR component of the Private Education discount rate formula to better reflect current market conditions which resulted in a $113 million Residual Interestmark-to-marketloss. Actual quarterly experience, including improved forward curve spreads used in the valuation of the Residual Interests, partially mitigated thesemark-to-marketlosses.


123

 

Interest Rate Risk Management
 
Asset and Liability Funding Gap
 
The tables below present our assets and liabilities (funding) arranged by underlying indices as of June 30, 2009. In the following GAAP presentation, the funding gap only includes derivatives that qualify as effective SFAS No. 133 hedges (those derivatives which are reflected in net interest margin, as opposed to those reflected in the “gains/(losses) on derivatives and hedging activities, net” line on the consolidated statements of income). The difference between the asset and the funding is the funding gap for the specified index. This represents our exposure to interest rate risk in the form of basis risk and repricing risk, which is the risk that the different indices may reset at different frequencies or may not move in the same direction or at the same magnitude.
 
Management analyzes interest rate risk on a Managed basis, which consists of both on-balance sheet and off-balance sheet assets and liabilities and includes all derivatives that are economically hedging our debt whether they qualify as effective hedges under SFAS No. 133 or not. Accordingly, we are also presenting the asset and liability funding gap on a Managed basis in the table that follows the GAAP presentation.
 
GAAP Basis
 
               
Index
 Frequency of
       Funding
 
(Dollars in billions)
 Variable Resets Assets  Funding(1)  Gap 
 
3-monthCommercial paper(2)
 daily $123.2  $17.3  $105.9 
3-monthTreasury bill
 weekly  6.8   .1   6.7 
Prime
 annual  .5   —   .5 
Prime
 quarterly  1.4   —   1.4 
Prime
 monthly  17.3   —   17.3 
PLUS Index
 annual  .5   —   .5 
3-month LIBOR
 daily  —   —   — 
3-month LIBOR
 quarterly  .1   108.0   (107.9)
1-month LIBOR
 monthly  3.9   2.6   1.3 
CMT/CPI Index
 monthly/quarterly  —   2.8   (2.8)
Non Discrete reset(3)
 monthly  —   25.8   (25.8)
Non Discrete reset(4)
 daily/weekly  13.3   1.9   11.4 
Fixed Rate(5)
    14.2   22.7   (8.5)
               
Total
   $181.2  $181.2  $— 
               
 
 
(1)Funding includes all derivatives that qualify as hedges under SFAS No. 133.
 
(2)Funding includes $17.2 billion of ED Participation Program facility which resets based on the prior quarter student loan commercial paper index.
 
(3)Funding consists of auction rate securities, the 2008 ABCP Facilities and the ED Conduit Program facility.
 
(4)Assets include restricted and non-restricted cash equivalents and other overnight type instruments.
 
(5)Assets include receivables and other assets (including Retained Interests, goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity (excluding series B Preferred Stock).
 
The “Funding Gaps” in the above table are primarily interest rate mismatches in short-term indices between our assets and liabilities. We address this issue typically through the use of basis swaps that typically convert quarterly three-month LIBOR to other indices that are more correlated to our asset indices. These basis swaps do not qualify as effective hedges under SFAS No. 133 and as a result the effect on the funding index is not included in our interest margin and is therefore excluded from the GAAP presentation.


124

 

Managed Basis
 
               
Index
 Frequency of
       Funding
 
(Dollars in billions)
 Variable Resets Assets  Funding(1)  Gap 
 
3-monthCommercial paper(2)
 daily $142.3  $17.3  $125.0 
3-monthTreasury bill
 weekly  9.0   6.5   2.5 
Prime
 annual  1.0   —   1.0 
Prime
 quarterly  6.3   3.5   2.8 
Prime
 monthly  25.2   14.5   10.7 
PLUS Index
 annual  .6   .1   .5 
3-monthLIBOR(3)
 daily  —   96.6   (96.6)
3-month LIBOR
 quarterly  —   30.1   (30.1)
1-month LIBOR
 monthly  3.9   0.0   3.9 
Non Discrete reset(4)
 monthly  —   25.6   (25.6)
Non Discrete reset(5)
 daily/weekly  14.5   1.4   13.1 
Fixed Rate(6)
    10.7   17.9   (7.2)
               
Total
   $213.5  $213.5  $— 
               
 
 
(1)Funding includes all derivatives that management considers economic hedges of interest rate risk and reflects how we internally manage our interest rate exposure.
 
(2)Funding includes $17.2 billion of ED Participation Program facility which resets based on the prior quarter student loan commercial paper index.
 
(3)Funding includes $2.5 billion of auction rate securities.
 
(4)Funding consists of auction rate securities, the 2008 ABCP Facilities and the ED Conduit Program facility.
 
(5)Assets include restricted and non-restricted cash equivalents and other overnight type instruments.
 
(6)Assets include receivables and other assets (including Retained Interests, goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity (excluding series B Preferred Stock).
 
We use interest rate swaps and other derivatives to achieve our risk management objectives. To the extent possible, we fund our assets with debt (in combination with derivatives) that has the same underlying index (index type and index reset frequency). When it is more economical, we also fund our assets with debt that has a different indexand/or reset frequency than the asset, but only in instances where we believe there is a high degree of correlation between the interest rate movement of the two indices. For example, we use daily reset three-month LIBOR to fund a large portion of our daily reset three-month commercial paper indexed assets. In addition, we use quarterly reset three-month LIBOR to fund a portion of our quarterly reset Prime rate indexed Private Education Loans. We also use our monthly Non Discrete reset and1-monthLIBOR funding to fund various asset types. In using different index types and different index reset frequencies to fund our assets, we are exposed to interest rate risk in the form of basis risk and repricing risk, which is the risk that the different indices that may reset at different frequencies will not move in the same direction or at the same magnitude. While we believe that this risk is low as all of these indices are short-term with rate movements that are highly correlated over a long period of time, market disruptions can lead to a temporary divergence between indices as was experienced beginning in the second half of 2007 to the present with the commercial paper and LIBOR indices. As of June 30, 2009, on a Managed Basis, we have approximately $113.9 billion of FFELP loans indexed to three-month commercial paper (“3M CP”) that are funded with debt indexed to LIBOR. We believe there is broad market recognition that, due to the unintended consequences of government action in other areas of the capital markets, the 3M CP index and its relationship to LIBOR is broken (see “LENDING BUSINESS SEGMENT” for a further discussion).
 
When compared with the GAAP presentation, the Managed basis presentation includes all of our off-balance sheet assets and funding, and also includes basis swaps that primarily convert quarterly three-month LIBOR to other indices that are more correlated to our asset indices.


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Weighted Average Life
 
The following table reflects the weighted average life of our Managed earning assets and liabilities at June 30, 2009.
 
         
  On-Balance
    
(Averages in Years)
 Sheet  Managed 
 
Earning assets
        
Student loans
  7.7   7.7 
Other loans
  6.4   6.4 
Cash and investments
  .1   .1 
         
Total earning assets
  7.0   7.1 
         
Borrowings
        
Short-term borrowings
  .4   .4 
Long-term borrowings
  6.5   6.5 
         
Total borrowings
  4.8   5.1 
         
 
Long-term debt issuances likely to be called by us or putable by the investor have been categorized according to their call or put dates rather than their maturity dates.
 
COMMON STOCK
 
The following table summarizes the Company’s common share repurchases and issuances for the three and six months ended June 30, 2009 and 2008.
 
                 
     Six Months
 
  Three Months Ended
  Ended
 
  June 30,  June 30, 
(Shares in millions)
 2009  2008  2009  2008 
 
Common shares repurchased:
                
Benefit plans(1)
  —   .2   .1   .5 
                 
Total shares repurchased
  —   .2   .1   .5 
                 
Average purchase price per share
 $—  $23.74  $23.84  $20.98 
                 
Common shares issued
  .1   .3   .4   1.5 
                 
Authority remaining at end of period for repurchases
  38.8   38.8   38.8   38.8 
                 
 
 
(1)Includes shares withheld from stock option exercises and vesting of restricted stock for employees’ tax withholding obligations and shares tendered by employees to satisfy option exercise costs.
 
The closing price of the Company’s common stock on June 30, 2009 was $10.27.
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
 
Interest Rate Sensitivity Analysis
 
The Company’s interest rate risk management seeks to limit the impact of short-term movements in interest rates on our results of operations and financial position. The following tables summarize the effect on earnings for the three and six months ended June 30, 2009 and 2008 and the effect on fair values at June 30, 2009 and December 31, 2008, based upon a sensitivity analysis performed by management assuming a hypothetical increase in market interest rates of 100 basis points and 300 basis points while funding spreads remain constant. Additionally, as it relates to the effect on earnings, a sensitivity analysis was performed assuming the funding index increases 25 basis points while holding the asset index constant, if the funding index is different than the asset index. Both of these analyses do not consider any potential mark-to-market


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losses that may occur related to our Residual Interests that may result from asset and funding basis divergence or a higher discount rate that would be used to compute the present value of the cash flows if long-term interest rates increased. See Note 6, “Student Loan Securitization,” to the consolidated financial statements, which details the potential decrease to the fair value of the Residual Interest that could occur under the referenced interest rate environment.
 
                         
  Three Months Ended June 30, 2009 
           Asset and
 
              Funding
 
  Interest Rates:  Index
 
  Change from
  Change from
  Mismatches(1) 
  Increase of
  Increase of
  Increase of
 
  100 Basis  300 Basis
  25 Basis
 
  Points  Points  Points 
(Dollars in millions, except per share amounts)
 $  %  $  %  $  % 
 
Effect on Earnings
                        
Increase/(decrease) in pre-tax net income before unrealized gains (losses) on derivative and hedging activities
 $(44)  (13)% $(57)  (17)% $(84)  (24)%
Unrealized gains (losses) on derivative and hedging activities
  120   23   139   27   98   19 
                         
Increase in net income before taxes
 $76   45% $82   49% $14   8%
                         
Increase in diluted earnings per common share
  .163   51% $.176   55% $.030   9%
                         
 
                         
  Three Months Ended June 30, 2008 
     Asset and
 
              Funding
 
  Interest Rates:  Index
 
  Change from
  Change from
  Mismatches(1) 
  Increase of
  Increase of
  Increase of
 
  100 Basis
  300 Basis
  25 Basis
 
  Points  Points  Points 
(Dollars in millions, except per share amounts)
 $  %  $  %  $  % 
 
Effect on Earnings
                        
Increase/(decrease) in pre-tax net income before unrealized gains (losses) on derivative and hedging activities
 $3   46% $11   158% $(71)  (1,026)%
Unrealized gains (losses) on derivative and hedging activities
  234   54   459   107   77   18 
                         
Increase in net income before taxes
 $237   56% $470   112% $6   1%
                         
Increase in diluted earnings per common share
 $.457   91% $.908   182% $.011   2%
                         
 
 
(1)If an asset is not funded with the same index/frequency reset of the asset then it is assumed the funding index increases 25 basis points while holding the asset index constant.
 


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  Six Months Ended June 30, 2009 
              Asset and
 
              Funding
 
  Interest Rates:  Index
 
  Change from
  Change from
  Mismatches(1) 
  Increase of
  Increase of
  Increase of
 
  100 Basis
  300 Basis
  25 Basis
 
  Points  Points  Points 
(Dollars in millions, except per share amounts)
 $  %  $  %  $  % 
 
Effect on Earnings
                        
Increase/(decrease) in pre-tax net income before unrealized gains (losses) on derivative and hedging activities
 $(97)  (35)% $(121)  (44)% $(163)  (59)%
Unrealized gains (losses) on derivative and hedging activities
  120   24   139   28   98   20 
                         
Increase in net income before taxes
 $23   10% $18   8% $(65)  (29)%
                         
Increase in diluted earnings per common share
  .049   12% $.039   9% $(.139)  (33)%
                         
 
                         
  Six Months Ended June 30, 2008 
              Asset and
 
              Funding
 
  Interest Rates:  Index
 
  Change from
  Change from
  Mismatches(1) 
  Increase of
  Increase of
  Increase of
 
  100 Basis
  300 Basis
  25 Basis
 
  Points  Points  Points 
(Dollars in millions, except per share amounts)
 $  %  $  %  $  % 
 
Effect on Earnings
                        
Increase/(decrease) in pre-tax net income before unrealized gains (losses) on derivative and hedging activities
 $(2)  (1)% $7   3% $(141)  (74)%
Unrealized gains (losses) on derivative and hedging activities
  234   363   459   713   77   120 
                         
Increase in net income before taxes
 $232   91% $466   182% $(64)  (25)%
                         
Increase in diluted earnings per common share
 $.495   215% $.996   433% $(.138)  (60)%
                         
 
 
(1)If an asset is not funded with the same index/frequency reset of the asset then it is assumed the funding index increases 25 basis points while holding the asset index constant.
 

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  At June 30, 2009 
     Interest Rates: 
     Change from
  Change from
 
     Increase of
  Increase of
 
     100 Basis
  300 Basis
 
     Points  Points 
(Dollars in millions)
 Fair Value  $  %  $  % 
 
Effect on Fair Values
                    
Assets
                    
Total FFELP student loans
 $127,239  $(454)  —% $(953)  (1)%
Private Education Loans
  18,035   —   —   —   — 
Other earning assets
  13,822   (4)  —   (11)  — 
Other assets
  13,080   (723)  (6)  (1,338)  (10)
                     
Total assets
 $172,176  $(1,181)  (1)% $(2,302)  (1)%
                     
Liabilities
                    
Interest bearing liabilities
 $157,987  $(743)  —% $(2,016)  (1)%
Other liabilities
  3,121   (111)  (4)  394   (13)
                     
Total liabilities
 $161,108  $(854)  (1)% $(1,622)  (1)%
                     
 
                     
  At December 31, 2008 
     Interest Rates: 
     Change from
  Change from
 
     Increase of
  Increase of
 
     100 Basis
  300 Basis
 
     Points  Points 
(Dollars in millions)
 Fair Value  $  %  $  % 
 
Effect on Fair Values
                    
Assets
                    
Total FFELP student loans
 $107,319  $(758)  (1)% $(1,602)  (1)%
Private Education Loans
  14,141   —   —   —   — 
Other earning assets
  9,265   (9)  —   (25)  — 
Other assets
  14,590   (848)  (6)  (2,108)  (14)
                     
Total assets
 $145,315  $(1,615)  (1)% $(3,735)  (3)%
                     
Liabilities
                    
Interest bearing liabilities
 $135,070  $(837)  (1)% $(2,500)  (2)%
Other liabilities
  3,604   (293)  (8)  (273)  (8)
                     
Total liabilities
 $138,674  $(1,130)  (1)% $(2,773)  (2)%
                     
 
A primary objective in our funding is to minimize our sensitivity to changing interest rates by generally funding our floating rate student loan portfolio with floating rate debt. However, as discussed under “LENDING BUSINESS SEGMENT — Summary of our Managed Student Loan Portfolio — Floor Income — Managed Basis,” we can have a fixed versus floating mismatch in funding if the student loan earns at the fixed borrower rate and the funding remains floating. In addition, we can have a mismatch in the index (including the frequency of reset) of floating rate debt versus floating rate assets.
 
During the three and six months ended June 30, 2009 and 2008, certain FFELP loans were earning Floor Income and we locked in a portion of that Floor Income through the use of Floor Income Contracts. The

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result of these hedging transactions was to convert a portion of the fixed rate nature of student loans to variable rate, and to fix the relative spread between the student loan asset rate and the variable rate liability.
 
In the above table, under the scenario where interest rates increase 100 and 300 basis points, the change in pre-tax net income before the unrealized gains (losses) on derivative and hedging activities is primarily due to the impact of (i) our unhedged on-balance sheet loans being in a fixed rate mode due to the Embedded Floor Income, while being funded with variable debt in low interest rate environments; and (ii) a portion of our variable assets being funded with fixed debt. Item (i) will generally cause income to decrease when interest rates increase from a low interest rate environment, whereas, item (ii) will generally offset this decrease. In the 100 and 300 basis point scenario for the three and six months ended June 30, 2009, the decreases in income resulted from the unhedged Floor Income discussed in item (i) above due to the low interest rate environment. The increase in income in the three and six months ended June 30, 2008, resulted from item (ii) discussed above. Item (i) did not have as great an impact due to the higher interest rate environment in the first half of 2008.
 
Under the scenario in the tables above, called “Asset and Funding Index Mismatches,” the main driver of the decrease in pre-tax income before unrealized gains (losses) on derivative and hedging activities is the result of LIBOR-based debt funding commercial paper-indexed assets. See “LIQUIDITY AND CAPITAL RESOURCES — Interest Rate Risk Management— Asset and Liability Funding Gap” for a further discussion. Increasing the spread between indices will also impact the unrealized gains (losses) on derivatives and hedging activities as it relates to basis swaps. Basis swaps used to convert LIBOR-based debt to indices that we believe are economic hedges of the indices of the assets being funded resulted in an unrealized loss of $(124) million for the three and six months ended June 30, 2009, and an unrealized loss of $(116) million for the three and six months ended June 30, 2008. Offsetting this unrealized loss, are basis swaps that economically hedge our off-balance sheet Private Education Loan securitization trusts. Unrealized gains for these basis swaps totaled $222 million for the three and six months ended June 30, 2009, and $193 million for the three and six months ended June 30, 2008. The net impact of both of these items was an unrealized gain for all periods presented.
 
In addition to interest rate risk addressed in the preceding tables, the Company is also exposed to risks related to foreign currency exchange rates. Foreign currency exchange risk is primarily the result of foreign currency denominated debt issued by the Company. As it relates to the Company’s corporate unsecured and securitization debt programs used to fund the Company’s business, the Company’s policy is to use cross currency interest rate swaps to swap all foreign currency denominated debt payments (fixed and floating) to U.S. dollar LIBOR using a fixed exchange rate. In the tables above, there would be an immaterial impact on earnings if exchange rates were to decrease or increase, due to the terms of the hedging instrument and hedged items matching. The balance sheet interest bearing liabilities would be affected by a change in exchange rates; however, the change would be materially offset by the cross currency interest rate swaps in other assets or other liabilities. In the current economic environment, volatility in the spread between spot and forward foreign exchange rates has resulted in material mark-to-market impacts to current-period earnings which have not been factored into the above analysis. The earnings impact is noncash, and at maturity of the instruments, the cumulative mark-to-market impact will be zero.


130

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
See Note 1, “Significant Accounting Policies — Recently Issued Accounting Pronouncements,” to the consolidated financial statements.
 
Item 4.  Controls and Procedures
 
Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined inRules 13a-15(e)and15d-15(e)under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2009. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer, concluded that, as of June 30, 2009, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control over Financial Reporting
 
No change in our internal control over financial reporting (as defined inRules 13a-15(f)and15d-15(f)under the Exchange Act) occurred during the fiscal quarter ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


131

 

 
PART II. OTHER INFORMATION
 
Item 1.  Legal Proceedings
 
On April 20, 2009, the Company received a letter on behalf of a shareholder, SEIU Pension Plans Master Trust, demanding, among other things, that the Company’s Board of Directors take action to recover Company funds it alleges were “unjustly paid to certain current and former employees and executive officers of the Company” from 2005 to the present, file civil lawsuits against former and current executives, revise the executive compensation structure, and offer shareholders an annual nonbinding “say on pay.” Twenty-nine financial services companies received similar letters that same week. This letter was referred to the Board of Directors.
 
On August 3, 2009, the Company received the final audit report of ED’s Office of the Inspector General (“OIG”) related to the Company’s billing practices for special allowance payments. Among other things, the OIG recommended that ED instruct the Company to return approximately $22 million in alleged special allowance overpayments. The Company continues to believe that its practices are consistent with longstanding ED guidance and all applicable rules and regulations and intends to continue disputing these findings. The OIG has audited other industry participants with regard to special allowance payments for loans funded by tax exempt obligations and in certain cases the Secretary of ED has disagreed with the OIG’s recommendations.
 
We are also subject to various claims, lawsuits and other actions that arise in the normal course of business. Most of these matters are claims by borrowers disputing the manner in which their loans have been processed or the accuracy of our reports to credit bureaus. In addition, the collections subsidiaries in our APG segment are routinely named in individual plaintiff or class action lawsuits in which the plaintiffs allege that we have violated a federal or state law in the process of collecting their accounts. Management believes that these claims, lawsuits and other actions will not have a material adverse effect on our business, financial condition or results of operations. Finally, from time to time, we receive information and document requests from state attorneys general and Congressional committees concerning certain of our business practices. Our practice has been and continues to be to cooperate with the state attorneys general and Congressional committees and to be responsive to any such requests.
 
Item 1A.  Risk Factors
 
There have been no material changes from the risk factors previously disclosed in our Annual Report on Form10-K for the year ended December 31, 2008.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table summarizes the Company’s common share repurchases during the second quarter of 2009 in connection with the exercise of stock options and vesting of restricted stock to satisfy minimum statutory tax withholding obligations and shares tendered by employees to satisfy option exercise costs. See Note 9, “Equity,” to the consolidated financial statements.
 
                 
           Maximum Number
 
        Total Number of
  of Shares That
 
        Shares Purchased
  May Yet Be
 
  Total Number
  Average Price
  as Part of Publicly
  Purchased Under
 
  of Shares
  Paid per
  Announced Plans
  the Plans or
 
(Common shares in millions)
 Purchased  Share  or Programs  Programs 
 
Period:
                
April 1 — April 30, 2009
  —  $—   —   38.8 
May 1 — May 31, 2009
  —   —   —   38.8 
June 1 — June 30, 2009
  —   —   —   38.8 
                 
Total second quarter of 2009
  —  $—   —     
                 
 
Item 3.  Defaults upon Senior Securities
 
Nothing to report.


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Item 4.  Submission of Matters to a Vote of Security Holders
 
At the Company’s annual meeting of shareholders held on May 22, 2009, the following proposals were approved by the margins indicated:
 
1. The vote on the election of the following named persons to serve as Directors of the Company for the ensuing year, was as follows:
 
             
  Number of Shares 
  Votes For  Votes Against  Abstain 
 
Ann Torre Bates
  393,358,216   12,544,011   21,014,377 
W. M. Diefenderfer III
  397,513,431   8,385,197   21,017,976 
Diane Suitt Gilleland
  386,100,208   19,783,549   21,012,847 
Earl A. Goode
  396,632,946   9,297,759   20,985,899 
Ronald F. Hunt
  396,901,279   9,003,976   21,011,349 
Albert L. Lord
  396,024,643   9,957,234   20,934,727 
Michael E. Martin
  398,175,693   7,756,512   20,984,399 
Barry A Munitz
  395,495,706   10,403,724   21,017,174 
Howard H. Newman
  398,314,566   7,616,925   20,985,113 
A. Alexander Porter, Jr. 
  386,244,824   19,654,152   21,017,628 
Frank C. Puleo
  398,333,646   7,598,014   20,984,944 
Wolfgang Schoellkopf
  385,267,362   20,632,922   21,016,320 
Steven L. Shapiro
  385,735,973   20,170,038   21,010,593 
J. Terry Strange
  389,528,583   16,406,536   20,981,485 
Anthony P. Terracciano
  398,112,766   7,825,125   20,978,713 
Barry L. Williams
  394,735,513   11,165,644   21,015,447 
 
2. The vote on adoption of the SLM Corporation Directors Equity Plan was as follows:
 
         
Number of Shares
Votes For
 
Votes Against
 
Abstain
 
341,627,230  28,698,124   25,044,937 
 
3. The vote on adoption of the SLM Corporation2009-2012Incentive Plan was as follows:
 
         
Number of Shares
Votes For
 
Votes Against
 
Abstain
 
337,107,821  33,218,333   25,044,137 
 
4. The vote on ratification of PricewaterhouseCoopers LLP as independent registered public accounting firm for the fiscal year ending December 31, 2009, was as follows:
 
         
Number of Shares
Votes For
 
Votes Against
 
Abstain
 
402,719,331  3,184,110   21,013,163 
 
Item 5.  Other Information
 
Nothing to report.


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Item 6.  Exhibits
 
The following exhibits are furnished or filed, as applicable:
 
   
10.1
 Confidential Agreement and Release - C.E. Andrews
10.2
 Confidential Agreement and Release - Robert Autor
10.3
 Amended and Restated Note Purchase and Security Agreement: Bluemont Funding I; the Conduit Lenders, the Alternate Lenders; the LIBOR lenders; the Managing Agents; Bank of America, N.A.; JPMorgan Chase Bank, N.A.; Banc of America Securities LLC; J.P. Morgan Securities Inc., The Bank of New York Mellon Trust Company, National Association; Sallie Mae, Inc.
10.4
 Schedule of Contracts Substantially Identical to Exhibit 10.3 in all Material Respects: Town Center Funding I LLC and Town Hall Funding I LLC
31.1
 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
 The following materials from SLM Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, formatted in XBRL (“Extensible Business Reporting Language”): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Changes in Stockholders’ Equity; (iv) the Consolidated Statements of Cash Flows; and (v) Notes to the Consolidated Financial Statements, tagged as blocks of text.


134

 

 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
SLM CORPORATION
(Registrant)
 
  By: 
/s/  John F. Remondi
John F. Remondi
Vice Chairman and Chief Financial Officer
(Principal Financial and Accounting Officer)
 
Date: August 5, 2009


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GLOSSARY
 
Listed below are definitions of key terms that are used throughout this document. See also APPENDIX A, “FEDERAL FAMILY EDUCATION LOAN PROGRAM,” included in SLM Corporation’s (“the Company’s”) 2008 Annual Report onForm 10-K,filed with the Securities and Exchange Commission (“SEC”) on March 2, 2009, for a further discussion of the FFELP.
 
Consolidation Loan Rebate Fee — All holders of FFELP Consolidation Loans are required to pay to the U.S. Department of Education (“ED”) an annual 105 basis point Consolidation Loan Rebate Fee on all outstanding principal and accrued interest balances of FFELP Consolidation Loans purchased or originated after October 1, 1993, except for loans for which consolidation applications were received between October 1, 1998 and January 31, 1999, where the Consolidation Loan Rebate Fee is 62 basis points.
 
Constant Prepayment Rate (“CPR”) — A variable inlife-of-loanestimates that measures the rate at which loans in the portfolio prepay before their stated maturity. The CPR is directly correlated to the average life of the portfolio. CPR equals the percentage of loans that prepay annually as a percentage of the beginning of period balance.
 
“Core Earnings” — The Company prepares financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”). In addition to evaluating the Company’s GAAP-based financial information, management evaluates the Company’s business segments on a basis that, as allowed under the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” differs from GAAP. The Company refers to management’s basis of evaluating its segment results as “Core Earnings” presentations for each business segment and refers to these performance measures in its presentations with credit rating agencies and lenders. While “Core Earnings” results are not a substitute for reported results under GAAP, the Company relies on “Core Earnings” performance measures in operating each business segment because it believes these measures provide additional information regarding the operational and performance indicators that are most closely assessed by management.
 
“Core Earnings” performance measures are the primary financial performance measures used by management to evaluate performance and to allocate resources. Accordingly, financial information is reported to management on a “Core Earnings” basis by reportable segment, as these are the measures used regularly by the Company’s chief operating decision makers. “Core Earnings” performance measures are used in developing the Company’s financial plans, tracking results, and establishing corporate performance targets and incentive compensation. Management believes this information provides additional insight into the financial performance of the Company’s core business activities. “Core Earnings” performance measures are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. “Core Earnings” net income reflects only current period adjustments to GAAP net income. Accordingly, the Company’s “Core Earnings” presentation does not represent another comprehensive basis of accounting.
 
See Note 16, “Segment Reporting,” to the consolidated financial statements and “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — BUSINESS SEGMENTS — Limitations of “Core Earnings” “ and “— Pre-tax Differences between “Core Earnings’ and GAAP by Business Segment” for further discussion of the differences between “Core Earnings” and GAAP, as well as reconciliations between “Core Earnings” and GAAP.
 
In prior filings with the SEC of SLM Corporation’s Annual Report onForm 10-Kand quarterly reports onForm 10-Q,“Core Earnings” has been labeled as “ ‘Core’ net income” or “Managed net income” in certain instances.
 
Economic Floor Income — Economic Floor Income equals Gross Floor Income earned on Managed loans, minus the payments on Floor Income Contracts, plus the amortization of net premiums on both Fixed Rate and Variable Rate Floor Income Contracts (see definitions for capitalized terms, below).
 
ED — The U.S. Department of Education.


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Embedded Floor Income — Embedded Floor Income is Floor Income (see definition below) that is earned on off-balance sheet student loans that are in securitization trusts sponsored by the Company. At the time of the securitization, the value of Embedded Fixed Rate Floor Income is included in the initial valuation of the Residual Interest (see definition below) and the gain or loss on sale of the student loans. Embedded Floor Income is also included in the quarterly fair value adjustments of the Residual Interest.
 
Exceptional Performer (“EP”) — The EP designation is determined by ED in recognition of a servicer meeting certain performance standards set by ED in servicing FFELP Loans. Upon receiving the EP designation, the EP servicer receives reimbursement on default claims higher than the legislated Risk Sharing (see definition below) levels on federally guaranteed student loans for all loans serviced for a period of at least 270 days before the date of default. The EP servicer is entitled to receive this benefit as long as it remains in compliance with the required servicing standards, which are assessed on an annual and quarterly basis through compliance audits and other criteria. The annual assessment is in part based upon subjective factors which alone may form the basis for an ED determination to withdraw the designation. If the designation is withdrawn, Risk Sharing may be applied retroactively to the date of the occurrence that resulted in noncompliance. The College Cost Reduction Act of 2007 (“CCRAA”) eliminated the EP designation effective October 1, 2007. See also Appendix A, “FEDERAL FAMILY EDUCATION LOAN PROGRAM,” included in the Company’s 2008 Annual Report onForm 10-K,filed with the SEC on March 2, 2009.
 
FDLP — The William D. Ford Federal Direct Loan Program.
 
FFELP — The Federal Family Education Loan Program, formerly the Guaranteed Student Loan Program.
 
FFELP Consolidation Loans — Under the FFELP, borrowers with multiple eligible student loans may consolidate them into a single student loan with one lender at a fixed rate for the life of the loan. The new loan is considered a FFELP Consolidation Loan. Typically a borrower may consolidate his student loans only once unless the borrower has another eligible loan to consolidate with the existing FFELP Consolidation Loan. The borrower rate on a FFELP Consolidation Loan is fixed for the term of the loan and is set by the weighted average interest rate of the loans being consolidated, rounded up to the nearest 1/8th of a percent, not to exceed 8.25 percent. In low interest rate environments, FFELP Consolidation Loans provide an attractive refinancing opportunity to certain borrowers because they allow borrowers to consolidate variable rate loans into a long-term fixed rate loan. Holders of FFELP Consolidation Loans are eligible to earn interest under the Special Allowance Payment (“SAP”) formula (see definition below). In April 2008, the Company suspended its participation in the FFELP Consolidation Loan program.
 
FFELP Stafford and Other Student Loans — Education loans to students or parents of students that are guaranteed or reinsured under FFELP. The loans are primarily Stafford loans but also include PLUS and HEAL loans.
 
Fixed Rate Floor Income — Fixed Rate Floor Income is Floor Income (see definition below) associated with student loans with borrower rates that are fixed to term (primarily FFELP Consolidation Loans and Stafford Loans originated on or after July 1, 2006).
 
Floor Income — FFELP loans generally earn interest at the higher of either the borrower rate, which is fixed over a period of time, or a floating rate based on the SAP formula (see definition below). The Company generally finances its student loan portfolio with floating rate debt whose interest is matched closely to the floating nature of the applicable SAP formula. If interest rates decline to a level at which the borrower rate exceeds the SAP formula rate, the Company continues to earn interest on the loan at the fixed borrower rate while the floating rate interest on our debt continues to decline. In these interest rate environments, the Company refers to the additional spread it earns between the fixed borrower rate and the SAP formula rate as Floor Income. Depending on the type of student loan and when it was originated, the borrower rate is either fixed to term or is reset to a market rate each July 1. As a result, for loans where the borrower rate is fixed to term, the Company may earn Floor Income for an extended period of time, and for those loans where the borrower interest rate is reset annually on July 1, the Company may earn Floor Income to the next reset date.


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In accordance with legislation enacted in 2006, lenders are required to rebate Floor Income to ED for all FFELP loans disbursed on or after April 1, 2006.
 
The following example shows the mechanics of Floor Income for a typical fixed rate FFELP Consolidation Loan (with a commercial paper-based SAP spread of 2.64 percent):
 
     
Fixed Borrower Rate
  7.25%
SAP Spread over Commercial Paper Rate
  (2.64)%
     
Floor Strike Rate(1)
  4.61%
     
 
 
(1)The interest rate at which the underlying index (Treasury bill or commercial paper) plus the fixed SAP spread equals the fixed borrower rate. Floor Income is earned anytime the interest rate of the underlying index declines below this rate.
 
Based on this example, if the quarterly average commercial paper rate is over 4.61 percent, the holder of the student loan will earn at a floating rate based on the SAP formula, which in this example is a fixed spread to commercial paper of 2.64 percent. On the other hand, if the quarterly average commercial paper rate is below 4.61 percent, the SAP formula will produce a rate below the fixed borrower rate of 7.25 percent and the loan holder earns at the borrower rate of 7.25 percent.
 
Graphic Depiction of Floor Income:
 
(LINE GRAPH)
 
Floor Income Contracts — The Company enters into contracts with counterparties under which, in exchange for an upfront fee representing the present value of the Floor Income that the Company expects to earn on a notional amount of underlying student loans being economically hedged, the Company will pay the counterparties the Floor Income earned on that notional amount over the life of the Floor Income Contract. Specifically, the Company agrees to pay the counterparty the difference, if positive, between the fixed borrower rate less the SAP (see definition below) spread and the average of the applicable interest rate index on that notional amount, regardless of the actual balance of underlying student loans, over the life of the contract. The contracts generally do not extend over the life of the underlying student loans. This contract effectively locks in the amount of Floor Income the Company will earn over the period of the contract. Floor Income Contracts are not considered effective hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and each quarter the Company must record the change in fair value of these contracts through income.
 
Front-End Borrower Benefits — Financial incentives offered to borrowers at origination. Front-End Borrower Benefits primarily represent the Company’s payment on behalf of borrowers for required FFELP fees, including the federal origination fee and federal default fee. The Company accounts for these Front-End


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Borrower Benefits as loan premiums amortized over the estimated life of the loans as an adjustment to the loan’s yield.
 
Gross Floor Income — Floor Income earned before payments on Floor Income Contracts.
 
Guarantors — State agencies or non-profit companies that guarantee (or insure) FFELP loans made by eligible lenders under The Higher Education Act of 1965 (“HEA”), as amended.
 
Interim ABCP Facility — An aggregate of $30 billion asset-backed commercial paper conduit facilities that the Company entered into on April 30, 2007 in connection with the April 16, 2007 announcement of a proposed acquisition of the Company by J.C. Flowers & Co., Bank of America, N.A., and JPMorgan Chase, N.A., which was terminated on January 25, 2008.
 
Lender Partners — Lender Partners are lenders who originate loans under forward purchase commitments under which the Company owns the loans from inception or, in most cases, acquires the loans soon after origination.
 
Managed Basis — The Company generally analyzes the performance of its student loan portfolio on a Managed Basis. The Company views both on-balance sheet student loans and off-balance sheet student loans owned by the securitization trusts as a single portfolio, and the related on-balance sheet financings are combined with off-balance sheet debt. When the term Managed is capitalized in this document, it is referring to Managed Basis.
 
Private Education Loans — Education loans to students or parents of students that are not guaranteed under the FFELP. Private Education Loans include loans for higher education (undergraduate and graduate degrees) and for alternative education, such as career training, private kindergarten through secondary education schools and tutorial schools. Higher education loans have repayment terms similar to FFELP loans, whereby repayments begin after the borrower leaves school. The Company’s higher education Private Education Loans are not dischargeable in bankruptcy, except in certain limited circumstances. Repayment for alternative education generally begins immediately.
 
In the context of the Company’s Private Education Loan business, the Company uses the term “non-traditional loans” to describe education loans made to certain borrowers that have or are expected to have a high default rate as a result of a number of factors, including having a lower tier credit rating, low program completion and graduation rates or, where the borrower is expected to graduate, a low expected income relative to the borrower’s cost of attendance.
 
Preferred Channel Originations — Preferred Channel Originations are comprised of: 1) loans that are originated by internally marketed Sallie Mae brands, and 2) student loans that are originated by Lender Partners (defined above).
 
Proposed Merger — On April 16, 2007, the Company announced that a buyer group (“Buyer Group”) led by J.C. Flowers & Co. (“J.C. Flowers”), Bank of America, N.A. and JPMorgan Chase, N.A. (the “Merger”) signed a definitive agreement (“Merger Agreement”) to acquire the Company for approximately $25.3 billion or $60.00 per share of common stock. (See also “Merger Agreement” filed with the SEC on the Company’s Current Report onForm 8-K,dated April 18, 2007.) On January 25, 2008, the Company, Mustang Holding Company Inc. (“Mustang Holding”), Mustang Merger Sub, Inc. (“Mustang Sub”), J.C. Flowers, Bank of America, N.A. and JPMorgan Chase Bank, N.A. entered into a Settlement, Termination and Release Agreement (the “Agreement”). Under the Agreement, a lawsuit filed by the Company related to the Merger, as well as all counterclaims, was dismissed.
 
Repayment Borrower Benefits — Financial incentives offered to borrowers based on pre-determined qualifying factors, which are generally tied directly to making on-time monthly payments. The impact of Repayment Borrower Benefits is dependent on the estimate of the number of borrowers who will eventually qualify for these benefits and the amount of the financial benefit offered to the borrower. The Company occasionally changes Repayment Borrower Benefits programs in both amount and qualification factors. These programmatic changes must be reflected in the estimate of the Repayment Borrower Benefits discount when made.


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Residual Interest — When the Company securitizes student loans, it retains the right to receive cash flows from the student loans sold to trusts that it sponsors in excess of amounts needed to pay servicing, derivative costs (if any), other fees, and the principal and interest on the bonds backed by the student loans. The Residual Interest, which may also include reserve and other cash accounts, is the present value of these future expected cash flows, which includes the present value of any Embedded Fixed Rate Floor Income described above. The Company values the Residual Interest at the time of sale of the student loans to the trust and as of the end of each subsequent quarter.
 
Retained Interest — The Retained Interest includes the Residual Interest (defined above) and servicing rights (as the Company retains the servicing responsibilities) for our securitization transactions accounted for as sales.
 
Risk Sharing — When a FFELP loan first disbursed on and after July 1, 2006 defaults, the federal government guarantees 97 percent of the principal balance plus accrued interest (98 percent on loans disbursed before July 1, 2006) and the holder of the loan is at risk for the remaining amount not guaranteed as a Risk Sharing loss on the loan. FFELP loans originated after October 1, 1993 are subject to Risk Sharing on loan default claim payments unless the default results from the borrower’s death, disability or bankruptcy. FFELP loans serviced by a servicer that has Exceptional Performer designation from ED were subject to one-percent Risk Sharing for claims filed on or after July 1, 2006 and before October 1, 2007. The CCRAA reduces default insurance to 95 percent of the unpaid principal and accrued interest for loans first disbursed on or after October 1, 2012.
 
Special Allowance Payment (“SAP”) — FFELP loans disbursed prior to April 1, 2006 (with the exception of certain PLUS and SLS loans discussed below) generally earn interest at the greater of the borrower rate or a floating rate determined by reference to the average of the applicable floating rates(91-dayTreasury bill rate or commercial paper) in a calendar quarter, plus a fixed spread that is dependent upon when the loan was originated and the loan’s repayment status. If the resulting floating rate exceeds the borrower rate, ED pays the difference directly to the Company. This payment is referred to as the Special Allowance Payment or SAP and the formula used to determine the floating rate is the SAP formula. The Company refers to the fixed spread to the underlying index as the SAP spread. For loans disbursed after April 1, 2006, FFELP loans effectively only earn at the SAP rate, as the excess interest earned when the borrower rate exceeds the SAP rate (Floor Income) must be refunded to ED.
 
Variable rate PLUS Loans and SLS Loans earn SAP only if the variable rate, which is reset annually, exceeds the applicable maximum borrower rate. For PLUS loans disbursed on or after January 1, 2000, this limitation on SAP was repealed effective April 1, 2006.
 
A schedule of SAP rates is set forth on pagesA-7 andA-8 of the Company’s 2008 Annual Report onForm 10-K.
 
Variable Rate Floor Income — Variable Rate Floor Income is Floor Income that is earned only through the next reset date. For FFELP Stafford loans whose borrower interest rate resets annually on July 1, the Company may earn Floor Income or Embedded Floor Income based on a calculation of the difference between the borrower rate and the then current interest rate (see definitions for capitalized terms, above).


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