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SLM Corporation (Sallie Mae)
SLM
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๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. SLM Corporation (Sallie Mae)
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2011 Q2

SLM Corporation (Sallie Mae) - 10-Q quarterly report FY2011 Q2


Text size:
Table of Contents

 
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, 2011
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.)
   
300 Continental Drive, Newark, Delaware 19713
(Address of principal executive offices) (Zip Code)
 
(302) 283-8000
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
 
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-accelerated filer 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 July 31, 2011
 
Voting common stock, $.20 par value 514,297,170 shares
 

 

 
SLM CORPORATION

FORM 10-Q
INDEX
June 30, 2011
 
         
Part I. Financial Information
    
 
Item 1.
  Financial Statements  2 
 
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations  43 
 
Item 3.
  Quantitative and Qualitative Disclosures about Market Risk  86 
 
Item 4.
  Controls and Procedures  93 
PART II. Other Information
    
 
Item 1.
  Legal Proceedings  94 
 
Item 1A.
  Risk Factors  94 
 
Item 2.
  Unregistered Sales of Equity Securities and Use of Proceeds  95 
 
Item 3.
  Defaults Upon Senior Securities  95 
 
Item 4.
  (Removed and Reserved)  95 
 
Item 5.
  Other Information  95 
 
Item 6.
  Exhibits  96 
Signatures
  97 
Glossary(1)
  98 
 Exhibit 10.1
 EX-12.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT
 
 
(1)Definitions for capitalized terms used in this document can be found in the “Glossary” at the end of this document.


1

Table of Contents

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,
 
  2011  2010 
 
Assets
        
FFELP Loans (net of allowance for losses of $189,024 and $188,858, respectively)
 $142,634,378  $148,649,400 
Private Education Loans (net of allowance for losses of $2,042,603 and $2,021,580, respectively)
  35,753,327   35,655,724 
Investments
        
Available-for-sale
  82,647   83,048 
Other
  1,056,762   873,376 
         
Total investments
  1,139,409   956,424 
Cash and cash equivalents
  4,144,734   4,342,327 
Restricted cash and investments
  6,074,901   6,254,493 
Goodwill and acquired intangible assets, net
  479,917   478,409 
Other assets
  10,129,933   8,970,272 
         
Total assets
 $200,356,599  $205,307,049 
         
Liabilities
        
Short-term borrowings
 $30,765,693  $33,615,856 
Long-term borrowings
  160,765,277   163,543,504 
Other liabilities
  3,814,390   3,136,111 
         
Total liabilities
  195,345,360   200,295,471 
         
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 
Common stock, par value $.20 per share, 1,125,000 shares authorized: 528,623 and 595,263 shares issued, respectively
  105,725   119,053 
Additional paid-in capital
  4,114,266   5,939,838 
Accumulated other comprehensive loss (net of tax benefit of $17,079 and $25,758, respectively)
  (29,636)  (44,664)
Retained earnings
  417,702   308,839 
         
Total SLM Corporation stockholders’ equity before treasury stock
  5,173,057   6,888,066 
Common stock held in treasury at cost: 10,474 and 68,320 shares, respectively
  170,496   1,876,488 
         
Total SLM Corporation stockholders’ equity
  5,002,561   5,011,578 
Noncontrolling interest
  8,678   — 
         
Total equity
  5,011,239   5,011,578 
         
Total liabilities and equity
 $200,356,599  $205,307,049 
         
 
Supplemental information — assets and liabilities of consolidated variable interest entities:
 
         
  June 30,
  December 31,
 
  2011  2010 
 
FFELP Loans, net
 $140,338,134  $145,750,016 
Private Education Loans, net
  25,084,114   24,355,683 
Restricted cash and investments
  5,846,002   5,983,080 
Other assets
  4,122,981   3,705,716 
Short-term borrowings
  23,069,956   24,484,353 
Long-term borrowings
  139,877,694   142,243,771 
         
Net assets of consolidated variable interest entities
 $12,443,581  $13,066,371 
         
 
See accompanying notes to consolidated financial statements.


2

Table of Contents

SLM CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
 
                 
     Six Months Ended
 
  Three Months Ended June 30,  June 30, 
  2011  2010  2011  2010 
 
Interest income:
                
FFELP Loans
 $849,275  $875,962  $1,726,653  $1,682,724 
Private Education Loans
  600,423   575,340   1,204,356   1,140,494 
Other loans
  5,393   7,254   11,304   16,250 
Cash and investments
  4,743   6,299   10,082   11,248 
                 
Total interest income
  1,459,834   1,464,855   2,952,395   2,850,716 
Total interest expense
  591,427   568,933   1,186,022   1,100,317 
                 
Net interest income
  868,407   895,922   1,766,373   1,750,399 
Less: provisions for loan losses
  290,686   382,239   594,091   741,359 
                 
Net interest income after provisions for loan losses
  577,721   513,683   1,172,282   1,009,040 
                 
Other income (loss):
                
Gains (losses) on sales of loans and securities, net
  —   (3,515)  —   5,138 
Gains (losses) on derivative and hedging activities, net
  (509,788)  95,316   (751,670)  12,906 
Servicing revenue
  92,600   98,740   190,852   221,012 
Contingency revenue
  85,617   88,172   163,998   168,484 
Gains on debt repurchases
  323   91,050   38,226   181,131 
Other
  3,188   (2,449)  24,933   11,351 
                 
Total other income (loss)
  (328,060)  367,314   (333,661)  600,022 
                 
Expenses:
                
Salaries and benefits
  125,139   139,061   260,580   288,163 
Other operating expenses
  143,580   170,668   311,339   309,201 
                 
Total operating expenses
  268,719   309,729   571,919   597,364 
Goodwill and acquired intangible assets impairment and amortization expense
  6,063   9,710   12,127   19,422 
Restructuring expenses
  1,594   17,808   5,155   42,612 
                 
Total expenses
  276,376   337,247   589,201   659,398 
                 
Income (loss) from continuing operations, before income tax expense (benefit)
  (26,715)  543,750   249,420   949,664 
Income tax expense (benefit)
  (9,585)  198,978   90,126   358,138 
                 
Net income (loss) from continuing operations
  (17,130)  344,772   159,294   591,526 
Income (loss) from discontinued operations, net of tax expense (benefit)
  11,482   (6,954)  9,752   (13,568)
                 
Net income (loss)
  (5,648)  337,818   169,046   577,958 
Preferred stock dividends
  4,052   18,711   7,930   37,389 
                 
Net income (loss) attributable to common stock
 $(9,700) $319,107  $161,116  $540,569 
                 
Basic earnings (loss) per common share:
                
Continuing operations
 $(.04) $.67  $.29  $1.15 
Discontinued operations
  .02   (.01)  .02   (.03)
                 
Total
 $(.02) $.66  $.31  $1.12 
                 
Average common shares outstanding
  523,808   484,832   525,269   484,547 
                 
Diluted earnings (loss) per common share:
                
Continuing operations
 $(.04) $.64  $.28  $1.11 
Discontinued operations
  .02   (.01)  .02   (.03)
                 
Total
 $(.02) $.63  $.30  $1.08 
                 
Average common and common equivalent shares outstanding
  523,808   527,391   530,865   527,013 
                 
Dividends per common share
 $.10  $—  $.10  $— 
                 
 
See accompanying notes to consolidated financial statements.


3

Table of Contents

 
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, 2010
  8,110,370   553,407,785   (67,563,788)  485,843,997  $1,375,370  $110,682  $5,106,094  $(42,511) $72,062  $(1,866,020) $4,755,677  $19  $4,755,696 
Comprehensive income:
                                                    
Net income (loss)
                                  337,818       337,818       337,818 
Other comprehensive income, net of tax:
                                                    
Change in unrealized gains (losses) on investments, net of tax
                              1,615           1,615       1,615 
Change in unrealized gains (losses) on derivatives, net of tax
                              (2,439)          (2,439)      (2,439)
Defined benefit pension plans adjustment
                              2           2       2 
                                                     
Comprehensive income
                                          336,996       336,996 
Cash dividends:
                                                    
Preferred stock, series A ($.87 per share)
                                  (2,875)      (2,875)      (2,875)
Preferred stock, series B ($.24 per share)
                                  (1,014)      (1,014)      (1,014)
Preferred stock, series C ($18.13 per share)
                                  (14,688)      (14,688)      (14,688)
Issuance of common shares
      163,599       163,599       33   3,765               3,798       3,798 
Preferred stock issuance costs and related amortization
                          134       (134)      —       — 
Tax benefit related to employee stock option and purchase plans
                          (1,212)              (1,212)      (1,212)
Stock-based compensation expense
                          13,802               13,802       13,802 
Repurchase of common shares:
                                                    
Benefit plans
          (211,014)  (211,014)                      (3,740)  (3,740)      (3,740)
Noncontrolling interest — other
                                          —   (15)  (15)
                                                     
Balance at June 30, 2010
  8,110,370   553,571,384   (67,774,802)  485,796,582  $1,375,370  $110,715  $5,122,583  $(43,333) $391,169  $(1,869,760) $5,086,744  $4  $5,086,748 
                                                     
Balance at March 31, 2011
  7,300,000   527,493,764   —   527,493,764  $565,000  $105,499  $4,092,334  $(35,401) $479,655  $—  $5,207,087  $—  $5,207,087 
Comprehensive income:
                                                    
Net income (loss)
                                  (5,648)      (5,648)      (5,648)
Other comprehensive income, net of tax:
                                                    
Change in unrealized gains (losses) on investments, net of tax
                              1,034           1,034       1,034 
Change in unrealized gains (losses) on derivatives, net of tax
                              4,731           4,731       4,731 
Defined benefit pension plans adjustment
                                          —       — 
                                                     
Comprehensive income
                                          117       117 
Cash dividends:
                                                    
Common stock ($.10 per share)
                                  (52,253)      (52,253)      (52,253)
Preferred stock, series A ($.87 per share)
                                  (2,875)      (2,875)      (2,875)
Preferred stock, series B ($.26 per share)
                                  (1,177)      (1,177)      (1,177)
Issuance of common shares
      1,129,399       1,129,399       226   12,079               12,305       12,305 
Tax benefit related to employee stock option and purchase plans
                          (2,216)              (2,216)      (2,216)
Stock-based compensation expense
                          12,069               12,069       12,069 
Repurchase of common shares:
                                                    
Open market
          (9,593,603)  (9,593,603)                      (156,105)  (156,105)      (156,105)
Benefit plans
          (880,731)  (880,731)                      (14,391)  (14,391)      (14,391)
Acquisition of noncontrolling interest
                                          —   8,678   8,678 
                                                     
Balance at June 30, 2011
  7,300,000   528,623,163   (10,474,334)  518,148,829  $565,000  $105,725  $4,114,266  $(29,636) $417,702  $(170,496) $5,002,561  $8,678  $5,011,239 
                                                     
 
See accompanying notes to consolidated financial statements.


4

Table of Contents

 
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, 2009
  8,110,370   552,219,576   (67,221,942)  484,997,634  $1,375,370  $110,444  $5,090,891  $(40,825) $604,467  $(1,861,738) $5,278,609  $13  $5,278,622 
Comprehensive income:
                                                    
Net income (loss)
                                  577,958       577,958       577,958 
Other comprehensive income, net of tax:
                                                    
Change in unrealized gains (losses) on investments, net of tax
                              1,678           1,678       1,678 
Change in unrealized gains (losses) on derivatives, net of tax
                              (4,151)          (4,151)      (4,151)
Defined benefit pension plans adjustment
                              (35)          (35)      (35)
                                                     
Comprehensive income
                                          575,450       575,450 
Cash dividends:
                                                    
Preferred stock, series A ($1.74 per share)
                                  (5,750)      (5,750)      (5,750)
Preferred stock, series B ($.48 per share)
                                  (1,969)      (1,969)      (1,969)
Preferred stock, series C ($36.25 per share)
                                  (29,376)      (29,376)      (29,376)
Restricted stock dividend
                                  (11)      (11)      (11)
Issuance of common shares
      1,351,808       1,351,808       271   10,166               10,437       10,437 
Preferred stock issuance costs and related amortization
                          294       (294)      —       — 
Tax benefit related to employee stock option and purchase plans
                          (4,805)              (4,805)      (4,805)
Stock-based compensation expense
                          26,037               26,037       26,037 
Cumulative effect of accounting change
                                  (753,856)      (753,856)      (753,856)
Repurchase of common shares:
                                                    
Benefit plans
          (552,860)  (552,860)                      (8,022)  (8,022)      (8,022)
Noncontrolling interest — other
                                          —   (9)  (9)
                                                     
Balance at June 30, 2010
  8,110,370   553,571,384   (67,774,802)  485,796,582  $1,375,370  $110,715  $5,122,583  $(43,333) $391,169  $(1,869,760) $5,086,744  $4  $5,086,748 
                                                     
Balance at December 31, 2010
  7,300,000   595,263,474   (68,319,589)  526,943,885  $565,000  $119,053  $5,939,838  $(44,664) $308,839  $(1,876,488) $5,011,578  $—  $5,011,578 
Comprehensive income:
                                                    
Net income (loss)
                                  169,046       169,046       169,046 
Other comprehensive income, net of tax:
                                                    
Change in unrealized gains (losses) on investments, net of tax
                              715           715       715 
Change in unrealized gains (losses) on derivatives, net of tax
                              14,105           14,105       14,105 
Defined benefit pension plans adjustment
                              208           208       208 
                                                     
Comprehensive income
                                          184,074       184,074 
Cash dividends:
                                                    
Common stock ($.10 per share)
                                  (52,253)      (52,253)      (52,253)
Preferred stock, series A ($1.74 per share)
                                  (5,750)      (5,750)      (5,750)
Preferred stock, series B ($.57 per share)
                                  (2,180)      (2,180)      (2,180)
Issuance of common shares
      3,434,058       3,434,058       687   34,553               35,240       35,240 
Retirement of common stock in treasury
      (70,074,369)  70,074,369   —       (14,015)  (1,889,891)          1,903,906   —       — 
Tax benefit related to employee stock option and purchase plans
                          (7,295)              (7,295)      (7,295)
Stock-based compensation expense
                          37,061               37,061       37,061 
Repurchase of common shares:
                                                    
Open market
          (9,593,603)  (9,593,603)                      (156,105)  (156,105)      (156,105)
Benefit plans
          (2,635,511)  (2,635,511)                      (41,809)  (41,809)      (41,809)
Acquisition of noncontrolling interest
                                          —   8,678   8,678 
                                                     
Balance at June 30, 2011
  7,300,000   528,623,163   (10,474,334)  518,148,829  $565,000  $105,725  $4,114,266  $(29,636) $417,702  $(170,496) $5,002,561  $8,678  $5,011,239 
                                                     
 
See accompanying notes to consolidated financial statements.


5

Table of Contents

 
SLM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
         
  Six Months Ended
 
  June 30, 
  2011  2010 
 
Operating activities
        
Net income
 $169,046  $577,958 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
        
(Income) loss from discontinued operations, net of tax
  (9,752)  13,568 
Gains on sale of loans and securities, net
  —   (5,138)
Gains on debt repurchases
  (38,226)  (181,131)
Goodwill and acquired intangible assets impairment and amortization expense
  12,127   19,422 
Stock-based compensation expense
  37,061   26,097 
Unrealized (gains)/losses on derivative and hedging activities
  396,238   (444,732)
Provisions for loan losses
  594,091   741,359 
Student loans originated for sale, net
  —   (10,482,146)
Decrease in restricted cash — other
  53,171   41,403 
Decrease (increase) in accrued interest receivable
  92,629   (147,462)
Increase in accrued interest payable
  69,825   34,677 
Decrease in other assets
  215,598   1,369,568 
(Decrease) in other liabilities
  (224,671)  (130,832)
         
Total adjustments
  1,198,091   (9,145,347)
         
Total net cash provided by (used in) operating activities
  1,367,137   (8,567,389)
         
Investing activities
        
Student loans acquired and originated
  (1,817,664)  (2,661,471)
Reduction of student loans:
        
Installment payments, claims and other
  6,707,474   4,992,892 
Proceeds from sales of student loans
  380,965   164,046 
Other loans — repaid
  29,919   100,860 
Other investing activities, net
  (202,329)  (351,700)
Purchases ofavailable-for-salesecurities
  (109,616)  (27,885,519)
Proceeds from maturities ofavailable-for-salesecurities
  133,344   28,725,393 
Purchases of other securities
  (131,195)  (64,188)
Proceeds from maturities of other securities
  127,944   71,812 
Decrease (increase) in restricted cash
  137,178   (218,129)
         
Cash provided by investing activities — continuing operations
  5,256,020   2,873,996 
         
Cash provided by investing activities — discontinued operations
  50,935   68,788 
         
Total net cash provided by investing activities
  5,306,955   2,942,784 
         
Financing activities
        
Borrowings collateralized by loans in trust — issued
  3,037,617   2,723,345 
Borrowings collateralized by loans in trust — repaid
  (5,725,474)  (4,274,591)
Asset-backed commercial paper conduits, net
  (444,957)  (1,999,582)
ED Participation Program, net
  —   10,849,768 
ED Conduit Program Facility, net
  (1,728,591)  1,559,198 
Other short-term borrowings repaid
  —   (198,183)
Other long-term borrowings issued
  1,966,806   1,463,538 
Other long-term borrowings repaid
  (4,132,838)  (4,512,180)
Other financing activities, net
  371,145   247,613 
Excess tax benefit from the exercise of stock-based awards
  895   355 
Common stock issued
  —   194 
Common stock repurchased
  (156,105)  — 
Common dividends paid
  (52,253)  — 
Preferred dividends paid
  (7,930)  (37,095)
Noncontrolling interest, net
  —   (749)
         
Net cash (used in) provided by financing activities
  (6,871,685)  5,821,631 
         
Net (decrease) increase in cash and cash equivalents
  (197,593)  197,026 
Cash and cash equivalents at beginning of period
  4,342,327   6,070,013 
         
Cash and cash equivalents at end of period
 $4,144,734  $6,267,039 
         
Cash disbursements made (refunds received) for:
        
Interest
 $1,225,041  $1,144,499 
         
Income taxes paid
 $364,171  $48,190 
         
Income taxes (received)
 $(21,966) $(499,041)
         
 
See accompanying notes to consolidated financial statements.


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 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 (“we,” “us,” “our,” or the “Company”) 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. The consolidated financial statements include the accounts of SLM Corporation and its majority-owned and controlled subsidiaries and those Variable Interest Entities (“VIEs”) for which we are the primary beneficiary, after eliminating the effects of intercompany accounts and transactions. 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 and six months ended June 30, 2011 are not necessarily indicative of the results for the year ending December 31, 2011 or for any other period. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report onForm 10-Kfor the year ended December 31, 2010 (the “2010Form 10-K”).
 
Reclassifications
 
Certain reclassifications have been made to the balances as of and for the three and six months ended June 30, 2010 to be consistent with classifications adopted for 2011, and had no effect on net income, total assets, or total liabilities.
 
Recently Issued Accounting Standards
 
Troubled Debt Restructurings
 
In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2011-02,Receivables (Topic 310), “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This new guidance clarifies when a loan restructuring constitutes a troubled debt restructuring. Under the new guidance, student loans for which we have granted certain concessions may now be considered troubled debt restructurings that were previously not and this may require us to increase the amount of our allowance for loan losses as certain types of forbearance usage may be considered a concession. This guidance is effective July 1, 2011, applied retrospectively to January 1, 2011. The most likely effect of implementing this new guidance would be to increase the size of our allowance for losses. At this time we have not completed the estimate of the change in our allowance for loan losses that could result from implementing this new guidance.
 
Fair Value Measurement and Disclosure Requirements
 
In May 2011, the FASB issued ASUNo. 2011-04,Fair Value Measurement (Topic 820), “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” These amendments (1) clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements; and (2) change particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. This new guidance is effective prospectively for interim and annual periods beginning after December 15, 2011 and is not expected to have a material impact on our fair value measurements.


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
2.  Allowance for Loan Losses
 
Our provisions for loan losses represent the periodic expense of maintaining an allowance sufficient to absorb incurred losses, net of expected recoveries, in theheld-for-investmentloan portfolios. The evaluation of the provisions for student loan losses is inherently subjective as it requires material estimates that may be susceptible to significant changes. We believe that the allowance for student loan losses is appropriate to cover probable losses incurred in the loan portfolios. We segregate our Private Education Loan portfolio into two classes of loans — traditional and non-traditional. Non-traditional loans are loans to (i) borrowers attending for-profit schools with an original Fair Isaac and Company (“FICO”) score of less than 670 and (ii) borrowers attendingnot-for-profitschools with an original FICO score of less than 640. The FICO score used in determining whether a loan is non-traditional is the greater of the borrower or co-borrower FICO score at origination. Traditional loans are defined as all other Private Education Loans that are not classified as non-traditional.
 
In determining the allowance for loan losses, we estimate the principal amount of loans that will default over the next two years (two years being the expected period between a loss event and default). In the first quarter of 2011, we implemented a new model to estimate these Private Education Loan defaults. Both the prior model and new model are considered “migration models”. Our prior allowance model (in place through December 31, 2010) segmented the portfolio into categories of similar risk characteristics based on loan program type, school type, loan status, seasoning, underwriting criteria (credit scores) and the existence or absence of a cosigner using school type, credit scores, cosigner status, loan status and seasoning as the primary risk characteristics. Our new model uses these same primary risk characteristics but also further segments the portfolio by the number of months the loan is in its repayment period (seasoning). While our previous allowance process incorporated the impact of seasoning, the new model more directly incorporates this feature. Another change in the new allowance model relates to the historical period of experience that we use as a starting point for projecting future defaults. Our new model is based upon a seasonal average, adjusted to the most recent three to six months of actual collection experience as the starting point and applies expected macroeconomic changes and collection procedure changes to estimate expected losses caused by loss events incurred as of the balance sheet date. Our previous model primarily used a one year historical default experience period and did not include the ability to directly model an economic expectation or collection procedure change. In addition, the previous allowance process included qualitative adjustments for these factors. Our current model places a greater emphasis on the more recent default experience rather than the default experience for older historical periods, as we believe the recent default experience is more indicative of the probable losses incurred in the loan portfolio today. While the model we use as a part of the allowance for loan losses process changed in the first quarter, the overall process for calculating the appropriate amount of allowance for Private Education Loan loss as disclosed in the 2010Form 10-Khas not changed. We believe that the current model more accurately reflects recent borrower behavior, loan performance, and collection performance, as well as expectations about economic factors. There was no adjustment to our allowance for loan loss upon implementing this new default projection model in the first quarter of 2011. In addition, there was no change in how we estimate the amount we will recover over time related to these defaulted amounts.
 


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
2.  Allowance for Loan Losses (Continued)
 
                 
  Allowance for Loan Losses
 
  Three Months Ended June 30, 2011 
     Private Education
  Other
    
  FFELP Loans  Loans  Loans  Total 
 
Allowance for Loan Losses
                
Beginning balance
 $190,235  $2,034,318  $73,797  $2,298,350 
Total provision
  22,313   264,938   3,435   290,686 
Charge-offs
  (20,827)  (263,580)  (13,665)  (298,072)
Loan sales
  (2,697)  —   —   (2,697)
Reclassification of interest reserve(1)
  —   6,927   —   6,927 
                 
Ending Balance
 $189,024  $2,042,603  $63,567  $2,295,194 
                 
Allowance:
                
Ending balance: individually evaluated for impairment
 $—  $133,796  $52,125  $185,921 
Ending balance: collectively evaluated for impairment
 $189,024  $1,908,807  $11,442  $2,109,273 
Ending balance: loans acquired with deteriorated credit quality
 $—  $—  $—  $— 
Loans:
                
Ending balance: individually evaluated for impairment
 $—  $563,650  $102,310  $665,960 
Ending balance: collectively evaluated for impairment
 $141,048,220  $38,093,353  $192,891  $179,334,464 
Ending balance: loans acquired with deteriorated credit quality
 $—  $—  $—  $— 
                 
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)
  .07%  3.5%  —%    
Charge-offs as a percentage of average loans in repayment (annualized)
  .09%  3.7%  —%    
Allowance as a percentage of the ending total loan balance
  .13%  5.3%  21.5%    
Allowance as a percentage of the ending loans in repayment
  .20%  7.1%  —%    
Allowance coverage of charge-offs (annualized)
  2.3   1.9   1.2     
Ending total loans(2)
 $141,048,220  $38,657,003  $295,201     
Average loans in repayment
 $94,317,705  $28,488,734  $—     
Ending loans in repayment
 $94,282,103  $28,871,968  $—     
 
 
(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 for Private Education Loans includes the receivable for partially charged-off loans.
 

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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
2.  Allowance for Loan Losses (Continued)
 
                 
  Allowance for Loan Losses
 
  Three Months Ended June 30, 2010 
     Private Education
  Other
    
  FFELP Loans  Loans  Loans  Total 
 
Allowance for Loan Losses
                
Beginning balance
 $186,215  $2,018,676  $78,664  $2,283,555 
Total provision
  28,613   349,211   4,415   382,239 
Charge-offs
  (24,235)  (335,766)  (6,553)  (366,554)
Loan sales
  (1,908)  —   —   (1,908)
Reclassification of interest reserve(1)
  —   10,292   —   10,292 
                 
Ending Balance
 $188,685  $2,042,413  $76,526  $2,307,624 
                 
Allowance:
                
Ending balance: individually evaluated for impairment
 $—  $81,867  $60,360  $142,227 
Ending balance: collectively evaluated for impairment
 $188,685  $1,960,546  $16,166  $2,165,397 
Ending balance: loans acquired with deteriorated credit quality
 $—  $—  $—  $— 
Loans:
                
Ending balance: individually evaluated for impairment
 $—  $363,370  $123,223  $486,593 
Ending balance: collectively evaluated for impairment
 $145,932,811  $37,735,165  $261,495  $183,929,471 
Ending balance: loans acquired with deteriorated credit quality
 $—  $—  $—  $— 
                 
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)
  .10%  5.1%  —%    
Charge-offs as a percentage of average loans in repayment (annualized)
  .12%  5.3%  —%    
Allowance as a percentage of the ending total loan balance
  .13%  5.4%  19.9%    
Allowance as a percentage of the ending loans in repayment
  .23%  7.9%  —%    
Allowance coverage of charge-offs (annualized)
  1.9   1.5   2.9     
Ending total loans(2)
 $145,932,811  $38,098,535  $384,718     
Average loans in repayment
 $82,449,191  $25,178,957  $—     
Ending loans in repayment
 $82,978,473  $25,721,573  $—     
 
 
(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 for Private Education Loans includes the receivable for partially charged-off loans.
 

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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
2.  Allowance for Loan Losses (Continued)
 
                 
  Allowance for Loan Losses
 
  Six Months Ended June 30, 2011 
     Private Education
  Other
    
  FFELP Loans  Loans  Loans  Total 
 
Allowance for Loan Losses
                
Beginning balance
 $188,858  $2,021,580  $72,516  $2,282,954 
Total provision
  45,435   539,986   8,670   594,091 
Charge-offs
  (41,140)  (536,582)  (17,619)  (595,341)
Loan sales
  (4,129)  —   —   (4,129)
Reclassification of interest reserve(1)
  —   17,619   —   17,619 
                 
Ending Balance
 $189,024  $2,042,603  $63,567  $2,295,194 
                 
Allowance:
                
Ending balance: individually evaluated for impairment
 $—  $133,796  $52,125  $185,921 
Ending balance: collectively evaluated for impairment
 $189,024  $1,908,807  $11,442  $2,109,273 
Ending balance: loans acquired with deteriorated credit quality
 $—  $—  $—  $— 
Loans:
                
Ending balance: individually evaluated for impairment
 $—  $563,650  $102,310  $665,960 
Ending balance: collectively evaluated for impairment
 $141,048,220  $38,093,353  $192,891  $179,334,464 
Ending balance: loans acquired with deteriorated credit quality
 $—  $—  $—  $— 
                 
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)
  .07%  3.6%  —%    
Charge-offs as a percentage of average loans in repayment (annualized)
  .09%  3.8%  —%    
Allowance as a percentage of the ending total loan balance
  .13%  5.3%  21.5%    
Allowance as a percentage of the ending loans in repayment
  .20%  7.1%  —%    
Allowance coverage of charge-offs (annualized)
  2.3   1.9   1.8     
Ending total loans(2)
 $141,048,220  $38,657,003  $295,201     
Average loans in repayment
 $94,907,800  $28,308,899  $—     
Ending loans in repayment
 $94,282,103  $28,871,968  $—     
 
 
(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 for Private Education Loans includes the receivable for partially charged-off loans.
 

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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
2.  Allowance for Loan Losses (Continued)
 
                 
  Allowance for Loan Losses
 
  Six Months Ended June 30, 2010 
     Private Education
  Other
    
  FFELP Loans  Loans  Loans  Total 
 
Allowance for Loan Losses
                
Beginning balance
 $161,168  $1,443,440  $76,261  $1,680,869 
Total provision
  51,609   674,233   15,517   741,359 
Charge-offs
  (45,639)  (620,244)  (15,252)  (681,135)
Loan sales
  (3,602)  —   —   (3,602)
Reclassification of interest reserve(1)
  —   20,934   —   20,934 
Consolidation of securitization trusts(2)
  25,149   524,050   —   549,199 
                 
Ending Balance
 $188,685  $2,042,413  $76,526  $2,307,624 
                 
Allowance:
                
Ending balance: individually evaluated for impairment
 $—  $81,867  $60,360  $142,227 
Ending balance: collectively evaluated for impairment
 $188,685  $1,960,546  $16,166  $2,165,397 
Ending balance: loans acquired with deteriorated credit quality
 $—  $—  $—  $— 
Loans:
                
Ending balance: individually evaluated for impairment
 $—  $363,370  $123,223  $486,593 
Ending balance: collectively evaluated for impairment
 $145,932,811  $37,735,165  $261,495  $183,929,471 
Ending balance: loans acquired with deteriorated credit quality
 $—  $—  $—  $— 
                 
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)
  .09%  4.8%  —%    
Charge-offs as a percentage of average loans in repayment (annualized)
  .11%  5.0%  —%    
Allowance as a percentage of the ending total loan balance
  .13%  5.4%  19.9%    
Allowance as a percentage of the ending loans in repayment
  .23%  7.9%  —%    
Allowance coverage of charge-offs (annualized)
  2.1   1.6   2.5%    
Ending total loans(3)
 $145,932,811  $38,098,535  $384,718     
Average loans in repayment
 $82,443,391  $24,913,768  $—     
Ending loans in repayment
 $82,978,473  $25,721,573  $—     
 
 
(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)Upon the adoption of the new consolidation accounting guidance on January 1, 2010, we consolidated all of our previously off-balance sheet securitization trusts.
 
(3)Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.

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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
2.  Allowance for Loan Losses (Continued)
 
 
The following tables provide information regarding the loan status and aging of past due loans as of June 30, 2011 and December 31, 2010.
 
                 
  FFELP Loan Delinquencies 
  June 30,
  December 31,
 
  2011  2010 
(Dollars in millions) Balance  %  Balance  % 
 
Loans in-school/grace/deferment(1)
 $25,718      $28,214     
Loans in forbearance(2)
  21,048       22,028     
Loans in repayment and percentage of each status:
                
Loans current
  78,201   82.9%  80,026   82.8%
Loans delinquent31-60 days(3)
  5,149   5.5   5,500   5.7 
Loans delinquent61-90 days(3)
  2,909   3.1   3,178   3.3 
Loans delinquent greater than 90 days(3)
  8,023   8.5   7,992   8.2 
                 
Total FFELP Loans in repayment
  94,282   100%  96,696   100%
                 
Total FFELP Loans, gross
  141,048       146,938     
FFELP Loan unamortized premium
  1,776       1,900     
                 
Total FFELP Loans
  142,824       148,838     
FFELP Loan allowance for losses
  (189)      (189)    
                 
FFELP Loans, net
 $142,635      $148,649     
                 
Percentage of FFELP Loans in repayment
      66.8%      65.8%
                 
Delinquencies as a percentage of FFELP Loans in repayment
      17.1%      17.2%
                 
FFELP Loans in forbearance as a percentage of loans in repayment and forbearance
      18.2%      18.6%
                 
 
 
(1) Loans for borrowers who may still 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.
 
(2)Loans for borrowers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making payments due to hardship or other factors.
 
(3)The period of delinquency is based on the number of days scheduled payments are contractually past due.
 


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
2.  Allowance for Loan Losses (Continued)
 
                 
  Private Education Traditional Loan Delinquencies 
  June 30,
  December 31,
 
  2011  2010 
(Dollars in millions) Balance  %  Balance  % 
 
Loans in-school/grace/deferment(1)
 $6,431      $7,419     
Loans in forbearance(2)
  1,225       1,156     
Loans in repayment and percentage of each status:
                
Loans current
  23,964   91.7%  22,850   91.2%
Loans delinquent31-60 days(3)
  759   2.9   794   3.2 
Loans delinquent61-90 days(3)
  433   1.7   340   1.4 
Loans delinquent greater than 90 days(3)
  978   3.7   1,060   4.2 
                 
Total traditional loans in repayment
  26,134   100%  25,044   100%
                 
Total traditional loans, gross
  33,790       33,619     
Traditional loans unamortized discount
  (775)      (801)    
                 
Total traditional loans
  33,015       32,818     
Traditional loans receivable for partially charged-off loans
  629       558     
Traditional loans allowance for losses
  (1,363)      (1,231)    
                 
Traditional loans, net
 $32,281      $32,145     
                 
Percentage of traditional loans in repayment
      77.3%      74.5%
                 
Delinquencies as a percentage of traditional loans in repayment
      8.3%      8.8%
                 
Loans in forbearance as a percentage of loans in repayment and forbearance
      4.5%      4.4%
                 
Loans in repayment greater than 12 months as a percentage of loans in repayment(4)
      66.7%      65.2%
                 
 
 
(1)Loans for borrowers who may still 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 requested extension of grace period generally during employment transition or who have temporarily ceased making payments due to hardship or other factors, consistent with 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.
 
(4)Based on number of months in an active repayment status for which a scheduled monthly payment was due.
 

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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
2.  Allowance for Loan Losses (Continued)
 
                 
  Private Education Non-Traditional Loan
 
  Delinquencies 
  June 30,
  December 31,
 
  2011  2010 
(Dollars in millions) Balance  %  Balance  % 
 
Loans in-school/grace/deferment(1)
 $785      $921     
Loans in forbearance(2)
  205       184     
Loans in repayment and percentage of each status:
                
Loans current
  2,030   74.1%  2,038   72.6%
Loans delinquent31-60 days(3)
  204   7.5   217   7.7 
Loans delinquent61-90 days(3)
  142   5.2   131   4.7 
Loans delinquent greater than 90 days(3)
  361   13.2   422   15.0 
                 
Total non-traditional loans in repayment
  2,737   100%  2,808   100%
                 
Total non-traditional loans, gross
  3,727       3,913     
Non-traditional loans unamortized discount
  (86)      (93)    
                 
Total non-traditional loans
  3,641       3,820     
Non-traditional loans receivable for partially charged-off loans
  511       482     
Non-traditional loans allowance for losses
  (680)      (791)    
                 
Non-traditional loans, net
 $3,472      $3,511     
                 
Percentage of non-traditional loans in repayment
      73.5%      71.8%
                 
Delinquencies as a percentage of non-traditional loans in repayment
      25.9%      27.4%
                 
Loans in forbearance as a percentage of loans in repayment and forbearance
      7.0%      6.1%
                 
Loans in repayment greater than 12 months as a percentage of loans in repayment(4)
      60.0%      55.9%
                 
 
 
(1)Loans for borrowers who may still 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 requested extension of grace period generally during employment transition or who have temporarily ceased making payments due to hardship or other factors, consistent with 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.
 
(4)Based on number of months in an active repayment status for which a scheduled monthly payment was due.

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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
2.  Allowance for Loan Losses (Continued)
 
 
The following table provides information regarding accrued interest receivable on our Private Education Loans at June 30, 2011 and December 31, 2010. The table also discloses the amount of accrued interest on loans greater than 90 days past due as compared to our allowance for uncollectible interest. The allowance for uncollectible interest exceeds the amount of accrued interest on our 90 days past due portfolio for all periods presented.
 
             
  Accrued Interest Receivable 
     Greater than
  Allowance for
 
     90 days
  Uncollectible
 
  Total  Past Due  Interest 
 
June 30, 2011
            
Private Education Loans — Traditional
 $970,674  $33,319  $50,718 
Private Education Loans — Non-Traditional
  178,013   17,990   36,412 
             
Total
 $1,148,687  $51,309  $87,130 
             
December 31, 2010
            
Private Education Loans — Traditional
 $1,062,289  $34,644  $56,755 
Private Education Loans — Non-Traditional
  208,587   20,270   37,057 
             
Total
 $1,270,876  $54,914  $93,812 
             
 
FFELP Loans are substantially guaranteed as to their principal and accrued interest in the event of default; therefore, the key credit quality indicator for this portfolio is loan status. The impact of changes in loan status is incorporated quarterly into the allowance for loan losses calculation. For Private Education Loans, the key credit quality indicators are school type, FICO scores, the existence of a cosigner, the loan status and loan seasoning. The school type/FICO score are assessed at origination and maintained through the traditional/non-traditional loan designation. The other Private Education Loan key quality indicators can change and are incorporated quarterly into the allowance for loan losses calculation. The following table


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
2.  Allowance for Loan Losses (Continued)
 
highlights the principal balance (excluding the receivable for partially charged-off loans) of our Private Education Loan portfolio stratified by the key credit quality indicators.
 
                 
  Private Education Loans
 
  Credit Quality Indicators 
  June 30, 2011  December 31, 2010 
(Dollars in millions) Balance(3)  % of Balance  Balance(3)  % of Balance 
 
Credit Quality Indicators
                
School Type/FICO Scores:
                
Traditional
 $33,790   90% $33,619   90%
Non-Traditional(1)
  3,727   10   3,913   10 
                 
Total
 $37,517   100% $37,532   100%
                 
Cosigners:
                
With cosigner
 $22,650   60% $22,259   59%
Without cosigner
  14,867   40   15,273   41 
                 
Total
 $37,517   100% $37,532   100%
                 
Seasoning(2):
                
1-12 payments
 $10,793   29% $10,932   29%
13-24payments
  6,625   18   6,659   18 
25-36payments
  4,592   12   4,457   12 
37-48payments
  3,267   9   2,891   8 
More than 48 payments
  5,024   13   4,253   11 
Not yet in repayment
  7,216   19   8,340   22 
                 
Total
 $37,517   100% $37,532   100%
                 
 
 
(1)Defined as loans to borrowers attending for-profit schools (with a FICO score of less than 670 at origination) and borrowers attendingnot-for-profitschools (with a FICO score of less than 640 at origination).
 
(2)Number of months in active repayment for which a scheduled payment was due.
 
(3)Balance represents gross Private Education Loans.
 
We offer temporary interest rate reductions to Private Education Loan borrowers who are both experiencing financial difficulties and meet other criteria. At June 30, 2011 and December 31, 2010, approximately $564 million and $444 million, respectively, had qualified at some point for an interest rate reduction modification since the inception of the program in May 2009. These modifications met the criteria of a troubled debt restructuring in accordance withASC 310-40Receivables — Troubled Debt Restructurings by Creditors and were individually evaluated for impairment. The allowance for loan losses associated with these loans was $134 million and $114 million at June 30, 2011 and December 31, 2010, respectively. Subsequent to modification, $89 million and $53 million defaulted through June 30, 2011 and December 31, 2010, respectively. At June 30, 2011 and December 31, 2010, approximately $284 million and $257 million, respectively, had qualified for the program and were currently receiving a reduction in their interest rate.


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
3.  Borrowings
 
The following table summarizes our borrowings as of June 30, 2011 and December 31, 2010.
 
                         
  June 30, 2011  December 31, 2010 
  Short
  Long
     Short
  Long
    
(Dollars in millions) Term  Term  Total  Term  Term  Total 
 
Unsecured borrowings:
                        
Senior unsecured debt
 $2,464  $16,787  $19,251  $4,361  $15,742  $20,103 
Brokered deposits
  1,550   1,654   3,204   1,387   3,160   4,547 
Retail and other deposits
  1,487   —   1,487   1,370   —   1,370 
Other(1)
  1,004   —   1,004   887   —   887 
                         
Total unsecured borrowings
  6,505   18,441   24,946   8,005   18,902   26,907 
                         
Secured borrowings:
                        
FFELP Loans securitizations
  —   109,524   109,524   —   112,425   112,425 
Private Education Loans securitizations
  —   21,815   21,815   —   21,409   21,409 
ED Conduit Program Facility
  22,756   —   22,756   24,484   —   24,484 
ABCP borrowings
  314   5,000   5,314   —   5,853   5,853 
Acquisition financing(2)
  —   1,010   1,010   —   1,064   1,064 
FHLB-DM Facility
  1,000   —   1,000   900   —   900 
Indentured trusts
  —   1,125   1,125   —   1,246   1,246 
                         
Total secured borrowings
  24,070   138,474   162,544   25,384   141,997   167,381 
                         
Total before hedge accounting adjustments
  30,575   156,915   187,490   33,389   160,899   194,288 
Hedge accounting adjustments
  191   3,850   4,041   227   2,644   2,871 
                         
Total
 $30,766  $160,765  $191,531  $33,616  $163,543  $197,159 
                         
 
 
(1)“Other” primarily consists of cash collateral held related to derivative exposures that are recorded as a short-term debt obligation.
 
(2)Relates to the acquisition of $25 billion of student loans at the end of 2010.


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
3.  Borrowings (Continued)
 
 
Secured Borrowings
 
We currently consolidate all of our financing entities that are variable interest entities (“VIEs”) of which we are the primary beneficiary. As a result, these financing VIEs are accounted for as secured borrowings. We consolidate the following financing VIEs as of June 30, 2011 and December 31, 2010:
 
                             
  June 30, 2011 
  Debt Outstanding  Carrying Amount of Assets Securing Debt
 
  Short
  Long
     Outstanding 
(Dollars in millions) Term  Term  Total  Loans  Cash  Other Assets  Total 
 
Secured Borrowings — VIEs:
                            
ED Conduit Program Facility
 $22,756  $—  $22,756  $22,802  $647  $572  $24,021 
ABCP borrowings
  314   5,000   5,314   5,661   77   75   5,813 
Securitizations — FFELP Loans
  —   109,524   109,524   110,434   3,825   575   114,834 
Securitizations — Private Education Loans
  —   21,815   21,815   25,084   1,171   753   27,008 
Indentured trusts
  —   1,125   1,125   1,441   126   13   1,580 
                             
Total before hedge accounting adjustments
  23,070   137,464   160,534   165,422   5,846   1,988   173,256 
Hedge accounting adjustments
  —   2,414   2,414   —   —   2,135   2,135 
                             
Total
 $23,070  $139,878  $162,948  $165,422  $5,846  $4,123  $175,391 
                             
 


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
3.  Borrowings (Continued)
 
                             
  December 31, 2010 
  Debt Outstanding  Carrying Amount of Assets Securing Debt
 
  Short
  Long
     Outstanding 
(Dollars in millions) Term  Term  Total  Loans  Cash  Other Assets  Total 
 
Secured Borrowings — VIEs:
                            
ED Conduit Program Facility
 $24,484  $—  $24,484  $24,511  $819  $634  $25,964 
ABCP borrowings
  —   5,853   5,853   6,290   94   53   6,437 
Securitizations — FFELP Loans
  —   112,425   112,425   113,400   3,728   966   118,094 
Securitizations — Private Education Loans
  —   21,409   21,409   24,355   1,213   690   26,258 
Indentured trusts
  —   1,246   1,246   1,549   129   15   1,693 
                             
Total before hedge accounting adjustments
  24,484   140,933   165,417   170,105   5,983   2,358   178,446 
Hedge accounting adjustments
  —   1,311   1,311   —   —   1,348   1,348 
                             
Total
 $24,484  $142,244  $166,728  $170,105  $5,983  $3,706  $179,794 
                             
 
Transactions During the Six Months Ended June 30, 2011
 
On June 30, 2011, we completed an $825 million Private Education Loan ABS transaction at an all-in LIBOR equivalent cost of one-month LIBOR plus 1.89 percent. This issue has a weighted average life of 4.0 years and an initial overcollateralization of approximately 18 percent.
 
On May 26, 2011, we completed an $821 million FFELP ABS transaction at an all-in LIBOR equivalent cost of one-month LIBOR plus 1.15 percent. This issue has a weighted average life of 5.8 years and an initial overcollateralization of approximately 3 percent.
 
On April 26, 2011, we completed a $562 million Private Education Loan ABS transaction at an all-in LIBOR equivalent cost of one-month LIBOR plus 1.99 percent. This issue has a weighted average life of 3.8 years and an initial overcollateralization of approximately 21 percent.
 
On March 3, 2011, we issued an $812 million FFELP ABS transaction at an all-in LIBOR equivalent cost of one-month LIBOR plus 1.14 percent. This issue has a weighted average life of 5.8 years and initial over-collateralization of approximately 3 percent.
 
On January 14, 2011, we issued a $2 billion five-year 6.25 percent fixed rate unsecured bond. The bond was issued to yield 6.50 percent before underwriting fees. The rate on the bond was swapped from a fixed rate to a floating rate equal to an all-in cost of one-month LIBOR plus 4.46 percent. The proceeds of this bond were designated for general corporate purposes.
 
We also repurchase our outstanding unsecured debt in both open-market repurchases and public tender offers. Repurchasing debt helps us to better manage our short-term and long-term funding needs by utilizing current excess liquidity to reduce future obligations related to our unsecured borrowings at favorable pricing.

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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
3.  Borrowings (Continued)
 
During the first half of 2011, we repurchased $885 million of debt and realized gains of $38 million for the six months ended June 30, 2011, compared with $2.7 billion and $181 million the six months ended June 30, 2010.
 
We have $5.2 billion in Private Education Loan securitization bonds outstanding at June 30, 2011, where we have the ability to call the bonds at a discount to par between the fourth quarter of 2011 and 2014. We have concluded that it is probable we will call these bonds at the call date at their respective discount to par. We consider it probable because we believe that 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, we are accreting this call discount as a reduction to interest expense through the call date. If it becomes less than probable that we will call these bonds at a future date, it will result in our reversing this prior accretion as a cumulativecatch-upadjustment. We have accreted approximately $228 million, cumulatively, and $28 million and $56 million in the three and six months ended June 30, 2011 as a reduction of interest expense.
 
The following table summarizes our securitization activity for the three and six months ended June 30, 2011 and 2010. The securitizations in the periods presented below were accounted for as financings.
 
                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2011  2010  2011  2010 
     Loan
     Loan
     Loan
     Loan
 
  No. of
  Amount
  No. of
  Amount
  No. of
  Amount
  No. of
  Amount
 
(Dollars in millions) Transactions  Securitized  Transactions  Securitized  Transactions  Securitized  Transactions  Securitized 
 
Securitizations:
                                
FFELP Stafford/PLUS Loans
  —  $—   1  $1,211   —  $—   1  $1,211 
FFELP Consolidation Loans
  1   774   —   —   2   1,546   —   — 
Private Education Loans
  2   1,699   —   —   2   1,699   1   1,929 
                                 
Total securitizations
  3  $2,473   1  $1,211   4  $3,245   2  $3,140 
                                 
 
4.  Derivative Financial Instruments
 
Our risk management strategy, use and accounting of derivatives has not materially changed from that discussed in our 2010Form 10-K.Please refer to Note 9, “Derivative Financial Instruments” in our 2010Form 10-Kfor a full discussion.


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
4.  Derivative Financial Instruments (Continued)
 
Summary of Derivative Financial Statement Impact
 
The following tables summarize the fair values and notional amounts of our derivative instruments at June 30, 2011 and December 31, 2010, and their impact on other comprehensive income and earnings for the three and six months ended June 30, 2011 and 2010.
 
Impact of Derivatives on Consolidated Balance Sheet
 
                                   
    Cash Flow  Fair Value  Trading  Total 
  Hedged Risk
 June 30,
  Dec. 31,
  June 30,
  Dec. 31,
  June 30,
  Dec. 31,
  June 30,
  Dec. 31,
 
(Dollars in millions) Exposure 2011  2010  2011  2010  2011  2010  2011  2010 
 
Fair Values(1)
                                  
Derivative Assets
                                  
Interest rate swaps
 Interest rate $—  $—  $972  $967  $158  $200  $1,130  $1,167 
Cross currency interest rate swaps
 Foreign currency and
interest rate		  —   —   2,768   1,925   100   101   2,868   2,026 
Other(2)
 Interest rate  —   —   —   —   3   26   3   26 
                                   
Total derivative assets(3)
    —   —   3,740   2,892   261   327   4,001   3,219 
Derivative Liabilities
                                  
Interest rate swaps
 Interest rate  (43)  (75)  —   —   (291)  (348)  (334)  (423)
Floor Income Contracts
 Interest rate  —   —   —   —   (2,390)  (1,315)  (2,390)  (1,315)
Cross currency interest rate swaps
 Foreign currency and
interest rate		  —   —   (184)  (215)  (1)  —   (185)  (215)
Other(2)
 Interest rate  —   —   —   —   —   (1)  —   (1)
                                   
Total derivative liabilities(3)
    (43)  (75)  (184)  (215)  (2,682)  (1,664)  (2,909)  (1,954)
                                   
Net total derivatives
   $(43) $(75) $3,556  $2,677  $(2,421) $(1,337) $1,092  $1,265 
                                   
 
 
(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 Euro-dollar futures contracts, the embedded derivatives in asset-backed financings, and derivatives related to our Total Return Swap Facility. The embedded derivatives are required to be accounted for as derivatives.
 
(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,
 
(Dollars in millions) 2011  2010  2011  2010 
 
Gross position
 $4,001  $3,219  $(2,909) $(1,954)
Impact of master netting agreements
  (858)  (782)  858   782 
                 
Derivative values with impact of master netting agreements (as carried on balance sheet)
  3,143   2,437   (2,051)  (1,172)
Cash collateral (held) pledged
  (1,003)  (886)  993   809 
                 
Net position
 $2,140  $1,551  $(1,058) $(363)
                 
 
The above fair values include adjustments for counterparty credit risk for both when we are exposed to the counterparty, net of collateral postings, and when the counterparty is exposed to us, net of collateral postings. The net adjustments decreased the overall net asset position at June 30, 2011 and December 31, 2010 by $77 million and $72 million, respectively. In addition, the above fair values reflect adjustments for illiquid derivatives as indicated by a wide bid/ask spread in the interest rate indices to which the derivatives


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
4.  Derivative Financial Instruments (Continued)
 
are indexed. These adjustments decreased the overall net asset position at June 30, 2011 and December 31, 2010 by $112 million and $129 million, respectively.
 
                                 
  Cash Flow  Fair Value  Trading  Total 
  June 30,
  Dec. 31,
  June 30,
  Dec. 31,
  June 30,
  Dec. 31,
  June 30,
  Dec. 31,
 
(Dollars in billions) 2011  2010  2011  2010  2011  2010  2011  2010 
 
Notional Values
                                
Interest rate swaps
 $1.1  $1.6  $14.0  $13.5  $103.1  $118.9  $118.2  $134.0 
Floor Income Contracts
  —   —   —   —   57.8   39.3   57.8   39.3 
Cross currency interest rate swaps
  —   —   16.5   17.5   .3   .3   16.8   17.8 
Other(1)
  —   —   —   —   1.4   1.0   1.4   1.0 
                                 
Total derivatives
 $1.1  $1.6  $30.5  $31.0  $162.6  $159.5  $194.2  $192.1 
                                 
 
 
(1)“Other” includes Euro-dollar futures contracts, embedded derivatives bifurcated from securitization debt, as well as derivatives related to our Total Return Swap Facility.
 
Impact of Derivatives on Consolidated Statements of Income
 
                                 
  Three Months Ended June 30, 
        Unrealized
    
     Realized Gain
  Gain
    
  Unrealized Gain
  (Loss)
  (Loss)
    
  (Loss) on
  on
  on Hedged
  Total Gain
 
  Derivatives(1)(2)  Derivatives(3)  Item(1)  (Loss) 
(Dollars in millions) 2011  2010  2011  2010  2011  2010  2011  2010 
 
Fair Value Hedges:
                                
Interest rate swaps
 $203  $437  $121  $129  $(230) $(475) $94  $91 
Cross currency interest rate swaps
  173   (1,733)  83   81   (299)  1,800   (43)  148 
                                 
Total fair value derivatives
  376   (1,296)  204   210   (529)  1,325   51   239 
Cash Flow Hedges:
                                
Interest rate swaps
  —   1   (9)  (15)  —   —   (9)  (14)
                                 
Total cash flow derivatives
  —   1   (9)  (15)  —   —   (9)  (14)
Trading:
                                
Interest rate swaps
  54   289   17   (6)  —   —   71   283 
Floor Income Contracts
  (277)  (42)  (202)  (222)  —   —   (479)  (264)
Cross currency interest rate swaps
  16   33   2   2   —   —   18   35 
Other
  20   12   13   (1)  —   —   33   11 
                                 
Total trading derivatives
  (187)  292   (170)  (227)  —   —   (357)  65 
                                 
Total
  189   (1,003)  25   (32)  (529)  1,325   (315)  290 
Less: realized gains recorded in interest expense
  —   —   195   195   —   —   195   195 
                                 
Gains (losses) on derivative and hedging activities, net
 $189  $(1,003) $(170) $(227) $(529) $1,325  $(510) $95 
                                 
 
 
(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.”
 


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
4.  Derivative Financial Instruments (Continued)
 
                                 
  Six Months Ended June 30, 
     Realized Gain
  Unrealized
    
  Unrealized Gain
  (Loss)
  Gain
    
  (Loss) on
  on
  (Loss)
  Total Gain
 
  Derivatives(1)(2)  Derivatives(3)  on Hedged Item(1)  (Loss) 
(Dollars in millions) 2011  2010  2011  2010  2011  2010  2011  2010 
 
Fair Value Hedges:
                                
Interest rate swaps
 $5  $492  $249  $249  $(25) $(538) $229  $203 
Cross currency interest rate swaps
  874   (3,081)  159   182   (1,177)  3,163   (144)  264 
                                 
Total fair value derivatives
  879   (2,589)  408   431   (1,202)  2,625   85   467 
Cash Flow Hedges:
                                
Interest rate swaps
  (2)  —   (23)  (30)  —   —   (25)  (30)
                                 
Total cash flow derivatives
  (2)  —   (23)  (30)  —   —   (25)  (30)
Trading:
                                
Interest rate swaps
  32   400   57   —   —   —   89   400 
Floor Income Contracts
  (126)  (23)  (428)  (433)  —   —   (554)  (456)
Cross currency interest rate swaps
  (1)  26   4   3   —   —   3   29 
Other
  23   6   12   (2)  —   —   35   4 
                                 
Total trading derivatives
  (72)  409   (355)  (432)  —   —   (427)  (23)
                                 
Total
  805   (2,180)  30   (31)  (1,202)  2,625   (367)  414 
Less: realized gains recorded in interest expense
  —   —   385   401   —   —   385   401 
                                 
Gains (losses) on derivative and hedging activities, net
 $805  $(2,180) $(355) $(432) $(1,202) $2,625  $(752) $13 
                                 
 
 
(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.”
 
Impact of Derivatives on Consolidated Statements of Changes in Stockholders’ Equity (net of tax)
 
                 
  Three Months
  Six Months
 
  Ended
  Ended
 
  June 30,  June 30, 
(Dollars in millions) 2011  2010  2011  2010 
 
Total losses on cash flow hedges
 $(3) $(11) $(5) $(26)
Realized losses reclassified to interest expense(1)(2)(3)
  8   10   18   22 
Hedge ineffectiveness reclassified to earnings(1)(4)
  —   (1)  1   — 
                 
Total change in stockholders’ equity for unrealized gains (losses) on derivatives
 $5  $(2) $14  $(4)
                 
 
 
     (1)  Amounts included in “Realized gains (losses) on derivatives” in the “Impact of Derivatives on Consolidated Statements of Income” table above.
 
     (2)  Includes net settlement income/expense.
 
     (3)  We expect to reclassify $7 million of after-tax net losses from accumulated other comprehensive income to earnings during the next 12 months related to amortization of cash flow hedges that were hedging debt instruments that are outstanding as of the reporting date.
 
     (4)  Recorded in “Gains (losses) derivatives and hedging activities, net” in the consolidated statements of income.

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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
4.  Derivative Financial Instruments (Continued)
 
 
Collateral
 
Collateral held and pledged at June 30, 2011 and December 31, 2010 related to derivative exposures between us and our derivative counterparties are detailed in the following table:
 
         
(Dollars in millions) June 30, 2011  December 31, 2010 
 
Collateral held:
        
Cash (obligation to return cash collateral is recorded in short-term borrowings)(1)
 $1,003  $886 
Securities at fair value (not recorded in financial statements)(2)
  1,053   585 
         
Total collateral held
 $2,056  $1,471 
         
Derivative asset at fair value including accrued interest
 $3,465  $2,540 
         
Collateral pledged to others:
        
Cash (right to receive return of cash collateral is recorded in investments)
 $993  $809 
Securities at fair value (recorded in restricted investments)(3)
  13   36 
         
Total collateral pledged
 $1,006  $845 
         
Derivative liability at fair value including accrued interest and premium receivable
 $933  $747 
         
 
 
(1)At June 30, 2011 and December 31, 2010, $136 million and $108 million, respectively, were held in restricted cash accounts.
 
(2)We do not have the ability to sell or re-pledge these securities. As such, the securities are not recorded in the financial statements.
 
(3)Counterparty has the right to sell or re-pledge securities.
 
Our corporate derivatives contain credit contingent features. At our current unsecured credit rating, we have fully collateralized our corporate derivative liability position (including accrued interest and net of premiums receivable) of $864 million with our counterparties as of the collateral call date. Further downgrades would not result in any additional collateral requirements, except to increase the frequency of collateral calls. Two counterparties have the right to terminate the contracts with further downgrades. We currently have a liability position with these derivative counterparties (including accrued interest and net of premiums receivable) of $215 million and have posted $239 million of collateral to these counterparties. If the credit contingent feature was triggered for these two counterparties and the counterparties exercised their right to terminate, we would not be required to deliver additional assets to settle the contracts. Trust related derivatives do not contain credit contingent features related to our or the trusts’ credit ratings.


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
5.  Other Assets
 
The following table provides detail on our other assets at June 30, 2011 and December 31, 2010.
 
                 
  June 30, 2011  December 31, 2010 
  Ending
  % of
  Ending
  % of
 
(Dollars in millions) Balance  Balance  Balance  Balance 
 
Derivatives at fair value
 $3,143   31% $2,437   27%
Accrued interest receivable
  2,835   28   2,927   33 
Income tax asset, net current and deferred
  1,511   15   1,283   14 
Accounts receivable — general
  1,371   14   730   8 
Benefit and insurance-related investments
  464   5   462   5 
Other loans, net
  232   2   271   3 
Fixed assets, net
  225   2   291   4 
Purchased paper-related receivables
  68   1   96   1 
Other
  281   2   473   5 
                 
Total
 $10,130   100% $8,970   100%
                 
 
The “Derivatives at fair value” line in the above table represents the fair value of our derivatives in a net asset position by counterparty, exclusive of accrued interest and collateral. At June 30, 2011 and December 31, 2010, these balances included $3.6 billion and $2.7 billion, respectively, of 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, 2011 and December 31, 2010, the cumulativemark-to-marketadjustment to the hedged debt was $(3.9) billion and $(2.7) billion, respectively.
 
6.  Stockholders’ Equity and Stock-Based Compensation
 
The following table summarizes our common share repurchases and issuances for the three and six months ended June 30, 2011 and 2010.
 
                 
     Six Months
 
  Three Months Ended
  Ended
 
  June 30,  June 30, 
(Dollars and shares in millions, except per share data) 2011  2010  2011  2010 
 
Common shares repurchased:
                
Open market
  9.6   —   9.6   — 
Benefit plans(1)
  .9   .2   2.6   .6 
                 
Total shares repurchased
  10.5   .2   12.2   .6 
                 
Average purchase price per share
 $16.28  $17.72  $16.18  $14.51 
                 
Common shares issued
  1.1   .2   3.4   1.4 
                 
Authority remaining at end of period for repurchases(2)
 $144.1   38.8  $144.1   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.
 
      (2)  In April 2011 we authorized the repurchase of up to $300 million of outstanding common stock in open market transactions, and terminated the previous stock repurchase program which had authorized the repurchase of up to 342.5 million shares.
 
The closing price of our common stock on the New York Stock Exchange on June 30, 2011 was $16.81.


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
6.  Stockholders’ Equity and Stock-Based Compensation (Continued)
 
In March 2011, we retired all 70 million shares of common stock held in treasury. This retirement decreased the balance in treasury stock by $1.9 billion, with corresponding decreases of $14 million in common stock and $1.9 billion in additional paid-in capital. There was no impact to total equity from this transaction.
 
In the first quarter, we changed our stock-based compensation plans so that retirement eligible employees would not forfeit unvested stock-based compensation upon their retirement. This change had the effect of accelerating $11 million of future stock-based compensation expenses associated with these unvested stock grants into the current period for those employees who are retirement eligible or who will become retirement eligible prior to the vesting date.
 
Dividend and Share Repurchase Program
 
On April 20, 2011, we declared a quarterly dividend of $.10 per share on our common stock, the first since early 2007. The dividend was paid on June 17, 2011, to shareholders of record at the close of business on June 3, 2011. In July 2011, we declared a $.10 per common share dividend to be paid on September 16, 2011. In April 2011, we also authorized the repurchase of up to $300 million of outstanding common stock in open market transactions and terminated all previous authorizations. During the second quarter 2011, we repurchased 9.6 million shares for an aggregate purchase price of $156 million.


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
7.  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, 2011 and 2010.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
  2011  2010  2011  2010 
 
Numerator:
                
Net income (loss) from continuing operations
 $(17,130) $344,772  $159,294  $591,526 
Less: preferred stock dividends
  4,052   18,711   7,930   37,389 
                 
Net income (loss) from continuing operations attributable to common stock
  (21,182)  326,061   151,364   554,137 
Adjusted for dividends of Series C Preferred Stock(1)
  —   14,688   —   29,376 
                 
Net income (loss) from continuing operations attributable to common stock, adjusted
  (21,182)  340,749   151,364   583,513 
Income (loss) from discontinued operations
  11,482   (6,954)  9,752   (13,568)
                 
Net income (loss) attributable to common stock, adjusted
 $(9,700) $333,795  $161,116  $569,945 
                 
Denominator (shares in thousands):
                
Weighted average shares used to compute basic EPS
  523,808   484,832   525,269   484,547 
Effect of dilutive securities:
                
Dilutive effect of Series C Preferred Stock(1)
  —   41,240   —   41,240 
Dilutive effect of stock options, non-vested deferred compensation and restricted stock, restricted stock units and Employee Stock Purchase Plan (“ESPP”)(2)
  —   1,319   5,596   1,226 
                 
Dilutive potential common shares(3)
  —   42,559   5,596   42,466 
                 
Weighted average shares used to compute diluted EPS
  523,808   527,391   530,865   527,013 
                 
Basic earnings (loss) per common share:
                
Continuing operations
 $(.04) $.67  $.29  $1.15 
Discontinued operations
  .02   (.01)  .02   (.03)
                 
Total
 $(.02) $.66  $.31  $1.12 
                 
Diluted earnings (loss) per common share:
                
Continuing operations
 $(.04) $.64  $.28  $1.11 
Discontinued operations
  .02   (.01)  .02   (.03)
                 
Total
 $(.02) $.63  $.30  $1.08 
                 
 
 
(1)Our 7.25 percent mandatory convertible preferred stock Series C was issued on December 31, 2007. The Series C Preferred Stock was fully converted to common shares on December 15, 2010.
 
(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 months ended June 30, 2011 and 2010, stock options covering approximately 33 million and 17 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive. For the six months ended June 30, 2011 and 2010, stock options covering approximately 13 million and 17 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
8.  Restructuring Activities
 
The following table summarizes the restructuring expenses incurred during the three and six months ended June 30, 2011 and 2010 and cumulative restructuring expenses incurred through June 30, 2011 associated with our restructuring plans.
 
                     
              Cumulative
 
  Three Months Ended
  Six Months Ended
  Expense(1)as of
 
  June 30,  June 30,  June 30,
 
  2011  2010  2011  2010  2011 
 
Severance costs
 $1,258  $17,658  $2,638  $42,455  $165,440 
Lease and other contract termination costs
  —   107   —   107   10,929 
Exit and other costs
  336   43   2,517   50   18,760 
                     
Total restructuring costs from continuing operations(1)
  1,594   17,808   5,155   42,612   195,129 
Total restructuring costs from discontinued operations
  9   (142)  (12)  1,336   29,221 
                     
Total
 $1,603  $17,666  $5,143  $43,948  $224,350 
                     
 
 
(1)Aggregate restructuring expenses from continuing operations incurred across our reportable segments are disclosed in Note 11, “Segment Reporting.”
 
Since the fourth quarter of 2007 through June 30, 2011, severance costs were incurred in conjunction with aggregate completed and planned position eliminations across all of our reportable segments, ranging from senior executives to servicing center personnel.
 
The following table summarizes changes in 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, 2009
 $9,195  $3,781  $—  $12,976 
Net accruals from continuing operations
  80,536   1,430   3,270   85,236 
Net accruals from discontinued operations
  3,108   2,384   70   5,562 
Cash paid
  (45,235)  (3,440)  (1,678)  (50,353)
                 
Balance at December 31, 2010
  47,604   4,155   1,662   53,421 
Net accruals from continuing operations
  2,638   —   2,517   5,155 
Net accruals from discontinued operations
  (18)  —   6   (12)
Cash paid
  (34,534)  (889)  (4,185)  (39,608)
                 
Balance at June 30, 2011
 $15,690  $3,266  $—  $18,956 
                 


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
9.  Fair Value Measurements
 
We use estimates of fair value in applying various accounting standards in our financial statements. We categorize our fair value estimates based on a hierarchical framework associated with three levels of price transparency utilized in measuring financial instruments at fair value. During the three and six months ended June 30, 2011, there were no significant transfers of financial instruments between levels, or changes in our methodology or assumptions used to value our financial instruments. Please refer to Note 15, “Fair Value Measurements” in our 2010Form 10-Kfor a full discussion.
 
The following tables summarize the valuation of our financial instruments that aremarked-to-marketon a recurring basis in the consolidated financial statements as of June 30, 2011 and December 31, 2010.
 
                                 
  Fair Value Measurements on a Recurring
  Fair Value Measurements on a Recurring
 
  Basis as of June 30, 2011  Basis as of December 31, 2010 
(Dollars in millions) Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
 
Assets
                                
Available-for-saleinvestments:
                                
U.S. Treasury securities
 $20  $—  $—  $20  $39  $—  $—  $39 
Agency residential mortgage backed securities
  —   64   —   64   —   68   —   68 
Guaranteed investment contracts
  —   21   —   21   —   20   —   20 
Other
  —   12   —   12   —   12   —   12 
                                 
Totalavailable-for-saleinvestments
  20   97   —   117   39   100   —   139 
Derivative instruments:(1)
                                
Interest rate swaps
  —   1,011   119   1,130   —   1,017   150   1,167 
Cross currency interest rate swaps
  —   447   2,421   2,868   —   427   1,599   2,026 
Other
  —   —   3   3   —   —   26   26 
                                 
Total derivative assets
  —   1,458   2,543   4,001   —   1,444   1,775   3,219 
Counterparty netting
              (858)              (782)
                                 
Subtotal(3)
              3,143               2,437 
Cash collateral held
              (1,003)              (886)
                                 
Net derivative assets
              2,140               1,551 
                                 
Total
 $20  $1,555  $2,543  $2,257  $39  $1,544  $1,775  $1,690 
                                 
Liabilities(2)
                                
Derivative instruments(1)
                                
Interest rate swaps
 $—  $(135) $(199) $(334) $—  $(183) $(240) $(423)
Floor Income Contracts
  —   (2,390)  —   (2,390)  —   (1,315)  —   (1,315)
Cross currency interest rate swaps
  —   (37)  (148)  (185)  —   (43)  (172)  (215)
Other
  —   —   —   —   (1)  —   —   (1)
                                 
Total derivative instruments
  —   (2,562)  (347)  (2,909)  (1)  (1,541)  (412)  (1,954)
Counterparty netting
              858               782 
                                 
Subtotal(3)
              (2,051)              (1,172)
Cash collateral pledged
              993               809 
                                 
Net derivative liabilities
              (1,058)              (363)
                                 
Total
 $—  $(2,562) $(347) $(1,058) $(1) $(1,541) $(412) $(363)
                                 
 
 
(1)Fair value of derivative instruments excludes accrued interest and the value of collateral.
 
(2)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.
 
(3)As carried on the balance sheet.


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
9.  Fair Value Measurements (Continued)
 
 
The following tables summarize 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, 2011 and 2010.
 
                                 
  Three Months Ended June 30, 2011(3)  Three Months Ended June 30, 2010(3) 
  Derivative Instruments  Derivative Instruments 
     Cross
           Cross
       
     Currency
     Total
     Currency
     Total
 
  Interest
  Interest
     Derivative
  Interest
  Interest
     Derivative
 
(Dollars in millions) Rate Swaps  Rate Swaps  Other  Instruments  Rate Swaps  Rate Swaps  Other  Instruments 
 
Balance, beginning of period
 $(85) $2,011  $26  $1,952  $(329) $1,548  $(22) $1,197 
Total gains/(losses) (realized and unrealized):
                                
Included in earnings(1)
  6   321   33   360   165   (1,086)  11   (910)
Included in other comprehensive income
  —   —   —   —   —   —   —   — 
Settlements
  (1)  (59)  (56)  (116)  2   (39)  2   (35)
Transfers in and/or out of Level 3
  —   —   —   —   —   —   —   — 
                                 
Balance, end of period
 $(80) $2,273  $3  $2,196  $(162) $423  $(9) $252 
                                 
Change in unrealized gains/(losses) relating to instruments still held at the reporting date(2)
 $5  $262  $14  $281  $161  $(1,125) $12  $(952)
                                 
 
                 
  Six Months Ended June 30, 2011(3) 
  Derivative Instruments 
     Cross
       
     Currency
     Total
 
  Interest
  Interest
     Derivative
 
(Dollars in millions) Rate Swaps  Rate Swaps  Other  Instruments 
 
Balance, beginning of period
 $(90) $1,427  $26  $1,363 
Total gains/(losses) (realized and unrealized):
                
Included in earnings(1)
  34   954   35   1,023 
Included in other comprehensive income
  —   —   —   — 
Settlements
  (24)  (108)  (58)  (190)
Transfers in and/or out of Level 3
  —   —   —   — 
                 
Balance, end of period
 $(80) $2,273  $3  $2,196 
                 
Change in unrealized gains/(losses) relating to instruments still held at the reporting date(2)
 $10  $844  $13  $867 
                 
 


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
9.  Fair Value Measurements (Continued)
 
                             
  Six Months Ended June 30, 2010 
     Derivative Instruments    
           Cross
          
           Currency
     Total
    
  Residual
  Interest
  Floor Income
  Interest
     Derivative
    
(Dollars in millions) Interests  Rate Swaps  Contracts  Rate Swaps  Other  Instruments  Total 
 
Balance, beginning of period
 $1,828  $(272) $(54) $1,596  $(18) $1,252  $3,080 
Total gains/(losses) (realized and unrealized):
                            
Included in earnings(1)
  —   160   3   (1,959)  4   (1,792)  (1,792)
Included in other comprehensive income
  —   —   —   —   —   —   — 
Settlements
  —   6   51   (87)  5   (25)  (25)
Cumulative effect of accounting change(3)
  (1,828)  (56)  —   873   —   817   (1,011)
Transfers in and/or out of Level 3
  —   —   —   —   —   —   — 
                             
Balance, end of period
 $—  $(162) $—  $423  $(9) $252  $252 
                             
Change in unrealized gains/(losses) relating to instruments still held at the reporting date(2)
 $—  $161  $—  $(2,047) $6  $(1,880) $(1,880)
                             
 
     (1) “Included in earnings” comprises the following amounts recorded in the specified line item in the consolidated statements of income:
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
(Dollars in millions) 2011  2010  2011  2010 
 
Gains (losses) on derivative and hedging activities, net
 $303  $(948) $916  $(1,876)
Interest expense
  57   38   107   84 
                 
Total
 $360  $(910) $1,023  $(1,792)
                 
 
     (2)  Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.
 
     (3)  Upon adoption of new consolidation accounting guidance on January 1, 2010, we consolidated previously off-balance sheet securitization trusts. This resulted in the removal of the Residual Interests and the recording of the fair value of swaps previously not in our consolidated results.

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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
9.  Fair Value Measurements (Continued)
 
 
The following table summarizes the fair values of our financial assets and liabilities, including derivative financial instruments, as of June 30, 2011 and December 31, 2010.
 
                         
  June 30, 2011  December 31, 2010 
  Fair
  Carrying
     Fair
  Carrying
    
(Dollars in millions) Value  Value  Difference  Value  Value  Difference 
 
Earning assets
                        
FFELP loans
 $140,341  $142,635  $(2,294) $147,163  $148,649  $(1,486)
Private Education Loans
  33,086   35,753   (2,667)  30,949   35,656   (4,707)
Other loans (presented in “other assets” on the balance sheet)
  84   232   (148)  88   270   (182)
Cash and investments(1)
  11,359   11,359   —   11,553   11,553   — 
                         
Total earning assets
  184,870   189,979   (5,109)  189,753   196,128   (6,375)
                         
Interest-bearing liabilities
                        
Short-term borrowings
  30,748   30,766   18   33,604   33,616   12 
Long-term borrowings
  151,843   160,765   8,922   154,355   163,544   9,189 
                         
Total interest-bearing liabilities
  182,591   191,531   8,940   187,959   197,160   9,201 
                         
Derivative financial instruments
                        
Floor Income/Cap contracts
  (2,390)  (2,390)  —   (1,315)  (1,315)  — 
Interest rate swaps
  796   796   —   744   744   — 
Cross currency interest rate swaps
  2,683   2,683   —   1,811   1,811   — 
Other
  3   3   —   25   25   — 
                         
Excess of net asset fair value over carrying value
         $3,831          $2,826 
                         
 
 
(1)“Cash and investments” includesavailable-for-saleinvestments that consist of investments that are primarily U.S. Treasury or U.S. agency securities whose cost basis is $113 million and $137 million at June 20, 2011 and December 31, 2010, respectively, versus a fair value of $117 million and $139 million at June 30, 2011 and December 31, 2010, respectively.
 
10.  Commitments and Contingencies
 
Mark A. Arthur et al. v. Sallie Mae, Inc.  As previously disclosed, this class action suit involves allegations made in U.S. District Court for the Western District of Washington that we contacted consumers on their cellular telephones via autodialer without their consent in violation of the Telephone Consumer Protection Act, 47 U.S.C. § 227 et seq. (“TCPA”). Each violation under the TCPA provides for $500 in statutory damages ($1,500 if a willful violation is shown). Plaintiffs are seeking statutory damages, damages for willful violations, attorneys’ fees, costs, and injunctive relief. We have denied vigorously all claims asserted against us, but previously agreed to a preliminary settlement of $19.5 million to avoid the burden and expense of continued litigation. Subsequent to reaching this preliminary settlement, we filed submissions with the Court to advise that additional individuals were omitted from the original notice list of class members.
 
On August 3, 2011, we reached an agreement in principle through a memorandum of understanding with the Plaintiffs on behalf of the settlement class, and we expect to formalize that agreement and request Court approval during the next several months. Under the memorandum of understanding, we have agreed to increase the settlement fund to $24.15 million. We have $24.15 million accrued related to this matter as of June 30, 2011.


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
10.  Commitments and Contingencies (Continued)
 
In the ordinary course of business, we and our 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 and other laws. In certain of these actions and proceedings, claims for substantial monetary damage are asserted against us and our subsidiaries.
 
In the ordinary course of business, we and our subsidiaries are subject to regulatory examinations, information gathering requests, inquiries and investigations. In connection with formal and informal inquiries in these cases, we and our subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of our regulated activities.
 
In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, we 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.
 
We are required to establish reserves for litigation and regulatory matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves.
 
Based on current knowledge, reserves have been established for certain litigation or regulatory matters where the loss is both probable and estimable. Based on current knowledge, management does not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our consolidated financial position, liquidity, results of operations or cash flows.
 
11.  Segment Reporting
 
FFELP Loans Segment
 
Our FFELP Loans segment consists of our $142.6 billion FFELP Loan portfolio as of June 30, 2011 and the underlying debt and capital funding the loans. We no longer originate FFELP Loans; however, we are actively seeking to acquire FFELP Loan portfolios.
 
The following table includes asset information for our FFELP Loans segment.
 
         
  June 30,
  December 31,
 
  2011  2010 
 
FFELP Loans, net
 $142,635  $148,649 
Cash and investments(1)
  6,041   5,963 
Other
  4,418   3,911 
         
Total assets
 $153,094  $158,523 
         
 
 
 
(1)Includes restricted cash and investments.


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
11.  Segment Reporting (Continued)
 
 
Consumer Lending Segment
 
We originate, acquire, finance and service Private Education Loans. The portfolio totaled $35.8 billion at June 30, 2011. We also provide savings products, primarily in the form of retail deposits, to help customers save for a college education.
 
The following table includes asset information for our Consumer Lending segment.
 
         
  June 30,
  December 31,
 
  2011  2010 
 
Private Education Loans, net
 $35,753  $35,656 
Cash and investments(1)
  2,794   3,372 
Other
  4,506   4,004 
         
Total assets
 $43,053  $43,032 
         
 
 
 
(1)Includes restricted cash and investments.
 
Business Services Segment
 
The Business Services segment generates its revenue from servicing our FFELP Loan portfolio as well as servicing FFELP and other loans for other financial institutions, Guarantors and ED. The segment also performs default aversion work and contingency collections on behalf of Guarantors and ED, Campus Solutions, account asset servicing and transaction processing activities.
 
At June 30, 2011 and December 31, 2010, the Business Services segment had total assets of $799 million and $930 million, respectively.
 
Other Segment
 
The Other segment primarily consists of the financial results related to the repurchase of debt, the corporate liquidity portfolio and all overhead. We also include results from smaller wind-down and discontinued operations within this segment.
 
At June 30, 2011 and December 31, 2010, the Other segment had total assets of $3.4 billion and $2.8 billion, respectively.
 
Measure of Profitability
 
The tables below include the condensed operating results for each of our reportable segments. Management, including the chief operating decision makers, evaluates the Company on certain performance measures that we refer to as “Core Earnings” performance measures for each operating segment. We use “Core Earnings” to manage each business segment because “Core Earnings” reflect adjustments to GAAP financial results for two items, discussed below, that create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that “Core Earnings” provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information as we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. The two items adjusted for in our “Core Earnings” presentations are: (1) our use of derivatives instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness and (2) the accounting for goodwill and acquired intangible assets. The tables presented below reflect “Core Earnings” operating


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
11.  Segment Reporting (Continued)
 
measures reviewed and utilized by management to manage the business. Reconciliation of the “Core Earnings” segment totals to our consolidated operating results in accordance with GAAP is also included in the tables below.
 
Our “Core Earnings” performance measures are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. 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. Our 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.


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
11.  Segment Reporting (Continued)
 
Segment Results and Reconciliations to GAAP
 
                                 
  Three Months Ended June 30, 2011 
  FFELP
  Consumer
  Business
        Total “Core
     Total
 
(Dollars in millions) Loans  Lending  Services  Other  Eliminations(1)  Earnings”  Adjustments(2)  GAAP 
 
Interest income:
                                
Student loans
 $721  $600  $—  $—  $—  $1,321  $129  $1,450 
Other loans
  —   —   —   5   —   5   —   5 
Cash and investments
  1   2   2   2   (2)  5   —   5 
                                 
Total interest income
  722   602   2   7   (2)  1,331   129   1,460 
Total interest expense
  357   201   —   14   (2)  570   22   592 
                                 
Net interest income (loss)
  365   401   2   (7)  —   761   107   868 
Less: provisions for loan losses
  23   265   —   3   —   291   —   291 
                                 
Net interest income (loss) after provisions for loan losses
  342   136   2   (10)  —   470   107   577 
Servicing revenue
  21   15   244   —   (187)  93   —   93 
Contingency revenue
  —   —   86   —   —   86   —   86 
Gains on debt repurchases
  —   —   —   —   —   —   —   — 
Other income (loss)
  —   —   11   3   —   14   (521)  (507)
                                 
Total other income (loss)
  21   15   341   3   (187)  193   (521)  (328)
Expenses:
                                
Direct operating expenses
  192   73   121   —   (187)  199   —   199 
Overhead expenses
  —   —   —   69   —   69   —   69 
                                 
Operating expenses
  192   73   121   69   (187)  268   —   268 
Goodwill and acquired intangible assets impairment and amortization
  —   —   —   —   —   —   6   6 
Restructuring expenses
  —   1   —   1   —   2   —   2 
                                 
Total expenses
  192   74   121   70   (187)  270   6   276 
                                 
Income (loss) from continuing operations, before income tax expense (benefit)
  171   77   222   (77)  —   393   (420)  (27)
Income tax expense (benefit)(3)
  63   28   82   (29)  —   144   (154)  (10)
                                 
Net income (loss) from continuing operations
  108   49   140   (48)  —   249   (266)  (17)
Income from discontinued operations, net of taxes
  —   —   —   11   —   11   —   11 
                                 
Net income (loss)
 $108  $49  $140  $(37) $—  $260  $(266) $(6)
                                 
 
(1)The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.
 
(2)“Core Earnings” adjustments to GAAP:
 
             
  Three Months Ended June 30, 2011 
     Net Impact of
    
  Net Impact of
  Goodwill and
    
  Derivative
  Acquired
    
(Dollars in millions) Accounting  Intangibles  Total 
 
Net interest income after provisions for loan losses
 $107  $—  $107 
Total other income (loss)
  (521)  —   (521)
Goodwill and acquired intangible assets impairment and amortization
  —   6   6 
             
Total “Core Earnings” adjustments to GAAP
 $(414) $(6)  (420)
             
Income tax benefit
          (154)
             
Net loss
         $(266)
             
 
(3)Income taxes are based on a percentage of net income before tax for the individual reportable segment.
 


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
11.  Segment Reporting (Continued)
 
                                 
  Three Months Ended June 30, 2010 
  FFELP
  Consumer
  Business
        Total “Core
     Total
 
(Dollars in millions) Loans  Lending  Services  Other  Eliminations(1)  Earnings”  Adjustments(2)  GAAP 
 
Interest income:
                                
Student loans
 $744  $575  $—  $—  $—  $1,319  $132  $1,451 
Other loans
  —   —   —   7   —   7   —   7 
Cash and investments
  2   4   4   1   (4)  7   —   7 
                                 
Total interest income (loss)
  746   579   4   8   (4)  1,333   132   1,465 
Total interest expense
  382   183   —   11   (4)  572   (3)  569 
                                 
Net interest income (loss)
  364   396   4   (3)  —   761   135   896 
Less: provisions for loan losses
  29   349   —   4   —   382   —   382 
                                 
Net interest income (loss) after provisions for loan losses
  335   47   4   (7)  —   379   135   514 
Servicing revenue
  15   21   228   —   (165)  99   —   99 
Contingency revenue
  —   —   88   —   —   88   —   88 
Gains on debt repurchases
  —   —   —   91   —   91   —   91 
Other income
  —   —   13   —   —   13   76   89 
                                 
Total other income (loss)
  15   21   329   91   (165)  291   76   367 
Expenses:
                                
Direct operating expenses
  187   86   133   2   (165)  243   —   243 
Overhead expenses
  —   —   —   66   —   66   —   66 
                                 
Operating expenses
  187   86   133   68   (165)  309   —   309 
Goodwill and acquired intangible assets impairment and amortization
  —   —   —   —   —   —   10   10 
Restructuring expenses
  15   1   2   —   —   18   —   18 
                                 
Total expenses
  202   87   135   68   (165)  327   10   337 
                                 
Income (loss) from continuing operations, before income tax expense (benefit)
  148   (19)  198   16   —   343   201   544 
Income tax expense (benefit)(3)
  53   (7)  71   8   —   125   74   199 
                                 
Net income (loss) from continuing operations
  95   (12)  127   8   —   218   127   345 
Loss from discontinued operations, net of taxes
  —   —   —   (7)  —   (7)  —   (7)
                                 
Net income (loss)
 $95  $(12) $127  $1  $—  $211  $127  $338 
                                 
 
(1)The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.
 
(2)“Core Earnings” adjustments to GAAP:
 
             
  Three Months Ended June 30, 2010 
     Net Impact of
    
  Net Impact of
  Goodwill and
    
  Derivative
  Acquired
    
(Dollars in millions) Accounting  Intangibles  Total 
 
Net interest income after provisions for loan losses
 $135  $—  $135 
Total other income
  76   —   76 
Goodwill and acquired intangible assets impairment and amortization
  —   10   10 
             
Total “Core Earnings” adjustments to GAAP
 $211  $(10)  201 
             
Income tax expense
          74 
             
Net income
         $127 
             
 
(3)Income taxes are based on a percentage of net income before tax for the individual reportable segment.
 

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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
11.  Segment Reporting (Continued)
 
                                 
  Six Months Ended June 30, 2011 
  FFELP
  Consumer
  Business
        Total “Core
     Total
 
(Dollars in millions) Loans  Lending  Services  Other  Eliminations(1)  Earnings”  Adjustments(2)  GAAP 
 
Interest income:
                                
Student loans
 $1,457  $1,204  $—  $—  $—  $2,661  $270  $2,931 
Other loans
  —   —   —   11   —   11   —   11 
Cash and investments
  2   5   5   3   (5)  10   —   10 
                                 
Total interest income (loss)
  1,459   1,209   5   14   (5)  2,682   270   2,952 
Total interest expense
  726   399   —   29   (5)  1,149   37   1,186 
                                 
Net interest income (loss)
  733   810   5   (15)  —   1,533   233   1,766 
Less: provisions for loan losses
  46   540   —   8   —   594   —   594 
                                 
Net interest income (loss) after provisions for loan losses
  687   270   5   (23)  —   939   233   1,172 
Servicing revenue
  46   32   489   —   (376)  191   —   191 
Contingency revenue
  —   —   164   —   —   164   —   164 
Gains on debt repurchases
  —   —   —   64   —   64   (26)  38 
Other income
  —   —   21   6   —   27   (754)  (727)
                                 
Total other income (loss)
  46   32   674   70   (376)  446   (780)  (334)
Expenses:
                                
Direct operating expenses
  387   155   249   9   (376)  424   —   424 
Overhead expenses
  —   —   —   148   —   148   —   148 
                                 
Operating expenses
  387   155   249   157   (376)  572   —   572 
Goodwill and acquired intangible assets impairment and amortization
  —   —   —   —   —   —   12   12 
Restructuring expenses
  1   2   1   1   —   5   —   5 
                                 
Total expenses
  388   157   250   158   (376)  577   12   589 
                                 
Income (loss) from continuing operations, before income tax expense (benefit)
  345   145   429   (111)  —   808   (559)  249 
Income tax expense (benefit)(3)
  127   54   158   (41)  —   298   (208)  90 
                                 
Net income (loss) from continuing operations
  218   91   271   (70)  —   510   (351)  159 
Income from discontinued operations, net of taxes
  —   —   —   10   —   10   —   10 
                                 
Net income (loss)
 $218  $91  $271  $(60) $—  $520  $(351) $169 
                                 
 
(1)The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.
 
(2)“Core Earnings” adjustments to GAAP:
 
             
  Six Months Ended June 30, 2011 
     Net Impact of
    
  Net Impact of
  Goodwill and
    
  Derivative
  Acquired
    
(Dollars in millions) Accounting  Intangibles  Total 
 
Net interest income after provisions for loan losses
 $233  $—  $233 
Total other income (loss)
  (780)  —   (780)
Goodwill and acquired intangible assets impairment and amortization
  —   12   12 
             
Total “Core Earnings” adjustments to GAAP
 $(547) $(12)  (559)
             
Income tax benefit
          (208)
             
Net loss
         $(351)
             
 
(3)Income taxes are based on a percentage of net income before tax for the individual reportable segment.
 

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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
11.  Segment Reporting (Continued)
 
                                 
  Six Months Ended June 30, 2010 
  FFELP
  Consumer
  Business
        Total “Core
     Total
 
(Dollars in millions) Loans  Lending  Services  Other  Eliminations(1)  Earnings”  Adjustments(2)  GAAP 
 
Interest income:
                                
Student loans
 $1,386  $1,141  $—  $—  $—  $2,527  $296  $2,823 
Other loans
  —   —   —   16   —   16   —   16 
Cash and investments
  4   6   8   1   (8)  11   —   11 
                                 
Total interest income (loss)
  1,390   1,147   8   17   (8)  2,554   296   2,850 
Total interest expense
  718   356   —   21   (8)  1,087   13   1,100 
                                 
Net interest income (loss)
  672   791   8   (4)  —   1,467   283   1,750 
Less: provisions for loan losses
  52   674   —   15   —   741   —   741 
                                 
Net interest income (loss) after provisions for loan losses
  620   117   8   (19)  —   726   283   1,009 
Servicing revenue
  36   41   473   —   (329)  221   —   221 
Contingency revenue
  —   —   168   —   —   168   —   168 
Gains on debt repurchases
  —   —   —   181   —   181   —   181 
Other income
  —   —   24   11   —   35   (5)  30 
                                 
Total other income (loss)
  36   41   665   192   (329)  605   (5)  600 
Expenses:
                                
Direct operating expenses
  375   166   252   4   (329)  468   —   468 
Overhead expenses
  —   —   —   129   —   129   —   129 
                                 
Operating expenses
  375   166   252   133   (329)  597   —   597 
Goodwill and acquired intangible assets impairment and amortization
  —   —   —   —   —   —   19   19 
Restructuring expenses
  33   3   5   2   —   43   —   43 
                                 
Total expenses
  408   169   257   135   (329)  640   19   659 
                                 
Income (loss) from continuing operations, before income tax expense (benefit)
  248   (11)  416   38   —   691   259   950 
Income tax expense (benefit)(3)
  89   (4)  149   18   —   252   106   358 
                                 
Net income (loss) from continuing operations
  159   (7)  267   20   —   439   153   592 
Loss from discontinued operations, net of taxes
  —   —   —   (14)  —   (14)  —   (14)
                                 
Net income (loss)
 $159  $(7) $267  $6  $—  $425  $153  $578 
                                 
 
(1)The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.
 
(2)“Core Earnings” adjustments to GAAP:
 
             
  Six Months Ended June 30, 2010 
     Net Impact of
    
  Net Impact of
  Goodwill and
    
  Derivative
  Acquired
    
(Dollars in millions) Accounting  Intangibles  Total 
 
Net interest income after provisions for loan losses
 $283  $—  $283 
Total other income (loss)
  (5)  —   (5)
Goodwill and acquired intangible assets impairment and amortization
  —   19   19 
             
Total “Core Earnings” adjustments to GAAP
 $278  $(19)  259 
             
Income tax benefit
          106 
             
Net loss
         $153 
             
 
(3)Income taxes are based on a percentage of net income before tax for the individual reportable segment.

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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
11.  Segment Reporting (Continued)
 
 
Summary of “Core Earnings” Adjustments to GAAP
 
The two adjustments required to reconcile from our “Core Earnings” results to our GAAP results of operations relate to differing treatments for: (1) our use of derivatives instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness and (2) the accounting for goodwill and acquired intangible assets. The following table reflects aggregate adjustments associated with these areas for the three and six months ended June 30, 2011 and 2010.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
(Dollars in millions) 2011  2010  2011  2010 
 
“Core Earnings” adjustments to GAAP:
                
Net impact of derivative accounting(1)
 $(414) $211  $(547) $278 
Net impact of acquired intangibles(2)
  (6)  (10)  (12)  (19)
Net tax effect(3)
  154   (74)  208   (106)
                 
Total “Core Earnings” adjustments to GAAP
 $(266) $127  $(351) $153 
                 
 
(1)Derivative accounting:“Core Earnings” exclude periodic unrealized gains and losses that are caused by themark-to-marketderivative valuations on derivatives that do not qualify for hedge accounting treatment under GAAP and periodic unrealized gains and losses that are a result of ineffectiveness recognized related to effective hedges. These unrealized gains and losses occur in our FFELP Loans, Consumer Lending and Other business segments. Under GAAP, for derivatives that are held to maturity, the cumulative net unrealized gain or loss at the time of maturity will equal $0 except for Floor Income Contracts where the cumulative unrealized gain will equal the amount for which we sold the contract. In our “Core Earnings” presentation, we recognized the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life.
 
(2)Goodwill and Acquired Intangibles: We exclude goodwill and intangible impairment and amortization of acquired intangibles.
 
(3)Net Tax Effect:Such tax effect is based upon our “Core Earnings” effective tax rate for the year.
 
12.  Discontinued Operations
 
Our Purchased Paper businesses are presented in discontinued operations for the current and prior periods. In the fourth quarter of 2010, we began actively marketing our Purchased Paper — Non-Mortgage business for sale and concluded it was probable this business would be sold within one year at which time we would exit the business. The Purchased Paper — Non-Mortgage business comprises operations and cash flows that can be clearly distinguished operationally and for financial reporting purposes from the rest of the Company. As a result, we have classified the business as held-for-sale, and, as such, the results of operations of this business were required to be presented in discontinued operations beginning in the fourth quarter of 2010. In connection with this classification, we are required to carry this business at the lower of fair value or historical cost basis. This resulted in us recording an after-tax loss of $52 million from discontinued operations in the fourth quarter of 2010, primarily due to adjusting the value of this business to its estimated fair value. We are currently seeking bids for this portfolio and anticipate closing on the sale in the second half of 2011.


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SLM CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
12.  Discontinued Operations (Continued)
 
The following table summarizes the discontinued assets and liabilities at June 30, 2011 and December 31, 2010, respectively.
 
         
  June 30,
  December 31,
 
  2011  2010 
 
Assets:
        
Cash and equivalents
 $11,912  $3,848 
Other assets
  139,087   176,916 
         
Assets of discontinued operations
 $150,999  $180,764 
         
Liabilities:
        
Liabilities of discontinued operations
 $5,336  $6,300 
         
 
At June 30, 2011 and December 31, 2010, other assets of our discontinued operations consist primarily of the Purchased Paper — Non-Mortgage loan portfolio and a deferred tax asset for intangibles that will be realized upon the sale of our Purchased Paper — Non-Mortgage business. At June 30, 2011 and December 31, 2010, liabilities of our discontinued operations consist primarily of restructuring liabilities related to severance and contract termination costs.
 
The following table summarizes the discontinued operations for the three and six months ended June 30, 2011 and 2010.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
  2011  2010  2011  2010 
 
Discontinued operations:
                
Income (loss) from discontinued operations before income taxes
 $18,217  $(9,829) $15,273  $(19,808)
Income tax expense (benefit)
  6,735   (2,875)  5,521   (6,240)
                 
Income (loss) from discontinued operations, net of taxes
 $11,482  $(6,954) $9,752  $(13,568)
                 


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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report onForm 10-Q.
 
This 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 risks and uncertainties set forth in Item 1A “Risk Factors” and elsewhere in our Annual Report onForm 10-Kfor the year ended December 31, 2010, in this Quarterly Report onForm 10-Q,and subsequent filings with the SEC; increases in financing costs; limits on liquidity; increases in costs associated with compliance with laws and regulations; changes in accounting standards and the impact of related changes in significant accounting estimates; any adverse outcomes in any significant litigation to which we are a party; credit risk associated with our exposure to third parties, including counterparties to our derivative transactions; and changes in the terms of student loans and the educational credit marketplace (including changes resulting from new laws and the implementation of existing laws). We could also be affected by, among other things: changes in our funding costs and availability; reductions to our credit ratings or the credit ratings of the United States of America; failures of our operating systems or infrastructure, including those of third-party vendors; damage to our reputation; failures to successfully implement cost-cutting and restructuring initiatives and adverse effects of such initiatives on our business; changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; changes in law and regulations with respect to the student lending business and financial institutions generally; increased competition from banks and other consumer lenders; the creditworthiness of our customers; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments and those of our earning assets versus our funding arrangements; changes in general economic conditions; and changes in the demand for debt management services. The preparation of our consolidated financial statements also requires management to make certain estimates and assumptions including estimates and assumptions about future events. These estimates or assumptions may prove to be incorrect. All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. We do not undertake any obligation to update or revise these forward-looking statements to conform the statement to actual results or changes in our expectations.
 
Definitions for capitalized terms used in this document can be found in the “Glossary” at the end of this document.
 
Through this discussion and analysis, we intend to provide the reader with some narrative context for how our management views our consolidated financial statements, additional context within which to assess our operating results, and information on the quality and variability of our earnings, liquidity and cash flows.


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Selected Financial Information and Ratios
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
(Dollars and shares in millions, except per share data) 2011  2010  2011  2010 
 
GAAP Basis
                
Net income (loss)
 $(6) $338  $169  $578 
Diluted earnings (loss) per common share(1)
 $(.02) $.63  $.30  $1.08 
Weighted average shares used to compute diluted earnings (loss) per share
  524   527   531   527 
Return on assets
  (.01)%  .68%  .18%  .59%
“Core Earnings” Basis(2)
                
“Core Earnings” net income
 $260  $211  $520  $425 
“Core Earnings” diluted earnings per common share(1)
 $.48  $.39  $.96  $.79 
Weighted average shares used to compute diluted earnings per share
  530   527   531   527 
“Core Earnings” return on assets
  .54%  .43%  .54%  .44%
Other Operating Statistics
                
Ending FFELP Loans, net
 $142,635  $148,492  $142,635  $148,492 
Ending Private Education Loans, net
  35,753   35,151   35,753   35,151 
                 
Ending total student loans, net
 $178,388  $183,643  $178,388  $183,643 
                 
Average student loans
 $180,783  $184,571  $182,575  $183,060 
 
 
(1)Preferred dividends of $15 million and $29 million, applicable to our convertible Series C Preferred Stock, were added back to the numerator in the three and six months ended June 30, 2010, respectively, in computing diluted earnings per share, as the Series C Preferred Stock was dilutive. The Series C Preferred Stock was fully converted to common shares on December 15, 2010.
 
(2)“Core Earnings” are non-GAAP measures and do not represent a comprehensive basis of accounting. For a greater explanation of “Core Earnings,” see the section titled “’Core Earnings’ — Definition and Limitations” and subsequent sections.
 
Overview
 
Our primary business is to help students and families save, plan and pay for college. As part of this, we originate, service and collect loans made to studentsand/or their parents to finance the cost of their education. We provide funding, delivery and servicing support for education loans in the United States, through our non-federally guaranteed Private Education Loan programs and as a servicer and collector of loans for the U.S. Department of Education (“ED”). In addition we are the largest holder, servicer and collector of loans made under the Federal Family Education Loan Program (“FFELP”), a program that was recently discontinued.
 
We have used internal growth and strategic acquisitions to attain our leadership position in the education finance market. The core of our marketing strategy is to generate student loan originations by promoting our products on campus through the financial aid office and through direct marketing to students and their parents. These sales and marketing efforts are supported by the largest and most diversified servicing capabilities in the industry.
 
We earn fee income by providing student loan-related services including student loan servicing, loan default aversion and defaulted loan collections, transaction processing capabilities and information technology to educational institutions, and 529 college-savings plan program management services and a consumer savings network.


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We monitor and assess our ongoing operations and results based on the following four reportable segments:
 
  • FFELP Loans segment — Consists of our $142.6 billion and $148.7 billion FFELP Loan portfolio and the underlying debt and capital funding the loans as of June 30, 2011 and December 31, 2010, respectively. We no longer originate FFELP Loans; however, we are actively seeking to acquire, and have acquired, FFELP Loan portfolios. The portfolio has a weighted average remaining life of 7.65 years.
 
  • Consumer Lending segment — We originate, acquire, finance and service Private Education Loans. The portfolio totaled $35.8 billion and $35.7 billion at June 30, 2011 and December 31, 2010, respectively. We also provide savings products, primarily in the form of retail deposits, to help customers save for a college education.
 
  • Business Services segment — In this segment we provide loan servicing to our FFELP Loans segment, ED and other third parties. We provide default aversion work and contingency collections on behalf of Guarantors, colleges, ED and other third parties. Through our Campus Solutions business we provide comprehensive financing and transaction processing solutions to college financial aid offices and students to streamline the financial aid process. We also perform account asset servicing and other transaction processing activities.
 
  • Other segment — primarily consists of the financial results related to the repurchase of debt, the corporate liquidity portfolio and all overhead. We also include results from smaller wind-down and discontinued operations within this segment.
 
Key Financial Measures
 
Our operating results are primarily driven by net interest income from our student loan portfolios, provision for loan losses, financing costs, costs necessary to generate new assets, the revenues and expenses generated by our service businesses, and gains and losses on loan sales, debt repurchases and derivatives. We manage and assess the performance of each business segment separately as each is focused on different customer bases and derives its revenue from different activities and services. A brief summary of our key financial measures (net interest income; provision for loan losses; charge-offs and delinquencies; servicing and contingency revenues; other income/(loss); operating expenses; and “Core Earnings”) can be found in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2010Form 10-K.
 
First Half of 2011 Summary of Results
 
We continue to operate in a challenging macroeconomic environment marked by high unemployment and uncertainty. On July 1, 2010, the Health Care and Education Reconciliation Act of 2010 (“HCERA”), which included the SAFRA Act, eliminated FFELP Loan originations, a major source of our net income. All federal loans to students are now made through the Direct Student Loan Program (“DSLP”) and as discussed above, we no longer originate FFELP Loans. In addition, on July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) that represents a comprehensive change to banking laws, imposing significant new regulation on almost every aspect of the U.S. financial services industry. A discussion of HCERA and the Dodd-Frank Act can be found in Item 1 “Business” and in Item 1A “Risk Factors” in our 2010Form 10-K.
 
In this environment, we were able to achieve significant accomplishments in the first half of 2011 as discussed below.
 
We report financial results on a GAAP basis and also present certain “Core Earnings” performance measures. Our management, equity investors, credit rating agencies and debt capital providers use these “Core Earnings” measures to monitor our business performance. See “’Core Earnings’ — Definition and Limitations” for a further discussion and a complete reconciliation between GAAP net income and “Core Earnings.”


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GAAP second quarter 2011 net loss was $6 million ($.02 diluted loss per share), versus net income of $338 million ($.63 diluted earnings per share) in the same quarter last year. We manage our business segments on a “Core Earnings” basis. The primary difference between our “Core Earnings” and GAAP results for the second quarter of 2011 is a $414 million unrealized,mark-to-marketloss on certain derivative contracts recognized in GAAP but not in “Core Earnings” results.
 
“Core Earnings” were $260 million ($.48 diluted earnings per share) for the second quarter 2011, compared with $211 million ($.39 diluted earnings per share) for the year-ago period. Improved loan loss provision and operating expenses more than offset lower debt repurchase gains.
 
During the first half of 2011, we raised $2 billion of unsecured debt and issued $1.6 billion of FFELP asset-backed securities and $1.4 billion of Private Education Loan securities. We also repurchased $885 million of debt and realized “Core Earnings” gains of $64 million for the six months ended June 30, 2011, compared with $2.7 billion and $181 million in the six months ended June 30, 2010.
 
In the second-quarter 2011, we utilized $156 million to repurchase 9.6 million common shares on the open market as part of our $300 million share repurchase program announced in April. We declared and paid a $.10 per share common dividend during the second quarter of 2011.
 
Effective March 31, 2011, we completed the relocation of our headquarters to Newark, Delaware from Reston, Virginia.
 
2011 Management Objectives
 
In 2011 we have set out five major goals to create shareholder value. They are: (1) Reduce our operating expenses; (2) Maximize cash flows from FFELP Loans; (3) Prudently grow Consumer Lending segment assets and revenue; (4) Increase Business Services segment revenue; and (5) Reinstate dividendsand/or share repurchases. Here is how we plan to achieve these objectives and the progress we have made to date.
 
Reduce Operating Expenses
 
The elimination of FFELP by HCERA greatly reduced the scope of our historical revenue generating capabilities. In 2010 we originated $14 billion of loans, 84 percent of them FFELP Loans; in 2011 we expect to originate $2.5 billion of new loans, all of them Private Education Loans. Our FFELP related revenues will decline over the coming years. As a result, we must effectively match our cost structure to our ongoing business. We have set a goal of getting to a quarterly operating expense of $250 million in the fourth quarter 2011 and are on track to achieve this goal. Operating expenses were $268 million in the second quarter of 2011. Operating expenses in the second quarter of 2011 included $13 million of servicing costs related to the $25 billion student loan portfolio acquisition at the end of last year and $2 million for litigation contingencies. We expect these servicing costs to decline as the acquired portfolio converts to our loan servicing system in the second half of 2011. These charges notwithstanding, we expect to achieve our quarterly operating expense target of $250 million in the fourth quarter of 2011.
 
Maximize Cash Flows from FFELP Loans
 
We have a $142.6 billion portfolio of FFELP Loans that is expected to generate significant amounts of cash flow and earnings in the coming years. We plan to reduce related costs, minimize income volatility and opportunistically purchase additional FFELP Loan portfolios such as the portfolio we purchased at the end of 2010. During the first six months of 2011 we acquired $615 million of FFELP loans and expect to purchase additional FFELP loans in the second half of the year.
 
Prudently Grow Consumer Lending Segment Assets and Revenue
 
Successfully growing Private Education Loan lending, which is designed to supplement federal financial aid, is the key component of our long-term plan to grow shareholder value. We must originate increasing numbers of high quality Private Education Loans, increase net interest margins and further reduce charge-offs


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and provision for loan losses. Originations were 21 percent higher in the second quarter of 2011 compared with the year-ago quarter. Charge-offs decreased to 3.7 percent of loans in repayment from 5.3 percent in the year-ago quarter.
 
Increase Business Services Segment Revenue
 
Our Business Services segment comprises several businesses with customers related to FFELP that will experience revenue declines and several businesses with customers that provide growth opportunities. Our growth businesses are ED servicing, ED collections, other school-based asset type servicing and collections, Campus Solutions, transaction processing and 529 college-savings plan account asset servicing.
 
  • Under our ED Servicing Contract, we currently receive a 22 percent allocation of new borrower loans originated by the Direct Loan Program. We expect that this volume will grow organically as more loans are originated under DSLP. Our goal is to further expand our market share and broaden the services we provide to ED and otherthird-partyservicing clients. We can expand our market share under the ED Servicing Contract by having a better performance ranking than the three other servicing companies.
 
  • Campus Solutions is a business line that we expect to grow by expanding our product offerings and leveraging our deep relationships with colleges and universities. In the first quarter, we announced a Sallie Mae Bank No-Fee Student Checking Account with Debit as an enhanced refund disbursement choice for schools and students to help higher education institutions rapidly process financial aid and tuition refunds. This new option complements existing refund disbursement choices that include electronic deposit to the bank account of the student’s choice, debit card or a check. We added 18 new refund disbursement clients in the second quarter 2011.
 
  • Assets under management in 529 college-savings plans total $38 billion and have been growing at a rate of 25 percent over the last three years. We recently were selected to continue as the program manager for New York’s 529 College Savings Program under a seven-year contract, which is currently being negotiated. New York has the largest direct 529 plan in the country. Our goal is to service additional 529 plans.
 
  • We also launched Sallie Mae Insurance Services during the quarter, which will offer directly to college students and higher education institutions tuition insurance, renters insurance and student health insurance.
 
Reinstate Dividends and/or Share Repurchases
 
Our objective was to begin either paying dividends or repurchasing shares, or a combination of both, by the second half of 2011. On June 17, 2011, we paid a quarterly dividend of $.10 per share on our common stock, the first since early 2007. In July 2011, we declared a $.10 per common share dividend to be paid on September 16, 2011. In April 2011, we authorized the repurchase of up to $300 million of outstanding common stock in open-market transactions and terminated all previous authorizations. In the second quarter 2011, we utilized $156 million to repurchase 9.6 million common shares on the open market.


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RESULTS OF OPERATIONS
 
We present the results of operations below first on a consolidated basis in accordance with GAAP. Following our discussion of consolidated earnings results on a GAAP basis, we present our results on a segment basis. We have four business segments: FFELP Loans, Consumer Lending, Business Services and Other. Since these segments operate in distinct business environments and we manage and evaluate the financial performance of these segments using non-GAAP financial measures, these segments are presented on a “Core Earnings” basis (see “‘Core Earnings’ Definition and Limitations”).
 
GAAP Statements of Income (Unaudited)
 
                                 
  Three Months
     Six Months
    
  Ended
  Increase
  Ended
  Increase
 
  June 30,  (Decrease)  June 30,  (Decrease) 
(Dollars in millions, except per share data) 2011  2010  $  %  2011  2010  $  % 
 
Interest income:
                                
FFELP Loans
 $850  $876  $(26)  (3)% $1,727  $1,682  $45   3%
Private Education Loans
  600   575   25   4   1,204   1,141   63   6 
Other loans
  5   7   (2)  (29)  11   16   (5)  (31)
Cash and investments
  5   7   (2)  (29)  10   11   (1)  (9)
                                 
Total interest income
  1,460   1,465   (5)  —   2,952   2,850   102   4 
Total interest expense
  592   569   23   4   1,186   1,100   86   8 
                                 
Net interest income
  868   896   (28)  (3)  1,766   1,750   16   1 
Less: provisions for loan losses
  291   382   (91)  (24)  594   741   (147)  (20)
                                 
Net interest income after provisions for loan losses
  577   514   63   12   1,172   1,009   163   16 
Other income (loss):
                                
Gains (losses) on sales of loans and securities, net
  —   (3)  3   (100)  —   5   (5)  (100)
Gains (losses) on derivative and hedging activities, net
  (510)  95   (605)  (637)  (752)  13   (765)  (5,885)
Servicing revenue
  93   99   (6)  (6)  191   221   (30)  (14)
Contingency revenue
  86   88   (2)  (2)  164   168   (4)  (2)
Gains on debt repurchases
  —   91   (91)  (100)  38   181   (143)  (79)
Other income (loss)
  3   (3)  6   200   25   12   13   108 
                                 
Total other income (loss)
  (328)  367   (695)  (189)  (334)  600   (934)  (156)
Expenses:
                                
Operating expenses
  268   309   (41)  (13)  572   597   (25)  (4)
Goodwill and acquired intangible assets impairment and amortization expense
  6   10   (4)  (40)  12   19   (7)  (37)
Restructuring expenses
  2   18   (16)  (89)  5   43   (38)  (88)
                                 
Total expenses
  276   337   (61)  (18)  589   659   (70)  (11)
Income (loss) from continuing operations before income tax expense (benefit)
  (27)  544   (571)  (105)  249   950   (701)  (74)
Income tax expense (benefit)
  (10)  199   (209)  (105)  90   358   (268)  (75)
                                 
Net income (loss) from continuing operations
  (17)  345   (362)  (105)  159   592   (433)  (73)
Income (loss) from discontinued operations, net of tax expense (benefit)
  11   (7)  18   257   10   (14)  24   171 
                                 
Net income (loss)
  (6)  338   (344)  (102)  169   578   (409)  (71)
Preferred stock dividends
  4   19   (15)  (79)  8   37   (29)  (78)
                                 
Net income (loss) attributable to common stock
 $(10) $319  $(329)  (103)% $161  $541  $(380)  (70)%
                                 
Basic earnings (loss) per common share:
                                
Continuing operations
 $(.04) $.67  $(.71)  (106)% $.29  $1.15  $(.86)  (75)%
Discontinued operations
  .02   (.01)  .03   300   .02   (.03)  .05   167 
                                 
Total
 $(.02) $.66  $(.68)  (103)% $.31  $1.12  $(.81)  (72)%
                                 
Diluted earnings (loss) per common share:
                                
Continuing operations
 $(.04) $.64  $(.68)  (106)% $.28  $1.11  $(.83)  (75)%
Discontinued operations
  .02   (.01)  .03   300   .02   (.03)  .05   167 
                                 
Total
 $(.02) $.63  $(.65)  (103)% $.30  $1.08  $(.78)  (72)%
                                 
Dividends per common share
 $.10  $—  $.10   100% $.10  $—  $.10   100%
                                 


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Consolidated Earnings Summary — GAAP-basis
 
Three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010
 
For the three months ended June 30, 2011 and 2010, net income (loss) was $(6) million, or $(.02) diluted loss per common share, and $338 million, or $.63 diluted earnings per common share, respectively. The decrease in net income was primarily due to a $605 million increase in net losses on derivative and hedging activities and a $91 million decrease in gains on debt repurchases. These reductions were partially offset by a $63 million increase in net interest income after provisions for loan losses and a $61 million decrease in total expenses.
 
The primary contributors to each of the identified drivers of changes in net income for the current quarter compared with the year-ago quarter are as follows:
 
  • Net interest income decreased by $28 million primarily as a result of a $3.8 billion decline in the average balance of our student loan portfolio and higher funding costs.
 
  • Provisions for loan losses decreased by $91 million as a result of the improving performance of the Private Education Loan portfolio.
 
  • Net losses on derivatives and hedging activities increased by $605 million. The primary factors affecting the change in losses were interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during the period. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivatives and hedging activities may vary significantly in future periods.
 
  • Servicing revenue decreased by $6 million primarily due to 2010 legislation that eliminated the origination of new FFELP Loans, thereby eliminating Guarantor issuance fees on new FFELP Loans. Outstanding FFELP Loans for which we earn additional fees also declined.
 
  • Gains on debt repurchases decreased $91 millionyear-over-yearas we repurchased less debt in the current period. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.
 
  • Operating expenses decreased $41 million primarily due to our ongoing cost savings initiative and an $18 million reduction in litigation contingency expenses. The second quarter of 2011 included $13 million of third-party servicing expenses related to the $25 billion loan portfolio acquisition on December 31, 2010 and $2 million of litigation contingency expenses. The second quarter of 2010 included $6 million of restructuring-related asset impairments and $20 million in litigation contingency expenses.
 
  • Restructuring expenses decreased $16 million primarily as a result of the substantial completion of our plan for restructuring the Company initiated during 2010 in response to legislation ending FFELP. Restructuring our operations in response to the elimination of FFELP required us to significantly reduce our operations and related operating costs associated with the origination of FFELP Loans. Restructuring expenses associated with continuing operations under this plan were $2 million in the second quarter of 2011 and $18 million in the second quarter of 2010. We currently expect to incur an estimated $9 million of additional restructuring costs in 2011. The majority of these expenses will be severance costs.
 
  • The effective tax rates for the second quarters of 2011 and 2010 were 36 percent and 37 percent, respectively.
 
  • Net income from discontinued operations in the three months ended June 30, 2011 increased $18 million primarily due to a higher yield on our Purchased Paper — Non-Mortgage portfolio as a result of higher than expected collections. At the end of 2010, we began actively marketing our Purchased Paper — Non-Mortgage business for sale and concluded it was probable this business would be sold within one year at which time we would exit the business. As a result, the results of operations of this business


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 were required to be presented as discontinued operations beginning in the fourth quarter of 2010. Our Purchased Paper businesses are presented as discontinued operations for the current and prior periods. We are currently seeking bids for this portfolio and anticipate closing on the sale of the portfolio in the second half of 2011.
 
Six Months Ended June 30, 2011 Compared with Six Months Ended June 30, 2010
 
For the six months ended June 30, 2011 and 2010, net income was $169 million, or $.30 diluted earnings per common share, and $578 million, or $1.08 diluted earnings per common share, respectively. The decrease in net income for the six months ended June 30, 2011 as compared with the prior year period was primarily due to a $765 million increase in net losses on derivative and hedging activities and a $143 million decrease in gains on debt repurchases. These were partially offset by a $163 million increase in net interest income after provisions for loans losses and a $70 million decrease in total expenses.
 
The primary contributors to each of the identified drivers of changes in net income for the current six-month period compared with the year-ago six-month period are as follows:
 
  • Net interest income increased by $16 million primarily the result of incremental net interest income from the acquisition of $25 billion of securitized student loans on December 31, 2010, which was partially offset by higher funding costs.
 
  • Provisions for loan losses decreased by $147 million as a result of the improving performance of the Private Education Loan portfolio which was primarily driven by the improving credit quality of the portfolio as well as an overall improvement in the economy.
 
  • Net losses on derivatives and hedging activities increased by $765 million primarily due to interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during the period. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivatives and hedging activities may vary significantly in future periods.
 
  • Servicing revenue decreased by $30 million primarily due to 2010 legislation that eliminated the origination of new FFELP Loans, thereby eliminating Guarantor issuance fees on new FFELP Loans. Outstanding FFELP Loans for which we earn additional fees also declined.
 
  • Gains on debt repurchases decreased $143 million as we repurchased less debt in the current period. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.
 
  • Other income increased by $13 million primarily due to an increase in foreign currency translation gains. The foreign currency translation gains relate to a portion of our foreign currency denominated debt that does not receive hedge accounting treatment. These gains were partially offset by the “losses on derivative and hedging activities, net” line item on the income statement related to the derivatives used to economically hedge these debt instruments.
 
  • Operating expenses decreased $25 million primarily as a result of our cost saving initiative. The first half of 2011 included $25 million of third-party servicing expenses related to the $25 billion loan portfolio acquisition on December 31, 2010, $12 million of litigation contingency expenses and $11 million from the acceleration of stock compensation expense. The first half of 2010 included $10 million of restructuring related impairments and $20 million of litigation contingency expenses.
 
  • Restructuring expenses decreased $38 million primarily the result of the substantial completion of our plan for restructuring the Company initiated during 2010 in response to legislation ending the FFELP.
 
  • The effective tax rates for six months ended June 30, 2011 and 2010 were 36 percent and 38 percent, respectively. The change in the effective tax rate for the six months ended June 30, 2011 was primarily driven by the impact of state tax rate changes recorded in the first half of 2010.


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  • Net income from discontinued operations for the six months ended June 30, 2011 was $10 million compared with a net loss from discontinued operations of $14 million for the six months ended June 30, 2010. The change was primarily driven by a higher yield on our Purchased Paper — Non-Mortgage portfolio as a result of higher than expected collections.
 
“Core Earnings” — Definition and Limitations
 
We prepare financial statements in accordance with GAAP; however, we also evaluate our business segments on a basis that differs from GAAP. We refer to this different basis of presentation as “Core Earnings.” We provide this “Core Earnings” basis of presentation on a consolidated basis for each business segment because this is what we internally review when making management decisions regarding our performance and how we allocate resources. We also refer to this information in our presentations with credit rating agencies, lenders and investors. Because our “Core Earnings” basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide “Core Earnings” disclosure in the notes to our consolidated financial statements for our business segments.
 
“Core Earnings” are not a substitute for reported results under GAAP. We use “Core Earnings” to manage each business segment because “Core Earnings” reflect adjustments to GAAP financial results for two items, discussed below, that create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that “Core Earnings” provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information as we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. The two items adjusted for in our “Core Earnings” presentations are: (1) our use of derivatives instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness and (2) the accounting for goodwill and acquired intangible assets.
 
While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, our “Core Earnings” basis of presentation does not. “Core Earnings” are subject to certain general and specific limitations that investors should carefully consider. For example, 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. Accordingly, our “Core Earnings” presentation does not represent a comprehensive basis of accounting. Investors, therefore, may not be able to compare our 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, our board of directors, rating agencies, lenders and investors to assess performance.
 
Specific adjustments that management makes to GAAP results to derive our “Core Earnings” basis of presentation are described in detail in the section entitled “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP” below.


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The following tables show “Core Earnings” for each business segment and our business as a whole along with the adjustments made to the income/expense items to reconcile the amounts to our reported GAAP results as required by GAAP and reported in “Note 11 — Segment Reporting.”
 
                                 
  Three Months Ended June 30, 2011 
  FFELP
  Consumer
  Business
        Total “Core
     Total
 
(Dollars in millions) Loans  Lending  Services  Other  Eliminations(1)  Earnings”  Adjustments(2)  GAAP 
 
Interest income:
                                
Student loans
 $721  $600  $—  $—  $—  $1,321  $129  $1,450 
Other loans
  —   —   —   5   —   5   —   5 
Cash and investments
  1   2   2   2   (2)  5   —   5 
                                 
Total interest income
  722   602   2   7   (2)  1,331   129   1,460 
Total interest expense
  357   201   —   14   (2)  570   22   592 
                                 
Net interest income (loss)
  365   401   2   (7)  —   761   107   868 
Less: provisions for loan losses
  23   265   —   3   —   291   —   291 
                                 
Net interest income (loss) after provisions for loan losses
  342   136   2   (10)  —   470   107   577 
Servicing revenue
  21   15   244   —   (187)  93   —   93 
Contingency revenue
  —   —   86   —   —   86   —   86 
Gains on debt repurchases
  —   —   —   —   —   —   —   — 
Other income (loss)
  —   —   11   3   —   14   (521)  (507)
                                 
Total other income (loss)
  21   15   341   3   (187)  193   (521)  (328)
Expenses:
                                
Direct operating expenses
  192   73   121   —   (187)  199   —   199 
Overhead expenses
  —   —   —   69   —   69   —   69 
                                 
Operating expenses
  192   73   121   69   (187)  268   —   268 
Goodwill and acquired intangible assets impairment and amortization
  —   —   —   —   —   —   6   6 
Restructuring expenses
  —   1   —   1   —   2   —   2 
                                 
Total expenses
  192   74   121   70   (187)  270   6   276 
                                 
Income (loss) from continuing operations, before income tax expense (benefit)
  171   77   222   (77)  —   393   (420)  (27)
Income tax expense (benefit)(3)
  63   28   82   (29)  —   144   (154)  (10)
                                 
Net income (loss) from continuing operations
  108   49   140   (48)  —   249   (266)  (17)
Income from discontinued operations, net of taxes
  —   —   —   11   —   11   —   11 
                                 
Net income (loss)
 $108  $49  $140  $(37) $—  $260  $(266) $(6)
                                 
 
(1)The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.
 
(2)“Core Earnings” adjustments to GAAP:
 
             
  Three Months Ended June 30, 2011 
     Net Impact of
    
  Net Impact of
  Goodwill and
    
  Derivative
  Acquired
    
(Dollars in millions) Accounting  Intangibles  Total 
 
Net interest income after provisions for loan losses
 $107  $—  $107 
Total other income (loss)
  (521)  —   (521)
Goodwill and acquired intangible assets impairment and amortization
  —   6   6 
             
Total “Core Earnings” adjustments to GAAP
 $(414) $(6)  (420)
             
Income tax benefit
          (154)
             
Net loss
         $(266)
             
 
(3)Income taxes are based on a percentage of net income before tax for the individual reportable segment.
 


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  Three Months Ended June 30, 2010 
  FFELP
  Consumer
  Business
        Total “Core
     Total
 
(Dollars in millions) Loans  Lending  Services  Other  Eliminations(1)  Earnings”  Adjustments(2)  GAAP 
 
Interest income:
                                
Student loans
 $744  $575  $—  $—  $—  $1,319  $132  $1,451 
Other loans
  —   —   —   7   —   7   —   7 
Cash and investments
  2   4   4   1   (4)  7   —   7 
                                 
Total interest income (loss)
  746   579   4   8   (4)  1,333   132   1,465 
Total interest expense
  382   183   —   11   (4)  572   (3)  569 
                                 
Net interest income (loss)
  364   396   4   (3)  —   761   135   896 
Less: provisions for loan losses
  29   349   —   4   —   382   —   382 
                                 
Net interest income (loss) after provisions for loan losses
  335   47   4   (7)  —   379   135   514 
Servicing revenue
  15   21   228   —   (165)  99   —   99 
Contingency revenue
  —   —   88   —   —   88   —   88 
Gains on debt repurchases
  —   —   —   91   —   91   —   91 
Other income
  —   —   13   —   —   13   76   89 
                                 
Total other income (loss)
  15   21   329   91   (165)  291   76   367 
Expenses:
                                
Direct operating expenses
  187   86   133   2   (165)  243   —   243 
Overhead expenses
  —   —   —   66   —   66   —   66 
                                 
Operating expenses
  187   86   133   68   (165)  309   —   309 
Goodwill and acquired intangible assets impairment and amortization
  —   —   —   —   —   —   10   10 
Restructuring expenses
  15   1   2   —   —   18   —   18 
                                 
Total expenses
  202   87   135   68   (165)  327   10   337 
                                 
Income (loss) from continuing operations, before income tax expense (benefit)
  148   (19)  198   16   —   343   201   544 
Income tax expense (benefit)(3)
  53   (7)  71   8   —   125   74   199 
                                 
Net income (loss) from continuing operations
  95   (12)  127   8   —   218   127   345 
Loss from discontinued operations, net of taxes
  —   —   —   (7)  —   (7)  —   (7)
                                 
Net income (loss)
 $95  $(12) $127  $1  $—  $211  $127  $338 
                                 
 
(1)The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.
 
(2)“Core Earnings” adjustments to GAAP:
 
             
  Three Months Ended June 30, 2010 
     Net Impact of
    
  Net Impact of
  Goodwill and
    
  Derivative
  Acquired
    
(Dollars in millions) Accounting  Intangibles  Total 
 
Net interest income after provisions for loan losses
 $135  $—  $135 
Total other income
  76   —   76 
Goodwill and acquired intangible assets impairment and amortization
  —   10   10 
             
Total “Core Earnings” adjustments to GAAP
 $211  $(10)  201 
             
Income tax expense
          74 
             
Net income
         $127 
             
 
(3)Income taxes are based on a percentage of net income before tax for the individual reportable segment.
 

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  Six Months Ended June 30, 2011 
  FFELP
  Consumer
  Business
        Total “Core
     Total
 
(Dollars in millions) Loans  Lending  Services  Other  Eliminations(1)  Earnings”  Adjustments(2)  GAAP 
 
Interest income:
                                
Student loans
 $1,457  $1,204  $—  $—  $—  $2,661  $270  $2,931 
Other loans
  —   —   —   11   —   11   —   11 
Cash and investments
  2   5   5   3   (5)  10   —   10 
                                 
Total interest income (loss)
  1,459   1,209   5   14   (5)  2,682   270   2,952 
Total interest expense
  726   399   —   29   (5)  1,149   37   1,186 
                                 
Net interest income (loss)
  733   810   5   (15)  —   1,533   233   1,766 
Less: provisions for loan losses
  46   540   —   8   —   594   —   594 
                                 
Net interest income (loss) after provisions for loan losses
  687   270   5   (23)  —   939   233   1,172 
Servicing revenue
  46   32   489   —   (376)  191   —   191 
Contingency revenue
  —   —   164   —   —   164   —   164 
Gains on debt repurchases
  —   —   —   64   —   64   (26)  38 
Other income
  —   —   21   6   —   27   (754)  (727)
                                 
Total other income (loss)
  46   32   674   70   (376)  446   (780)  (334)
Expenses:
                                
Direct operating expenses
  387   155   249   9   (376)  424   —   424 
Overhead expenses
  —   —   —   148   —   148   —   148 
                                 
Operating expenses
  387   155   249   157   (376)  572   —   572 
Goodwill and acquired intangible assets impairment and amortization
  —   —   —   —   —   —   12   12 
Restructuring expenses
  1   2   1   1   —   5   —   5 
                                 
Total expenses
  388   157   250   158   (376)  577   12   589 
                                 
Income (loss) from continuing operations, before income tax expense (benefit)
  345   145   429   (111)  —   808   (559)  249 
Income tax expense (benefit)(3)
  127   54   158   (41)  —   298   (208)  90 
                                 
Net income (loss) from continuing operations
  218   91   271   (70)  —   510   (351)  159 
Income from discontinued operations, net of taxes
  —   —   —   10   —   10   —   10 
                                 
Net income (loss)
 $218  $91  $271  $(60) $—  $520  $(351) $169 
                                 
 
(1)The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.
 
(2)“Core Earnings” adjustments to GAAP:
 
             
  Six Months Ended June 30, 2011 
     Net Impact of
    
  Net Impact of
  Goodwill and
    
  Derivative
  Acquired
    
(Dollars in millions) Accounting  Intangibles  Total 
 
Net interest income after provisions for loan losses
 $233  $—  $233 
Total other income (loss)
  (780)  —   (780)
Goodwill and acquired intangible assets impairment and amortization
  —   12   12 
             
Total “Core Earnings” adjustments to GAAP
 $(547) $(12)  (559)
             
Income tax benefit
          (208)
             
Net loss
         $(351)
             
 
(3)Income taxes are based on a percentage of net income before tax for the individual reportable segment.
 

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  Six Months Ended June 30, 2010 
  FFELP
  Consumer
  Business
        Total “Core
     Total
 
(Dollars in millions) Loans  Lending  Services  Other  Eliminations(1)  Earnings”  Adjustments(2)  GAAP 
 
Interest income:
                                
Student loans
 $1,386  $1,141  $—  $—  $—  $2,527  $296  $2,823 
Other loans
  —   —   —   16   —   16   —   16 
Cash and investments
  4   6   8   1   (8)  11   —   11 
                                 
Total interest income (loss)
  1,390   1,147   8   17   (8)  2,554   296   2,850 
Total interest expense
  718   356   —   21   (8)  1,087   13   1,100 
                                 
Net interest income (loss)
  672   791   8   (4)  —   1,467   283   1,750 
Less: provisions for loan losses
  52   674   —   15   —   741   —   741 
                                 
Net interest income (loss) after provisions for loan losses
  620   117   8   (19)  —   726   283   1,009 
Servicing revenue
  36   41   473   —   (329)  221   —   221 
Contingency revenue
  —   —   168   —   —   168   —   168 
Gains on debt repurchases
  —   —   —   181   —   181       181 
Other income
  —   —   24   11   —   35   (5)  30 
                                 
Total other income (loss)
  36   41   665   192   (329)  605   (5)  600 
Expenses:
                                
Direct operating expenses
  375   166   252   4   (329)  468   —   468 
Overhead expenses
  —   —   —   129   —   129   —   129 
                                 
Operating expenses
  375   166   252   133   (329)  597   —   597 
Goodwill and acquired intangible assets impairment and amortization
  —   —   —   —   —   —   19   19 
Restructuring expenses
  33   3   5   2   —   43   —   43 
                                 
Total expenses
  408   169   257   135   (329)  640   19   659 
                                 
Income (loss) from continuing operations, before income tax expense (benefit)
  248   (11)  416   38   —   691   259   950 
Income tax expense (benefit)(3)
  89   (4)  149   18   —   252   106   358 
                                 
Net income (loss) from continuing operations
  159   (7)  267   20   —   439   153   592 
Loss from discontinued operations, net of taxes
  —   —   —   (14)  —   (14)  —   (14)
                                 
Net income (loss)
 $159  $(7) $267  $6  $—  $425  $153  $578 
                                 
 
(1)The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.
 
(2)“Core Earnings” adjustments to GAAP:
 
             
  Six Months Ended June 30, 2010 
     Net Impact of
    
  Net Impact of
  Goodwill and
    
  Derivative
  Acquired
    
(Dollars in millions) Accounting  Intangibles  Total 
 
Net interest income after provisions for loan losses
 $283  $—  $283 
Total other income (loss)
  (5)  —   (5)
Goodwill and acquired intangible assets impairment and amortization
  —   19   19 
             
Total “Core Earnings” adjustments to GAAP
 $278  $(19)  259 
             
Income tax benefit
          106 
             
Net loss
         $153 
             
 
(3)Income taxes are based on a percentage of net income before tax for the individual reportable segment.

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Differences between “Core Earnings” and GAAP
 
The following discussion summarizes the differences between “Core Earnings” and GAAP net income, and details each specific adjustment required to reconcile our “Core Earnings” segment presentation to our GAAP earnings.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
(Dollars in millions) 2011  2010  2011  2010 
 
“Core Earnings”
 $260  $211  $520  $425 
“Core Earnings” adjustments:
                
Net impact of derivative accounting
  (414)  211   (547)  278 
Net impact of goodwill and acquired intangibles
  (6)  (10)  (12)  (19)
                 
Total “Core Earnings” adjustments before income tax effect
  (420)  201   (559)  259 
Net income tax effect
  154   (74)  208   (106)
                 
Total “Core Earnings” adjustments
  (266)  127   (351)  153 
                 
GAAP net income (loss)
 $(6) $338  $169  $578 
                 
 
1) Derivative Accounting: “Core Earnings” exclude periodic unrealized gains and losses that are caused primarily by themark-to-marketvaluations on derivatives that do not qualify for hedge accounting treatment under GAAP. To a lesser extent, these periodic unrealized gains and losses are also a result of ineffectiveness recognized related to effective hedges. These unrealized gains and losses occur in our FFELP Loans, Consumer Lending and Other business segments. Under GAAP, for our derivatives that are held to maturity, the cumulative net unrealized gain or loss over the life of the contract will equal $0 except for Floor Income Contracts where the cumulative unrealized gain will equal the amount for which we sold the contract. In our “Core Earnings” presentation, we recognize the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life.
 
The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria are met. We believe that our derivatives are effective economic hedges, and as such, are a critical element of our interest rate and foreign currency risk management strategy. However, some of our derivatives, primarily Floor Income Contracts and certain basis swaps, do not qualify for hedge accounting treatment 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. These gains and losses recorded 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 accounting treatment.
 
Our Floor Income Contracts are written options that must meet more stringent requirements than other hedging relationships to achieve hedge effectiveness. 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 derivatives accounting treatment, 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 earning Floor Income but that offsetting change in value is not recognized. 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. Therefore, for


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purposes of “Core Earnings”, we have removed the unrealized gains and losses related to these contracts and added back the amortization of the net premiums received on the Floor Income Contracts. The amortization of the net premiums received on the Floor Income Contracts for “Core Earnings” is reflected in student loan interest income. Under GAAP accounting, the premium received on the Floor Income Contracts is recorded as revenue in the “gains (losses) on derivatives and hedging activities, net” line item by the end of the contracts’ life.
 
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 hedge 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 LIBOR debt. The accounting for derivatives 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 for hedge accounting treatment. Additionally, some of our FFELP Loans can earn at either a variable or a fixed interest rate depending on market interest rates and therefore swaps written on the FFELP Loans do not meet the criteria for hedge accounting treatment. 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 on our net income for the three and six months ended June 30, 2011 and 2010.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
(Dollars in millions) 2011  2010  2011  2010 
 
“Core Earnings” derivative adjustments:
                
Gains (losses) on derivative and hedging activities, net, included in other income(1)
 $(510) $95  $(752) $13 
Plus: Realized losses on derivative and hedging activities, net(1)
  185   226   371   431 
                 
Unrealized gains (losses) on derivative and hedging activities, net
  (325)  321   (381)  444 
Amortization of net premiums on Floor Income Contracts in net interest income for “Core Earnings”
  (74)  (90)  (159)  (144)
Other pre-change in derivatives accounting adjustments
  (15)  (20)  (7)  (22)
                 
Total net impact derivative accounting(2)
 $(414) $211  $(547) $278 
                 
 
 
     (1)  See “Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” below for a detailed breakdown of the components of realized 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
 
The accounting for derivative instruments 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 to be recorded in a separate income statement line item below net interest income. Under our “Core Earnings” 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 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. The table below summarizes the realized losses on


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derivative and hedging activities and the associated reclassification on a “Core Earnings” basis for the three and six months ended June 30, 2011 and 2010.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
(Dollars in millions) 2011  2010  2011  2010 
 
Reclassification of realized gains (losses) on derivative and hedging activities:
                
Net settlement expense on Floor Income Contracts reclassified to net interest income
 $(202) $(222) $(428) $(433)
Net settlement income on interest rate swaps reclassified to net interest income
  17   (5)  33   2 
Foreign exchange derivatives losses reclassified to other income
  —   1   (1)  1 
Net realized gains (losses) on terminated derivative contracts reclassified to other income
  —   —   25   (1)
                 
Total reclassifications of realized losses on derivative and hedging activities
  (185)  (226)  (371)  (431)
Add: Unrealized gains (losses) on derivative and hedging activities, net(1)
  (325)  321   (381)  444 
                 
Gains (losses) on derivative and hedging activities, net
 $(510) $95  $(752) $13 
                 
 
 
     (1) “Unrealized gains (losses) on derivative and hedging activities, net” comprises the following unrealizedmark-to-marketgains (losses):
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
(Dollars in millions) 2011  2010  2011  2010 
 
Floor Income Contracts
 $(277) $(42) $(126) $(23)
Basis swaps
  25   263   19   326 
Foreign currency hedges
  (110)  99   (304)  107 
Other
  37   1   30   34 
                 
Total unrealized gains (losses) on derivative and hedging activities, net
 $(325) $321  $(381) $444 
                 
 
2) Goodwill and Acquired Intangibles: “Core Earnings” exclude goodwill and intangible impairment and the amortization of acquired intangibles. The following table summarizes the goodwill and acquired intangible adjustments for the three and six months ended June 30, 2011 and 2010.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
(Dollars in millions) 2011  2010  2011  2010 
 
“Core Earnings” goodwill and acquired intangibles adjustments(1):
                
Amortization of acquired intangibles from continuing operations
 $(6) $(10) $(12) $(19)
                 
Total “Core Earnings” goodwill and acquired intangibles adjustments
 $(6) $(10) $(12) $(19)
                 
 
 
     (1) Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income.


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Business Segment Earnings Summary — “Core Earnings” Basis
 
FFELP Loans Segment
 
The following table includes “Core Earnings” results for our FFELP Loans segment.
 
                         
  Three Months Ended
  % Increase
  Six Months Ended
  % Increase
 
  June 30,  (Decrease)  June 30,  (Decrease) 
(Dollars in millions) 2011  2010  2011 vs. 2010  2011  2010  2011 vs. 2010 
 
“Core Earnings” interest income:
                        
FFELP Loans
 $721  $744   (3)% $1,457  $1,386   5%
Cash and investments
  1   2   (50)  2   4   (50)
                         
Total “Core Earnings” interest income
  722   746   (3)  1,459   1,390   5 
Total “Core Earnings” interest expense
  357   382   (7)  726   718   1 
                         
Net “Core Earnings” interest income
  365   364   —   733   672   9 
Less: provisions for loan losses
  23   29   (21)  46   52   (12)
                         
Net “Core Earnings” interest income after provisions for loan losses
  342   335   2   687   620   11 
Servicing revenue
  21   15   40   46   36   28 
Direct operating expenses
  192   187   3   387   375   3 
Restructuring expenses
  —   15   (100)  1   33   (97)
                         
Total expenses
  192   202   (5)  388   408   (5)
                         
Income from continuing operations, before income tax expense
  171   148   16   345   248   39 
Income tax expense
  63   53   19   127   89   43 
                         
“Core Earnings”
 $108  $95   14% $218  $159   37%
                         
 
“Core Earnings” from the FFELP Loans segment were $108 million in the second quarter of 2011, compared with $95 million in the year-ago quarter. Key financial measures include:
 
  • Net interest margin of .98 percent in the second quarter of 2011 compared with .95 percent in the year-ago quarter.
 
  • The provision of loan losses of $23 million in the second quarter of 2011 decreased from $29 million in the year-ago quarter.


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FFELP Loans Net Interest Margin
 
The following table shows the FFELP Loans “Core Earnings” net interest margin along with reconciliation to the GAAP-basis FFELP Loans net interest margin.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
  2011  2010  2011  2010 
 
“Core Earnings” basis FFELP student loan yield
  2.57%  2.64%  2.60%  2.57%
Hedged Floor Income
  .20   .24   .22   .21 
Unhedged Floor Income
  .19   .01   .13   .01 
Consolidation Loan Rebate Fees
  (.66)  (.57)  (.66)  (.58)
Repayment Borrower Benefits
  (.12)  (.10)  (.11)  (.10)
Premium amortization
  (.17)  (.20)  (.16)  (.20)
                 
“Core Earnings” basis FFELP student loan net yield
  2.01   2.02   2.02   1.91 
“Core Earnings” basis FFELP student loan cost of funds
  (.96)  (.97)  (.96)  (.93)
                 
“Core Earnings” basis FFELP student loan spread
  1.05   1.05   1.06   .98 
“Core Earnings” basis FFELP other asset spread impact
  (.07)  (.10)  (.08)  (.09)
                 
“Core Earnings” basis FFELP Loans net interest margin(1)
  .98%  .95%  .98%  .89%
                 
“Core Earnings” basis FFELP Loans net interest margin(1)
  .98%  .95%  .98%  .89%
Adjustment for GAAP accounting treatment
  .32   .34   .34   .38 
                 
GAAP-basis FFELP Loans net interest margin(1)
  1.30%  1.29%  1.32%  1.27%
                 
 
 
     (1) The average balances of our FFELP interest-earning assets for the respective periods are:
 
                 
(Dollars in millions)            
 
FFELP Loans
 $143,999  $148,101  $145,681  $146,486 
Other interest-earning assets
  4,982   5,649   4,999   5,655 
                 
Total FFELP “Core Earnings” basis interest-earning assets
 $148,981  $153,750  $150,680  $152,141 
                 
 
The “Core Earnings” basis FFELP Loans net interest margin for the six months ended June 30, 2011 compared with the prior year period increased nine basis points which was primarily the result of an increase in Floor Income.
 
As of June 30, 2011, our FFELP Loan portfolio totaled approximately $142.6 billion, including $52.8 billion of FFELP Stafford and $89.8 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios is 4.9 years and 9.3 years, respectively, assuming a Constant Prepayment Rate (“CPR”) of 6 percent and 3 percent, respectively.


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Floor Income
 
The following table analyzes the ability of the FFELP Loans in our portfolio to earn Floor Income after June 30, 2011 and 2010, based on interest rates as of those dates.
 
                         
  June 30, 2011  June 30, 2010 
  Fixed
  Variable
     Fixed
  Variable
    
  Borrower
  Borrower
     Borrower
  Borrower
    
(Dollars in billions) Rate  Rate  Total  Rate  Rate  Total 
 
Student loans eligible to earn Floor Income
 $121.5  $18.8  $140.3  $126.1  $19.0  $145.1 
Less: post-March 31, 2006 disbursed loans required to rebate Floor Income
  (64.5)  (1.3)  (65.8)  (74.9)  (1.2)  (76.1)
Less: economically hedged Floor Income Contracts
  (41.5)  —   (41.5)  (39.2)  —   (39.2)
                         
Student loans eligible to earn Floor Income
 $15.5  $17.5  $33.0  $12.0  $17.8  $29.8 
                         
Student loans earning Floor Income
 $15.5  $2.6  $18.1  $3.2  $2.7  $5.9 
                         
 
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 balance of FFELP Consolidation Loans for which Fixed Rate Floor Income has been economically hedged through Floor Income Contracts for the period July 1, 2011 to June 30, 2016. The hedges related to these loans do not qualify as effective hedges.
 
                         
  July 1, 2011 to
                
(Dollars in billions) December 31, 2011  2012  2013  2014  2015  2016 
 
Average balance of FFELP Consolidation Loans whose Floor Income is economically hedged
 $41.5  $38.3  $32.6  $28.3  $27.2  $10.4 
                         
 
FFELP Provisions for Loan Losses and Loan Charge-Offs
 
The following table summarizes the total FFELP provisions for loan losses and FFELP Loan charge-offs for the three and six months June 30, 2011 and 2010.
 
                 
  Three Months
 Six Months
  Ended
 Ended
  June 30, June 30,
(Dollars in millions) 2011 2010 2011 2010
 
FFELP Loan provisions for loan losses
 $23  $29  $46  $52 
FFELP Loan charge-offs
  21   24   41   46 
 
Operating Expenses — FFELP Loans Segment
 
Operating expenses for our FFELP Loans segment primarily include the contractual rates we pay to service loans in term asset-backed securitization trusts or a similar rate if a loan is not in a term financing facility (which is presented as an intercompany charge from the Business Services segment which services the loans), the fees we pay for third-party loan servicing and costs incurred to acquire loans. The increases in operating expenses in the three and six months ended June 30, 2011 compared with the three and six months ended June 30, 2010 were primarily the result of the increase in servicing costs related to the $25 billion loan portfolio acquisition on December 31, 2010. Operating expenses, excluding restructuring-related asset impairments, were 53 basis points and 49 basis points of average FFELP Loans in the quarters ended June 30, 2011 and June 30, 2010, respectively, and 54 basis points and 51 basis points for the six months ended June 30, 2011 and 2010, respectively.


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Consumer Lending Segment
 
The following table includes “Core Earnings” results for our Consumer Lending segment.
 
                         
        % Increase
        % Increase
 
  Three Months Ended
  (Decrease)  Six Months Ended
  (Decrease) 
  June 30,  2011 vs.
  June 30,  2011 vs.
 
(Dollars in millions) 2011  2010  2010  2011  2010  2010 
 
“Core Earnings” interest income:
                        
Private Education Loans
 $600  $575   4% $1,204  $1,141   6%
Cash and investments
  2   4   (50)  5   6   (17)
                         
Total “Core Earnings” interest income
  602   579   4   1,209   1,147   5 
Total “Core Earnings” interest expense
  201   183   10   399   356   12 
                         
Net “Core Earnings” interest income
  401   396   1   810   791   2 
Less: provisions for loan losses
  265   349   (24)  540   674   (20)
                         
Net “Core Earnings” interest income after provisions for loan losses
  136   47   189   270   117   131 
Servicing revenue
  15   21   (29)  32   41   (22)
Direct operating expenses
  73   86   (15)  155   166   (7)
Restructuring expenses
  1   1   —   2   3   (33)
                         
Total expenses
  74   87   (15)  157   169   (7)
                         
Income (loss) from continuing operations, before income tax expense (benefit)
  77   (19)  505   145   (11)  1,418 
Income tax expense (benefit)
  28   (7)  500   54   (4)  1,450 
                         
“Core Earnings” (loss)
 $49  $(12)  508% $91  $(7)  1,400%
                         
 
“Core Earnings” were $49 million for the three months ended June 30, 2011, compared with a net loss of $12 million in the year-ago period. The improvement in the three and six month periods ended June 30, 2011 compared with prior periods was primarily due to a decreased loan loss provision. Loan delinquencies and charge-offs both improved.
 
Highlights vs. second-quarter 2010 included:
 
  • Loan originations were $264 million, up 21 percent from $219 million. The portfolio totaled $35.8 billion at June 30, 2011, compared with $35.2 billion one year earlier.
 
  • Net interest margin was 4.05 percent, compared with 3.79 percent.
 
  • The provision for loan losses declined to $265 million, compared with $349 million.
 
  • Delinquencies of 90 days or more (as a percentage of loans in repayment) were 4.6 percent, compared with 5.8 percent.
 
  • The annual charge-off rate (as a percentage of loans in repayment) improved to 3.7 percent, compared with 5.3 percent.


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Consumer Lending Net Interest Margin
 
The following table shows the Consumer Lending “Core Earnings” net interest margin along with reconciliation to the GAAP-basis Consumer Lending net interest margin before provisions for loan losses.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
  2011  2010  2011  2010 
 
“Core Earnings” basis Private Education Student Loan yield
  6.29%  6.05%  6.32%  6.02%
Discount amortization
  .26   .28   .26   .27 
                 
“Core Earnings” basis Private Education Loan net yield
  6.55   6.33   6.58   6.29 
“Core Earnings” basis Private Education Loan cost of funds
  (2.02)  (1.72)  (1.99)  (1.70)
                 
“Core Earnings” basis Private Education Loan spread
  4.53   4.61   4.59   4.59 
“Core Earnings” basis other asset spread impact
  (.48)  (.82)  (.51)  (.78)
                 
“Core Earnings” basis Consumer Lending net interest margin(1)
  4.05%  3.79%  4.08%  3.81%
                 
“Core Earnings” basis Consumer Lending net interest margin(1)
  4.05%  3.79%  4.08%  3.81%
Adjustment for GAAP accounting treatment
  (.05)  .04   (.05)  .02 
                 
GAAP-basis Consumer Lending net interest margin(1)
  4.00%  3.83%  4.03%  3.83%
                 
 
 
(1)The average balances of our Consumer Lending interest-earning assets for the respective periods are:
 
                 
(Dollars in millions)            
 
Private Education Loans
 $36,784  $36,470  $36,894  $36,574 
Other interest-earning assets
  2,910   5,506   3,134   5,290 
                 
Total Consumer Lending “Core Earnings” basis interest-earning assets
 $39,694  $41,976  $40,028  $41,864 
                 
 
The Private Education Loan spread remained relatively consistent across all periods presented. The increase in the net interest margin for both the comparable prior year quarter and six month period was primarily the result of a decline in the average balance of our Other asset portfolio. The size of the Other asset portfolio, which is primarily securitization trust restricted cash and cash held at Sallie Mae Bank (the “Bank”), has decreased significantly since the first quarter 2010. This Other asset portfolio earns a negative yield and as a result, when its relative weighting decreases compared to the Private Education Loan portfolio, the overall net interest margin increases.
 
Private Education Loans Provisions for Loan Losses and Loan Charge-Offs
 
The following table summarizes the total Private Education Loans provision for loan losses and charge-offs for the three and six months ended June 30, 2011 and 2010.
 
                 
  Three Months Ended
 Six Months Ended
  June 30, June 30,
(Dollars in millions) 2011 2010 2011 2010
 
Private Education Loans provision for loan losses
 $265  $349  $540  $674 
Private Education Loans charge-offs
  263   336   537   620 
 
The continuing improvements for all periods presented above are primarily a result of the improving credit quality of the portfolio as well as an overall improvement to the U.S. economy. The Private Education Loan portfolio experienced a significant increase in delinquencies through the first quarter of 2010 (delinquencies as a percentage of loans in repayment were 12.2 percent at March 31, 2010); since then delinquencies as


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a percentage of loans in repayment have declined to 10.0 percent at June 30, 2011. Private Education Loans in forbearance as a percentage of loans in repayment and forbearance decreased to 4.7 percent from the year-ago quarter’s 5.3 percent. Charge-offs as a percentage of loans in repayment have declined significantly from 5.3 percent in the second quarter 2010 to 3.7 percent in the second quarter of 2011. The Private Education Loan allowance coverage of annual charge-offs ratio was 1.9 at June 30, 2011 compared with 1.5 at June 30, 2010. The allowance for loan losses as a percentage of ending Private Education Loans in repayment decreased from 7.9 percent at June 30, 2010 to 7.1 percent at June 30, 2011. We analyzed changes in the key ratios when determining the appropriate Private Education Loan allowance for loan losses.
 
Operating Expenses — Consumer Lending Segment
 
Operating expenses for our Consumer Lending segment include costs incurred to originate Private Education Loans and to service and collect on our Private Education Loan portfolio. The decreases in operating expenses in the three and six months ended June 30, 2011 compared with the three and six months ended June 30, 2010 were primarily the result of our cost cutting initiatives. Operating expenses, excluding restructuring-related asset impairments, were 80 basis points and 95 basis points of average Private Education Loans in the quarters ended June 30, 2011 and June 30, 2010, respectively, and 85 basis points and 92 basis points of average Private Education Loans in the six months ended June 30, 2011 and 2010, respectively.
 
Business Services Segment
 
The following tables include “Core Earnings” results for our Business Services segment.
 
                         
  Three Months Ended
  % Increase
  Six Months Ended
  % Increase
 
  June 30,  (Decrease)  June 30,  (Decrease) 
(Dollars in millions) 2011  2010  2011 vs. 2010  2011  2010  2011 vs. 2010 
 
Net interest income after provision
 $2  $4   (50)% $5  $8   (38)%
Servicing revenue:
                        
Intercompany loan servicing
  187   165   13   376   329   14 
Third-party loan servicing
  20   17   18   40   36   11 
Account asset servicing
  19   19   —   38   35   9 
Campus Solutions
  3   4   (25)  10   12   (17)
Guarantor servicing
  15   23   (35)  25   61   (59)
                         
Total servicing revenue
  244   228   7   489   473   3 
Contingency revenue
  86   88   (2)  164   168   (2)
Transaction fees
  11   12   (8)  20   23   (13)
Other
  —   1   (100)  1   1   — 
                         
Total other income
  341   329   4   674   665   1 
Direct operating expenses
  121   133   (9)  249   252   (1)
Restructuring expenses
  —   2   (100)  1   5   (80)
                         
Total expenses
  121   135   (10)  250   257   (3)
                         
Income from continuing operations, before income tax expense
  222   198   12   429   416   3 
Income tax expense
  82   71   15   158   149   6 
                         
“Core Earnings”
 $140  $127   10% $271  $267   1%
                         
 
“Core Earnings” were $140 million in the second quarter of 2011, compared with $127 million in the year-ago quarter. The improvement was driven by substantial FFELP loan acquisitions last year that increased FFELP loan servicing revenue.


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Our Business Services segment earns intercompany loan servicing fees from servicing the FFELP Loans in our FFELP Loans segment. The average balance of this portfolio was $142 billion and $134 billion for the quarters ended June 30, 2011 and June 30, 2010 and $143 billion and $133 billion for the six months ended June 30, 2011 and 2010, respectively. The increase in intercompany loan servicing revenue from the year-ago periods is primarily the result of the acquisition of the $25 billion FFELP Loan portfolio on December 31, 2010 which was partially offset by the amortization of the underlying portfolio as well as the FFELP Loans sold to ED as part of the Participation Program in 2010.
 
We are servicing approximately 3 million accounts under the ED Servicing Contract as of June 30, 2011. Loan servicing fees in the second quarter of 2011 and the second quarter of 2010 included $15 million and $10 million, respectively, of servicing revenue related to the ED Servicing Contract.
 
Account asset servicing revenue represents fees earned on program management, transfer and servicing agent services and administration services for our various 529 college-savings plans. Assets under administration in our 529 college savings plans totaled $38 billion as of June 30, 2011, a 59 percent increase from the year-ago quarter.
 
Campus Solutions revenue is earned from our Campus Solutions business whose services include comprehensive financing and transaction processing solutions that we provide to college financial aid offices and students to streamline the financial aid process.
 
The decrease in Guarantor servicing revenue compared with the year-ago quarter and six-month period was primarily due to the elimination of the FFELP in 2010 and our no longer earning Guarantor issuance fees as well as the lower balance of outstanding FFELP Loans on which we earn additional fees.
 
The following table presents the outstanding inventory of contingent collections receivables that our Business Services segment will collect on behalf of others.
 
         
  June 30,
  June 30,
 
(Dollars in millions) 2011  2010 
 
Student loans
 $10,475  $9,926 
Other
  2,042   2,358 
         
Total
 $12,517  $12,284 
         
 
Transaction fees are earned in conjunction with our rewards program from participating companies based on member purchase activity, either online or in stores, depending on the contractual arrangement with the participating company. Typically, a percentage of the purchase price of the consumer members’ eligible purchases with participating companies is set aside in an account maintained by us on behalf of our members.
 
Revenues related to services performed on FFELP Loans accounted for 79 percent and 80 percent of total segment revenues for the quarters ended June 30, 2011 and June 30, 2010, respectively, and 79 percent and 80 percent for the six months ended June 30, 2011 and 2010, respectively.
 
We recently launched Sallie Mae Insurances Services, which will offer directly to college students and higher education institutions tuition insurance, renters insurance and student health insurance. In conjunction with this initiative, on June 30, 2011, we acquired a 45 percent stake in Next Generation Insurance Company, a nationally licensed insurance agency. We also include a Tuition Insurance Benefit with our Smart Option Student Loan.
 
Operating Expenses — Business Services Segment
 
Operating expenses for the three and six months ended June 30, 2011 decreased from the three and six months ended June 30, 2010 primarily as a result of our cost cutting initiatives. Included in operating expenses for 2011 are approximately $12 million per quarter in third-party servicing costs associated with our acquisition of $25 billion in loans at the end of 2010. As we transition these loans onto our own servicing platform in the second half of 2011, we expect the servicing costs associated with these loans to decline significantly as the loans are converted onto our servicing platform.


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Other Segment
 
The following table includes “Core Earnings” results of our Other segment
 
                         
  Three Months Ended
  % Increase
  Six Months Ended
  % Increase
 
  June 30,  (Decrease)  June 30,  (Decrease) 
(Dollars in millions) 2011  2010  2011 vs. 2010  2011  2010  2011 vs. 2010 
 
Net interest loss after provision
 $(10) $(7)  43% $(23) $(19)  21%
Gains on debt repurchases
  —   91   (100)  64   181   (65)
Other
  3   —   100   6   11   (45)
                         
Total income
  3   91   (97)  70   192   (64)
Direct operating expenses
  —   3   (100)  9   4   125 
Overhead expenses:
                        
Corporate overhead
  38   34   12   87   66   32 
Unallocated information technology costs
  31   32   (3)  61   63   (3)
                         
Total overhead expenses
  69   66   5   148   129   15 
                         
Operating expenses
  69   69   —   157   133   18 
Restructuring expenses
  1   —   100   1   2   (50)
                         
Total expenses
  70   69   1   158   135   17 
                         
Income (loss) from continuing operations, before income tax expense (benefit)
  (77)  15   (613)  (111)  38   (392)
Income tax expense (benefit)
  (29)  7   (514)  (41)  18   (328)
                         
Net income (loss) from continuing operations
  (48)  8   (700)  (70)  20   (450)
Income (loss) from discontinued operations, net of tax
  11   (7)  257   10   (14)  171 
                         
“Core Earnings” (loss)
 $(37) $1   (3,800)% $(60) $6   (1,100)%
                         
 
Purchased Paper Business
 
Our Purchased Paper businesses are presented in discontinued operations for the current and prior periods. (See “Consolidated Earnings Summary — GAAP-basis” for further discussion.)
 
The following table summarizes the carrying value of the Purchased Paper — Non-Mortgage portfolio:
 
         
  June 30,
 June 30,
(Dollars in millions) 2011 2010
 
Carrying value of purchased paper
 $63  $207 
 
Gains on Debt Repurchases
 
We began repurchasing our outstanding debt in the second quarter of 2008. We repurchased $60 million and $1.4 billion face amount of our senior unsecured notes for the quarters ended June 30, 2011 and June 30, 2010, respectively, and $885 million and $2.7 billion for the six months ended June 30, 2011 and 2010, respectively.
 
Overhead
 
Corporate overhead comprises costs related to executive management, the board of directors, accounting, finance, legal, human resources and stock option expense. Unallocated information technology costs are related to infrastructure and operations.


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The increase in corporate overhead for the six-month period ended June 30, 2011 compared with the six-month period ended June 30, 2010, was primarily the result of a change in the terms of our stock compensation plans and restructuring-related consulting expenses incurred in the first half of 2011. In the first quarter of 2011, we changed our stock compensation plans so that retirement eligible employees would not forfeit unvested stock compensation upon their retirement. This change had the effect of accelerating the future stock compensation expenses associated with these unvested stock grants into the current period for those employees that are retirement-eligible.
 
Financial Condition
 
This section provides additional information regarding the changes related to our loan portfolio assets and related liabilities as well as credit performance indicators related to our loan portfolio.
 
Subsequent to the adoption of the new consolidation accounting guidance on January 1, 2010, our GAAP and “Core Earnings” loan portfolios are identical, as all of our securitization trusts are treated as on-balance sheet for GAAP now. Hence, in referencing the total loan portfolio, ending and average loan balances, provision for loan losses and charge-offs, we no longer distinguish between the two as they are the same, unless otherwise noted.


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Average Balance Sheets — GAAP
 
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, 2011 and 2010. This table reflects our net interest margin on a consolidated basis.
 
                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2011  2010  2011  2010 
(Dollars in millions) Balance  Rate  Balance  Rate  Balance  Rate  Balance  Rate 
 
Average Assets
                                
FFELP Stafford and Other Student Loans
 $53,667   1.83% $66,488   1.96% $54,597   1.88% $64,339   1.91%
FFELP Consolidation Loans
  90,332   2.68   81,613   2.71   91,084   2.70   82,147   2.64 
Private Education Loans
  36,784   6.55   36,470   6.33   36,894   6.58   36,574   6.29 
Other loans
  242   8.94   322   9.05   252   9.06   356   9.20 
Cash and investments
  10,565   .18   13,152   .19   10,870   .19   12,964   .17 
                                 
Total interest-earning assets
  191,590   3.06%  198,045   2.97%  193,697   3.07%  196,380   2.93%
                                 
Non-interest-earning assets
  5,477       6,503       5,332       6,619     
                                 
Total assets
 $197,067      $204,548      $199,029      $202,999     
                                 
Average Liabilities and Stockholders’ Equity
                                
Short-term borrowings
 $31,352   .88% $42,813   .78% $32,209   .89% $40,906   .82%
Long-term borrowings
  157,027   1.33   153,303   1.27   158,291   1.33   153,783   1.23 
                                 
Total interest-bearing liabilities
  188,379   1.26%  196,116   1.16%  190,500   1.26%  194,689   1.14%
                                 
Non-interest-bearing liabilities
  3,639       3,485       3,455       3,449     
Stockholders’ equity
  5,049       4,947       5,074       4,861     
                                 
Total liabilities and stockholders’ equity
 $197,067      $204,548      $199,029      $202,999     
                                 
Net interest margin
      1.82%      1.81%      1.84%      1.80%
                                 


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Rate/Volume Analysis — GAAP
 
The following rate/volume analysis shows the relative contribution of changes in interest rates and asset volumes.
 
             
  Increase
  Change Due To(1) 
(Dollars in millions) (Decrease)  Rate  Volume 
 
Three Months Ended June 30, 2011 vs. 2010
            
Interest income
 $(5) $43  $(48)
Interest expense
  23   46   (23)
             
Net interest income
 $(28) $2  $(30)
             
Six Months Ended June 30, 2011 vs. 2010
            
Interest income
 $102  $141  $(39)
Interest expense
  86   110   (24)
             
Net interest income
 $16  $40  $(24)
             
 
 
(1)Changes in income and expense due to both rate and volume have been allocated in proportion to the relationship of the absolute dollar amounts of the change in each. The changes in income and expense are calculated independently for each line in the table. The totals for the rate and volume columns are not the sum of the individual lines.
 
Summary of our Student Loan Portfolio
 
Ending Student Loan Balances, net
 
                     
  June 30, 2011 
  FFELP
  FFELP
  Total
  Private
    
  Stafford and
  Consolidation
  FFELP
  Education
    
(Dollars in millions) Other  Loans  Loans  Loans  Total 
 
Total student loan portfolio:
                    
In-school
 $4,109  $—  $4,109  $2,341  $6,450 
Grace and repayment
  47,933   89,006   136,939   35,176   172,115 
                     
Total, gross
  52,042   89,006   141,048   37,517   178,565 
Unamortized premium/(discount)
  901   875   1,776   (861)  915 
Receivable for partially charged-off loans
  —   —   —   1,140   1,140 
Allowance for losses
  (119)  (70)  (189)  (2,043)  (2,232)
                     
Total student loan portfolio
 $52,824  $89,811  $142,635  $35,753  $178,388 
                     
% of total FFELP
  37%  63%  100%        
% of total
  30%  50%  80%  20%  100%
 
                     
  December 31, 2010 
  FFELP
  FFELP
  Total
  Private
    
  Stafford and
  Consolidation
  FFELP
  Education
    
(Dollars in millions) Other  Loans  Loans  Loans  Total 
 
Total student loan portfolio:
                    
In-school
 $6,333  $—  $6,333  $3,752  $10,085 
Grace and repayment
  49,068   91,537   140,605   33,780   174,385 
                     
Total, gross
  55,401   91,537   146,938   37,532   184,470 
Unamortized premium/(discount)
  971   929   1,900   (894)  1,006 
Receivable for partially charged-off loans
  —   —   —   1,039   1,039 
Allowance for losses
  (120)  (69)  (189)  (2,021)  (2,210)
                     
Total student loan portfolio
 $56,252  $92,397  $148,649  $35,656  $184,305 
                     
% of total FFELP
  38%  62%  100%        
% of total
  31%  50%  81%  19%  100%


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Average Student Loan Balances (net of unamortized premium/discount)
 
                     
  Three Months Ended June 30, 2011 
  FFELP
  FFELP
  Total
  Private
    
  Stafford and
  Consolidation
  FFELP
  Education
    
(Dollars in millions) Other  Loans  Loans  Loans  Total 
 
Total
 $53,667  $90,332  $143,999  $36,784  $180,783 
% of FFELP
  37%  63%  100%        
% of total
  30%  50%  80%  20%  100%
 
                     
  Three Months Ended June 30, 2010 
  FFELP
  FFELP
  Total
  Private
    
  Stafford and
  Consolidation
  FFELP
  Education
    
(Dollars in millions) Other  Loans  Loans  Loans  Total 
 
Total
 $66,488  $81,613  $148,101  $36,470  $184,571 
% of FFELP
  45%  55%  100%        
% of total
  36%  44%  80%  20%  100%
 
                     
  Six Months Ended June 30, 2011 
  FFELP
  FFELP
  Total
  Private
    
  Stafford and
  Consolidation
  FFELP
  Education
    
(Dollars in millions) Other  Loans  Loans  Loans  Total 
 
Total
 $54,597  $91,084  $145,681  $36,894  $182,575 
% of FFELP
  37%  63%  100%        
% of total
  30%  50%  80%  20%  100%
 
                     
  Six Months Ended June 30, 2010 
  FFELP
  FFELP
  Total
  Private
    
  Stafford and
  Consolidation
  FFELP
  Education
    
(Dollars in millions) Other  Loans  Loans  Loans  Total 
 
Total
 $64,339  $82,147  $146,486  $36,574  $183,060 
% of FFELP
  44%  56%  100%        
% of total
  35%  45%  80%  20%  100%
 
Student Loan Activity
 
                     
  Three Months Ended June 30, 2011 
  FFELP
  FFELP
  Total
  Total Private
    
  Stafford and
  Consolidation
  FFELP
  Education
  Total
 
(Dollars in millions) Other  Loans  Loans  Loans  Portfolio 
 
Beginning balance
 $54,366  $91,192  $145,558  $35,966  $181,524 
Acquisitions and originations
  190   58   248   292   540 
Capitalized interest and premium/discount amortization
  360   370   730   330   1,060 
Consolidations to third parties
  (730)  (280)  (1,010)  (15)  (1,025)
Sales
  (192)  —   (192)  —   (192)
Repayments/defaults/other
  (1,170)  (1,529)  (2,699)  (820)  (3,519)
                     
Ending balance
 $52,824  $89,811  $142,635  $35,753  $178,388 
                     
 


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  Three Months Ended June 30, 2010 
  FFELP
  FFELP
  Total
  Total Private
    
  Stafford and
  Consolidation
  FFELP
  Education
  Total
 
(Dollars in millions) Other  Loans  Loans  Loans  Portfolio 
 
Beginning balance
 $64,346  $82,178  $146,524  $35,362  $181,886 
Acquisitions and originations
  4,935   —   4,935   252   5,187 
Capitalized interest and premium/discount amortization
  336   349   685   365   1,050 
Consolidations to third parties
  (480)  (207)  (687)  (10)  (697)
Sales
  (90)  —   (90)  —   (90)
Repayments/defaults/other
  (1,590)  (1,285)  (2,875)  (818)  (3,693)
                     
Ending balance
 $67,457  $81,035  $148,492  $35,151  $183,643 
                     
 
                     
  Six Months Ended June 30, 2011 
  FFELP
  FFELP
  Total
  Total Private
    
  Stafford and
  Consolidation
  FFELP
  Education
  Total
 
(Dollars in millions) Other  Loans  Loans  Loans  Portfolio 
 
Beginning balance
 $56,252  $92,397  $148,649  $35,656  $184,305 
Acquisitions and originations
  293   305   598   1,221   1,819 
Capitalized interest and premium/discount amortization
  682   741   1,423   624   2,047 
Consolidations to third parties
  (1,581)  (558)  (2,139)  (32)  (2,171)
Sales
  (381)  —   (381)  —   (381)
Repayments/defaults/other
  (2,441)  (3,074)  (5,515)  (1,716)  (7,231)
                     
Ending balance
 $52,824  $89,811  $142,635  $35,753  $178,388 
                     
 
                     
  Six Months Ended June 30, 2010 
  FFELP
  FFELP
  Total
  Total Private
    
  Stafford and
  Consolidation
  FFELP
  Education
  Total
 
(Dollars in millions) Other  Loans  Loans  Loans  Portfolio 
 
Beginning balance — GAAP-basis
 $52,675  $68,379  $121,054  $22,753  $143,807 
Consolidation of off-balance sheet loans(1)
  5,500   14,797   20,297   12,341   32,638 
                     
Beginning balance — total portfolio
  58,175   83,176   141,351   35,094   176,445 
Acquisitions and originations
  13,132   —   13,132   1,062   14,194 
Capitalized interest and premium/discount amortization
  598   684   1,282   677   1,959 
Consolidations to third parties
  (947)  (374)  (1,321)  (22)  (1,343)
Sales
  (166)  —   (166)  —   (166)
Repayments/defaults/other
  (3,335)  (2,451)  (5,786)  (1,660)  (7,446)
                     
Ending balance
 $67,457  $81,035  $148,492  $35,151  $183,643 
                     
 
 
(1)On January 1, 2010, upon the adoption of the new consolidation accounting guidance, all off-balance sheet loans are included in the GAAP-basis.
 
Private Education Loan Originations
 
Total Private Education Loan originations increased 21 percent from the year-ago quarter to $264 million in the quarter ended June 30, 2011 and 14 percent in the first six months of 2011 compared with the year-ago period.

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The following table summarizes our Private Education Loan originations.
 
                 
  Three Months Ended June 30,  Six Months Ended June 30, 
(Dollars in millions) 2011  2010  2011  2010 
 
Private Education Loan originations
 $264  $219  $1,204  $1,058 
                 
 
FFELP Loan Portfolio Performance
 
FFELP Loan Delinquencies and Forbearance
 
The table below presents our FFELP Loan delinquency trends as of June 30, 2011 and 2010. Delinquencies have the potential to adversely impact earnings as they are an indication of the borrower’s potential to possibly default and as a result require a higher loan loss reserve than loans in current status. Delinquent loans also require increased servicing and collection efforts, resulting in higher operating costs.
 
                 
  FFELP Loan Delinquencies 
  June 30, 
  2011  2010 
(Dollars in millions) Balance  %  Balance  % 
 
Loans in-school/grace/deferment(1)
 $25,718      $43,397     
Loans in forbearance(2)
  21,048       19,557     
Loans in repayment and percentage of each status:
                
Loans current
  78,201   82.9%  68,657   82.7%
Loans delinquent31-60 days(3)
  5,149   5.5   4,837   5.8 
Loans delinquent61-90 days(3)
  2,909   3.1   2,540   3.1 
Loans delinquent greater than 90 days(3)
  8,023   8.5   6,945   8.4 
                 
Total FFELP Loans in repayment
  94,282   100%  82,979   100%
                 
Total FFELP Loans, gross
  141,048       145,933     
FFELP Loan unamortized premium
  1,776       2,748     
                 
Total FFELP Loans
  142,824       148,681     
FFELP Loan allowance for losses
  (189)      (189)    
                 
FFELP Loans, net
 $142,635      $148,492     
                 
Percentage of FFELP Loans in repayment
      66.8%      56.9%
                 
Delinquencies as a percentage of FFELP Loans in repayment
      17.1%      17.3%
                 
FFELP Loans in forbearance as a percentage of loans in repayment and forbearance
      18.2%      19.1%
                 
 
 
(1)Loans for borrowers who may still 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 payments due to hardship or other factors.
 
(2)Loans for borrowers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making payments due to hardship or other factors.
 
(3)The period of delinquency is based on the number of days scheduled payments are contractually past due.


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Allowance for FFELP Loan Losses
 
The following table summarizes changes in the allowance for FFELP Loan losses for the three and six months ended June 30, 2011 and 2010.
 
                 
  Activity in Allowance for FFELP Loans 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
(Dollars in millions) 2011  2010  2011  2010 
 
Allowance at beginning of period — GAAP-basis
 $190  $186  $189  $161 
Consolidation of securitization trusts(1)
  —   —   —   25 
                 
Allowance at beginning of period
  190   186   189   186 
Provision for FFELP Loan losses
  23   29   46   52 
Charge-offs
  (21)  (24)  (41)  (46)
Student loan sales and securitization activity
  (3)  (2)  (5)  (3)
                 
Allowance at end of period
 $189  $189  $189  $189 
                 
Charge-offs as a percentage of average loans in repayment (annualized)
  .09%  .12%  .09%  .11%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)
  .07%  .10%  .07%  .09%
Allowance as a percentage of the ending total loans, gross
  .13%  .13%  .13%  .13%
Allowance as a percentage of ending loans in repayment
  .20%  .23%  .20%  .23%
Allowance coverage of charge-offs (annualized)
  2.3   1.9   2.3   2.1 
Ending total loans, gross
 $141,048  $145,933  $141,048  $145,933 
Average loans in repayment
 $94,318  $82,449  $94,908  $82,443 
Ending loans in repayment
 $94,282  $82,979  $94,282  $82,979 
 
  ­ ­
 
  (1)Upon the adoption of the new consolidation accounting guidance on January 1, 2010, we consolidated all of our off-balance sheet securitization trusts.


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Consumer Lending Portfolio Performance
 
Private Education Loan Delinquencies and Forbearance
 
The table below presents our Private Education Loan delinquency trends as of June 30, 2011 and 2010. Delinquencies have the potential to adversely impact earnings as they are an indication of the borrower’s potential to possibly default and as a result require a higher loan loss reserve than loans in current status. Delinquent loans also require increased servicing and collection efforts, resulting in higher operating costs.
 
                 
  Private Education Loan Delinquencies 
  June 30, 
  2011  2010 
(Dollars in millions) Balance  %  Balance  % 
 
Loans in-school/grace/deferment(1)
 $7,216      $10,051     
Loans in forbearance(2)
  1,430       1,437     
Loans in repayment and percentage of each status:
                
Loans current
  25,994   90.0%  22,669   88.2%
Loans delinquent31-60 days(3)
  963   3.4   948   3.7 
Loans delinquent61-90 days(3)
  575   2.0   604   2.3 
Loans delinquent greater than 90 days(3)
  1,339   4.6   1,501   5.8 
                 
Total Private Education Loans in repayment
  28,871   100.0%  25,722   100.0%
                 
Total Private Education Loans, gross
  37,517       37,210     
Private Education Loan unamortized discount
  (861)      (905)    
                 
Total Private Education Loans
  36,656       36,305     
Private Education Loan receivable for partially charged-off loans
  1,140       888     
Private Education Loan allowance for losses
  (2,043)      (2,042)    
                 
Private Education Loans, net
 $35,753      $35,151     
                 
Percentage of Private Education Loans in repayment
      77.0%      69.1%
                 
Delinquencies as a percentage of Private Education Loans in repayment
      10.0%      11.9%
                 
Loans in forbearance as a percentage of loans in repayment and forbearance
      4.7%      5.3%
                 
Loans in repayment greater than 12 months as a percentage of loans in repayment(4)
      66.0%      58.4%
                 
 
 
(1)Loans for borrowers who may still 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 requested extension of grace period generally during employment transition or who have temporarily ceased making payments due to hardship or other factors, consistent with 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.
 
(4)Based on number of months in an active repayment status for which a scheduled monthly payment was 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, 2011 and 2010.
 
                 
  Activity in Allowance
 
  for Private Education
 
  Loans 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
(Dollars in millions) 2011  2010  2011  2010 
 
Allowance at beginning of period — GAAP-basis
 $2,034  $2,019  $2,022  $1,443 
Consolidation of securitization trusts(1)
  —   —   —   524 
                 
Allowance at beginning of period
  2,034   2,019   2,022   1,967 
Provision for Private Education Loan losses
  265   349   540   674 
Charge-offs
  (263)  (336)  (537)  (620)
Reclassification of interest reserve
  7   10   18   21 
                 
Allowance at end of period
 $2,043  $2,042  $2,043  $2,042 
                 
Charge-offs as a percentage of average loans in repayment (annualized)
  3.7%  5.3%  3.8%  5.0%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)
  3.5%  5.1%  3.6%  4.8%
Allowance as a percentage of the ending total loan balance
  5.3%  5.4%  5.3%  5.4%
Allowance as a percentage of ending loans in repayment
  7.1%  7.9%  7.1%  7.9%
Average coverage of charge-offs (annualized)
  1.9   1.5   1.9   1.6 
Ending total loans(2)
 $38,657  $38,098  $38,657  $38,098 
Average loans in repayment
 $28,489  $25,179  $28,309  $24,914 
Ending loans in repayment
 $28,871  $25,722  $28,871  $25,722 
 
 
(1)Upon the adoption of the new consolidation accounting guidance on January 1, 2010, we consolidated all of our off-balance sheet securitization trusts.
 
(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 detail for the traditional and non-traditional Private Education Loans at June 30, 2011 and 2010.
 
                         
  June 30, 2011  June 30, 2010 
     Non-
        Non-
    
  Traditional  Traditional  Total  Traditional  Traditional  Total 
 
Ending total loans(1)
 $34,419  $4,238  $38,657  $33,541  $4,557  $38,098 
Ending loans in repayment
  26,134   2,737   28,871   22,898   2,824   25,722 
Private Education Loan allowance for losses
  1,363   680   2,043   1,168   874   2,042 
Charge-offs as a percentage of average loans in repayment (annualized)
  2.8%  12.5%  3.7%  3.7%  18.7%  5.3%
Allowance as a percentage of total ending loan balance
  4.0%  16.0%  5.3%  3.5%  19.2%  5.4%
Allowance as a percentage of ending loans in repayment
  5.2%  24.8%  7.1%  5.1%  31.0%  7.9%
Average coverage of charge-offs (annualized)
  1.9   2.0   1.9   1.4   1.7   1.5 
Delinquencies as a percentage of Private Education Loans in repayment
  8.3%  25.9%  10.0%  9.7%  29.6%  11.9%
Delinquencies greater than 90 days as a percentage of Private Education Loans in repayment
  3.7%  13.2%  4.6%  4.6%  16.1%  5.8%
Loans in forbearance as a percentage of loans in repayment and forbearance
  4.5%  7.0%  4.7%  5.1%  7.2%  5.3%
Loans that entered repayment during the period(2)
 $1,010  $103  $1,113  $1,339  $153  $1,492 
Percentage of Private Education Loans with a cosigner
  64%  29%  60%  62%  28%  58%
Average FICO at origination
  725   624   716   725   623   714 
 
 
(1)Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans.
 
(2)Includes loans that are required to make a payment for the first time.
 
Use of Forbearance as a Private Education Loan Collection Tool
 
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 extends the original term of the loan. Forbearance does not grant any reduction in the total repayment obligation (principal or interest). While 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 the total number of forbearance months granted over the life of the loan. In some instances, we require good-faith payments before granting forbearance. Exceptions to forbearance policies are permitted when such exceptions are judged to increase the likelihood of collection of the loan. Forbearance as a collection tool is used most effectively when applied based on a borrower’s unique situation, including historical information and judgments. We leverage updated borrower information and other decision support tools to best determine who will be granted forbearance based on our expectations 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. See “Recently Issued Accounting Standards — Troubled Debt Restructurings” for additional information on how our allowance for loan losses may be affected in the third quarter of 2011 if certain types of forbearance are now considered troubled debt restructurings.
 
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


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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.
 
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, 67 percent of the loans are current, paid in full, or receiving an in-school grace or deferment, and 19 percent have defaulted. The default experience associated with loans which utilize forbearance is considered in our allowance for loan losses. 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 since 2008. The monthly average number of loans granted forbearance as a percentage of loans in repayment and forbearance increased to 5.0 percent in the second quarter of 2011 compared with the year-ago quarter of 4.5 percent. As of June 30, 2011, 2.5 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 as of June 30, 2011 (borrowers made payments on approximately 20 percent of these loans immediately prior to being granted forbearance).
 
             
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
  entering repayment
  loans never entering
 
  for the first time  (all loans)  forbearance 
 
In-school/grace/deferment
  9.4%  8.6%  4.5%
Current
  49.8   57.7   65.2 
Delinquent31-60 days
  3.1   2.0   0.4 
Delinquent61-90 days
  1.9   1.1   0.2 
Delinquent greater than 90 days
  4.8   2.7   0.3 
Forbearance
  4.4   3.4   — 
Defaulted
  18.8   10.0   5.2 
Paid
  7.8   14.5   24.2 
             
Total
  100%  100%  100%
             
 
The tables below show the composition and status of the 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 status decreases the longer the loans have been in active repayment status. At June 30, 2011, loans in forbearance status as a percentage of loans in repayment and forbearance were 6.8 percent for loans that have been in active repayment status for less than 25 months. The percentage drops to 1.3 percent for loans that have been in active repayment status for more than


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48 months. Approximately 83 percent of our Private Education Loans in forbearance status has been in active repayment status less than 25 months.
 
                             
  Monthly Scheduled Payments Due       
(Dollars in millions)
             More
  Not Yet in
    
June 30, 2011 1 to 12  13 to 24  25 to 36  37 to 48  than 48  Repayment  Total 
 
Loans in-school/grace/deferment
 $—  $—  $—  $—  $—  $7,216  $7,216 
Loans in forbearance
  990   200   118   57   65   —   1,430 
Loans in repayment — current
  8,254   5,844   4,131   3,040   4,725   —   25,994 
Loans in repayment — delinquent31-60 days
  487   192   127   65   92   —   963 
Loans in repayment — delinquent61-90 days
  327   108   66   32   42   —   575 
Loans in repayment — delinquent greater than 90 days
  735   281   150   73   100   —   1,339 
                             
Total
 $10,793  $6,625  $4,592  $3,267  $5,024  $7,216   37,517 
                             
Unamortized discount
                          (861)
Receivable for partially charged-off loans
                          1,140 
Allowance for loan losses
                          (2,043)
                             
Total Private Education Loans, net
                         $35,753 
                             
Loans in forbearance as a percentage of loans in repayment and forbearance
  9.2%  3.0%  2.6%  1.8%  1.3%  —%  4.7%
                             
 
                             
  Monthly Scheduled Payments Due       
(Dollars in millions)
             More
  Not Yet in
    
June 30, 2010 1 to 12  13 to 24  25 to 36  37 to 48  than 48  Repayment  Total 
 
Loans in-school/grace/deferment
 $—  $—  $—  $—  $—  $10,051  $10,051 
Loans in forbearance
  1,087   175   86   41   48   —   1,437 
Loans in repayment — current
  8,761   4,791   3,521   2,311   3,285   —   22,669 
Loans in repayment — delinquent31-60 days
  563   174   94   50   67   —   948 
Loans in repayment — delinquent61-90 days
  395   101   49   26   33   —   604 
Loans in repayment — delinquent greater than 90 days
  975   282   112   55   77   —   1,501 
                             
Total
 $11,781  $5,523  $3,862  $2,483  $3,510  $10,051   37,210 
                             
Unamortized discount
                          (905)
Receivable for partially charged-off loans
                          888 
Allowance for loan losses
                          (2,042)
                             
Total Private Education Loans, net
                         $35,151 
                             
Loans in forbearance as a percentage of loans in repayment and forbearance
  9.2%  3.2%  2.2%  1.7%  1.4%  —%  5.3%
                             


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The table below stratifies the portfolio of Private Education Loans in forbearance by the cumulative number of months the borrower has used forbearance as of the dates indicated. As detailed in the table below, 4 percent of loans currently in forbearance have cumulative forbearance of more than 24 months.
 
                 
  June 30, 2011  June 30, 2010 
  Forbearance
  % of
  Forbearance
  % of
 
(Dollars in millions) Balance  Total  Balance  Total 
 
Cumulative number of months borrower has used forbearance
                
Up to 12 months
 $947   66% $1,014   71%
13 to 24 months
  433   30   372   26 
More than 24 months
  50   4   51   3 
                 
Total
 $1,430   100% $1,437   100%
                 
 
Receivable for Partially Charged-Off Private Education Loans
 
At the end of each month, for loans that are 212 days past due, we charge 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 immediately charged off through provision expense with an offsetting reduction in the receivable for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered.
 
The following table summarizes the activity in the receivable for partially charged-off Private Education Loans for the three and six months ended June 30, 2011, and 2010.
 
                 
  Three Months Ended
  Six Months Ended
 
  June 30,  June 30, 
(Dollars in millions) 2011  2010  2011  2010 
 
Receivable at beginning of period — GAAP-basis
 $1,090  $797  $1,039  $499 
Consolidation of off-balance sheet trusts(1)
  —   —   —   229 
                 
Receivable at beginning of period
  1,090   797   1,039   728 
Expected future recoveries of current period defaults(2)
  94   121   192   222 
Recoveries(3)
  (37)  (24)  (77)  (49)
Charge-offs(4)
  (7)  (6)  (14)  (13)
                 
Receivable at end of period
 $1,140  $888  $1,140  $888 
                 
 
 
(1)Upon the adoption of the new consolidation accounting guidance on January 1, 2010, we consolidated all of our off-balance sheet securitization trusts.
 
(2)Remaining loan balance expected to be collected from contractual loan balances partially charged off during the period. This is the difference between the defaulted loan balance and the amount of the defaulted loan balance that was charged off.
 
(3)Current period cash collections of amounts originally expected to be recovered.
 
(4)Represents the current period recovery shortfall. This is the difference between what was expected to be collected and what was actually collected.
 
Private Education Loan Repayment Options
 
Certain loan programs allow borrowers to select from a variety of repayment options depending on their loan type and their enrollment/loan status, which include the ability to extend their repayment term or change


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their monthly payment. The chart below provides the optional repayment offerings in addition to the standard level principal and interest payments as of June 30, 2011.
 
                 
  Loan Program
  Signature and
   Career
  
(Dollars in millions) Other Smart Option Training Total
 
$ in Repayment
  $23,513   $3,416   $1,942  $28,871 
$ in Total
  32,036   3,468   2,013   37,517 
Payment method by enrollment status:
                
In-school/Grace
  Deferred(1)  Deferred(1),
Interest-only or
fixed $25/month		  Interest-only or
fixed $25/month		     
                 
                 
Repayment
  Level principal and interest
or graduated		   Level principal and
interest		   Level principal and
interest		     
 
 
(1)“Deferred” includes loans for which no payments are required and interest charges are capitalized into the loan balance.
 
The graduated repayment program that is part of Signature and Other Loans includes an interest-only payment feature that may be selected at the option of the borrower. Borrowers elect to participate in this program at the time they enter repayment following their grace period. This program is available to borrowers in repayment, after their grace period, who would like a temporary lower payment from the required principal and interest payment amount. Borrowers participating in this program pay monthly interest with no amortization of their principal balance for up to 48 payments after entering repayment (dependent on the loan product type). The maturity date of the loan is not extended when a borrower participates in this program. As of June 30, 2011 and 2010, borrowers in repayment owing approximately $7.4 billion (26 percent of loans in repayment) and $7.5 billion (29 percent of loans in repayment), respectively, were enrolled in the interest-only program. Of these amounts, 12 percent and 13 percent were non-traditional loans as of June 30, 2011 and 2010, respectively.
 
Liquidity and Capital Resources
 
We expect to fund our ongoing liquidity needs, including the origination of new Private Education Loans and the repayment of $2.5 billion of senior unsecured notes to mature in the next twelve months, primarily through our current cash and investment position and very predictable operating cash flows provided by earnings and repayment of principal on unencumbered student loan assets, distributions from our securitization trusts (including servicing fees which are priority payments within the trusts), as well as drawdowns under the FFELP ABCP Facilities and the facility with the Federal Home Loan Bank in Des Moines (the “FHLB-DM Facility”), the issuance of term ABS, the collection of additional term bank deposits and the issuance of unsecured debt.
 
Currently, new Private Education Loan originations are initially funded through bank deposits and subsequently securitized to term on a programmatic basis. We have $1.4 billion of cash at the Bank as of June 30, 2011 available to fund future originations.
 
Sources of Liquidity and Available Capacity
 
The following tables detail our main sources of primary liquidity and our main sources of secondary liquidity (unused secured credit facilities contingent upon obtaining eligible collateral) outstanding at June 30,


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2011 and December 31, 2010 and the average balances for the three and six months ended June 30, 2011 and 2010.
 
         
  As of 
(Dollars in millions) June 30, 2011  December 31, 2010 
 
Sources of primary liquidity:
        
Unrestricted cash and liquid investments:
        
Cash and cash equivalents
 $4,145  $4,342 
Investments
  83   85 
         
Total unrestricted cash and liquid investments(1)
 $4,228  $4,427 
         
Unencumbered FFELP Loans
 $855  $1,441 
         
Sources of secondary liquidity contingent on obtaining eligible collateral:
        
Unused secured credit facilities: FFELP ABCP Facilities and FHLB-DM Facility(2)
 $10,728  $12,601 
 
 
(1)At June 30, 2011 and December 31, 2010, ending balances include $1.4 billion and $2.0 billion, respectively, of cash and liquid investments at the Bank. This cash will be used primarily to originate or acquire student loans.
 
(2)Current borrowing capacity under the FFELP ABCP Facilities and FHLB-DM Facility is determined based on qualifying collateral from the unencumbered FFELP Loans reported in primary liquidity above. Additional borrowing capacity would primarily be used to fund FFELP Loan portfolio acquisitions and to refinance FFELP Loans used as collateral in the ED Conduit Program Facility. The total amount we can borrow is contingent upon obtaining eligible collateral. If we use our unencumbered FFELP Loans as collateral to borrow against these facilities, the remaining amount we could borrow is reduced accordingly.
 
                 
  Average Balances
  Average Balances
 
  Three Months Ended June 30,  Six Months Ended June 30, 
(Dollars in millions) 2011  2010  2011  2010 
 
Sources of primary liquidity:
                
Unrestricted cash and liquid investments:
                
Cash and cash equivalents
 $3,404  $6,311  $3,815  $6,162 
Investments
  101   99   90   101 
                 
Total unrestricted cash and liquid investments(1)
 $3,505  $6,410  $3,905  $6,263 
                 
Unused bank lines of credit
 $—  $2,298  $—  $2,889 
Unencumbered FFELP Loans
 $1,673  $1,995  $1,925  $2,092 
                 
Sources of secondary liquidity contingent on obtaining eligible collateral:
                
Unused secured credit facilities: FFELP ABCP Facilities and FHLB-DM Facility(2)
 $11,408  $13,728  $11,725  $11,983 
 
 
(1)For the three months ended June 30, 2011 and 2010, average balances include $1.0 billion and $2.7 billion, respectively, of cash and liquid investments at the Bank. For the six months ended June 30, 2011 and 2010, average balances include $1.2 billion and $2.4 billion, respectively, of cash and liquid investments at the Bank.
 
(2)Current borrowing capacity under the FFELP ABCP Facilities and FHLB-DM Facility is determined based on qualifying collateral from the unencumbered FFELP Loans reported in primary liquidity above. Additional borrowing capacity would primarily be used to fund FFELP Loan portfolio acquisitions and to refinance FFELP Loans used as collateral in the ED Conduit Program Facility. The total amount we can borrow is contingent upon obtaining eligible collateral. If we use our unencumbered FFELP Loans as collateral to borrow against these facilities, the remaining amount we could borrow is reduced accordingly.
 
In addition to the assets listed in the table above, we hold a number of other unencumbered assets, consisting primarily of Private Education Loans and other assets. At June 30, 2011, we had a total of $21.4 billion of unencumbered assets (which includes the assets that comprise our primary liquidity and are available to serve as collateral for our secondary liquidity), excluding goodwill and acquired intangibles. Total student loans, net, comprised $11.4 billion of our unencumbered assets of which $10.5 billion and $.9 billion related to Private Education Loans, net and FFELP Loans, net, respectively.


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For a discussion of our various sources of liquidity, such as the ED Conduit Program, the Sallie Mae Bank, our continued access to the ABS market, our asset-based financing facilities, the lending agreement we entered into with the FHLB-DM and our issuance of unsecured debt, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” to our 2010Form 10-K.
 
The following table reconciles encumbered and unencumbered assets and their net impact on total tangible equity.
 
         
  June 30,
  December 31,
 
(Dollars in billions) 2011  2010 
 
Net assets of consolidated variable interest entities (encumbered assets)
 $12.4  $13.1 
Tangible unencumbered assets(1)
  21.4   22.3 
Unsecured debt
  (24.9)  (26.9)
Mark-to-marketon unsecured hedged debt(2)
  (1.6)  (1.4)
Other liabilities, net
  (2.8)  (2.6)
         
Total tangible equity
 $4.5  $4.5 
         
 
  ­ ­
 
  (1)Excludes goodwill and acquired intangible assets.
 
  (2)At June 30, 2011 and December 31, 2010, there were $1.4 billion and $1.4 billion, respectively, of net gains on derivatives hedging this debt in unencumbered assets, which partially offset these losses.
 
Transactions During the Second Quarter 2011
 
On June 30, 2011, we completed an $825 million Private Education Loan ABS transaction at an all-in LIBOR equivalent cost of one-month LIBOR plus 1.89 percent. This issue has a weighted average life of 4.0 years and an initial overcollateralization of approximately 18 percent.
 
On May 26, 2011, we completed an $821 million FFELP ABS transaction at an all-in LIBOR equivalent cost of one-month LIBOR plus 1.15 percent. This issue has a weighted average life of 5.8 years and an initial overcollateralization of approximately 3 percent.
 
On April 26, 2011, we completed a $562 million Private Education Loan ABS transaction at an all-in LIBOR equivalent cost of one-month LIBOR plus 1.99 percent. This issue has a weighted average life of 3.8 years and an initial overcollateralization of approximately 21 percent.
 
We also repurchase our outstanding unsecured debt in both open-market repurchases and public tender offers. Repurchasing debt helps us to better manage our short-term and long-term funding needs by utilizing current excess liquidity to reduce future obligations related to our unsecured borrowings at favorable pricing. In the second quarter of 2011 we repurchased $60 million face amount of our senior unsecured notes in the aggregate, with maturity dates ranging from 2011 to 2014, which resulted in a total gain of $0.3 million.
 
In the second-quarter 2011, we utilized $156 million to repurchase 9.6 million common shares on the open market as part of our $300 million share repurchase program announced in April. We declared and paid a $.10 per common share dividend during the second quarter of 2011.
 
While we are very comfortable with our maturity profile and pleased with the outcome of these most recent transactions, we will not be fully satisfied until we see our credit ratings and our funding cost improve significantly.
 
Counterparty Exposure
 
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 us. Risks associated with our lending portfolio are discussed in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — FFELP Loan Portfolio Performance” and “— Consumer Lending Portfolio Performance.”


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Our investment portfolio is composed of very short-term securities issued by highly rated issuers limiting our counterparty exposure. Additionally, our investing activity is governed by Board approved limits on the amount that is allowed to be invested with any one issuer based on the credit rating of the issuer, further minimizing our counterparty exposure. Counterparty credit risk is considered when valuing investments and assessing impairment.
 
Related to derivative transactions, protection against counterparty risk is generally provided by 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. All derivative contracts entered into by SLM Corporation and the Bank are covered under such agreements and require collateral to be exchanged based on the net fair value of derivatives with each counterparty. Our securitization trusts require collateral in all cases if the counterparty’s credit rating is withdrawn or downgraded below a certain level. Additionally, 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. In all cases, our exposure is limited to the value of the derivative contracts in a gain position net of any collateral we are holding. We consider counterparties’ credit risk when determining the fair value of derivative positions on our exposure net of collateral.
 
We have liquidity exposure related to collateral movements between us and our derivative counterparties. Movements in the value of the derivatives, which are primarily affected by changes in interest rate and foreign exchange rates, may require us to return cash collateral held or may require us to access primary liquidity to post collateral to counterparties. If our credit ratings are downgraded from current levels, we may be required to segregate unrestricted cash collateral into restricted accounts.
 
The table below highlights exposure related to our derivative counterparties at June 30, 2011.
 
         
  SLM Corporation
  
  and Sallie Mae Bank
 Securitization Trust
(Dollars in millions) Contracts Contracts
 
Exposure, net of collateral
 $203  $1,612 
Percent of exposure to counterparties with credit ratings below S&P AA- or Moody’s Aa3
  57%  34%
Percent of exposure to counterparties with credit ratings below S&P A- or Moody’s A3
  0%  0%
 
“Core Earnings” Basis Borrowings
 
The following tables present the ending balances of our “Core Earnings” basis borrowings at June 30, 2011 and December 31, 2010, and average balances and average interest rates of our “Core Earnings” basis borrowings for the three and six months ended June 30, 2011 and 2010. The average interest rates include derivatives that are economically hedging the underlying debt but do not qualify for hedge accounting


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treatment. (See ‘‘ ‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP — Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” of this Item 2.)
 
Ending Balances
 
                         
  June 30, 2011  December 31, 2010 
  Short
  Long
     Short
  Long
    
(Dollars in millions) Term  Term  Total  Term  Term  Total 
 
Unsecured borrowings:
                        
Senior unsecured debt
 $2,464  $16,787  $19,251  $4,361  $15,742  $20,103 
Brokered deposits
  1,550   1,654   3,204   1,387   3,160   4,547 
Retail and other deposits
  1,487   —   1,487   1,370   —   1,370 
Other(1)
  1,004   —   1,004   887   —   887 
                         
Total unsecured borrowings
  6,505   18,441   24,946   8,005   18,902   26,907 
                         
Secured borrowings:
                        
FFELP Loans securitizations
  —   109,524   109,524   —   112,425   112,425 
Private Education Loans securitizations
  —   21,815   21,815   —   21,409   21,409 
ED Conduit Program Facility
  22,756   —   22,756   24,484   —   24,484 
ED Participation Program Facility
  —   —   —   —   —   — 
ABCP borrowings
  314   5,000   5,314   —   5,853   5,853 
Acquisition financing(2)
  —   1,010   1,010   —   1,064   1,064 
FHLB-DM Facility
  1,000   —   1,000   900   —   900 
Indentured trusts
  —   1,125   1,125   —   1,246   1,246 
                         
Total secured borrowings
  24,070   138,474   162,544   25,384   141,997   167,381 
                         
Total
 $30,575  $156,915  $187,490  $33,389  $160,899  $194,288 
                         
 
 
(1)“Other” primarily consists of cash collateral held related to derivative exposures that are recorded as a short-term debt obligation.
 
(2)Relates to the acquisition of $25 billion of student loans at the end of 2010.
 
Secured borrowings comprised 87 percent of our “Core Earnings” basis debt outstanding at June 30, 2011 versus 86 percent at December 31, 2010.


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Average Balances
 
                                 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2011  2010  2011  2010 
  Average
  Average
  Average
  Average
  Average
  Average
  Average
  Average
 
(Dollars in millions) Balance  Rate  Balance  Rate  Balance  Rate  Balance  Rate 
 
Unsecured borrowings:
                                
Senior unsecured debt
 $19,845   2.31% $25,995   1.68% $20,629   2.23% $26,272   1.55%
Brokered deposits
  3,729   2.41   5,212   2.61   4,040   2.41   5,406   2.78 
Retail and other deposits
  1,491   1.16   278   .84   1,484   1.20   246   .68 
Other(1)
  1,132   .23   769   .21   1,076   .28   934   .18 
                                 
Total unsecured borrowings
  26,197   2.17   32,254   1.79   27,229   2.12   32,858   1.71 
                                 
Secured borrowings:
                                
FFELP Loans securitizations
  109,988   .89   100,387   .92   110,683   .90   100,722   .87 
Private Education Loans securitizations
  21,051   2.19   21,438   2.15   21,034   2.18   21,047   2.09 
ED Conduit Program Facility
  23,220   .74   15,144   .72   23,665   .75   14,711   .67 
ED Participation Program Facility
  —   —   18,374   .72   —   —   15,835   .73 
ABCP borrowings
  4,850   1.03   6,551   1.16   4,893   1.08   7,718   1.20 
Acquisition financing(2)
  1,024   4.79   —   —   1,044   4.83   —   — 
FHLB-DM Facility
  883   .25   437   .35   756   .28   241   .34 
Indentured trusts
  1,166   .71   1,531   .72   1,196   .69   1,557   .66 
                                 
Total secured borrowings
  162,182   1.06   163,862   1.05   163,271   1.07   161,831   1.01 
                                 
Total
 $188,379   1.21% $196,116   1.17% $190,500   1.22% $194,689   1.13%
                                 
 
 
(1)“Other” primarily consists of cash collateral held related to derivative exposures that are recorded as a short-term obligation.
 
(2)Relates to the acquisition of $25 billion of student loans at the end of 2010.
 
Critical Accounting Policies and Estimates
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. A discussion of our critical accounting policies, which include allowance for loan losses, premium and discount amortization related to our loan portfolio, fair value measurement, transfers of financial assets and the VIE consolidation model, derivative accounting and goodwill and intangible assets can be found in our Annual Report onForm 10-Kfor the year ended December 31, 2010. There were no significant changes to these critical accounting policies during the first six months of 2011. However, related to Private Education Loan allowance for loan losses, we did implement a new model used to estimate defaults as discussed below.
 
In determining the allowance for loan losses, we estimate the principal amount of loans that will default over the next two years (two years being the expected period between a loss event and default). In the first quarter of 2011, we implemented a new model to estimate these Private Education Loan defaults. Both the prior model and new model are considered “migration models”. Our prior allowance model (in place through December 31, 2010) segmented the portfolio into categories of similar risk characteristics based on loan program type, school type, loan status, seasoning, underwriting criteria (credit scores) and the existence or absence of a cosigner using school type, credit scores, cosigner status, loan status and seasoning as the primary risk characteristics. Our new model uses these same primary risk characteristics but also further segments the portfolio by the number of months the loan is in its repayment period (seasoning). While our previous allowance process incorporated the impact of seasoning, the new model more directly incorporates this feature. Another change in the new allowance model relates to the historical period of experience that we use as a starting point for projecting future defaults. Our new model is based upon a seasonal average,


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adjusted to the most recent three to six months of actual collection experience as the starting point and applies expected macroeconomic changes and collection procedure changes to estimate expected losses caused by loss events incurred as of the balance sheet date. Our previous model primarily used a one year historical default experience period and did not include the ability to directly model an economic expectation or collection procedure change. In addition, the previous allowance process included qualitative adjustments for these factors. Our current model places a greater emphasis on the more recent default experience rather than the default experience for older historical periods, as we believe the recent default experience is more indicative of the probable losses incurred in the loan portfolio today. While the model we use as a part of the allowance for loan losses process changed in the first quarter, the overall process for calculating the appropriate amount of allowance for Private Education Loan loss as disclosed in the 2010Form 10-Khas not changed. We believe that the current model more accurately reflects recent borrower behavior, loan performance, and collection performance, as well as expectations about economic factors. There was no adjustment to our allowance for loan loss upon implementing this new default projection model in the first quarter of 2011. In addition, there was no change in how we estimate the amount we will recover over time related to these defaulted amounts.
 
Recently Issued Accounting Standards
 
Troubled Debt Restructurings
 
In April 2011, the Financial Accounting Standards Board issued Accounting Standards UpdateNo. 2011-02,Receivables (Topic 310), “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This new guidance clarifies when a loan restructuring constitutes a troubled debt restructuring. Under the new guidance, student loans for which we have granted certain concessions may now be considered troubled debt restructurings that were previously not and this may require us to increase the amount of our allowance for loan losses. This guidance is effective July 1, 2011, applied retrospectively to January 1, 2011. The most likely effect of implementing this new guidance would be to increase the size of our allowance for losses as certain types of forbearance usage may be considered a concession. At this time we have not completed the estimate of the change in our allowance for loan losses that could result from implementing this new guidance.
 
Fair Value Measurement and Disclosure Requirements
 
In May 2011, the FASB issued ASUNo. 2011-04,Fair Value Measurement (Topic 820), “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” These amendments (1) clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements; and (2) change particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. This new guidance is effective prospectively for interim and annual periods beginning after December 15, 2011 and is not expected to have a material impact on our fair value measurements.
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
 
Interest Rate Sensitivity Analysis
 
Our 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, 2011 and 2010 and the effect on fair values at June 30, 2011 and December 31, 2010, 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


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funding index increases 25 basis points while holding the asset index constant, if the funding index is different than the asset index.
 
                         
  Three Months Ended June 30, 2011 
     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
                        
Decrease in pre-tax net income before unrealized gains (losses) on derivative and hedging activities
 $(21)  (7)% $(33)  (10)% $(105)  (34)%
Unrealized gains (losses) on derivative and hedging activities
  493   145   851   251   (22)  (6)
                         
Increase/(decrease) in net income before taxes
 $472   1,749% $818   3,029% $(127)  (470)%
                         
Increase/(decrease) in diluted earnings per common share
 $.90   4,505% $1.56   7,804% $(.24)  (1,212)%
                         
 
                         
  Three Months Ended June 30, 2010 
     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
 $4   2% $11   5% $(103)     (49)%
Unrealized gains (losses) on derivative and hedging activities
  207   64   197   61   (51)  (16)
                         
Increase/(decrease) in net income before taxes
 $211   39% $208   39% $(154)  (29)%
                         
Increase/(decrease) in diluted earnings per common share
 $.40   63% $.39   63% $(.29)  (46)%
                         
 
 
(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, 2011 
     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
                        
Decrease in pre-tax net income before unrealized gains (losses) on derivative and hedging activities
 $(24)  (4)% $(32)  (5)% $(211)  (33)%
Unrealized gains (losses) on derivative and hedging activities
  472   119   818   206   (22)  (6)
                         
Increase/(decrease) in net income before taxes
 $448   180% $786   316% $(233)  (94)%
                         
Increase/(decrease) in diluted earnings per common share
 $.85   278% $1.50   488% $(.45)  (145)%
                         
 
                         
  Six Months Ended June 30, 2010 
     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
 $4   1% $23   5% $(204)   (42)%
Unrealized gains (losses) on derivative and hedging activities
  207   47   197   44   (51)  (12)
                         
Increase/(decrease) in net income before taxes
 $211   23% $220   24% $(255)  (27)%
                         
Increase/(decrease) in diluted earnings per common share
 $.40   37% $.42   39% $(.49)  (45)%
                         
 
 
(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, 2011 
     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 Loans
 $140,341  $(671)  —% $(1,348)  (1)%
Private Education Loans
  33,086   —   —   —   — 
Other earning assets
  11,443   —   —   (1)  — 
Other assets
  10,378   (561)  (5)  977   9%
                     
Total assets
 $195,248  $(1,232)  (1)% $(372)  —%
                     
Liabilities
                    
Interest — bearing liabilities
 $182,591  $(749)  —% $(2,068)  (1)%
Other liabilities
  3,814   (513)  (13)  (313)  (8)
                     
Total liabilities
 $186,405  $(1,262)  (1)% $(2,381)  (1)%
                     
 
                     
  At December 31, 2010 
     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 Loans
 $147,163  $(649)  —% $(1,318)  (1)%
Private Education Loans
  30,949   —   —   —   — 
Other earning assets
  11,641   (1)  —   (2)  — 
Other assets
  9,449   (565)  (6)  (996)  (11)%
                     
Total assets
 $199,202  $(1,215)  (1)% $(2,316)  (1)%
                     
Liabilities
                    
Interest — bearing liabilities
 $187,959  $(704)  —% $(1,938)  (1)%
Other liabilities
  3,136   (217)  (7)  257   8 
                     
Total liabilities
 $191,095  $(921)  —% $(1,681)  (1)%
                     
 
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, due to the ability of some FFELP loans to earn Floor Income, 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, 2011 and 2010, 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 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 preceding tables, 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

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primarily due to the impact of (i) our unhedged loans being in a fixed-rate mode due to 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 rate liabilities and equity. 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 three months ended June 30, 2011, item (i) had a greater impact compared to the three and six months ended June 30, 2010 due to a larger amount of unhedged Floor Income in the current year period. The increase in unrealized gains (losses) on derivatives and hedging activities in both scenarios is primarily related to Floor Income Contracts that do not qualify for GAAP hedge accounting treatment and therefore are not offset by anymark-to-marketof the economically hedged Floor Income.
 
Under the scenario in the tables above labeled “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 “Asset and Liability Funding Gap” of this Item 3 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 swap that hedge the mismatch between the asset and funding indices.
 
In addition to interest rate risk addressed in the preceding tables, we are 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 us. As it relates to our corporate unsecured and securitization debt programs used to fund our business, our 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 materialmark-to-marketimpacts 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 cumulativemark-to-marketimpact will be zero.
 
Asset and Liability Funding Gap
 
The tables below present our assets and liabilities (funding) arranged by underlying indices as of June 30, 2011. In the following GAAP presentation, the funding gap only includes derivatives that qualify as effective 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 and in doing so includes all derivatives that are economically hedging our debt whether they qualify as effective hedges or not (“Core Earnings” basis). Accordingly, we are also presenting the asset and liability funding gap on a “Core Earnings” basis in the table that follows the GAAP presentation.


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GAAP-Basis
 
               
  Frequency of
         
Index
 Variable
       Funding
 
(Dollars in billions) Resets Assets  Funding(1)  Gap 
 
3-monthCommercial paper
 daily $133.7  $—  $133.7 
3-monthTreasury bill
 weekly  7.7   —   7.7 
Prime
 annual  .8   —   .8 
Prime
 quarterly  5.2   —   5.2 
Prime
 monthly  22.4   —   22.4 
Prime
 daily  —   2.9   (2.9)
PLUS Index
 annual  .5   —   .5 
3-month LIBOR
 daily  —   —   — 
3-month LIBOR
 quarterly  —   125.5   (125.5)
1-month LIBOR
 monthly  8.3   18.6   (10.3)
CMT/CPI Index
 monthly/quarterly  —   1.6   (1.6)
Non-Discrete reset(2)
 monthly  —   33.1   (33.1)
Non-Discrete reset(3)
 daily/weekly  11.3   2.5   8.8 
Fixed Rate(4)
    10.5   16.2   (5.7)
               
Total
   $200.4  $200.4  $— 
               
 
  ­ ­
 
  (1)Funding includes all derivatives that qualify as hedges.
 
  (2)Funding consists of auction rate securities, the ABCP Facilities, the ED Conduit Program Facility and FHLB — DM Facility.
 
  (3)Assets include restricted and unrestricted cash equivalents and other overnight type instruments. Funding includes retail and other deposits and cash collateral held related to derivatives exposures that are recorded as a short-term debt obligation.
 
  (4)Assets include receivables and other assets (including 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 reset3-monthLIBOR to other indices that are more correlated to our asset indices. These basis swaps do not qualify as effective hedges 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.


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“Core Earnings” Basis
 
               
Index
 Frequency of
       Funding
 
(Dollars in billions) Variable Resets Assets  Funding(1)  Gap 
 
3-monthCommercial paper
 daily $133.7  $—  $133.7 
3-monthTreasury bill
 weekly  7.7   2.0   5.7 
Prime
 annual  .8   —   .8 
Prime
 quarterly  5.2   1.5   3.7 
Prime
 monthly  22.4   6.5   15.9 
Prime
 daily  —   2.9   (2.9)
PLUS Index
 annual  .5   —   .5 
3-month LIBOR
 daily  —   41.5   (41.5)
3-month LIBOR
 quarterly  —   61.0   (61.0)
1-month LIBOR
 monthly  8.3   25.4   (17.1)
1-month LIBOR
 daily  —   9.0   (9.0)
Non-Discrete reset(2)
 monthly  —   33.1   (33.1)
Non-Discrete reset(3)
 daily/weekly  11.3   2.5   8.8 
Fixed Rate(4)
    6.7   11.2   (4.5)
               
Total
   $196.6  $196.6  $— 
               
 
 
     (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 consists of auction rate securities, the ABCP Facilities, the ED Conduit Program Facility and FHLB — DM Facility.
 
     (3)  Assets include restricted and unrestricted cash equivalents and other overnight type instruments. Funding includes retail and other deposits and cash collateral held related to derivatives exposures that are recorded as a short-term debt obligation.
 
     (4)  Assets include receivables and other assets (including 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 and quarterly reset3-monthLIBOR to fund a large portion of our daily reset3-monthcommercial paper indexed assets. In addition, we use quarterly reset3-monthLIBOR 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 through the second quarter of 2009 with the commercial paper and LIBOR indices. As of June 30, 2011, we have approximately $87.4 billion of FFELP Loans indexed to3-monthcommercial paper that are funded with debt indexed to3-monthLIBOR.


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Weighted Average Life
 
The following table reflects the weighted average life for our earning assets and liabilities at June 30, 2011.
 
     
  Weighted Average
 
(Averages in Years) Life 
 
Earning assets
    
Student loans
  7.6 
Other loans
  6.4 
Cash and investments
  .1 
     
Total earning assets
  7.2 
     
Borrowings
    
Short-term borrowings
  .3 
Long-term borrowings
  7.1 
     
Total borrowings
  6.0 
     
 
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, 2011. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer, concluded that, as of June 30, 2011, 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, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION
 
Item 1.  Legal Proceedings
 
Mark A. Arthur et al. v. Sallie Mae, Inc.  As previously disclosed, this class action suit involves allegations made in U.S. District Court for the Western District of Washington that we contacted consumers on their cellular telephones via autodialer without their consent in violation of the Telephone Consumer Protection Act, 47 U.S.C. § 227 et seq. (“TCPA”). Each violation under the TCPA provides for $500 in statutory damages ($1,500 if a willful violation is shown). Plaintiffs are seeking statutory damages, damages for willful violations, attorneys’ fees, costs, and injunctive relief. We have denied vigorously all claims asserted against us, but previously agreed to a preliminary settlement of $19.5 million to avoid the burden and expense of continued litigation. Subsequent to reaching this preliminary settlement, we filed submissions with the Court to advise that additional individuals were omitted from the original notice list of class members.
 
On August 3, 2011, we reached an agreement in principle through a memorandum of understanding with the Plaintiffs on behalf of the settlement class, and we expect to formalize that agreement and request Court approval during the next several months. Under the memorandum of understanding, we have agreed to increase the settlement fund to $24.15 million.
 
Rodriguez v. SLM Corporation et al.  As previously disclosed, on December 17, 2007, plaintiffs filed a complaint against us in the U.S. District Court for the District of Connecticut alleging that we engaged in underwriting practices which, among other things, resulted in certain applicants for student loans being directed into substandard and expensive loans on the basis of race. The complaint did not identify the relief plaintiffs sought. We recently agreed to settle this case, with the Court providing preliminary approval on June 20, 2011, with final Court approval expected on October 17, 2011. We do not expect the settlement as currently proposed to have a material impact on our financial position or our business.
 
We and our subsidiaries and affiliates also are 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, our collections subsidiaries are routinely named in individual plaintiff or class action lawsuits in which the plaintiffs allege that those subsidiaries have violated a federal or state law in the process of collecting their accounts. We believe 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 and our subsidiaries and affiliates receive information and document requests from state attorneys general, legislative committees and administrative agencies concerning certain business practices. Our practice has been and continues to be to cooperate with these bodies and to be responsive to any such requests.
 
For a description of these items and other litigation to which we are a party, see our 2010Form 10-K.
 
Item 1A.  Risk Factors
 
There have been no material changes from the risk factors previously disclosed in our Annual Report onForm 10-Kfor the year ended December 31, 2010, except as set forth below.
 
Downgrades of the credit rating of the United States of America may materially adversely affect our business, financial condition and results of operations.
 
The current U.S. debt ceiling debate in Congress has increased the possibility of the credit-rating agencies downgrading the U.S.’s credit rating. Various aspects of our business may be affected by changes to the U.S.’s credit rating. Given the unprecedented nature of events such as these, we cannot estimate the extent to which such an action or actions could materially adversely affect our liquidity, cash flows and results of operations,


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increase our borrowing costs, limit our access to the capital markets or trigger other implications under certain collateralized arrangements.
 
If the U.S.’s credit rating were to be downgraded our cost of funds on new and certain existing asset-backed securities and conduit facilities collateralized with FFELP Loans (“FFELP ABS”) could increase; we could be required to increase the amount of over-collateralization associated with newly issued FFELP ABS and existing conduit facilities to maintain the AAA credit ratings traditionally associated with these offerings and facilities; and our ability to accessand/ormaintain existing FFELP conduit facilities and to efficiently sell or refinance loans previously funded through these vehicles could be adversely affected. For more information on our funding and liquidity risk management practices and resources, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Funding and Liquidity Risk Management” and “— Primary Sources of Liquidity and Available Capacity” in our 2010Form 10-K.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table provides information relating to our purchase of shares of our common stock from April 1, 2011 through June 30, 2011:
 
                 
           Approximate Dollar
 
           Value of
 
           Shares That
 
        Total Number of
  May Yet Be
 
        Shares Purchased
  Purchased Under
 
  Total Number
  Average Price
  as Part of Publicly
  Publicly Announced
 
  of Shares
  Paid per
  Announced Plans
  Plans or
 
(Dollars and common shares in millions) Purchased(1)  Share  or Programs(2)  Programs(2) 
 
Period:
                
April 1 — April 30, 2011
  1.0  $16.33   .7  $289.2 
May 1 — May 31, 2011
  4.3   16.33   4.0   223.1 
June 1 — June 30, 2011
  5.2   16.22   4.9   144.1 
                 
Total second-quarter 2011
  10.5  $16.28   9.6     
                 
 
 
(1)The total number of shares purchased includes: (i) shares purchased under the stock repurchase program discussed below, and (ii) shares of our common stock tendered to us to satisfy the exercise price in connection with cashless exercise of stock options, and tax withholding obligations in connection with exercise of stock options and vesting of restricted stock and restricted stock units.
 
(2)In April 2011, our board of directors authorized us to purchase up to $300 million of shares of our common stock in open market transactions, and terminated all previous authorizations. There is no expiration date related to this new program.
 
The closing price of our common stock on the New York Stock Exchange on June 30, 2011 was $16.81.
 
Item 3.  Defaults upon Senior Securities
 
Nothing to report.
 
Item 4.  (Removed and Reserved).
 
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 SLM Corporation Employee Stock Purchase Plan†
 12.1 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
 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.INS XBRL Instance Document.
 101.SCH XBRL Taxonomy Extension Schema Document.
 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
 101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
 101.LAB XBRL Taxonomy Extension Label Linkbase Document.
 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
†Management Contract or Compensatory Plan or Arrangement


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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/  JONATHAN C. CLARK
Jonathan C. Clark
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 
Date: August 5, 2011


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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) 2010 Annual Report onForm 10-K,filed with the Securities and Exchange Commission (“SEC”) on February 28, 2011, 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” — We prepare financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”). In addition to evaluating our GAAP-based financial information, management evaluates the business segments on a basis that, as allowed under the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” differs from GAAP. We refer to management’s basis of evaluating its segment results as “Core Earnings” presentations for each business segment and refer to these performance measures in our presentations with equity investors, credit rating agencies and debt capital providers. While “Core Earnings” results are not a substitute for reported results under GAAP, we rely on “Core Earnings” performance measures in operating each business segment because we believe 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 our chief operating decision makers. “Core Earnings” performance measures are used in developing our financial plans, tracking results, and establishing corporate performance targets and incentive compensation. Management believes this information provides additional insight into the financial performance of our 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. Our “Core Earnings” presentation does not represent another comprehensive basis of accounting.
 
“Note 11 — Segment Reporting” and Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — ‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP” for further discussion of the differences between “Core Earnings” and GAAP, as well as reconciliations between “Core Earnings” and GAAP.
 
Direct Lending; Direct Loans — Educational loans provided by the DSLP (see definition, below) to students and parent borrowers directly through ED (see definition below) rather than through a bank or other lender.
 
DSLP — The William D. Ford Federal Direct Loan Program.
 
ED — The U.S. Department of Education.
 
Exceptional Performer — The exceptional performer designation is determined by ED in recognition of a servicer meeting certain performance standards set by ED in servicing FFELP Loans. Upon receiving the designation, the servicer receives reimbursement on default claims higher than the legislated Risk Sharing levels on federally guaranteed student loans for all loans serviced for a period of at least 270 days before the date of default. The 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


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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 CCRAA eliminated the EP designation effective October 1, 2007. See also Appendix A “Federal Family Education 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. In April 2008, we suspended originating new FFELP Consolidation Loans.
 
FFELP Stafford and Other Student Loans — Education loans to students or parents of students that are guaranteed or reinsured under the 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 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. We generally finance our 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, we continue 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, we refer 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, we 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, we may earn Floor Income to the next reset date. 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.


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Graphic Depiction of Floor Income:
 
(LINE GRAPH)
 
Floor Income Contracts — We enter into contracts with counterparties under which, in exchange for an upfront fee representing the present value of the Floor Income that we expect to earn on a notional amount of underlying student loans being economically hedged, we will pay the counterparties the Floor Income earned on that notional amount over the life of the Floor Income Contract. Specifically, we agree 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 we will earn over the period of the contract. Floor Income Contracts are not considered effective hedges under ASC 815, “Derivatives and Hedging,” and each quarter we must record the change in fair value of these contracts through income.
 
Gross Floor Income — Floor Income earned before payments on Floor Income Contracts.
 
Guarantor(s) — 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.
 
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. Our 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 our Private Education Loan business, we use 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. Non-traditional loans are loans to borrowers attending for-profit schools with an original FICO score of less than 670 and borrowers attendingnot-for-profitschools with an original FICO score of less than 640. The FICO score used in determining whether a loan is non-traditional is the greater of the borrower or co-borrower FICO score at origination.
 
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. We occasionally


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change 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.
 
Residual Interest — When we securitize student loans, we retain the right to receive cash flows from the student loans sold to trusts that we sponsor 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. We value 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 we retain 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 us. 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. We refer 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.
 
Variable Rate Floor Income — Variable Rate Floor Income is Floor Income that is earned only through the next date at which the borrower interest rate is reset to a market rate. For FFELP Stafford loans whose borrower interest rate resets annually on July 1, we 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.


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