Edgar Filing: SLM CORP

e10vq

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

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended June 30, 2009
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission File Number: 001-13251

SLM Corporation

(Exact name of registrant as specified in its charter)


Delaware		52-2013874
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

12061 Bluemont Way, Reston, Virginia (Address of principal executive offices)		20190 (Zip Code)

(703) 810-3000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of 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 of Regulation S-T during 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 in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:


Class		Outstanding at June 30, 2009

Voting common stock, $.20 par value		467,607,602 shares

SLM CORPORATION

FORM 10-Q

INDEX

June 30, 2009


Part I. Financial Information
	Item 1.	Financial Statements	2
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	57
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	126
	Item 4.	Controls and Procedures	131

PART II. Other Information
	Item 1.	Legal Proceedings	132
	Item 1A.	Risk Factors	132
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	132
	Item 3.	Defaults Upon Senior Securities	132
	Item 4.	Submission of Matters to a Vote of Security Holders	133
	Item 5.	Other Information	133
	Item 6.	Exhibits	134
Signatures			135
Glossary⁽¹⁾			136


⁽¹⁾		Definitions for capitalized terms used in this document can be found in the “Glossary” at the end of this document.

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

SLM CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands, except per share amounts)
(Unaudited)


	June 30,			December 31,
	2009			2008

Assets
FFELP Stafford and Other Student Loans (net of allowance for losses of $102,857 and $90,906, respectively)	$	44,044,636		$	44,025,361
FFELP Stafford Loans Held-for-Sale		18,159,232			8,450,976
FFELP Consolidation Loans (net of allowance for losses of $50,181 and $46,637, respectively)		70,102,304			71,743,435
Private Education Loans (net of allowance for losses of $1,396,707 and $1,308,043, respectively)		21,850,688			20,582,298
Other loans (net of allowance for losses of $68,282 and $58,395, respectively)		489,180			729,380
Investments:
Available-for-sale		1,186,971			861,008
Other		885,511			180,397

Total investments		2,072,482			1,041,405
Cash and cash equivalents		6,139,957			4,070,002
Restricted cash and investments		5,245,702			3,535,286
Retained Interest in off-balance sheet securitized loans		1,820,614			2,200,298
Goodwill and acquired intangible assets, net		1,233,871			1,249,219
Other assets		10,025,129			11,140,777

Total assets	$	181,183,795		$	168,768,437

Liabilities
Short-term borrowings	$	47,331,576		$	41,933,043
Long-term borrowings		125,880,044			118,224,794
Other liabilities		3,120,636			3,604,260

Total liabilities		176,332,256			163,762,097

Commitments and contingencies
Equity
Preferred stock, par value $.20 per share, 20,000 shares authorized:
Series A: 3,300 and 3,300 shares, respectively, issued at stated value of $50 per share		165,000			165,000
Series B: 4,000 and 4,000 shares, respectively, issued at stated value of $100 per share		400,000			400,000
Series C: 7.25% mandatory convertible preferred stock; 1,150 and 1,150 shares, respectively, issued at liquidation preference of $1,000 per share		1,149,770			1,149,770
Common stock, par value $.20 per share, 1,125,000 shares authorized: 534,842 and 534,411 shares issued, respectively		106,969			106,883
Additional paid-in capital		4,709,053			4,684,112
Accumulated other comprehensive loss (net of tax benefit of $27,750 and $43,202, respectively)		(48,683	)		(76,476	)
Retained earnings		229,865			426,175

Total SLM Corporation stockholders’ equity before treasury stock		6,711,974			6,855,464
Common stock held in treasury at cost: 67,128 and 66,958 shares, respectively		1,860,440			1,856,394

Total SLM Corporation stockholders’ equity		4,851,534			4,999,070
Noncontrolling interest		5			7,270

Total equity		4,851,539			5,006,340

Total liabilities and equity	$	181,183,795		$	168,768,437

See accompanying notes to consolidated financial statements.

SLM CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands, except per share amounts)
(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008

Interest income:
FFELP Stafford and Other Student Loans	$	323,939		$	497,598		$	666,755		$	962,074
FFELP Consolidation Loans		460,690			769,664			950,052			1,606,320
Private Education Loans		393,019			409,323			780,060			852,845
Other loans		18,468			21,355			34,888			44,699
Cash and investments		7,044			70,521			13,015			194,337

Total interest income		1,203,160			1,768,461			2,444,770			3,660,275
Total interest expense		819,459			1,365,918			1,846,006			2,981,363

Net interest income		383,701			402,543			598,764			678,912
Less: provisions for loan losses		278,112			143,015			528,391			280,326

Net interest income after provisions for loan losses		105,589			259,528			70,373			398,586

Other income:
Servicing and securitization revenue (loss)		87,488			1,630			(7,817	)		109,272
Losses on sales of loans and securities, net		—			(43,583	)		—			(78,249	)
Gains (losses) on derivative and hedging activities, net		(561,795	)		362,043			(457,770	)		89,247
Contingency fee revenue		73,368			83,790			148,183			169,096
Collections revenue		22,068			26,365			738			83,604
Guarantor servicing fees		24,772			23,663			58,780			58,316
Other		399,065			108,728			591,523			202,261

Total other income		44,966			562,636			333,637			633,547

Expenses:
Salaries and benefits		139,419			167,788			276,340			347,517
Other operating expenses		175,766			185,900			340,328			361,819
Restructuring expenses		4,430			46,740			9,203			67,418

Total expenses		319,615			400,428			625,871			776,754

Net income (loss) before income tax benefit		(169,060	)		421,736			(221,861	)		255,379
Income tax expense (benefit)		(46,551	)		153,074			(78,247	)		90,586

Net income (loss)		(122,509	)		268,662			(143,614	)		164,793
Less: net income attributable to noncontrolling interest		211			2,926			492			2,861

Net income (loss) attributable to SLM Corporation		(122,720	)		265,736			(144,106	)		161,932
Preferred stock dividends		25,800			27,391			52,195			56,416

Net income (loss) attributable to SLM Corporation common stock	$	(148,520	)	$	238,345		$	(196,301	)	$	105,516

Basic earnings (loss) per common share attributable to SLM Corporation common shareholders	$	(.32	)	$	.51		$	(.42	)	$	.23

Average common shares outstanding		466,799			466,649			466,780			466,615

Diluted earnings (loss) per common share attributable to SLM Corporation common shareholders	$	(.32	)	$	.50		$	(.42	)	$	.23

Average common and common equivalent shares outstanding		466,799			517,954			466,780			467,316

Dividends per common share attributable to SLM Corporation common shareholders	$	—		$	—		$	—		$	—

See accompanying notes to consolidated financial statements.

SLM CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share amounts)
(Unaudited)


																		Accumulated
	Preferred														Additional			Other									Total
	Stock		Common Stock Shares								Preferred		Common		Paid-In			Comprehensive			Retained			Treasury			Stockholders’			Noncontrolling			Total
	Shares		Issued		Treasury			Outstanding			Stock		Stock		Capital			Income (Loss)			Earnings			Stock			Equity			Interest			Equity

Balance at March 31, 2008		8,450,000		533,678,028		(66,301,201	)		467,376,827		$	1,715,000	$	106,736	$	4,610,278		$	(2,394	)	$	617,184		$	(1,838,637	)	$	5,208,167		$	6,608		$	5,214,775
Comprehensive income:
Net income (loss)																						265,736						265,736			2,926			268,662
Noncontrolling interest — other																												—			(54	)		(54	)
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments, net of tax																			(8,984	)								(8,984	)					(8,984	)
Change in unrealized gains (losses) on derivatives, net of tax																			73,844									73,844						73,844
Defined benefit pension plans adjustment																			(472	)								(472	)					(472	)

Comprehensive income																												330,124			2,872			332,996
Cash dividends:
Preferred stock, series A ($.87 per share)																						(2,875	)					(2,875	)					(2,875	)
Preferred stock, series B ($.88 per share)																						(3,511	)					(3,511	)					(3,511	)
Preferred stock, series C ($18.13 per share)																						(20,844	)					(20,844	)					(20,844	)
Restricted stock dividend																						(2	)					(2	)					(2	)
Issuance of common shares				332,150		3,142			335,292					66		6,761									70			6,897						6,897
Issuance of preferred shares																161						(161	)					—
Tax benefit related to employee stock option and purchase plans																(3,866	)											(3,866	)					(3,866	)
Stock-based compensation cost																24,397												24,397						24,397
Repurchase of common shares:
Benefit plans						(146,726	)		(146,726	)															(3,483	)		(3,483	)					(3,483	)

Balance at June 30, 2008		8,450,000		534,010,178		(66,444,785	)		467,565,393		$	1,715,000	$	106,802	$	4,637,731		$	61,994		$	855,527		$	(1,842,050	)	$	5,535,004		$	9,480		$	5,544,484

Balance at March 31, 2009		8,449,770		534,698,117		(67,105,360	)		467,592,757		$	1,714,770	$	106,940	$	4,694,155		$	(70,450	)	$	378,387		$	(1,859,955	)	$	4,963,847		$	12		$	4,963,859
Comprehensive income:
Net income (loss)																						(122,720	)					(122,720	)		211			(122,509	)
Noncontrolling interest — other																												—			(218	)		(218	)
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments, net of tax																			1,319									1,319			—			1,319
Change in unrealized gains (losses) on derivatives, net of tax																			20,606									20,606			—			20,606
Defined benefit pension plans adjustment																			(158	)								(158	)					(158	)

Comprehensive income																												(100,953	)		(7	)		(100,960	)
Cash dividends:
Preferred stock, series A ($.87 per share)																						(2,875	)					(2,875	)					(2,875	)
Preferred stock, series B ($.51 per share)																						(1,923	)					(1,923	)					(1,923	)
Preferred stock, series C ($18.13 per share)																						(20,840	)					(20,840	)					(20,840	)
Restricted stock dividend																						(2	)					(2	)					(2	)
Issuance of common shares				143,762		—			143,762					29		181												210						210
Issuance of preferred shares																162						(162	)					—						—
Tax benefit related to employee stock option and purchase plans																(1,324	)											(1,324	)					(1,324	)
Stock-based compensation cost																15,879												15,879						15,879
Repurchase of common shares:
Benefit plans						(22,839	)		(22,839	)															(485	)		(485	)					(485	)

Balance at June 30, 2009		8,449,770		534,841,879		(67,128,199	)		467,713,680		$	1,714,770	$	106,969	$	4,709,053		$	(48,683	)	$	229,865		$	(1,860,440	)	$	4,851,534		$	5		$	4,851,539

See accompanying notes to consolidated financial statements.

SLM CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share amounts)
(Unaudited)


																		Accumulated
	Preferred														Additional			Other									Total
	Stock		Common Stock Shares								Preferred		Common		Paid-In			Comprehensive			Retained			Treasury			Stockholders’			Noncontrolling			Total
	Shares		Issued		Treasury			Outstanding			Stock		Stock		Capital			Income (Loss)			Earnings			Stock			Equity			Interest			Equity

Balance at December 31, 2007		8,300,000		532,493,081		(65,951,394	)		466,541,687		$	1,565,000	$	106,499	$	4,590,174		$	236,364		$	557,204		$	(1,831,706	)	$	5,223,535		$	11,360		$	5,234,895
Comprehensive income:
Net income (loss)																						161,932						161,932			2,861			164,793
Acquisition of noncontrolling interest in Purchased Paper business																												—			(4,355	)		(4,355	)
Noncontrolling interest — other																												—			(386	)		(386	)
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments, net of tax																			(21,513	)								(21,513	)					(21,513	)
Change in unrealized gains (losses) on derivatives, net of tax																			42,270									42,270						42,270
Defined benefit pension plans adjustment																			(472	)								(472	)					(472	)

Comprehensive income																												182,217			(1,880	)		180,337
Cash dividends:
Preferred stock, series A ($1.74 per share)																						(5,750	)					(5,750	)					(5,750	)
Preferred stock, series B ($2.31 per share)																						(8,897	)					(8,897	)					(8,897	)
Preferred stock, series C ($33.23 per share)																						(41,446	)					(41,446	)					(41,446	)
Restricted stock dividend																						(1,848	)					(1,848	)					(1,848	)
Issuance of common shares				1,517,097		3,142			1,520,239					303		18,704									70			19,077						19,077
Issuance of preferred shares		150,000										150,000				(4,332	)					(323	)					145,345						145,345
Tax benefit related to employee stock option and purchase plans																(10,016	)											(10,016	)					(10,016	)
Stock-based compensation cost																43,201												43,201						43,201
Cumulative effect of accounting change																			(194,655	)		194,655						—						—
Repurchase of common shares:
Benefit plans						(496,533	)		(496,533	)															(10,414	)		(10,414	)					(10,414	)

Balance at June 30, 2008		8,450,000		534,010,178		(66,444,785	)		467,565,393		$	1,715,000	$	106,802	$	4,637,731		$	61,994		$	855,527		$	(1,842,050	)	$	5,535,004		$	9,480		$	5,544,484

Balance at December 31, 2008		8,449,770		534,411,271		(66,958,400	)		467,452,871		$	1,714,770	$	106,883	$	4,684,112		$	(76,476	)	$	426,175		$	(1,856,394	)	$	4,999,070		$	7,270		$	5,006,340
Comprehensive income:
Net income (loss)																						(144,106	)					(144,106	)		492			(143,614	)
Sale of international Purchased Paper — Non-Mortgage business																												—			(7,257	)		(7,257	)
Noncontrolling interest — other																												—			(500	)		(500	)
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments, net of tax																			2,269									2,269			—			2,269
Change in unrealized gains (losses) on derivatives, net of tax																			26,015									26,015			—			26,015
Defined benefit pension plans adjustment																			(491	)								(491	)					(491	)

Comprehensive income																												(116,313	)		(7,265	)		(123,578	)
Cash dividends:
Preferred stock, series A ($1.74 per share)																						(5,750	)					(5,750	)					(5,750	)
Preferred stock, series B ($1.17 per share)																						(4,443	)					(4,443	)					(4,443	)
Preferred stock, series C ($36.25 per share)																						(41,680	)					(41,680	)					(41,680	)
Restricted stock dividend																						(9	)					(9	)					(9	)
Issuance of common shares				430,608		98			430,706					86		2,226									5			2,317						2,317
Issuance of preferred shares																322						(322	)					—						—
Tax benefit related to employee stock option and purchase plans																(5,819	)											(5,819	)					(5,819	)
Stock-based compensation cost																28,212												28,212						28,212
Repurchase of common shares:
Benefit plans						(169,897	)		(169,897	)															(4,051	)		(4,051	)					(4,051	)

Balance at June 30, 2009		8,449,770		534,841,879		(67,128,199	)		467,713,680		$	1,714,770	$	106,969	$	4,709,053		$	(48,683	)	$	229,865		$	(1,860,440	)	$	4,851,534		$	5		$	4,851,539

See accompanying notes to consolidated financial statements.

SLM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)


	Six Months Ended
	June 30,
	2009			2008

Operating activities
Net income (loss)	$	(143,614	)	$	164,793
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Losses on sales of loans and securities, net		—			78,249
Stock-based compensation cost		30,144			48,080
Unrealized (gains)/losses on derivative and hedging activities		497,361			(64,418	)
Provisions for loan losses		528,391			280,326
Decrease in purchased paper mortgages, net		174,701			109,720
Student loans originated for sale		(10,171,363	)		—
Decrease in restricted cash — other		52,552			1,050
Decrease in accrued interest receivable		481,791			52,020
(Decrease) in accrued interest payable		(409,109	)		(166,484	)
Adjustment for non-cash loss related to Retained Interest		351,331			279,900
(Increase) in other assets, goodwill and acquired intangible assets, net		(120,788	)		(55,712	)
(Decrease) in other liabilities		(150,321	)		(346,220	)

Total adjustments		(8,735,310	)		216,511

Net cash (used in) provided by operating activities		(8,878,924	)		381,304

Investing activities
Student loans acquired		(4,944,270	)		(15,340,698	)
Loans purchased from securitized trusts (primarily loan consolidations)		(3,698	)		(555,024	)
Reduction of student loans:
Installment payments, claims and other		5,148,780			5,268,996
Proceeds from sales of student loans		462,311			27,239
Other loans — originated		(2,817	)		(931,752	)
Other loans — repaid		217,557			1,183,672
Other investing activities, net		(736,002	)		(58,287	)
Purchases of available-for-sale securities		(66,062,442	)		(72,071,580	)
Proceeds from sales of available-for-sale securities		100,056			—
Proceeds from maturities of available-for-sale securities		65,615,526			72,279,652
Purchase of held-to-maturity and other securities		—			(400	)
Proceeds from maturities of held-to-maturity securities and other securities		68,928			12,502
(Increase) decrease in restricted cash — on-balance sheet trusts		(663,658	)		874,029
Return of investment from Retained Interest		16,361			217,391
Purchase of subsidiaries, net of cash acquired		—			(37,868	)

Net cash used in investing activities		(783,368	)		(9,132,128	)

Financing activities
Borrowings collateralized by loans in trust — issued		9,040,986			11,590,919
Borrowings collateralized by loans in trust — repaid		(2,932,288	)		(3,535,266	)
Asset-backed commercial paper conduits — net activity		(12,454,223	)		(161,576	)
ED Participation Program		9,871,053			—
ED Conduit Program facility		11,094,745			—
Other short-term borrowings issued		298,294			1,304,509
Other short-term borrowings repaid		(990,720	)		(333,397	)
Other long-term borrowings issued		4,333,168			2,437,226
Other long-term borrowings repaid		(4,935,047	)		(5,942,937	)
Other financing activities, net		(1,533,226	)		842,957
Excess tax benefit from the exercise of stock-based awards		—			282
Common stock issued		5			4,403
Preferred stock issued		—			145,345
Preferred dividends paid		(51,873	)		(56,093	)
Noncontrolling interest, net		(8,627	)		(4,378	)

Net cash provided by financing activities		11,732,247			6,291,994

Net increase (decrease) in cash and cash equivalents		2,069,955			(2,458,830	)
Cash and cash equivalents at beginning of period		4,070,002			7,582,031

Cash and cash equivalents at end of period	$	6,139,957		$	5,123,201

Cash disbursements made for:
Interest	$	2,303,145		$	3,557,181

Income taxes	$	177,478		$	564,269

See accompanying notes to consolidated financial statements.

SLM CORPORATION

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


1.	Significant Accounting Policies

Basis of Presentation

The accompanying unaudited, consolidated financial statements of SLM Corporation (the “Company” or “Sallie Mae”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of the results for the interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three months ended June 30, 2009 are not necessarily indicative of the results for the year ending December 31, 2009. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s 2008 Annual Report on Form 10-K. Management has evaluated subsequent events, and the impact on the reported results and disclosures, through August 5, 2009, which is the date these financial statements were issued.

Reclassifications

Certain reclassifications have been made to the balances as of and for the three and six months ended June 30, 2008 to be consistent with classifications adopted for 2009, and had no effect on net income, total assets, or total liabilities.

Recently Issued Accounting Pronouncements

Transfers of Financial Assets and the Variable Interest Entity (“VIE”) Consolidation Model

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 166, “Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140,” and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).”

SFAS No. 166, among other things, (1) eliminates the concept of a Qualifying Special Purpose Entity (“QSPE”), (2) changes the requirements for derecognizing financial assets, (3) changes the amount of the recognized gain/loss on a transfer accounted for as a sale when beneficial interests are received by the transferor, and (4) requires additional disclosure. SFAS No. 166 is effective for fiscal years beginning after November 15, 2009.

SFAS No. 167 significantly changes the consolidation model for Variable Interest Entities (“VIEs”). SFAS No. 167 amends FIN No. 46(R) and, among other things, (1) eliminates the exemption for QSPEs, (2) provides a new approach for determining who should consolidate a VIE which is more focused on control rather than economic interest, (3) changes when it is necessary to reassess who should consolidate a VIE and (4) requires additional disclosure. SFAS No. 167 is effective for the first annual reporting period beginning after November 15, 2009.

The Company is currently evaluating the impact of these statements to its consolidated financial statements. Based on the Company’s preliminary review, management expects these changes will lead to the consolidation of QSPEs that are currently not consolidated by the Company. Assuming no changes to the Company’s current business model, the Company will consolidate its securitization trusts that are currently off-balance sheet on January 1, 2010 at their historical cost basis. The historical cost basis is the basis that would exist if these securitization trusts had remained on balance sheet since they settled. These proposed new

SLM CORPORATION

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


1.	Significant Accounting Policies (Continued)

accounting rules would also be applied to new transactions entered into from January 1, 2010 forward. If these statements had been adopted as of June 30, 2009, the Company would have removed the $1.8 billion of Residual Interests associated with these trusts from the consolidated balance sheet and the Company would have consolidated $36.7 billion of assets and $35.9 billion of liabilities, which would have resulted in an approximate $0.6 billion reduction of stockholders’ equity as of June 30, 2009. Management allocates capital on a Managed Basis. This change will not impact management’s view of capital adequacy.

FASB Accounting Standards Codification

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” which replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” and establishes the FASB Accounting Standards Codification (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009. The Company will begin to use the new Codification when referring to GAAP in its Form 10-Q for the quarter ending September 30, 2009. The Codification does not change authoritative guidance. Accordingly, implementing the Codification will not change any of the Company’s accounting, and therefore, will not have an impact on the consolidated results of the Company.

Subsequent Events

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” This standard is intended to establish general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for fiscal years and interim periods ending after June 15, 2009. The Company adopted this standard effective June 15, 2009 and has evaluated any events subsequent to June 30, 2009, and their impact on the reported results and disclosures, through the date of this filing. The Company does not believe there are any material subsequent events that would require further disclosure.

Fair Value Measurements

On April 9, 2009, the FASB issued three staff positions regarding fair value measurements and recognition of impairment. Under FASB Staff Position (“FSP”) Financial Accounting Standards (“FAS”) No. 115-2 and FAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” impairment must be recorded within the consolidated statements of income for debt securities if there exists a fair value loss and the entity intends to sell the security or it is more likely than not the entity will be required to sell the security before recovery of the loss. Additionally, expected credit losses must be recorded through income regardless of the impairment determination above. Remaining fair value losses are recorded to other comprehensive income. FSP FAS No. 107-1 and APB No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires interim disclosures of the fair value of financial instruments that were previously only required annually. Finally, FSP FAS No. 157-4, “Determining Fair Value When the Volume


1.	Significant Accounting Policies (Continued)

and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides guidance for determining when a significant decrease in market activity has occurred and when a transaction is not orderly. It further reiterates that prices from inactive markets or disorderly transactions should carry less weight, if any, to the determination of fair value. These standards were effective for the Company beginning April 1, 2009. The adoption of these standards was not material to the Company.

On February 12, 2008, the FASB issued FSP FAS No. 157-2, “Effective Date of Statement of Financial Accounting Standards (“SFAS”) No. 157,” which defers the effective date of SFAS No. 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP FAS No. 157-2 delayed the implementation of SFAS No. 157 for the Company’s accounting of goodwill, acquired intangibles, and other nonfinancial assets and liabilities that are measured at the lower of cost or market until January 1, 2009. Adoption of this standard was not material to the Company.

Business Combinations

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the entire acquisition-date fair value of assets acquired and liabilities assumed in both full and partial acquisitions; changes the recognition of assets acquired and liabilities assumed related to contingencies; changes the recognition and measurement of contingent consideration; requires expensing of most transaction and restructuring costs; and requires additional disclosures to enable the users of the financial statements to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) applies to all transactions or other events in which the Company obtains control of one or more businesses. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the reporting period beginning on or after December 15, 2008, which for the Company was January 1, 2009. The adoption of this standard on January 1, 2009, did not have a material effect on the Company’s results of operations or financial position.

In February 2009, the FASB issued FSP FAS No. 141(R), “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP FAS No. 141(R) amends the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination under SFAS No. 141(R), “Business Combinations.” FSP FAS No. 141(R) had the same effective date as SFAS No. 141(R). The adoption of this standard did not have a material effect on the Company’s results of operations or financial position.

Noncontrolling Interests in Consolidated Financial Statements — an Amendment of Accounting Research Bulletin No. 51

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of Accounting Research Bulletin No. 51.” SFAS No. 160 requires reporting entities to present noncontrolling (minority) interests as equity (as opposed to a presentation as a liability or mezzanine equity) and provides guidance on the accounting for transactions between an entity and noncontrolling interests. On January 1, 2009, the Company adopted SFAS No. 160, the provisions of which, among other things, require that minority interests be renamed “noncontrolling interests” and that a company present a consolidated net income (loss) measure that includes the amount attributable to such “noncontrolling interests” for all periods presented. SFAS No. 160 applies prospectively for reporting periods beginning on or


1.	Significant Accounting Policies (Continued)

after December 15, 2008, except for the presentation and disclosure requirements which are applied retrospectively for all periods presented. The Company has reclassified financial statement line items within its consolidated balance sheets, statements of income, statements of changes in stockholders’ equity and statements of cash flows for the prior period to conform to this standard. Other than the change in presentation of noncontrolling interests, the adoption of SFAS No. 160 had no impact on the consolidated financial statements.

Disclosures about Derivative Investments and Hedging Activities — an Amendment of FASB Statement No. 133

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Investments and Hedging Activities — an Amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities, including (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related interpretations, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. To meet those objectives, SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted this standard on January 1, 2009.

Accounting for Hedging Activities — An Amendment of FASB Statement No. 133

In June 2008, the FASB issued an exposure draft to amend the accounting for hedging activities in SFAS No. 133. This proposed statement is intended to simplify accounting for hedging activities, improve the financial reporting of hedging activities, resolve major practice issues related to hedge accounting that have arisen under SFAS No. 133, and address differences resulting from recognition and measurement anomalies between the accounting for derivative instruments and the accounting for hedged items or transactions. While the amendment as currently drafted may simplify the Company’s accounting model for hedging activities under SFAS No. 133, the Company does not expect it to significantly impact its results of operations. The full impact of this amendment, effective January 1, 2010, as currently proposed, cannot be evaluated until the final statement is issued. The exposure draft is currently in redeliberations at the FASB.


2.	Allowance for Loan Losses

The Company’s provisions for loan losses represent the periodic expense of maintaining an allowance sufficient to absorb incurred losses, net of recoveries, in the held-for-investment loan portfolios. The evaluation of the provisions for loan losses is inherently subjective as it requires material estimates that may be susceptible to significant changes. The Company believes that the allowance for loan losses is appropriate to cover probable losses incurred in the loan portfolios.


2.	Allowance for Loan Losses (Continued)

The following table summarizes the total loan provisions for the three and six months ended June 30, 2009 and 2008.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2009		2008		2009		2008

Private Education Loans	$	241,759	$	119,838	$	445,304	$	238,449
FFELP Stafford and Other Student Loans		25,595		19,295		59,993		35,398
Mortgage and consumer loans		10,758		3,882		23,094		6,479

Total provisions for loan losses	$	278,112	$	143,015	$	528,391	$	280,326

Allowance for Private Education Loan Losses

The following table summarizes changes in the allowance for loan losses for Private Education Loans for the three and six months ended June 30, 2009 and 2008.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008

Allowance at beginning of period	$	1,384,454		$	1,073,317		$	1,308,043		$	1,003,964
Provision for Private Education Loan losses		241,759			119,838			445,304			238,449
Charge-offs		(238,943	)		(72,249	)		(377,758	)		(129,601	)
Reclassification of interest reserve⁽¹⁾		9,437			8,094			21,118			16,188

Allowance at end of period	$	1,396,707		$	1,129,000		$	1,396,707		$	1,129,000

Charge-offs as a percentage of average loans in repayment (annualized)		8.2	%		3.6	%		6.7	%		3.5	%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)		7.6	%		3.2	%		6.2	%		3.0	%
Allowance as a percentage of the ending total loan balance		5.9	%		5.8	%		5.9	%		5.8	%
Allowance as a percentage of ending loans in repayment		11.5	%		13.1	%		11.5	%		13.1	%
Allowance coverage of charge-offs (annualized)		1.5			3.9			1.8			4.3
Ending total loans⁽²⁾	$	23,784,039		$	19,607,553		$	23,784,039		$	19,607,553
Average loans in repayment	$	11,700,129		$	7,991,624		$	11,405,253		$	7,543,605
Ending loans in repayment	$	12,145,736		$	8,608,651		$	12,145,736		$	8,608,651


⁽¹⁾		Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

⁽²⁾		Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans.


2.	Allowance for Loan Losses (Continued)

Private Education Loan Delinquencies

The table below presents the Company’s Private Education Loan delinquency trends as of June 30, 2009, December 31, 2008, and June 30, 2008.


	Private Education Loan Delinquencies
	June 30, 2009						December 31, 2008						June 30, 2008
(Dollars in millions)	Balance			%			Balance			%			Balance			%

Loans in-school/grace/deferment⁽¹⁾	$	10,355					$	10,159					$	9,662
Loans in forbearance⁽²⁾		945						862						1,178
Loans in repayment and percentage of each status:
Loans current		10,294			84.8	%		9,748			87.2	%		7,720			89.7	%
Loans delinquent 31-60 days⁽³⁾		504			4.2			551			4.9			326			3.8
Loans delinquent 61-90 days⁽³⁾		335			2.7			296			2.6			210			2.4
Loans delinquent greater than 90 days⁽³⁾		1,013			8.3			587			5.3			353			4.1

Total Private Education Loans in repayment		12,146			100	%		11,182			100	%		8,609			100	%

Total Private Education Loans, gross		23,446						22,203						19,449
Private Education Loan unamortized discount		(537	)					(535	)					(508	)

Total Private Education Loans		22,909						21,668						18,941
Private Education Loan receivable for partially charged-off loans		338						222						159
Private Education Loan allowance for losses		(1,396	)					(1,308	)					(1,129	)

Private Education Loans, net	$	21,851					$	20,582					$	17,971

Percentage of Private Education Loans in repayment					51.8	%					50.4	%					44.3	%

Delinquencies as a percentage of Private Education Loans in repayment					15.2	%					12.8	%					10.3	%

Loans in forbearance as a percentage of loans in repayment and forbearance					7.2	%					7.2	%					12.0	%


⁽¹⁾		Loans for borrowers who may be attending school or engaging in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

⁽²⁾		Loans for borrowers who have used their allowable deferment time or do not qualify for deferment and need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors consistent with the established loan program servicing procedures and policies.

⁽³⁾		The period of delinquency is based on the number of days scheduled payments are contractually past due.


2.	Allowance for Loan Losses (Continued)

Allowance for FFELP Loan Losses

The following table summarizes changes in the allowance for loan losses for the FFELP loan portfolio for the three and six months ended June 30, 2009 and 2008.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008

Allowance at beginning of period	$	152,294		$	93,997		$	137,543		$	88,729
Provision for FFELP loan losses		25,595			19,295			59,993			35,398
Charge-offs		(24,851	)		(15,876	)		(43,731	)		(26,711	)
Increase (decrease) for student loan sales		—			277			(767	)		277

Allowance at end of period	$	153,038		$	97,693		$	153,038		$	97,693

Charge-offs as a percentage of average loans in repayment (annualized)		.1	%		.1	%		.1	%		.1	%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)		.1	%		.1	%		.1	%		.1	%
Allowance as a percentage of the ending total loan balance		.1	%		.1	%		.1	%		.1	%
Allowance as a percentage of ending loans in repayment		.2	%		.1	%		.2	%		.1	%
Allowance coverage of charge-offs (annualized)		1.5			1.5			1.7			1.8
Ending total loans	$	130,084,026		$	114,067,540		$	130,084,026		$	114,067,540
Average loans in repayment	$	68,657,756		$	65,967,183		$	68,949,585		$	65,101,991
Ending loans in repayment	$	70,011,495		$	66,687,513		$	70,011,495		$	66,687,513

The Company maintains an allowance for Risk Sharing loan losses on its FFELP loan portfolio. The level of Risk Sharing has varied over the past few years with legislative changes. As of June 30, 2009, 53 percent of the on-balance sheet FFELP loan portfolio was subject to three-percent Risk Sharing, 46 percent was subject to two-percent Risk Sharing and the remaining 1 percent was not subject to any Risk Sharing.


2.	Allowance for Loan Losses (Continued)

FFELP Loan Delinquencies

The table below shows the Company’s FFELP loan delinquency trends as of June 30, 2009, December 31, 2008 and June 30, 2008.


	FFELP Loan Delinquencies
	June 30, 2009						December 31, 2008						June 30, 2008
(Dollars in millions)	Balance			%			Balance			%			Balance			%

Loans in-school/grace/deferment⁽¹⁾	$	46,644					$	39,270					$	35,136
Loans in forbearance⁽²⁾		13,428						12,483						12,245
Loans in repayment and percentage of each status:
Loans current		58,746			83.9	%		58,811			83.8	%		57,046			85.5	%
Loans delinquent 31-60 days⁽³⁾		3,996			5.7			4,044			5.8			3,573			5.4
Loans delinquent 61-90 days⁽³⁾		1,959			2.8			2,064			2.9			1,662			2.5
Loans delinquent greater than 90 days⁽³⁾		5,311			7.6			5,255			7.5			4,406			6.6

Total FFELP loans in repayment		70,012			100	%		70,174			100	%		66,687			100	%

Total FFELP loans, gross		130,084						121,927						114,068
FFELP loan unamortized premium		2,375						2,431						2,347

Total FFELP loans		132,459						124,358						116,415
FFELP loan allowance for losses		(153	)					(138	)					(97	)

FFELP loans, net	$	132,306					$	124,220					$	116,318

Percentage of FFELP loans in repayment					53.8	%					57.6	%					58.5	%

Delinquencies as a percentage of FFELP loans in repayment					16.1	%					16.2	%					14.5	%

FFELP loans in forbearance as a percentage of loans in repayment and forbearance					16.1	%					15.1	%					15.5	%


⁽¹⁾		Loans for borrowers who may be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as, loans for borrowers who have requested extension of grace period during employment transition or who have temporarily ceased making full payments due to hardship or other factors.

⁽²⁾		Loans for borrowers who have used their allowable deferment time or do not qualify for deferment, and need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors, consistent with the established loan program servicing policies and procedures.

⁽³⁾		The period of delinquency is based on the number of days scheduled payments are contractually past due.


2.	Allowance for Loan Losses (Continued)


3.	Investments

A summary of investments and restricted investments as of June 30, 2009 and December 31, 2008 follows:


	June 30, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

Investments
Available-for-sale
U.S. Treasury securities and other U.S. government agency obligations	$	9,061	$	73	$	—		$	9,134
Other securities:
Asset-backed securities		115,114		—		(843	)		114,271
Commercial paper and asset-backed commercial paper		1,049,988		—		—			1,049,988
Municipal bonds		10,298		2,048		—			12,346
Other		1,530		—		(298	)		1,232

Total investment securities available-for-sale	$	1,185,991	$	2,121	$	(1,141	)	$	1,186,971

Restricted Investments
Available-for sale
U.S. Treasury securities and other U.S. government agency obligations	$	32,750	$	—	$	—		$	32,750
Guaranteed investment contracts		25,189		—		—			25,189

Total restricted investments available-for-sale	$	57,939	$	—	$	—		$	57,939

Held-to-maturity
Guaranteed investment contracts	$	3,963	$	—	$	—		$	3,963
Other		215		—		—			215

Total restricted investments held-to-maturity	$	4,178	$	—	$	—		$	4,178


3.	Investments (Continued)


	December 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

Investments
Available-for-sale
U.S. Treasury securities and other U.S. government agency obligations	$	8,908	$	195	$	—		$	9,103
Other securities:
Asset-backed securities		40,907		13		(4,299	)		36,621
Commercial paper and asset-backed commercial paper		801,169		—		—			801,169
Municipal bonds		10,883		1,924		—			12,807
Other		1,673		—		(365	)		1,308

Total investment securities available-for-sale	$	863,540	$	2,132	$	(4,664	)	$	861,008

Restricted Investments
Available-for sale
Guaranteed investment contracts	$	31,914	$	—	$	—		$	31,914

Total restricted investments available-for-sale	$	31,914	$	—	$	—		$	31,914

Held-to-maturity
Guaranteed investment contracts	$	5,500	$	—	$	—		$	5,500
Other		215		—		—			215

Total restricted investments held-to-maturity	$	5,715	$	—	$	—		$	5,715

In addition to the restricted investments detailed above, at June 30, 2009 and December 31, 2008, the Company had restricted cash of $5.2 billion and $3.5 billion, respectively.

As of June 30, 2009 and December 31, 2008, $1 million and $(2) million, respectively, of the net unrealized gain (loss) (after tax) related to available-for-sale investments was included in accumulated other comprehensive income. As of June 30, 2009 and December 31, 2008, $60 million ($33 million of this is in restricted cash and investments on the balance sheet) and $26 million (none of which is in restricted cash and investments on the balance sheet), respectively, of available-for-sale investment securities were pledged as collateral.

There were no sales of investments during the three-months ended June 30, 2009. In the six months ended June 30, 2009, the Company sold available-for-sale securities with a fair value of $100 million, resulting in no realized gain or loss. There were no sales of securities in the three and six months ended June 30, 2008. The cost basis for these securities was determined through specific identification of the securities sold.


3.	Investments (Continued)

As of June 30, 2009, the stated maturities for the investments (including restricted investments) are shown in the following table:


	June 30, 2009
	Held-to-		Available-for-
	Maturity		Sale⁽¹⁾		Other

Year of Maturity
2009	$	—	$	1,093,104	$	814,316
2010		215		—		6,833
2011		—		—		5,092
2012		—		—		—
2013		—		936		—
2014-2018		—		12,346		31,044
After 2018		3,963		138,524		28,226

Total	$	4,178	$	1,244,910	$	885,511


⁽¹⁾		Available-for-sale securities are stated at fair value.

At June 30, 2009 and December 31, 2008, the Company also had other investments of $886 million and $180 million, respectively. At June 30, 2009, other investments included a $772 million receivable for cash collateral posted to derivative counterparties. Other investments also included leveraged leases which at June 30, 2009 and December 31, 2008, totaled $65 million and $76 million, respectively, that are general obligations of American Airlines and Federal Express Corporation. At June 30, 2009 and December 31, 2008, other investments also included the Company’s remaining investment in The Reserve Primary Fund totaling $42 million and $97 million, respectively.


4.	Goodwill and Acquired Intangible Assets

Goodwill

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” all acquisitions must be assigned to a reporting unit or units. A reporting unit is the same as or one level below an operating segment, as defined in SFAS No. 131. The following table summarizes the Company’s allocation of goodwill to its reporting units.


	As of June 30,
(Dollars in millions)	2009		2008

Lending	$	388	$	388
Asset Performance Group		401		396
Guarantor services		62		62
Upromise		140		140

Total	$	991	$	986


4.	Goodwill and Acquired Intangible Assets (Continued)

Impairment Testing

In accordance with SFAS No. 142, the Company performs goodwill impairment testing annually in the fourth quarter as of a September 30 valuation date or more frequently if an event occurs or circumstances change such that there is a potential that the fair value of a reporting unit or reporting units may be below their respective carrying values.

On February 26, 2009, the Obama Administration (“the Administration”) issued their 2010 budget request to Congress, which included provisions that could significantly impact the FFELP. In light of the potential implications of the Administration’s 2010 budget proposal to the Company’s business model, as well as continued uncertainty in the economy, the tight credit markets and the Company’s decline in market capitalization during the first quarter of 2009, the Company assessed goodwill impairment as of March 31, 2009. This assessment resulted in estimated fair values of the Company’s reporting units in excess of their carrying values. Accordingly, no goodwill impairment was recorded in the first quarter.

During the second quarter, no new unfavorable events or changes in circumstances occurred to warrant an impairment assessment as of June 30, 2009. Nevertheless, in light of ongoing uncertainties associated with the Administration’s proposed budget and the economic conditions described above, the Company continues to monitor the fair value of goodwill for each of its reporting units on a quarterly basis. Based on the Company’s assessment that there have been no change in circumstances associated with any of its reporting units during the second quarter and based on its aforementioned monitoring process, the Company concluded that goodwill is not impaired as of June 30, 2009.

Acquired Intangible Assets

Acquired intangible assets include the following:


	Average	As of June 30, 2009
	Amortization				Accumulated
(Dollars in millions)	Period		Gross		Amortization			Net

Intangible assets subject to amortization:
Customer, services, and lending relationships	12 years		$	332	$	(190	)	$	142
Software and technology	7 years			98		(88	)		10
Non-compete agreements	2 years			11		(10	)		1

Total				441		(288	)		153
Intangible assets not subject to amortization:
Trade name and trademark	Indefinite			91		—			91

Total acquired intangible assets			$	532	$	(288	)	$	244


4.	Goodwill and Acquired Intangible Assets (Continued)


	Average	As of December 31, 2008
	Amortization				Accumulated
(Dollars in millions)	Period		Gross		Amortization			Net

Intangible assets subject to amortization:
Customer, services, and lending relationships	13 years		$	332	$	(173	)	$	159
Software and technology	7 years			93		(85	)		8
Non-compete agreements	2 years			11		(10	)		1

Total				436		(268	)		168
Intangible assets not subject to amortization:
Trade name and trademark	Indefinite			91		—			91

Total acquired intangible assets			$	527	$	(268	)	$	259

The Company recorded amortization of acquired intangible assets totaling $10 million and $15 million for the three months ended June 30, 2009 and 2008, respectively, and $19 million and $31 million for the six months ended June 30, 2009 and 2008, respectively. The Company will continue to amortize its intangible assets with definite useful lives over their remaining estimated useful lives.


5.	Borrowings

The following table summarizes the Company’s borrowings as of June 30, 2009 and December 31, 2008.


	June 30, 2009						December 31, 2008
	Short		Long				Short		Long
(Dollars in millions)	Term		Term		Total		Term		Term		Total

Unsecured borrowings	$	4,249	$	28,416	$	32,665	$	6,794	$	31,182	$	37,976
Term bank deposits		901		5,199		6,100		1,148		1,108		2,256
Indentured trusts		8		1,761		1,769		31		1,972		2,003
2008 Asset-Backed Financing Facilities		12,476		—		12,476		24,768		—		24,768
ED Participation Program facility		17,236		—		17,236		7,365		—		7,365
ED Conduit Program facility		11,095		—		11,095		—		—		—
On-balance sheet securitizations		—		87,386		87,386		—		80,601		80,601
Other		1,358		—		1,358		1,827		—		1,827

Total before fair value adjustments		47,323		122,762		170,085		41,933		114,863		156,796
SFAS No. 133 fair value adjustments		9		3,118		3,127		—		3,362		3,362

Total	$	47,332	$	125,880	$	173,212	$	41,933	$	118,225	$	160,158

As of June 30, 2009, the Company had $3.5 billion in unsecured revolving credit facilities which provide liquidity support for general corporate purposes. The Company has never drawn on these facilities. The facilities include a $1.9 billion revolving credit facility maturing in October 2010 and $1.6 billion maturing in October 2011. These figures do not include a $215 million commitment from a subsidiary of Lehman Brothers Holding, Inc. On April 24, 2009, in conjunction with the extension of the 2008 ABCP Facilities, a $1.4 billion


5.	Borrowings (Continued)

revolving credit facility maturing in October 2009 was retired and a $1.9 billion revolving credit facility maturing in October 2011 was reduced to $1.6 billion. In connection with the early termination of the unsecured revolving credit facilities, interest on these facilities, if drawn, increases to LIBOR plus 450 basis points. The principal financial covenants in the unsecured revolving credit facilities require the Company to maintain tangible net worth of at least $1.38 billion at all times. Consolidated tangible net worth as calculated for purposes of this covenant was $2.9 billion as of June 30, 2009. The covenants also require the Company to meet either a minimum interest coverage ratio or a minimum net adjusted revenue test based on the four preceding quarters’ adjusted “Core Earnings” financial performance. The Company was compliant with both the minimum interest coverage ratio and the minimum net adjusted revenue tests as of the quarter ended June 30, 2009. Failure to meet these covenants would result in the facilities being withdrawn. In the past, the Company has not relied upon its unsecured revolving credit facilities as a primary source of liquidity. Although the Company has never borrowed under these facilities, they are available to be drawn upon for general corporate purposes.

Lehman Brothers Bank, FSB, a subsidiary of Lehman Brothers Holdings Inc., is a party to the Company’s unsecured revolving credit facilities under which they provide the Company with a $215 million commitment. Lehman Brothers Holdings Inc. declared bankruptcy on September 15, 2008. The Company is operating under the assumption that the lending commitment of Lehman Brothers Bank, FSB, will not be honored if drawn upon. While the Company continues to explore various options, it does not anticipate replacing its commitment from Lehman Brothers Bank, FSB.

Secured Borrowings

FIN No. 46(R), “Consolidation of Variable Interest Entities,” requires VIEs to be consolidated by their primary beneficiaries. A VIE exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics are the direct or indirect ability to make decisions about an entity’s activities that have a significant impact on the success of the entity, the obligation to absorb the expected losses of an entity, and the rights to receive the expected residual returns of the entity.

The Company currently consolidates a number of financing entities that are VIEs as a result of being the entities’ primary beneficiary. As a result, these financing VIEs are accounted for as secured borrowings. The process of identifying the primary beneficiary involves identifying all other parties that hold variable interests in the entity and determining which of the parties, including the Company, has the responsibility to absorb the majority of the entity’s expected losses or the rights to its expected residual returns. The Company is the


5.	Borrowings (Continued)

primary beneficiary of and currently consolidates the following financing VIEs as of June 30, 2009 and December 31, 2008:


	June 30, 2009
	Debt Outstanding
	Short		Long				Carrying Amount of Assets Securing Debt Outstanding
(Dollars in millions)	Term		Term		Total		Loans		Cash		Other Assets		Total

Secured Borrowings:
ED Participation Program facility	$	17,236	$	—	$	17,236	$	17,472	$	127	$	243	$	17,842
ED Conduit Program facility		11,095		—		11,095		11,390		204		353		11,947
2008 Asset-Backed Financing Facilities⁽¹⁾		12,476		—		12,476		13,707		346		126		14,179
On-balance sheet securitizations		—		87,386		87,386		90,161		3,523		2,816		96,500
Indentured trusts		8		1,761		1,769		2,253		189		31		2,473

		40,815		89,147		129,962		134,983		4,389		3,569		142,941
SFAS No. 133 fair value adjustment		—		1,307		1,307		—		—		—		—

Total	$	40,815	$	90,454	$	131,269	$	134,983	$	4,389	$	3,569	$	142,941


⁽¹⁾		Includes $95 million of assets within the facility that can be released to the Company.


	December 31, 2008
	Debt Outstanding
	Short		Long				Carrying Amount of Assets Securing Debt Outstanding
(Dollars in millions)	Term		Term		Total		Loans		Cash		Other Assets		Total

Secured Borrowings:
ED Participation Program facility	$	7,365	$	—	$	7,365	$	7,733	$	88	$	85	$	7,906
2008 Asset-Backed Financing Facilities		24,768		—		24,768		31,953		462		816		33,231
On-balance sheet securitizations		—		80,601		80,601		81,547		2,632		999		85,178
Indentured trusts		31		1,972		2,003		2,199		236		40		2,475

		32,164		82,573		114,737		123,432		3,418		1,940		128,790
SFAS No. 133 fair value adjustment		—		872		872		—		—		—		—

Total	$	32,164	$	83,445	$	115,609	$	123,432	$	3,418	$	1,940	$	128,790

Asset-Backed Financing Facilities

During the first quarter of 2008, the Company entered into three new asset-backed financing facilities (the “2008 Asset-Backed Financing Facilities”): (i) a $26.0 billion FFELP student loan ABCP conduit facility (the “2008 FFELP ABCP Facility”); (ii) a $5.9 billion Private Education Loan ABCP conduit facility (the “2008 Private Education Loan ABCP Facility”) (collectively, the “2008 ABCP Facilities”); and (iii) a


5.	Borrowings (Continued)

$2.0 billion secured FFELP loan facility (the “2008 Asset-Backed Loan Facility”). The initial term of the 2008 Asset-Backed Financing Facilities was 364 days. The underlying cost of borrowing under the 2008 ABCP Facilities was approximately LIBOR plus 0.68 percent for the FFELP loan facilities and LIBOR plus 1.55 percent for the Private Education Loan facility, excluding up-front and unused commitment fees. All-in pricing on the 2008 ABCP Facilities varies based on usage. For the full year 2008, the combined, all-in cost of borrowings related to the 2008 Asset-Backed Financing Facilities, including amortized up-front fees and unused commitment fees, was three-month LIBOR plus 2.47 percent. The primary use of the 2008 Asset-Backed Financing Facilities was to refinance comparable ABCP facilities incurred in connection with the Proposed Merger, with the expectation that outstanding balances under the 2008 Asset-Backed Financing Facilities would be reduced through securitization of the underlying student loan collateral in the term asset-backed securities (“ABS”) market.

On February 2, 2009, the Company extended the maturity date of the 2008 ABCP Facilities from February 28, 2009 to April 28, 2009 for a $61 million upfront fee. The other terms of the facilities remained materially unchanged.

On February 27, 2009, the Company extended the maturity date of the 2008 Asset-Backed Loan Facility from February 28, 2009 to April 28, 2009 for a $4 million upfront fee. The other terms of this facility remained materially unchanged.

On April 24, 2009, the Company extended the maturity of $21.8 billion of the 2008 FFELP ABCP Facility for one year to April, 23, 2010. The Company also extended its 2008 Asset-Backed Loan Facility in the amount of $1.5 billion. The 2008 Asset-Backed Loan Facility matured on June 26, 2009 and was paid in full. A total of $86 million in fees were paid related to these extensions. The 2008 Private Education Loan ABCP Facility was paid off and terminated on April 24, 2009. The stated borrowing rate of the 2008 FFELP ABCP Facility is the applicable funding rate plus 130 basis points excluding upfront fees. The applicable funding rate generally will be either a LIBOR or commercial paper rate. The terms of the 2008 FFELP ABCP Facility call for an increase in the applicable funding spread to 300 basis points if the outstanding borrowing amount is not reduced to $15.2 billion and $10.9 billion as of June 30, 2009 and September 30, 2009, respectively. If the Company does not negotiate an extension or pay off all outstanding amounts of the 2008 FFELP ABCP Facility at maturity, the facility will extend by 90 days with the interest rate generally increasing to LIBOR plus 250 basis points to 550 basis points over the 90 day period. The other terms of the facilities remained materially unchanged.

The maximum amount the Company may borrow under the 2008 FFELP ABCP Facility is limited based on certain factors, including market conditions and the fair value of student loans in the facility. As of June 30, 2009, the maximum borrowing amount was approximately $14.8 billion under the 2008 FFELP ABCP Facility. Funding under the 2008 FFELP ABCP Facility is subject to usual and customary conditions. The 2008 FFELP ABCP Facility is subject to termination under certain circumstances, including the Company’s failure to comply with the principal financial covenants in its unsecured revolving credit facilities.

Borrowings under the 2008 FFELP ABCP Facility are nonrecourse to the Company. As of June 30, 2009, the Company had $12.5 billion outstanding in connection with the 2008 FFELP ABCP Facility. The book basis of the assets securing this facility as of June 30, 2009 was $14.2 billion.


5.	Borrowings (Continued)

ED Conduit Program

Pursuant to the Ensuring Continued Access to Student Loans Act of 2008 (“ECASLA”), on January 15, 2009, ED published summary terms under which it will purchase eligible FFELP Stafford and PLUS loans from a conduit vehicle established to provide funding for eligible student lenders (the “ED Conduit Program”). Loans eligible for the ED Conduit Program must be first disbursed on or after October 1, 2003, but not later than July 1, 2009, and fully disbursed before September 30, 2009, and meet certain other requirements including with respect to borrower benefits. The ED Conduit was launched on May 11, 2009. Funding for the ED Conduit Program is provided by the capital markets at a cost based on market rates, with the Company being advanced 97 percent of the student loan face amount. The ED Conduit Program has a term of five years and will expire on January 19, 2014. The Student Loan Short-Term Notes (“SLST Notes”), issued by the ED Conduit, are supported by a combination of i) Funding Notes backed by FFELP student loans, ii) the Liquidity Agreement with the Federal Financing Bank (“FFB”) and iii) the Put Agreement provided by ED. If the conduit does not have sufficient funds to pay all SLST Notes then those SLST Notes will be repaid with funds from the FFB. The FFB will hold the notes for a short period of time and if at the end of that time the SLST Notes still cannot be paid off, the underlying FFELP loans that serve as collateral to the ED Conduit will be sold to ED through the Put Agreement at a price of 97 percent of the face amount of the loans. Approximately $15.5 billion of the Company’s Stafford and PLUS loans (excluding loans currently in the Participation Program) are eligible for funding under the ED Conduit Program. As of June 30, 2009, $11.4 billion of these assets have been funded through this program with a weighted average issuance cost of approximately .74 percent.

Term Asset-Backed Securities Loan Facility (“TALF”)

On February 6, 2009, the Federal Reserve Bank of New York published proposed terms for a program designed to facilitate renewed issuance of consumer and small business ABS at lower interest rate spreads. TALF was initiated on March 17, 2009 and currently provides investors with funding of up to five years for eligible ABS rated by two or more rating agencies in the highest investment-grade rating category. Eligible ABS include ‘AAA’ rated student loan ABS backed by FFELP and private student loans first disbursed since May 1, 2007. As of June 30, 2009, the Company had approximately $12.7 billion book basis ($13.4 billion face amount) of student loans eligible to serve as collateral for ABS funded under TALF; this amount does not include loans eligible for ECASLA financing programs. The Federal Reserve Bank launched the TALF program on March 3, 2009.

On May 5, 2009, the Company priced a $2.6 billion Private Education Loan securitization which closed on May 12, 2009. The issue bears a coupon of 1-month LIBOR plus 6.0 percent and is callable at the Company’s option at 93 percent of the outstanding balance of the ABS between November 15, 2011 and April 15, 2012. If the issue is called on November 15, 2011, which the Company believes is probable, the effective cost of the bond financing will be approximately 1-month LIBOR plus 3.7 percent. This transaction was TALF-eligible.

This securitization is accounted for as a secured borrowing. The Company has concluded that it is probable it will call these bonds at the call date at the 7 percent discount. Probability is based on the Company’s assessment on whether these bonds can be refinanced at the call date at or lower than a breakeven cost of funds based on the call discount. As a result, the Company is accreting this call discount as a reduction to interest expense through the call date under APB No. 21, “Interest on Receivables and Payables,” and SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans


5.	Borrowings (Continued)

and Initial Direct Costs of Leases.” If it becomes less than probable the Company will call these bonds at a future date it will result in the Company reversing this prior accretion as a cumulative catch up under SFAS No. 91 and the effective interest rate method. The Company has accreted approximately $9 million as a reduction of interest expense through June 30, 2009.

Consolidation of Off-Balance Sheet Securitizations

In the second quarter of 2009, three of the Company’s off-balance sheet securitization trusts were re-evaluated under SFAS No. 140 and it was determined that they no longer met the criteria to be considered QSPEs. These trusts were then evaluated as VIEs using the guidance in FIN No. 46(R) and it was determined that they should be consolidated and accounted for as secured borrowings as the Company is the primary beneficiary. These trusts had reached their 10 percent clean-up call levels but the call was not exercised by the Company. Under SFAS No. 140, because the Company can now exercise that option at their discretion going forward, the Company effectively controls the assets of the trusts. This resulted in the Company consolidating at fair value $454 million in assets and $432 million in liabilities related to these trusts. This resulted in an $11 million gain being recognized during the second quarter of 2009.


6.	Student Loan Securitization

The Company securitizes its FFELP Stafford loans, FFELP Consolidation Loans and Private Education Loan assets and, for transactions qualifying as sales, retains a Residual Interest and servicing rights (as the Company retains the servicing responsibilities), all of which are referred to as the Company’s Retained Interest in off-balance sheet securitized loans. The Residual Interest is the right to receive cash flows from the student loans and reserve accounts in excess of the amounts needed to pay servicing, derivative costs (if any), other fees, and the principal and interest on the bonds backed by the student loans.


6.	Student Loan Securitization (Continued)

Securitization Activity

The following table summarizes the Company’s securitization activity for the three and six months ended June 30, 2009 and 2008. Those securitizations listed as sales are off-balance sheet transactions and those listed as financings remain on-balance sheet.


	Three Months Ended June 30,
	2009									2008
			Loan		Pre-							Loan		Pre-
	No. of		Amount		Tax					No. of		Amount		Tax
(Dollars in millions)	Transactions		Securitized		Gain		Gain%			Transactions		Securitized		Gain		Gain%

Securitizations — sales:
FFELP Stafford/PLUS loans		—	$	—	$	—		—	%		—	$	—	$	—		—	%
FFELP Consolidation Loans		—		—		—		—			—		—		—		—
Private Education Loans		—		—		—		—			—		—		—		—

Total securitizations — sales		—		—	$	—		—	%		—		—	$	—		—	%

Securitizations — financings:
FFELP Stafford/PLUS Loans⁽¹⁾		—		—							3		7,125
FFELP Consolidation Loans⁽¹⁾		2		4,524							—		—
Private Education Loans⁽¹⁾		1		3,527							—		—

Total securitizations — financings		3		8,051							3		7,125

Total securitizations		3	$	8,051							3	$	7,125


	Six Months Ended June 30,
	2009									2008
			Loan		Pre-							Loan		Pre-
	No. of		Amount		Tax					No. of		Amount		Tax
(Dollars in millions)	Transactions		Securitized		Gain		Gain%			Transactions		Securitized		Gain		Gain%

Securitizations — sales:
FFELP Stafford/PLUS loans		—	$	—	$	—		—	%		—	$	—	$	—		—	%
FFELP Consolidation Loans		—		—		—		—			—		—		—		—
Private Education Loans		—		—		—		—			—		—		—		—

Total securitizations — sales		—		—	$	—		—	%		—		—	$	—		—	%

Securitizations — financings:
FFELP Stafford/PLUS Loans⁽¹⁾		—		—							6		11,825
FFELP Consolidation Loans⁽¹⁾		2		4,524							—		—
Private Education Loans⁽¹⁾		2		6,419							—		—

Total securitizations — financings		4		10,943							6		11,825

Total securitizations		4	$	10,943							6	$	11,825


⁽¹⁾		In certain securitizations there are terms within the deal structure that result in such securitizations not qualifying for sale treatment and accordingly, they are accounted for on-balance sheet as VIEs. Terms that prevent sale treatment include: (1) allowing the Company to hold certain rights that can affect the remarketing of certain bonds, (2) allowing the trust to enter into interest rate cap agreements after the initial settlement of the securitization, which do not relate to the reissuance of third party beneficial interests or (3) allowing the Company to hold an unconditional call option related to a certain percentage of the securitized assets.


6.	Student Loan Securitization (Continued)

The following table summarizes cash flows received from or paid to the off-balance sheet securitization trusts during the three and six months ended June 30, 2009 and 2008.


	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in millions)	2009			2008			2009			2008

Net proceeds from new securitizations completed during the period	$	—		$	—		$	—		$	—
Cash distributions from trusts related to Residual Interests		154			285			268			515
Servicing fees received⁽¹⁾		57			62			115			125
Purchases of previously transferred financial assets for representation and warranty violations		(2	)		(10	)		(5	)		(13	)
Reimbursements of borrower benefits⁽²⁾		(8	)		(7	)		(16	)		(14	)
Purchases of delinquent Private Education Loans from securitization trusts using delinquent loan call option		—			(52	)		—			(100	)
Purchases of loans using clean-up call option		—			112			—			112


⁽¹⁾		The Company receives annual servicing fees of 90 basis points, 50 basis points and 70 basis points of the outstanding securitized loan balance related to its FFELP Stafford, FFELP Consolidation Loan and Private Education Loan securitizations, respectively.

⁽²⁾		Under the terms of the securitizations, the transaction documents require that the Company reimburse the trusts for any borrower benefits afforded the borrowers of the underlying securitized loans.


6.	Student Loan Securitization (Continued)

Retained Interest in Securitized Receivables

The following tables summarize the fair value of the Company’s Residual Interests, included in the Company’s Retained Interest (and the assumptions used to value such Residual Interests), along with the underlying off-balance sheet student loans that relate to those securitizations in transactions that were treated as sales as of June 30, 2009 and December 31, 2008.


	As of June 30, 2009
	FFELP			Consolidation			Private
	Stafford and			Loan			Education
(Dollars in millions)	PLUS			Trusts⁽¹⁾			Loan Trusts			Total

Fair value of Residual Interests⁽²⁾	$	272		$	721		$	827		$	1,820
Underlying securitized loan balance		6,046			14,736			13,372			34,154
Weighted average life		3.1 yrs.			8.0 yrs.			6.4 yrs.
Prepayment speed (annual rate)⁽³⁾
Interim status		0	%		N/A			0	%
Repayment status		2-19	%		1-6	%		2-15	%
Life of loan — repayment status		12	%		4	%		6	%
Expected remaining credit losses (% of outstanding student loan principal)⁽⁴⁾		.10	%		.22	%		5.76	%
Residual cash flows discount rate		11.5	%		13.0	%		32.4	%


	As of December 31, 2008
	FFELP			Consolidation			Private
	Stafford and			Loan			Education
(Dollars in millions)	PLUS			Trusts⁽¹⁾			Loan Trusts			Total

Fair value of Residual Interests⁽²⁾	$	250		$	918		$	1,032		$	2,200
Underlying securitized loan balance		7,057			15,077			13,690			35,824
Weighted average life		3.0 yrs.			8.1 yrs.			6.4 yrs.
Prepayment speed (annual rate)⁽³⁾
Interim status		0	%		N/A			0	%
Repayment status		2-19	%		1-6	%		2-15	%
Life of loan — repayment status		12	%		4	%		6	%
Expected remaining credit losses (% of outstanding student loan principal)⁽⁴⁾		.11	%		.23	%		5.22	%
Residual cash flows discount rate		13.1	%		11.9	%		26.3	%


⁽¹⁾		Includes $529 million and $762 million related to the fair value of the Embedded Floor Income as of June 30, 2009 and December 31, 2008, respectively. Changes in the fair value of the Embedded Floor Income are primarily due to changes in the interest rates and the paydown of the underlying loans.

⁽²⁾		The Company had no unrealized gains (pre-tax) in accumulated other comprehensive income that related to the Retained Interests for any of the periods presented.

⁽³⁾		The Company uses CPR curves for Residual Interest valuations that are based on seasoning (the number of months since entering repayment). Under this methodology, a different CPR is applied to each year of a loan’s seasoning. Repayment status CPR used is based on the number of months since first entering repayment (seasoning). Life of loan CPR is related to repayment status only and does not include the impact of the loan while in interim status. The CPR assumption used for all periods includes the impact of projected defaults.

⁽⁴⁾		Remaining expected credit losses as of the respective balance sheet date.


6.	Student Loan Securitization (Continued)

The Company recorded net unrealized mark-to-market losses in “servicing and securitization revenue (loss)” of $90 million and $192 million in the three months ended June 30, 2009 and 2008, respectively, and $351 million and $280 million in the six months ended June 30, 2009 and 2008, respectively, related to the Residual Interest.

As of June 30, 2009, the Company did not change any significant assumptions compared to those used as of March 31, 2009, to determine the fair value of the Residual Interests. The $90 million unrealized mark-to-market loss in the second quarter of 2009 was primarily a result of an increase in forward interest rates which resulted in a higher discount rate used to value the Residual Interests as well as a reduction in the fair value of the Embedded Fixed Rate Floor Income. The $192 million unrealized mark-to-market loss in the second quarter of 2008 was primarily related to increases in forward interest rates during the quarter reducing the value of Embedded Fixed Rate Floor Income ($137 million decrease) and increasing the discount rate used to value the Residual Interests ($57 million decrease). Additionally, the Company increased the spread to LIBOR component of the Private Education discount rate formula to better reflect current market conditions which resulted in a $113 million Residual Interest mark-to-market loss. Actual quarterly experience, including improved forward curve spreads used in the valuation of the Residual Interests, partially mitigated these mark-to-market losses.

The following table reflects the sensitivity of the current fair value of the Residual Interests to adverse changes in the key economic assumptions used in the valuation of the Residual Interest at June 30, 2009, discussed in detail in the preceding table. The effect of a variation in a particular assumption on the fair value of the Residual Interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower


6.	Student Loan Securitization (Continued)

prepayments and increased credit losses), which might magnify or counteract the sensitivities. These sensitivities are hypothetical, as the actual results could be materially different than these estimates.


	As of June 30, 2009
	FFELP			FFELP
	Stafford/PLUS			Consolidation			Private Education
(Dollars in millions)	Loan Trusts⁽⁵⁾			Loan Trusts⁽⁵⁾			Loan Trusts⁽⁵⁾

Fair value of Residual Interest	$	272		$	721	⁽¹⁾	$	827
Weighted-average life		3.1 yrs.			8.0 yrs.			6.4 yrs.
Prepayment speed assumptions⁽²⁾
Interim status		0	%		N/A			0	%
Repayment status		2-19	%		1-6	%		2-15	%
Life of loan — repayment status		12	%		4	%		6	%
Impact on fair value of 5% absolute increase	$	(24	)	$	(82	)	$	(108	)
Impact on fair value of 10% absolute increase	$	(43	)	$	(143	)	$	(195	)
Expected credit losses (as a% of student loan principal)		.10	%		.22	%		5.76	%⁽³⁾
Impact on fair value of 5% absolute increase in default rate	$	(6	)	$	(8	)	$	(170	)
Impact on fair value of 10% absolute increase in default rate	$	(10	)	$	(16	)	$	(339	)
Residual cash flows discount rate		11.5	%		13.0	%		32.4	%
Impact on fair value of 5% absolute increase	$	(25	)	$	(115	)	$	(94	)
Impact on fair value of 10% absolute increase	$	(46	)	$	(198	)	$	(169	)


	3 month LIBOR forward curve at June 30, 2009 plus contracted spreads
Difference between Asset and Funding underlying indices⁽⁴⁾
Impact on fair value of 0.25% absolute increase in funding index compared to asset index	$	(42	)	$	(161	)	$	(2	)
Impact on fair value of 0.50% absolute increase in funding index compared to asset index	$	(85	)	$	(322	)	$	(4	)


⁽¹⁾		Certain consolidation trusts have $3.3 billion of non-U.S. dollar (Euro denominated) bonds outstanding. To convert these non-U.S. dollar denominated bonds into U.S. dollar liabilities, the trusts have entered into foreign-currency swaps with certain counterparties. Additionally, certain Private Education Loan trusts contain interest rate swaps that hedge the basis and reset risk between the Prime indexed assets and LIBOR index notes. As of June 30, 2009, these swaps are in an $833 million gain position (in the aggregate) and the trusts had $600 million of exposure to counterparties (gain position less collateral posted) primarily as a result of the decline in the exchange rates between the U.S. dollar and the Euro. This unrealized market value gain is not part of the fair value of the Residual Interest in the table above. Not all derivatives within the trusts require the swap counterparties to post collateral to the respective trust for changes in market value, unless the trust’s swap counterparty’s credit rating has been withdrawn or has been downgraded below a certain level. If the swap counterparty does not post the required collateral or is downgraded further, the counterparty must find a suitable replacement counterparty or provide the trust with a letter of credit or a guaranty from an entity that has the required credit ratings. Ultimately, the Company’s exposure related to a swap counterparty failing to make its payments is limited to the fair value of the related trust’s Residual Interest which was $1.3 billion as of June 30, 2009.

⁽²⁾		See previous table for details on CPR. Impact on fair value due to increase in prepayment speeds only increases the repayment status speeds. Interim status CPR remains 0%.

⁽³⁾		Expected credit losses are used to project future cash flows related to the Private Education Loan securitization’s Residual Interest. However, until the fourth quarter of 2008 when it ceased this activity for all trusts settling prior to September 30, 2005, the Company purchased loans at par when the loans reached 180 days delinquent prior to default under a contingent call option, resulting in no credit losses at the trust nor related to the Company’s Residual Interest. When the Company exercised its contingent call option and purchased the loans from the trust at par, the Company recorded a loss related to these loans that are now on the Company’s balance sheet. The Company recorded losses of $43 million and $80 million, respectively, for the three and six months ended June 30, 2008, and did not record any losses for the three and six months ended June 30, 2009, related to this activity. For all trusts settling after October 1, 2005, the Company does not hold this contingent call option.

⁽⁴⁾		Student loan assets are primarily indexed to a Treasury bill, commercial paper or a prime index. Funding within the trust is primarily indexed to a LIBOR index. Sensitivity analysis increases funding indices as indicated while keeping assets underlying indices fixed.

⁽⁵⁾		In addition to the assumptions in the table above, the Company also projects the reduction in distributions that will result from the various benefit programs that exist related to consecutive on-time payments by borrowers. Related to the entire $1.8 billion Residual Interest, there are $205 million (present value) of benefits projected which reduce the fair value.


6.	Student Loan Securitization (Continued)

The table below shows the Company’s off-balance sheet Private Education Loan delinquency trends as of June 30, 2009 and 2008.


	Off-Balance Sheet Private Education Loan Delinquencies
	June 30, 2009					June 30, 2008
(Dollars in millions)	Balance		%			Balance		%

Loans in-school/grace/deferment⁽¹⁾	$	2,974				$	4,159
Loans in forbearance⁽²⁾		583					1,339
Loans in repayment and percentage of each status:
Loans current		8,874		90.4	%		7,871		95.1	%
Loans delinquent 31-60 days⁽³⁾		261		2.7			178		2.2
Loans delinquent 61-90 days⁽³⁾		174		1.8			102		1.2
Loans delinquent greater than 90 days⁽³⁾		505		5.1			124		1.5

Total off-balance sheet Private Education Loans in repayment		9,814		100	%		8,275		100	%

Total off-balance sheet Private Education Loans, gross	$	13,371				$	13,773


⁽¹⁾		Loans for borrowers who may be attending school or engaging in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

⁽²⁾		Loans for borrowers who have used their allowable deferment time or do not qualify for deferment, and need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors consistent with the established loan program servicing procedures and programs.

⁽³⁾		The period of delinquency is based on the number of days scheduled payments are contractually past due.

The following table summarizes charge-off activity for Private Education Loans in the off-balance sheet trusts for the three and six months ended June 30, 2009 and 2008.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in millions)	2009			2008			2009			2008

Charge-offs	$	116		$	40		$	179		$	73
Charge-offs as a percentage of average loans in repayment (annualized)		4.8	%		2.1	%		3.8	%		1.9	%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)		4.6	%		1.8	%		3.6	%		1.6	%
Ending off-balance sheet total Private Education Loans⁽¹⁾	$	13,520		$	13,831		$	13,520		$	13,831
Average off-balance sheet Private Education Loans in repayment	$	9,630		$	7,811		$	9,522		$	7,638
Ending off-balance sheet Private Education Loans in repayment	$	9,814		$	8,275		$	9,814		$	8,275


⁽¹⁾		Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans (see Note 2, “Allowance for Loan Losses”).


6.	Student Loan Securitization (Continued)


7.	Derivative Financial Instruments

Derivative instruments that are used as part of the Company’s interest rate and foreign currency risk management strategy include interest rate swaps, basis swaps, cross-currency interest rate swaps, interest rate futures contracts, and interest rate floor and cap contracts with indices that relate to the pricing of specific balance sheet assets and liabilities including the Residual Interests from off-balance sheet securitizations. (For a full discussion of the Company’s risk management strategy and use of derivatives, please see the Company’s 2008 Form 10-K, Note 9, “Derivative Financial Instruments,” to the consolidated financial statements.) The Company accounts for its derivatives under SFAS No. 133 which requires that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The Company’s derivative instruments are classified and accounted for by the Company as fair value hedges, cash flow hedges or trading activities.

Fair Value Hedges

Fair value hedges are generally used by the Company to hedge the exposure to changes in fair value of a recognized fixed rate asset or liability. The Company enters into interest rate swaps to convert fixed rate assets into variable rate assets and fixed rate debt into variable rate debt. The Company also enters into cross-currency interest rate swaps to convert foreign currency denominated fixed and floating debt to U.S. dollar denominated variable debt. Changes in value for both the hedge and the hedged item are recorded to earnings. These amounts offset each other with the net amount representing the ineffectiveness of the relationship.

Cash Flow Hedges

Cash flow hedges are used by the Company to hedge the exposure to variability in cash flows for a forecasted debt issuance and for exposure to variability in cash flows of floating rate debt. This strategy is used primarily to minimize the exposure to volatility from future changes in interest rates. Gains and losses on the effective portion of a qualifying hedge are accumulated in other comprehensive income and ineffectiveness is recorded immediately to earnings.

Trading Activities

When instruments do not qualify as hedges under SFAS No. 133, they are accounted for as trading where all changes in fair value of the derivatives are recorded through earnings. In general, derivative instruments included in trading activities include Floor Income Contracts, basis swaps and various other derivatives that do not qualify for hedge accounting under SFAS No. 133.


7.	Derivative Financial Instruments (Continued)

Summary of Derivative Financial Statement Impact

The following tables summarize the fair values and notional amounts of all derivative instruments at June 30, 2009 and December 31, 2008, and their impact on other comprehensive income and earnings for the three and six months ended June 30, 2009 and 2008.

Impact of Derivatives on Consolidated Balance Sheet


		Cash Flow						Fair Value						Trading						Total
	Hedged Risk	Jun. 30,			Dec. 31,			Jun. 30,			Dec. 31,			Jun. 30,			Dec. 31,			Jun. 30,			Dec. 31,
(Dollars in millions)	Exposure	2009			2008			2009			2008			2009			2008			2009			2008

Fair Values⁽¹⁾
Derivative Assets
Interest rate swaps	Interest rate	$	—		$	—		$	810		$	1,529		$	82		$	323		$	892		$	1,852
Cross currency interest rate swaps	Foreign currency and interest rate		—			—			2,498			2,743			36			13			2,534			2,756

Total derivative assets⁽³⁾			—			—			3,308			4,272			118			336			3,426			4,608
Derivative Liabilities
Interest rate swaps	Interest rate		(106	)		(146	)		—			—			(635	)		(332	)		(741	)		(478	)
Floor/Cap contracts	Interest rate		—			—			—			—			(1,143	)		(1,466	)		(1,143	)		(1,466	)
Futures	Interest rate		—			—			—			—			(2	)		(3	)		(2	)		(3	)
Cross currency interest rate swaps	Foreign currency and interest rate		—			—			(210	)		(640	)		(1	)		—			(211	)		(640	)
Other⁽²⁾	Interest rate		—			—			—			—			(22	)		—			(22	)		—

Total derivative liabilities⁽³⁾			(106	)		(146	)		(210	)		(640	)		(1,803	)		(1,801	)		(2,119	)		(2,587	)

Net total derivatives		$	(106	)	$	(146	)	$	3,098		$	3,632		$	(1,685	)	$	(1,465	)	$	1,307		$	2,021


⁽¹⁾		Fair values reported are exclusive of collateral held and pledged and accrued interest. Assets and liabilities are presented without consideration of master netting agreements. Derivatives are carried on the balance sheet based on net position by counterparty under master netting agreements, and classified in other assets or other liabilities depending on whether in a net positive or negative position.

⁽²⁾		“Other” includes the fair value of the embedded derivatives in the total return swap related to the $1.5 billion asset-backed securities based facility which closed in January 2009. The embedded derivatives are required to be accounted for as derivatives under SFAS No. 133.


⁽³⁾	The following table reconciles gross positions without the impact of master netting agreements to the balance sheet classification:


	Other Assets						Other Liabilities
	June 30,			December 31,			June 30,			December 31,
	2009			2008			2009			2008

Gross position	$	3,426		$	4,608		$	(2,119	)	$	(2,587	)
Impact of master netting agreements		(1,052	)		(1,594	)		1,052			1,594

Derivative values with impact of master netting agreements	$	2,374		$	3,014		$	(1,067	)	$	(993	)


7.	Derivative Financial Instruments (Continued)


	Cash Flow				Fair Value				Trading				Total
	Jun. 30,		Dec. 31,		Jun. 30,		Dec. 31,		Jun. 30,		Dec. 31,		Jun. 30,		Dec. 31,
(Dollars in billions)	2009		2008		2009		2008		2009		2008		2009		2008

Notional Values
Interest rate swaps	$	3.9	$	4.8	$	10.9	$	13.4	$	154.8	$	159.3	$	169.6	$	177.5
Floor/Cap contracts		—		—		—		—		38.7		32.4		38.7		32.4
Futures		—		—		—		—		.2		.2		.2		.2
Cross currency interest rate swaps		—		—		20.9		23.1		.3		.1		21.2		23.2
Other⁽¹⁾		—		—		—		—		5.1		.7		5.1		.7

Total derivatives	$	3.9	$	4.8	$	31.8	$	36.5	$	199.1	$	192.7	$	234.8	$	234.0


⁽¹⁾	“Other” includes embedded derivatives bifurcated from newly issued on-balance sheet securitization debt, as a result of adopting SFAS No. 155 as well as embedded derivatives in the total return swap discussed in footnote 2 to the table above.

Impact of Derivatives on Consolidated Statements of Income


	Three Months Ended June 30,
							Realized Gain
	Unrealized Gain						(Loss)						Unrealized Gain
	(Loss) on						on						(Loss)					Total Gain
	Derivatives⁽¹⁾⁽²⁾						Derivatives⁽³⁾						on Hedged Item⁽¹⁾					(Loss)
(Dollars in millions)	2009			2008			2009			2008			2009			2008		2009			2008

Fair Value Hedges
Interest rate swaps	$	(487	)	$	(364	)	$	97		$	42		$	521		$	358	$	131		$	36
Cross currency interest rate swaps		1,163			(396	)		120			(3	)		(1,524	)		439		(241	)		40

Total fair value derivatives		676			(760	)		217			39			(1,003	)		797		(110	)		76
Cash Flow Hedges
Interest rate swaps		(5	)		—			(21	)		(11	)		—			—		(26	)		(11	)

Total cash flow derivatives		(5	)		—			(21	)		(11	)		—			—		(26	)		(11	)
Trading
Interest rate swaps		(301	)		(170	)		119			105			—			—		(182	)		(65	)
Floor/Cap contracts		236			569			(171	)		(174	)		—			&#