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 September 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 September 30, 2009

Voting common stock, $.20 par value		474,590,764 shares

SLM CORPORATION

FORM 10-Q

INDEX

September 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	129
	Item 4.	Controls and Procedures	133

PART II. Other Information
	Item 1.	Legal Proceedings	134
	Item 1A.	Risk Factors	134
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	134
	Item 3.	Defaults Upon Senior Securities	135
	Item 4.	Submission of Matters to a Vote of Security Holders	135
	Item 5.	Other Information	135
	Item 6.	Exhibits	135
Signatures			136
Glossary⁽¹⁾			137
EX-10.5
EX-10.6
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


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

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

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


	September 30,			December 31,
	2009			2008

Assets
FFELP Stafford and Other Student Loans (net of allowance for losses of $101,343 and $90,906, respectively)	$	43,257,743		$	44,025,361
FFELP Stafford Loans Held-for-Sale		23,846,566			8,450,976
FFELP Consolidation Loans (net of allowance for losses of $54,384 and $46,637, respectively)		69,246,231			71,743,435
Private Education Loans (net of allowance for losses of $1,401,496 and $1,308,043, respectively)		22,494,955			20,582,298
Other loans (net of allowance for losses of $74,057 and $58,395, respectively)		454,557			729,380
Investments:
Available-for-sale		984,669			861,008
Other		850,141			180,397

Total investments		1,834,810			1,041,405
Cash and cash equivalents		5,186,998			4,070,002
Restricted cash and investments		5,760,583			3,535,286
Retained Interest in off-balance sheet securitized loans		1,838,203			2,200,298
Goodwill and acquired intangible assets, net		1,224,272			1,249,219
Other assets		11,299,006			11,140,777

Total assets	$	186,443,924		$	168,768,437

Liabilities
Short-term borrowings	$	53,406,554		$	41,933,043
Long-term borrowings		124,647,818			118,224,794
Other liabilities		3,400,527			3,604,260

Total liabilities		181,454,899			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; 1,012 and 1,150 shares, respectively, issued at liquidation preference of $1,000 per share		1,012,370			1,149,770
Common stock, par value $.20 per share, 1,125,000 shares authorized: 541,849 and 534,411 shares issued, respectively		108,362			106,883
Additional paid-in capital		4,862,071			4,684,112
Accumulated other comprehensive loss (net of tax benefit of $25,176 and $43,202, respectively)		(44,143	)		(76,476	)
Retained earnings		346,347			426,175

Total SLM Corporation stockholders’ equity before treasury stock		6,850,007			6,855,464
Common stock held in treasury at cost: 67,159 and 66,958 shares, respectively		1,860,989			1,856,394

Total SLM Corporation stockholders’ equity		4,989,018			4,999,070
Noncontrolling interest		7			7,270

Total equity		4,989,025			5,006,340

Total liabilities and equity	$	186,443,924		$	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						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Interest income:
FFELP Stafford and Other Student Loans	$	303,192		$	516,116		$	969,947		$	1,478,190
FFELP Consolidation Loans		481,592			830,566			1,431,644			2,436,886
Private Education Loans		396,339			445,572			1,176,399			1,298,417
Other loans		11,042			19,874			45,930			64,573
Cash and investments		6,881			57,154			19,896			251,491

Total interest income		1,199,046			1,869,282			3,643,816			5,529,557
Total interest expense		673,870			1,394,533			2,519,876			4,375,896

Net interest income		525,176			474,749			1,123,940			1,153,661
Less: provisions for loan losses		321,127			186,909			849,518			467,235

Net interest income after provisions for loan losses		204,049			287,840			274,422			686,426

Other income (loss):
Servicing and securitization revenue		155,065			64,990			147,248			174,262
Gains (losses) on sales of loans and securities, net		12,452			(43,899	)		12,752			(122,148	)
Gains (losses) on derivative and hedging activities, net		(111,556	)		(241,757	)		(569,326	)		(152,510	)
Contingency fee revenue		82,200			89,418			230,383			258,514
Collections revenue (loss)		15,580			(170,692	)		16,318			(87,088	)
Guarantor servicing fees		48,087			36,848			106,867			95,164
Other		150,006			93,096			741,229			295,357

Total other income (loss)		351,834			(171,996	)		685,471			461,551

Expenses:
Salaries and benefits		142,435			157,408			418,775			504,925
Other operating expenses		176,185			209,744			516,513			571,563
Restructuring expenses		3,592			10,508			12,795			77,926

Total expenses		322,212			377,660			948,083			1,154,414

Net income (loss) before income tax benefit		233,671			(261,816	)		11,810			(6,437	)
Income tax expense (benefit)		74,363			(103,819	)		(3,884	)		(13,233	)

Net income (loss)		159,308			(157,997	)		15,694			6,796
Less: net income attributable to noncontrolling interest		198			544			690			3,405

Net income (loss) attributable to SLM Corporation		159,110			(158,541	)		15,004			3,391
Preferred stock dividends		42,627			27,474			94,822			83,890

Net income (loss) attributable to SLM Corporation common stock	$	116,483		$	(186,015	)	$	(79,818	)	$	(80,499	)

Basic earnings (loss) per common share attributable to SLM Corporation common shareholders	$	.25		$	(.40	)	$	(.17	)	$	(.17	)

Average common shares outstanding		470,280			466,646			467,960			466,625

Diluted earnings (loss) per common share attributable to SLM Corporation common shareholders	$	.25		$	(.40	)	$	(.17	)	$	(.17	)

Average common and common equivalent shares outstanding		471,058			466,646			467,960			466,625

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 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
Comprehensive income:
Net income (loss)																									(158,541	)					(158,541	)		544			(157,997	)
Noncontrolling interest — other																															—			(1,483	)		(1,483	)
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments, net of tax																						(4,686	)								(4,686	)					(4,686	)
Change in unrealized gains (losses) on derivatives, net of tax																						(10,338	)								(10,338	)					(10,338	)
Defined benefit pension plans adjustment																						(283	)								(283	)					(283	)

Comprehensive income																															(173,848	)		(939	)		(174,787	)
Cash dividends:
Preferred stock, series A ($.87 per share)																									(2,875	)					(2,875	)					(2,875	)
Preferred stock, series B ($.89 per share)																									(3,592	)					(3,592	)					(3,592	)
Preferred stock, series C ($18.13 per share)																									(20,843	)					(20,843	)					(20,843	)
Restricted stock dividend																									(3	)					(3	)					(3	)
Issuance of common shares					399,904		525			400,429						80			11,654									9			11,743						11,743
Issuance of preferred shares																			164						(164	)					—						—
Conversion of preferred shares		(230	)		9,595					9,595			(230	)		2			228												—						—
Tax benefit related to employee stock option and purchase plans																			(3,342	)											(3,342	)					(3,342	)
Stock-based compensation cost																			19,179												19,179						19,179
Repurchase of common shares:
Benefit plans							(507,731	)		(507,731	)																	(14,299	)		(14,299	)					(14,299	)

Balance at September 30, 2008		8,449,770			534,419,677		(66,951,991	)		467,467,686		$	1,714,770		$	106,884		$	4,665,614		$	46,687		$	669,509		$	(1,856,340	)	$	5,347,124		$	8,541		$	5,355,665

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
Comprehensive income:
Net income (loss)																									159,110						159,110			198			159,308
Noncontrolling interest — other																															—			(196	)		(196	)
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments, net of tax																						1,420									1,420						1,420
Change in unrealized gains (losses) on derivatives, net of tax																						3,346									3,346						3,346
Defined benefit pension plans adjustment																						(226	)								(226	)					(226	)

Comprehensive income																															163,650			2			163,652
Cash dividends:
Preferred stock, series A ($.87 per share)																									(2,875	)					(2,875	)					(2,875	)
Preferred stock, series B ($.34 per share)																									(1,299	)					(1,299	)					(1,299	)
Preferred stock, series C ($18.13 per share)																									(17,906	)					(17,906	)					(17,906	)
Restricted stock dividend																									(1	)					(1	)					(1	)
Issuance of common shares					15,048					15,048						(5	)		279												274						274
Issuance of preferred shares																			164						(164	)					—						—
Conversion of preferred shares		(137,400	)		6,992,368					6,992,368			(137,400	)		1,398			146,423						(20,383	)					(9,962	)					(9,962	)
Tax benefit related to employee stock option and purchase plans																			(2,843	)											(2,843	)					(2,843	)
Stock-based compensation cost																			8,995												8,995						8,995
Repurchase of common shares:
Benefit plans							(30,876	)		(30,876	)																	(549	)		(549	)					(549	)

Balance at September 30, 2009		8,312,370			541,849,295		(67,159,075	)		474,690,220		$	1,577,370		$	108,362		$	4,862,071		$	(44,143	)	$	346,347		$	(1,860,989	)	$	4,989,018		$	7		$	4,989,025

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)																								3,391						3,391			3,405			6,796
Acquisition of noncontrolling interest in Purchased Paper business																														—			(4,355	)		(4,355	)
Noncontrolling interest — other																														—			(1,869	)		(1,869	)
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments, net of tax																					(26,199	)								(26,199	)					(26,199	)
Change in unrealized gains (losses) on derivatives, net of tax																					31,932									31,932						31,932
Defined benefit pension plans adjustment																					(755	)								(755	)					(755	)

Comprehensive income																														8,369			(2,819	)		5,550
Cash dividends:
Preferred stock, series A ($2.61 per share)																								(8,625	)					(8,625	)					(8,625	)
Preferred stock, series B ($3.20 per share)																								(12,489	)					(12,489	)					(12,489	)
Preferred stock, series C ($51.36 per share)																								(62,289	)					(62,289	)					(62,289	)
Restricted stock dividend																								(1,851	)					(1,851	)					(1,851	)
Issuance of common shares					1,917,001		3,667			1,920,668						383		30,358									79			30,820						30,820
Issuance of preferred shares		150,000											150,000					(4,168	)					(487	)					145,345						145,345
Conversion of preferred shares		(230	)		9,595					9,595			(230	)		2		228												—						—
Tax benefit related to employee stock option and purchase plans																		(13,358	)											(13,358	)					(13,358	)
Stock-based compensation cost																		62,380												62,380						62,380
Cumulative effect of accounting change																					(194,655	)		194,655						—						—
Repurchase of common shares:
Benefit plans							(1,004,264	)		(1,004,264	)																(24,713	)		(24,713	)					(24,713	)

Balance at September 30, 2008		8,449,770			534,419,677		(66,951,991	)		467,467,686		$	1,714,770		$	106,884	$	4,665,614		$	46,687		$	669,509		$	(1,856,340	)	$	5,347,124		$	8,541		$	5,355,665

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)																								15,004						15,004			690			15,694
Sale of international Purchased Paper — Non-Mortgage business																														—			(7,257	)		(7,257	)
Noncontrolling interest — other																														—			(696	)		(696	)
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments, net of tax																					3,689									3,689						3,689
Change in unrealized gains (losses) on derivatives, net of tax																					29,361									29,361						29,361
Defined benefit pension plans adjustment																					(717	)								(717	)					(717	)

Comprehensive income																														47,337			(7,263	)		40,074
Cash dividends:
Preferred stock, series A ($2.61 per share)																								(8,625	)					(8,625	)					(8,625	)
Preferred stock, series B ($1.51 per share)																								(5,742	)					(5,742	)					(5,742	)
Preferred stock, series C ($54.38 per share)																								(59,586	)					(59,586	)					(59,586	)
Restricted stock dividend																								(10	)					(10	)					(10	)
Issuance of common shares					445,656		98			445,754						81		2,505									5			2,591						2,591
Issuance of preferred shares																		486						(486	)					—						—
Conversion of preferred shares		(137,400	)		6,992,368					6,992,368			(137,400	)		1,398		146,423						(20,383	)					(9,962	)					(9,962	)
Tax benefit related to employee stock option and purchase plans																		(8,662	)											(8,662	)					(8,662	)
Stock-based compensation cost																		37,207												37,207						37,207
Repurchase of common shares:
Benefit plans							(200,773	)		(200,773	)																(4,600	)		(4,600	)					(4,600	)

Balance at September 30, 2009		8,312,370			541,849,295		(67,159,075	)		474,690,220		$	1,577,370		$	108,362	$	4,862,071		$	(44,143	)	$	346,347		$	(1,860,989	)	$	4,989,018		$	7		$	4,989,025

See accompanying notes to consolidated financial statements.

SLM CORPORATION

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


	Nine Months Ended
	September 30,
	2009			2008

Operating activities
Net income	$	15,694		$	6,796
Adjustments to reconcile net income to net cash used in operating activities:
(Gains) losses on sales of loans and securities, net		(12,752	)		122,148
Stock-based compensation cost		40,073			69,937
Unrealized (gains)/losses on derivative and hedging activities		491,644			125,457
Provisions for loan losses		849,518			467,235
Decrease in purchased paper mortgages, net		233,130			200,098
Student loans originated for sale, net		(15,846,043	)		(4,102,691	)
Decrease in restricted cash — other		44,201			61,131
Decrease (increase) in accrued interest receivable		241,377			(240,906	)
(Decrease) in accrued interest payable		(439,920	)		(192,335	)
Adjustment for non-cash loss related to Retained Interest		333,951			361,141
Decrease in other assets, goodwill and acquired intangible assets, net		91,405			361,804
Increase (decrease) in other liabilities		40,870			(149,966	)

Total adjustments		(13,932,546	)		(2,916,947	)

Net cash used in operating activities		(13,916,852	)		(2,910,151	)

Investing activities
Student loans acquired		(7,211,675	)		(20,527,609	)
Loans purchased from securitized trusts		(5,030	)		(1,201,058	)
Reduction of student loans:
Installment payments, claims and other		7,997,484			7,997,789
Proceeds from sales of student loans		515,140			25,844
Other loans — originated		(2,818	)		(1,097,231	)
Other loans — repaid		237,980			1,470,040
Other investing activities, net		(676,612	)		(67,006	)
Purchases of available-for-sale securities		(104,663,811	)		(93,787,195	)
Proceeds from sales of available-for-sale securities		100,056			—
Proceeds from maturities of available-for-sale securities		104,417,273			95,830,890
Purchase of held-to-maturity and other securities		—			(500,255	)
Proceeds from maturities of held-to-maturity securities and other securities		68,991			12,502
(Increase) decrease in restricted cash — on-balance sheet trusts		(1,318,410	)		629,001
Return of investment from Retained Interest		16,361			352,633
Purchase of subsidiaries, net of cash acquired		—			(37,868	)

Net cash used in investing activities		(525,071	)		(10,899,523	)

Financing activities
Borrowings collateralized by loans in trust — issued		11,572,592			17,986,955
Borrowings collateralized by loans in trust — repaid		(4,196,889	)		(4,819,485	)
Asset-backed commercial paper conduits, net		(15,504,025	)		(1,733,537	)
ED Participation Program, net		15,499,015			3,554,618
ED Conduit Program facility, net		14,189,923			—
Other short-term borrowings issued		298,294			2,001,875
Other short-term borrowings repaid		(1,198,661	)		(1,067,281	)
Other long-term borrowings issued		4,333,173			2,437,226
Other long-term borrowings repaid		(8,335,181	)		(8,495,343	)
Other financing activities, net		(1,006,261	)		195,843
Excess tax benefit from the exercise of stock-based awards		—			281
Common stock issued		6			5,983
Preferred stock issued		—			145,345
Preferred dividends paid		(83,915	)		(83,403	)
Noncontrolling interest, net		(9,152	)		(5,581	)

Net cash provided by financing activities		15,558,919			10,123,496

Net increase (decrease) in cash and cash equivalents		1,116,996			(3,686,178	)
Cash and cash equivalents at beginning of period		4,070,002			7,582,031

Cash and cash equivalents at end of period	$	5,186,998		$	3,895,853

Cash disbursements made for:
Interest	$	3,070,349		$	4,801,466

Income taxes	$	292,115		$	697,146

See accompanying notes to consolidated financial statements.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2009 and for the three and nine months ended
September 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 September 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 November 4, 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 nine months ended September 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

FASB Accounting Standards Codification

The Company adopted, as of July 1, 2009, the Financial Accounting Standards Board’s (“FASB’s”) Accounting Standards Codification (“ASC”) 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. The ASC does not change authoritative guidance. Accordingly, implementing the ASC did not change any of the Company’s accounting, and therefore, did not have an impact on the consolidated results of the Company. References to authoritative GAAP literature have been updated accordingly.

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

In June 2009, the FASB issued topic updates to ASC 860, “Transfers and Servicing,” and to ASC 810, “Consolidation.”

The topic update to ASC 860, 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. The topic update to ASC 860 is effective for fiscal years beginning after November 15, 2009.

The topic update to ASC 810 significantly changes the consolidation model for Variable Interest Entities (“VIEs”). The topic update amends ASC 810 and, among other things, (1) eliminates the exemption for QSPEs, (2) provides a new approach for determining who should consolidate a VIE, that is more focused on control rather than economic interest, (3) changes when it is necessary to reassess who should consolidate a

SLM CORPORATION

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


1.	Significant Accounting Policies (Continued)

VIE and (4) requires additional disclosure. The topic update to ASC 810 is effective for the first annual reporting period beginning after November 15, 2009.

The Company is currently evaluating the impact of these topic updates 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 new accounting rules would also be applied to new transactions entered into from January 1, 2010 forward. If these topic updates had been adopted as of September 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 $36.1 billion of assets and $35.4 billion of liabilities, which would have resulted in an approximate $0.7 billion after-tax reduction of stockholders’ equity as of September 30, 2009. Management allocates capital on a Managed Basis. This change will not impact management’s view of capital adequacy.

Subsequent Events

In May 2009, the FASB issued a topic update on ASC 855, “Subsequent Events.” This topic update 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 topic update 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. The topic update to ASC 855 is effective for fiscal years and interim periods ending after June 15, 2009. The Company adopted this topic update effective June 15, 2009 and has evaluated any events subsequent to September 30, 2009, and their impact on the reported results and disclosures, through the date of this filing.

Fair Value Measurements

In August 2009, the FASB issued a topic update to ASC 820, “Fair Value Measurements and Disclosures.” The update provides clarification for the valuation of liabilities when a quoted price in an active market for the liability does not exist, and clarifies that a quoted price for the liability when traded as an asset (when no adjustments are required) is a Level 1 fair value measurement. In addition, it also clarifies that an entity is not required to adjust the value of a liability for the existence of a restriction that prevents the transfer of the liability. This topic update is effective for the Company beginning October 1, 2009 and will not be material to the Company.

On April 9, 2009, the FASB issued three ASC topic updates regarding fair value measurements and recognition of impairment. Under ASC 320, “Investments — Debt and Equity Securities,” 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. ASC 825, “Financial Instruments,” requires interim disclosures of the fair value of financial


1.	Significant Accounting Policies (Continued)

instruments that were previously only required annually. Finally, the topic update to ASC 820, “Fair Value Measurements and Disclosures,” 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 topic updates were effective for the Company beginning April 1, 2009. The adoption of these topic updates was not material to the Company.

On February 12, 2008, the FASB issued another topic update on ASC 820, which defers the effective date of the topic for nonfinancial assets and liabilities, except for such items that are recognized or disclosed at fair value in the financial statements on a recurring basis. This topic update delayed the implementation of these areas of ASC 820 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 topic update was not material to the Company.

Business Combinations

In December 2007, the FASB issued a topic update to ASC 805, “Business Combinations.” The update 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. The ASC 805 topic update applies to all transactions or other events in which the Company obtains control of one or more businesses. The ASC topic update 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 topic update 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 another topic update to ASC 805. This additional update 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 ASC 805. The ASC topic update had the same effective date as the topic update to ASC 805 referenced above. The adoption of this topic update did not have a material effect on the Company’s results of operations or financial position.

Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued a topic update to ASC 810, “Consolidation.” This update requires reporting entities to present noncontrolling (minority) interests as equity (as opposed to 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 this ASC topic update, 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. The topic update to ASC 810 applies prospectively for reporting periods beginning on or 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


1.	Significant Accounting Policies (Continued)

changes in stockholders’ equity and statements of cash flows for the prior period to conform to this topic update. Other than the change in presentation of noncontrolling interests, the adoption of this topic update had no impact on the consolidated financial statements.

Disclosures about Derivative Investments and Hedging Activities

In March 2008, the FASB updated ASC 815, “Derivatives and Hedging.” This topic update 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 ASC 815 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, the topic update 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. This ASC topic update is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted this topic update on January 1, 2009.


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.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

Private Education Loans	$	287,315	$	135,813	$	732,619	$	374,262
FFELP Stafford and Other Student Loans		20,918		40,407		80,911		75,805
Mortgage and consumer loans		12,894		10,689		35,988		17,168

Total provisions for loan losses	$	321,127	$	186,909	$	849,518	$	467,235


2.	Allowance for Loan Losses (Continued)

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 nine months ended September 30, 2009 and 2008.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Allowance at beginning of period	$	1,396,707		$	1,129,000		$	1,308,043		$	1,003,964
Provision for Private Education Loan losses		287,315			135,813			732,619			374,262
Charge-offs		(292,845	)		(76,312	)		(670,603	)		(205,913	)
Reclassification of interest reserve⁽¹⁾		10,319			8,393			31,437			24,581

Allowance at end of period	$	1,401,496		$	1,196,894		$	1,401,496		$	1,196,894

Charge-offs as a percentage of average loans in repayment (annualized)		9.6	%		3.5	%		7.7	%		3.5	%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)		8.9	%		3.1	%		7.1	%		3.0	%
Allowance as a percentage of the ending total loan balance		5.7	%		5.6	%		5.7	%		5.6	%
Allowance as a percentage of ending loans in repayment		11.4	%		13.3	%		11.4	%		13.3	%
Allowance coverage of charge-offs (annualized)		1.2			3.9			1.6			4.4
Ending total loans⁽²⁾	$	24,439,749		$	21,548,294		$	24,439,749		$	21,548,294
Average loans in repayment	$	12,082,965		$	8,703,525		$	11,633,640		$	7,933,067
Ending loans in repayment	$	12,254,212		$	9,015,795		$	12,254,212		$	9,015,795


⁽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 September 30, 2009, December 31, 2008, and September 30, 2008.


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

Loans in-school/grace/deferment⁽¹⁾	$	10,899					$	10,159					$	11,263
Loans in forbearance⁽²⁾		851						862						1,085
Loans in repayment and percentage of each status:
Loans current		10,458			85.3	%		9,748			87.2	%		7,902			87.6	%
Loans delinquent 31-60 days⁽³⁾		551			4.5			551			4.9			393			4.4
Loans delinquent 61-90 days⁽³⁾		353			2.9			296			2.6			249			2.8
Loans delinquent greater than 90 days⁽³⁾		892			7.3			587			5.3			472			5.2

Total Private Education Loans in repayment		12,254			100	%		11,182			100	%		9,016			100	%

Total Private Education Loans, gross		24,004						22,203						21,364
Private Education Loan unamortized discount		(543	)					(535	)					(514	)

Total Private Education Loans		23,461						21,668						20,850
Private Education Loan receivable for partially charged-off loans		435						222						184
Private Education Loan allowance for losses		(1,401	)					(1,308	)					(1,197	)

Private Education Loans, net	$	22,495					$	20,582					$	19,837

Percentage of Private Education Loans in repayment					51.1	%					50.4	%					42.2	%

Delinquencies as a percentage of Private Education Loans in repayment					14.7	%					12.8	%					12.4	%

Loans in forbearance as a percentage of loans in repayment and forbearance					6.5	%					7.2	%					10.7	%


⁽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 nine months ended September 30, 2009 and 2008.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Allowance at beginning of period	$	153,038		$	97,693		$	137,543		$	88,729
Provision for FFELP loan losses		20,918			40,407			80,911			75,805
Charge-offs		(16,977	)		(15,932	)		(60,708	)		(42,643	)
Increase (decrease) for student loan sales and other		(1,252	)		1,087			(2,019	)		1,364

Allowance at end of period	$	155,727		$	123,255		$	155,727		$	123,255

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	%		.2	%		.2	%		.2	%
Allowance coverage of charge-offs (annualized)		2.3			1.9			1.9			2.2
Ending total loans	$	134,087,420		$	119,165,201		$	134,087,420		$	119,165,201
Average loans in repayment	$	69,679,688		$	66,858,709		$	69,195,627		$	65,691,920
Ending loans in repayment	$	69,832,792		$	67,074,302		$	69,832,792		$	67,074,302

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 September 30, 2009, 55 percent of the on-balance sheet FFELP loan portfolio was subject to three-percent Risk Sharing, 44 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 September 30, 2009, December 31, 2008 and September 30, 2008.


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

Loans in-school/grace/deferment⁽¹⁾	$	50,795					$	39,270					$	40,056
Loans in forbearance⁽²⁾		13,459						12,483						12,035
Loans in repayment and percentage of each status:
Loans current		57,934			83.0	%		58,811			83.8	%		56,874			84.8	%
Loans delinquent 31-60 days⁽³⁾		4,225			6.0			4,044			5.8			3,707			5.5
Loans delinquent 61-90 days⁽³⁾		2,041			2.9			2,064			2.9			1,683			2.5
Loans delinquent greater than 90 days⁽³⁾		5,633			8.1			5,255			7.5			4,810			7.2

Total FFELP loans in repayment		69,833			100	%		70,174			100	%		67,074			100	%

Total FFELP loans, gross		134,087						121,927						119,165
FFELP loan unamortized premium		2,419						2,431						2,449

Total FFELP loans		136,506						124,358						121,614
FFELP loan allowance for losses		(156	)					(138	)					(123	)

FFELP loans, net	$	136,350					$	124,220					$	121,491

Percentage of FFELP loans in repayment					52.1	%					57.6	%					56.3	%

Delinquencies as a percentage of FFELP loans in repayment					17.0	%					16.2	%					15.2	%

FFELP loans in forbearance as a percentage of loans in repayment and forbearance					16.2	%					15.1	%					15.2	%


⁽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.


3.	Investments

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


	September 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	$	7,029	$	8	$	—		$	7,037
Other securities:
Asset-backed securities		113,096		689		(56	)		113,729
Commercial paper and asset-backed commercial paper		849,985		—		—			849,985
Municipal bonds		10,298		2,255		—			12,553
Other		1,547		—		(182	)		1,365

Total investment securities available-for-sale	$	981,955	$	2,952	$	(238	)	$	984,669

Restricted Investments
Available-for sale
U.S. Treasury securities and other U.S. government agency obligations	$	27,366	$	2	$	—		$	27,368
Guaranteed investment contracts		34,619		—		—			34,619

Total restricted investments available-for-sale	$	61,985	$	2	$	—		$	61,987

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 September 30, 2009 and December 31, 2008, the Company had restricted cash of $5.7 billion and $3.5 billion, respectively.

As of September 30, 2009 and December 31, 2008, $2 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 September 30, 2009 and December 31, 2008, $54 million ($28 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 September 30, 2009. In the nine months ended September 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 nine months ended September 30, 2008. The cost basis for these securities was determined through specific identification of the securities sold.


3.	Investments (Continued)

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


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

Year of Maturity
2009	$	—	$	885,755	$	779,144
2010		215		—		6,872
2011		—		—		5,125
2012		—		—		—
2013		—		838		—
2014-2018		—		12,553		30,607
After 2018		3,963		147,510		28,393

Total	$	4,178	$	1,046,656	$	850,141


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

At September 30, 2009 and December 31, 2008, the Company also had other investments of $850 million and $180 million, respectively. At September 30, 2009, other investments included a $737 million receivable for cash collateral posted to derivative counterparties. Other investments also included leveraged leases which at September 30, 2009 and December 31, 2008, totaled $66 million and $76 million, respectively, that are general obligations of American Airlines and Federal Express Corporation. At September 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

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. The following table summarizes the Company’s allocation of goodwill to its reporting units.


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

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

Total	$	991	$	991


4.	Goodwill and Acquired Intangible Assets (Continued)

Impairment Testing

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 its 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.

On September 17, 2009, the House of Representatives passed H.R. 3221, The Student Aid and Fiscal Responsibility Act (“SAFRA”), which was consistent with the Administration’s 2010 budget request to Congress. SAFRA would eliminate the FFELP and require that, after July 1, 2010, all new federal student loans be made through the Direct Student Loan Program. The Senate has yet to take up the legislation. In addition to reform included in the House-passed legislation, there are several other reforms that may be considered as the legislation moves forward. These include a possible extension of The Ensuring Continued Access to Student Loans Act of 2008 (“ECASLA”), which expires on July 1, 2010, and the Student Loan Community Proposal, an alternative student loan proposal endorsed by a cross-section of FFELP service providers (including Sallie Mae).

During the third quarter, no new unfavorable events or changes in circumstances occurred to warrant an impairment assessment as of September 30, 2009, as SAFRA was consistent with the Administration’s 2010 budget request which was submitted to Congress in the first quarter of 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 third quarter and based on its aforementioned monitoring process, the Company concluded that goodwill was not impaired as of September 30, 2009.

However, the Company notes that due to the uncertainties surrounding the ongoing legislative process, there is potential that some of its goodwill and intangible assets may be impaired, based on the final form of legislation, if any.


4.	Goodwill and Acquired Intangible Assets (Continued)

Acquired Intangible Assets

Acquired intangible assets include the following:


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

Intangible assets subject to amortization:
Customer, services, and lending relationships		12 years	$	332	$	(199	)	$	133
Software and technology		7 years		98		(88	)		10
Non-compete agreements		2 years		11		(11	)		—

Total				441		(298	)		143
Intangible assets not subject to amortization:
Trade name and trademark		Indefinite		91		—			91

Total acquired intangible assets			$	532	$	(298	)	$	234


	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 $14 million for the three months ended September 30, 2009 and 2008, respectively, and $29 million and $44 million for the nine months ended September 30, 2009 and 2008, respectively. In the third quarter of 2008, the Company decided to wind down its purchased paper businesses. As a result, in the third quarter of 2008, the Company recorded an aggregate amount of $36 million of impairment of acquired intangible assets, of which $28 million related to the impairment of two trade names and $8 million related to certain banking customer relationships. 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 September 30, 2009 and December 31, 2008.


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

Unsecured borrowings	$	4,330	$	24,869	$	29,199	$	6,794	$	31,182	$	37,976
Unsecured term bank deposits		762		5,129		5,891		1,148		1,108		2,256
ED Participation Program facility		22,864		—		22,864		7,365		—		7,365
ED Conduit Program facility		14,190		—		14,190		—		—		—
2008 Asset-Backed Financing Facilities		9,434		—		9,434		24,768		—		24,768
On-balance sheet securitizations		—		88,961		88,961		—		80,601		80,601
Indentured trusts		66		1,629		1,695		31		1,972		2,003
Other		1,732		—		1,732		1,827		—		1,827

Total before fair value adjustments		53,378		120,588		173,966		41,933		114,863		156,796
ASC 815 fair value adjustments		28		4,060		4,088		—		3,362		3,362

Total	$	53,406	$	124,648	$	178,054	$	41,933	$	118,225	$	160,158

As of September 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. These facilities include a $1.9 billion revolving credit facility maturing in October 2010 and a $1.6 billion revolving credit facility maturing in October 2011. These figures do not include a $215 million commitment from Aurora Bank, FSB, formerly known as Lehman Brothers Bank, a subsidiary of Lehman Brothers Holdings Inc, which declared bankruptcy on September 15, 2008. The Company is operating under the assumption that the lending commitment of Aurora 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 Aurora Bank, FSB.

On April 24, 2009, in conjunction with the extension of the 2008 ABCP Facilities, a $1.4 billion revolving credit facility maturing in October 2009 was retired and a $1.9 billion revolving credit facility maturing in October 2011 was reduced to $1.6 billion. 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 consolidated tangible net worth of at least $1.38 billion at all times. Consolidated tangible net worth as calculated for purposes of this covenant was $3.1 billion as of September 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 September 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.


5.	Borrowings (Continued)

Secured Borrowings

Variable Interest Entities (“VIEs”) are required 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 primary beneficiary of and currently consolidates the following financing VIEs as of September 30, 2009 and December 31, 2008:


	September 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	$	22,864	$	—	$	22,864	$	23,226	$	206	$	371	$	23,803
ED Conduit Program facility		14,190		—		14,190		14,396		438		423		15,257
2008 Asset-Backed Financing Facilities⁽¹⁾		9,434		—		9,434		10,819		233		90		11,142
On-balance sheet securitizations		—		88,961		88,961		92,274		3,588		3,425		99,287
Indentured trusts		66		1,629		1,695		2,177		193		26		2,396

		46,554		90,590		137,144		142,892		4,658		4,335		151,885
ASC 815 fair value adjustment		—		1,632		1,632		—		—		—		—

Total	$	46,554	$	92,222	$	138,776	$	142,892	$	4,658	$	4,335	$	151,885


⁽¹⁾		Includes $253 million of assets within the facility that can be released to the Company.


5.	Borrowings (Continued)


	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
ASC 815 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 $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 upfront 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 upfront fees and unused commitment fees, was three-month LIBOR plus 2.47 percent. The primary use of the 2008 Asset-Backed Financing Facilities was to refinance comparable ABCP facilities incurred in connection with the Proposed Merger, with the expectation that outstanding balances under the 2008 Asset-Backed Financing Facilities would be reduced through securitization of the underlying student loan collateral in the term ABS market.

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

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

On April 24, 2009, the Company extended the maturity of $21.8 billion of the 2008 FFELP ABCP Facility for one year to April 23, 2010. The Company also extended its 2008 Asset-Backed Loan Facility in the amount of $1.5 billion. The extended 2008 Asset-Backed Loan Facility matured on June 26, 2009 and was paid in full. A


5.	Borrowings (Continued)

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 was not reduced to $15.2 billion and $10.9 billion as of June 30, 2009 and September 30, 2009, respectively. The outstanding borrowings were reduced to $12.5 billion and $9.4 billion on 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 from 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 September 30, 2009, the maximum borrowing amount was approximately $10.5 billion. 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 September 30, 2009, the Company had $9.4 billion outstanding in connection with the 2008 FFELP ABCP Facility. The book basis of the assets securing this facility as of September 30, 2009 was $10.9 billion.

The Department of Education (“ED”) Funding Programs

In August 2008, ED implemented the Loan Purchase Commitment Program (“Purchase Program”) and the Loan Purchase Participation Program (“Participation Program”) pursuant to ECASLA. Under the Purchase Program, ED purchases eligible FFELP loans at a price equal to the sum of (i) par value, (ii) accrued interest, (iii) the one-percent origination fee paid to ED, and (iv) a fixed amount of $75 per loan. Under the Participation Program, ED provides short-term liquidity to FFELP lenders by purchasing participation interests in pools of FFELP loans. FFELP lenders are charged a rate of the preceding quarter commercial paper rate plus 0.50 percent on the principal amount of participation interests outstanding. Under the terms of the Participation Program, on September 30, 2010, AY 2009-2010 loans funded under the Participation Program must be either repurchased by the Company or sold to ED pursuant to the Participation Program, which has identical economics to the Purchase Program. Loans eligible for the Participation or Purchase Programs were originally limited to FFELP Stafford or PLUS, first disbursed on or after May 1, 2008 but no later than July 1, 2009, with no ongoing borrower benefits other than permitted rate reductions of 0.25 percent for automatic payment processing. On October 7, 2008, legislation was enacted extending ED’s authority to finance and purchase FFELP Stafford and PLUS loans made for AY’s 2009-2010, and allowing for the extension of ED’s Purchase and Participation Programs from September 30, 2009 to September 30, 2010. On November 8, 2008, ED formally announced new purchase and participation programs which cover eligible loans originated for the AY 2009-2010. On January 15, 2009, ED announced that the terms of the programs for AY 2009-2010 will replicate in all material respects the terms of the programs for AY 2008-2009. The Company applied for these AY 2009-2010 funding programs in June 2009 and its participation was approved on July 31, 2009.

On August 14, 2008, the Company received its initial advance under the Participation Program. As of September 30, 2009, the Company had $22.9 billion of advances outstanding under the Participation Program. Through October 15, 2009, the Company has sold to ED approximately $18.5 billion face amount of loans as


5.	Borrowings (Continued)

part of the Purchase Program (approximately $840 million face amount was sold in the third quarter of 2009). Outstanding debt of $18.5 billion has been paid down related to the Participation Program in connection with these loan sales.

Also pursuant to ECASLA, on January 15, 2009, ED published summary terms under which it will purchase eligible FFELP Stafford and PLUS loans from a conduit vehicle established to provide funding for eligible student lenders (the “ED Conduit Program”). Loans eligible for the ED Conduit Program must be first disbursed on or after October 1, 2003, but not later than July 1, 2009, and fully disbursed before September 30, 2009, and meet certain other requirements including with respect to borrower benefits. The ED Conduit Program was launched on May 11, 2009 and will accept eligible loans through July 1, 2010. The ED Conduit Program has a term of five years and will expire on January 19, 2014. 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 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. As of September 30, 2009, approximately $14.1 billion face amount of the Company’s Stafford and PLUS loans were funded through the ED Conduit Program with a weighted average issuance cost of approximately 0.87 percent. As of September 30, 2009, there are approximately $1.1 billion face amount of additional FFELP Stafford and PLUS loans (excluding loans currently in the Participation Program) that can be funded through the ED Conduit Program.

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 who purchase eligible ABS with funding of up to five years. Eligible ABS include ‘AAA’ rated student loan ABS backed by FFELP and private student loans first disbursed since May 1, 2007. As of September 30, 2009, the Company had approximately $10.6 billion book basis of student loans (including $7.3 billion book basis of Private Education Loans and $3.3 billion book basis of Consolidation Loans) eligible to serve as collateral for ABS funded under TALF; this amount does not include loans eligible for ECASLA financing programs. For student loan collateral, TALF is scheduled to expire on March 31, 2010.

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 issuer’s option at 93 percent of the outstanding balance of the ABS between November 15, 2011 and April 16, 2012. If the issue is called on November 15, 2011, which the Company believes is probable; the effective cost of the financing will be approximately 1-month LIBOR plus 3.7 percent. This transaction was TALF-eligible.

On July 2, 2009, the Company priced a $1.1 billion Private Education Loan securitization which closed on July 14, 2009. The issue bears a coupon of Prime plus 1.25 percent and is callable at the issuer’s option at 94 percent of the outstanding balance of the ABS between January 16, 2012 and June 15, 2012. If the issue is


5.	Borrowings (Continued)

called on January 16, 2012, which the Company believes is probable; the effective cost of the financing will be approximately Prime minus 0.71 percent. This transaction was TALF-eligible.

On August 5, 2009, the Company priced a $1.7 billion Private Education Loan securitization which closed on August 13, 2009. The issue bears a coupon of Prime plus 0.25 percent and is callable at the issuer’s option at 94 percent of the outstanding balance of the ABS between August 15, 2013 and July 15, 2014. If the issue is called on August 15, 2013, which the Company believes is probable; the effective cost of the financing will be approximately Prime minus 0.55 percent. This transaction was TALF-eligible.

These securitizations are accounted for as secured borrowings. The Company has concluded that it is probable it will call these bonds at the call date at the respective discount. Probability is based on the Company’s assessment of 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. 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. The Company has accreted approximately $33 million as a reduction of interest expense through September 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 and it was determined that they no longer met the criteria to be considered QSPEs. These trusts were then evaluated as VIEs 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. Because the Company can now exercise that option at its 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 nine months ended September 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 September 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		6,721
FFELP Consolidation Loans⁽¹⁾		—		—							—		—
Private Education Loans⁽¹⁾		2		3,766							—		—

Total securitizations — financings		2		3,766							3		6,721

Total securitizations		2	$	3,766							3	$	6,721


	Nine Months Ended September 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⁾		—		—							9		18,546
FFELP Consolidation Loans⁽¹⁾		2		4,524							—		—
Private Education Loans⁽¹⁾		4		10,184							—		—

Total securitizations — financings		6		14,708							9		18,546

Total securitizations		6	$	14,708							9	$	18,546


⁽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 nine months ended September 30, 2009 and 2008.


	Three Months Ended September 30,						Nine Months Ended September 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		100			237			368			753
Servicing fees received⁽¹⁾		55			61			171			187
Purchases of previously transferred financial assets for representation and warranty violations		(1	)		(2	)		(6	)		(15	)
Reimbursements of borrower benefits⁽²⁾		(9	)		(7	)		(26	)		(21	)
Purchases of delinquent Private Education Loans from securitization trusts using delinquent loan call option		—			(51	)		—			(152	)
Purchases of loans using clean-up call option		—			584			—			697


⁽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 September 30, 2009 and December 31, 2008.


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

Fair value of Residual Interests	$	254		$	858		$	726		$	1,838
Underlying securitized loan balance		5,810			14,551			13,079			33,440
Weighted average life		3.2 yrs.			9.1 yrs.			6.3 yrs.
Prepayment speed (annual rate)⁽²⁾
Interim status		0	%		N/A			0	%
Repayment status		0-14	%		2-4	%		2-15	%
Life of loan — repayment status		9	%		3	%		6	%
Expected remaining credit losses (% of outstanding student loan principal)⁽³⁾⁽⁴⁾		.10	%		.25	%		5.57	%
Residual cash flows discount rate		10.6	%		12.1	%		32.0	%


	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	$	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)⁽²⁾
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)⁽³⁾⁽⁴⁾		.11	%		.23	%		5.22	%
Residual cash flows discount rate		13.1	%		11.9	%		26.3	%


	⁽¹⁾	Includes $641 million and $762 million related to the fair value of the Embedded Floor Income as of September 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 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.

	⁽³⁾	Remaining expected credit losses as of the respective balance sheet date.

	⁽⁴⁾	For Private Education Loan trusts, estimated defaults from settlement to maturity are 11.6 percent and 9.1 percent at September 30, 2009 and December 31, 2008, respectively. These estimated defaults do not include recoveries related to defaults but do include prior purchases of loans at par by the Company when loans reached 180 days delinquent (prior to default) under a contingent call option. Although these loan purchases do not result in a realized loss to the trust, the Company has included them here. Not including these purchases in the disclosure would result in estimated defaults of 8.7 percent and 6.1 percent at September 30, 2009 and December 31, 2008, respectively.


6.	Student Loan Securitization (Continued)

The Company recorded net unrealized mark-to-market gains/(losses) in “servicing and securitization revenue (loss)” of $13 million and $(81) million for the three months ended September 30, 2009 and 2008, respectively, and $(338) million and $(361) million in the nine months ended September 30, 2009 and 2008, respectively, related to the Residual Interests.

The tables above disclose the assumptions that are used to value the Residual Interests. As of September 30, 2009, the Company changed the following significant assumptions compared to those used as of June 30, 2009, to determine the fair value of the Residual Interests:


	•	Prepayment speed assumptions on FFELP Stafford and Consolidation Loans were decreased. This change reflects the significant decrease in prepayment activity experienced since 2008. This decrease in prepayment activity, which the Company expects will continue into the foreseeable future, was primarily due to a reduction in third-party consolidation activity as a result of the CCRAA and the current U.S. economic and credit environment.

	•	The discount rate assumption related to FFELP Residual Interests decreased by 75 basis points. The Company assessed the appropriateness of the current risk premium, which is added to the risk free rate, for the purpose of arriving at a discount rate in light of the current economic and credit uncertainty that exists in the market as of September 30, 2009. The Company reduced the risk premium to reflect improved conditions in the credit markets. This discount rate is applied to the projected cash flows to arrive at a fair value representative of the current economic conditions.

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 September 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 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.


6.	Student Loan Securitization (Continued)


	As of September 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	$	254		$	858	⁽¹⁾	$	726
Weighted-average life		3.2 yrs.			9.1 yrs.			6.3 yrs.
Prepayment speed assumptions⁽²⁾
Interim status		0	%		N/A			0	%
Repayment status		0-14	%		2-4	%		2-15	%
Life of loan — repayment status		9	%		3	%		6	%
Impact on fair value of 5% absolute increase	$	(29	)	$	(104	)	$	(107	)
Impact on fair value of 10% absolute increase	$	(51	)	$	(184	)	$	(193	)
Expected credit losses (as a % of student loan principal)		.10	%		.25	%		5.57	%⁽³⁾
Impact on fair value of 5% absolute increase in default rate	$	(5	)	$	(9	)	$	(165	)
Impact on fair value of 10% absolute increase in default rate	$	(10	)	$	(17	)	$	(326	)
Residual cash flows discount rate		10.6	%		12.1	%		32.0	%
Impact on fair value of 5% absolute increase	$	(30	)	$	(144	)	$	(92	)
Impact on fair value of 10% absolute increase	$	(54	)	$	(247	)	$	(165	)


	3 month LIBOR forward curve at September 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	$	(43	)	$	(177	)	$	(2	)
Impact on fair value of 0.50% absolute increase in funding index compared to asset index	$	(86	)	$	(354	)	$	(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 September 30, 2009, these swaps are in a $959 million gain position (in the aggregate) and the trusts had $633 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 September 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 $44 million and $124 million, respectively, for the three and nine months ended September 30, 2008, and did not record any losses for the three and nine months ended September 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 $223 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 September 30, 2009 and 2008.


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

Loans in-school/grace/deferment⁽¹⁾	$	3,148				$	4,259
Loans in forbearance⁽²⁾		474					1,159
Loans in repayment and percentage of each status:
Loans current		8,516		90.0	%		7,733		93.9	%
Loans delinquent 31-60 days⁽³⁾		312		3.3			217		2.6
Loans delinquent 61-90 days⁽³⁾		161		1.7			103		1.3
Loans delinquent greater than 90 days⁽³⁾		469		5.0			177		2.2

Total off-balance sheet Private Education Loans in repayment		9,458		100	%		8,230		100	%

Total off-balance sheet Private Education Loans, gross	$	13,080				$	13,648


	⁽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 nine months ended September 30, 2009 and 2008.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in millions)	2009			2008			2009			2008

Charge-offs	$	150		$	36		$	329		$	109
Charge-offs as a percentage of average loans in repayment (annualized)		6.2	%		1.8	%		4.6	%		1.9	%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)		5.9	%		1.5	%		4.3	%		1.6	%
Ending off-balance sheet total Private Education Loans⁽¹⁾	$	13,280		$	13,721		$	13,280		$	13,721
Average off-balance sheet Private Education Loans in repayment	$	9,585		$	8,103		$	9,543		$	7,794
Ending off-balance sheet Private Education Loans in repayment	$	9,458		$	8,230		$	9,458		$	8,230


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


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


7.	Derivative Financial Instruments (Continued)

2008 Form 10-K, Note 9, “Derivative Financial Instruments,” to the consolidated financial statements.) The accounting of the Company’s derivatives 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, 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 ASC 815.


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 September 30, 2009 and December 31, 2008, and their impact on other comprehensive income and earnings for the three and nine months ended September 30, 2009 and 2008.

Impact of Derivatives on Consolidated Balance Sheet


		Cash Flow						Fair Value						Trading						Total
	Hedged Risk	Sept. 30,			Dec. 31,			Sept. 30,			Dec. 31,			Sept. 30,			Dec. 31,			Sept. 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	$	—		$	—		$	930		$	1,529		$	114		$	323		$	1,044		$	1,852
Cross currency interest rate swaps	Foreign currency and interest rate		—			—			3,377			2,743			55			13			3,432			2,756

Total derivative assets⁽³⁾			—			—			4,307			4,272			169			336			4,476			4,608
Derivative Liabilities
Interest rate swaps	Interest rate		(90	)		(146	)		—			—			(605	)		(332	)		(695	)		(478	)
Floor/Cap contracts	Interest rate		—			—			—			—			(1,390	)		(1,466	)		(1,390	)		(1,466	)
Futures	Interest rate		—			—			—			—			(2	)		(3	)		(2	)		(3	)
Cross currency interest rate swaps	Foreign currency and interest rate		—			—			(275	)		(640	)		(1	)		—			(276	)		(640	)
Other⁽²⁾	Interest rate		—			—			—			—			(26	)		—			(26	)		—

Total derivative liabilities⁽³⁾			(90	)		(146	)		(275	)		(640	)		(2,024	)		(1,801	)		(2,389	)		(2,587	)

Net total derivatives		$	(90	)	$	(146	)	$	4,032		$	3,632		$	(1,855	)	$	(1,465	)	$	2,087		$	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 asset-backed financings. The embedded derivatives are required to be accounted for as derivatives.

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


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

Gross position	$	4,476		$	4,608		$	(2,389	)	$	(2,587	)
Impact of master netting agreements		(1,197	)		(1,594	)		1,197			1,594

Derivative values with impact of master netting agreements	$	3,279		$	3,014		$	(1,192	)	$	(993	)


7.	Derivative Financial Instruments (Continued)


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

Notional Values
Interest rate swaps	$	1.7	$	4.8	$	10.4	$	13.4	$	156.0	$	159.3	$	168.1	$	177.5
Floor/Cap contracts		—		—		—		—		47.2		32.4		47.2		32.4
Futures		—		—		—		—		.2		.2		.2		.2
Cross currency interest rate swaps		—		—		20.6		23.1		.3		.1		20.9		23.2
Other⁽¹⁾		—		—		—		—		7.9		.7		7.9		.7

Total derivatives	$	1.7	$	4.8	$	31.0	$	36.5	$	211.6	$	192.7	$	244.3	$	234.0


⁽¹⁾		“Other” includes embedded derivatives bifurcated from newly issued on-balance sheet securitization debt, 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 September 30,

Realized Gain

Unrealized Gain

(Loss)

Unrealized Gain

(Loss) on

(Loss)

Total Gain

Derivatives⁽¹⁾⁽²⁾

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