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, 2010
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		20190
(Address of principal executive offices)		(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 October 31, 2010

Voting common stock, $.20 par value		485,590,403 shares

SLM CORPORATION

FORM 10-Q

INDEX

September 30, 2010


Part I. Financial Information
	Item 1.	Financial Statements	2
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	64
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	136
	Item 4.	Controls and Procedures	141
PART II. Other Information
	Item 1.	Legal Proceedings	142
	Item 1A.	Risk Factors	143
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	143
	Item 3.	Defaults Upon Senior Securities	143
	Item 4.	(Removed and Reserved)	143
	Item 5.	Other Information	143
	Item 6.	Exhibits	144
Signatures			145
Glossary⁽¹⁾			146
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


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

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,
	2010			2009

Assets
FFELP Stafford and Other Student Loans (net of allowance for losses of $120,386 and $104,219, respectively)	$	46,026,138		$	42,978,874
FFELP Stafford Loans Held-for-Sale		20,655,561			9,695,714
FFELP Consolidation Loans (net of allowance for losses of $68,880 and $56,949, respectively)		79,911,599			68,378,560
Private Education Loans (net of allowance for losses of $2,035,034 and $1,443,440, respectively)		35,541,640			22,753,462
Investments:
Available-for-sale		203,125			1,273,275
Other		913,986			740,553

Total investments		1,117,111			2,013,828
Cash and cash equivalents		5,875,510			6,070,013
Restricted cash and investments		5,837,546			5,168,871
Retained Interest in off-balance sheet securitized loans		—			1,828,075
Goodwill and acquired intangible assets, net		488,220			1,177,310
Other assets		10,653,449			9,920,591

Total assets	$	206,106,774		$	169,985,298

Liabilities
Short-term borrowings	$	45,388,432		$	30,896,811
Long-term borrowings		153,003,935			130,546,272
Other liabilities		3,140,330			3,263,593

Total liabilities		201,532,697			164,706,676

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; 810 and 810 shares, respectively, issued at liquidation preference of $1,000 per share		810,370			810,370
Common stock, par value $.20 per share, 1,125,000 shares authorized: 553,787 and 552,220 shares issued, respectively		110,758			110,444
Additional paid-in capital		5,127,313			5,090,891
Accumulated other comprehensive loss (net of tax benefit of $25,386 and $23,448, respectively)		(44,159	)		(40,825	)
Retained earnings (loss)		(122,565	)		604,467

Total SLM Corporation stockholders’ equity before treasury stock		6,446,717			7,140,347
Common stock held in treasury at cost: 68,011 and 67,222 shares, respectively		1,872,640			1,861,738

Total SLM Corporation stockholders’ equity		4,574,077			5,278,609
Noncontrolling interest		—			13

Total equity		4,574,077			5,278,622

Total liabilities and equity	$	206,106,774		$	169,985,298

Supplemental information — assets and liabilities of consolidated variable interest entities:


	September 30,		December 31,
	2010		2009

FFELP Stafford and Other Student Loans, net	$	65,557,473	$	51,067,680
FFELP Consolidation Loans, net		78,396,367		67,664,019
Private Education Loans, net		24,511,699		10,107,298
Restricted cash and investments		5,522,584		4,596,147
Other assets		4,373,606		3,639,918
Short-term borrowings		36,806,456		23,384,051
Long-term borrowings		128,473,542		101,012,628

Net assets of consolidated variable interest entities	$	13,081,731	$	12,678,383

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 September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009

Interest income:
FFELP Stafford and Other Student Loans	$	320,234		$	303,192		$	928,713		$	969,947
FFELP Consolidation Loans		564,586			481,592			1,638,831			1,431,644
Private Education Loans		610,893			396,339			1,751,387			1,176,399
Other loans		7,190			11,042			23,440			45,930
Cash and investments		7,630			6,881			18,878			19,896

Total interest income		1,510,533			1,199,046			4,361,249			3,643,816
Total interest expense		638,599			673,870			1,738,916			2,519,876

Net interest income		871,934			525,176			2,622,333			1,123,940
Less: provisions for loan losses		358,110			321,127			1,099,469			849,518

Net interest income after provisions for loan losses		513,824			204,049			1,522,864			274,422

Other income (loss):
Securitization servicing and Residual Interest revenue		—			155,065			—			147,248
Gains on sales of loans and securities, net		1,607			12,452			6,745			12,752
Gains (losses) on derivative and hedging activities, net		(344,458	)		(111,556	)		(331,552	)		(569,326	)
Contingency fee revenue		83,746			82,200			252,238			230,383
Collections revenue		13,097			21,241			52,282			88,830
Guarantor servicing fees		15,996			48,087			74,543			106,867
Other		90,502			150,006			445,811			741,229

Total other income (loss)		(139,510	)		357,495			500,067			757,983

Expenses:
Salaries and benefits		139,099			140,888			429,716			413,813
Other operating expenses		180,120			162,242			544,621			473,195
Goodwill and acquired intangible assets impairment and amortization expense		669,668			9,774			689,090			29,176
Restructuring expenses		11,082			2,492			55,030			9,598

Total expenses		999,969			315,396			1,718,457			925,782

Income (loss) from continuing operations, before income tax expense (benefit)		(625,655	)		246,148			304,474			106,623
Income tax expense (benefit)		(127,558	)		80,423			224,340			31,796

Net income (loss) from continuing operations		(498,097	)		165,725			80,134			74,827
Income (loss) from discontinued operations, net of tax		3,211			(6,417	)		3,211			(59,133	)

Net income (loss)		(494,886	)		159,308			83,345			15,694
Less: net income attributable to noncontrolling interest		61			198			334			690

Net income (loss) attributable to SLM Corporation		(494,947	)		159,110			83,011			15,004
Preferred stock dividends		18,787			42,627			56,176			94,822

Net income (loss) attributable to SLM Corporation common stock	$	(513,734	)	$	116,483		$	26,835		$	(79,818	)



Net income (loss) attributable to SLM Corporation:
Continuing operations, net of tax	$	(498,158	)	$	165,527		$	79,800		$	74,137
Discontinued operations, net of tax		3,211			(6,417	)		3,211			(59,133	)

Net income (loss) attributable to SLM Corporation	$	(494,947	)	$	159,110		$	83,011		$	15,004

Basic earnings (loss) per common share attributable to SLM Corporation common shareholders:
Continuing operations	$	(1.07	)	$	.26		$	.05		$	(.04	)
Discontinued operations		.01			(.01	)		.01			(.13	)

Total	$	(1.06	).	$	.25		$	.06		$	(.17	)

Average common shares outstanding		484,936			470,280			484,678			467,960

Diluted earnings (loss) per common share attributable to SLM Corporation common shareholders:
Continuing operations	$	(1.07	)	$	.26		$	.05		$	(.04	)
Discontinued operations		.01			(.01	)		.01			(.13	)

Total	$	(1.06	)	$	.25		$	.06		$	(.17	)

Average common and common equivalent shares outstanding		484,936			471,058			486,209			467,960

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, 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
Other comprehensive income (loss), 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 (loss)																															163,650			198			163,848
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
Preferred stock issuance costs and related amortization																			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	)
Noncontrolling interest — other																															—			(196	)		(196	)

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

Balance at June 30, 2010		8,110,370			553,571,384		(67,774,802	)		485,796,582		$	1,375,370		$	110,715		$	5,122,583		$	(43,333	)	$	391,169		$	(1,869,760	)	$	5,086,744		$	4		$	5,086,748
Comprehensive income:
Net income (loss)																									(494,947	)					(494,947	)		61			(494,886	)
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on investments, net of tax																						(71	)								(71	)					(71	)
Change in unrealized gains (losses) on derivatives, net of tax																						(732	)								(732	)					(732	)
Defined benefit pension plans adjustment																						(23	)								(23	)					(23	)

Comprehensive income																															(495,773	)		61			(495,712	)
Cash dividends:
Preferred stock, series A ($.87 per share)																									(2,875	)					(2,875	)					(2,875	)
Preferred stock, series B ($.32 per share)																									(1,224	)					(1,224	)					(1,224	)
Preferred stock, series C ($18.13 per share)																									(14,688	)					(14,688	)					(14,688	)
Restricted stock dividend
Issuance of common shares					215,962					215,962						43			2,417												2,460						2,460
Tax benefit related to employee stock option and purchase plans																			(2,883	)											(2,883	)					(2,883	)
Stock-based compensation cost																			5,196												5,196						5,196
Repurchase of common shares:
Benefit plans							(236,005	)		(236,005	)																	(2,880	)		(2,880	)					(2,880	)
Noncontrolling interest — other																															—			(65	)		(65	)

Balance at September 30, 2010		8,110,370			553,787,346		(68,010,807	)		485,776,539		$	1,375,370		$	110,758		$	5,127,313		$	(44,159	)	$	(122,565	)	$	(1,872,640	)	$	4,574,077		$	—		$	4,574,077

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, 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
Other comprehensive income (loss), 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 (loss)																														47,337			690			48,027
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
Preferred stock issuance costs and related amortization																		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	)
Sale of international Purchased Paper — Non-Mortgage business																														—			(7,257	)		(7,257	)
Noncontrolling interest — other																														—			(696	)		(696	)

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

Balance at December 31, 2009		8,110,370			552,219,576		(67,221,942	)		484,997,634		$	1,375,370		$	110,444	$	5,090,891		$	(40,825	)	$	604,467		$	(1,861,738	)	$	5,278,609		$	13		$	5,278,622
Comprehensive income:
Net income (loss)																								83,011						83,011			334			83,345
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments, net of tax																					1,607									1,607						1,607
Change in unrealized gains (losses) on derivatives, net of tax																					(4,883	)								(4,883	)					(4,883	)
Defined benefit pension plans adjustment																					(58	)								(58	)					(58	)

Comprehensive income																														79,677			334			80,011
Cash dividends:
Preferred stock, series A ($2.61 per share)																								(8,625	)					(8,625	)					(8,625	)
Preferred stock, series B ($.80 per share)																								(3,193	)					(3,193	)					(3,193	)
Preferred stock, series C ($54.38 per share)																								(44,064	)					(44,064	)					(44,064	)
Restricted stock dividend																								(11	)					(11	)					(11	)
Issuance of common shares					1,567,770					1,567,770						314		12,583												12,897						12,897
Preferred stock issuance costs and related amortization																		294						(294	)					—						—
Tax benefit related to employee stock option and purchase plans																		(7,688	)											(7,688	)					(7,688	)
Stock-based compensation cost																		31,233												31,233						31,233
Cumulative effect of accounting change (See Note 1)																								(753,856	)					(753,856	)					(753,856	)
Repurchase of common shares:
Benefit plans							(788,865	)		(788,865	)																(10,902	)		(10,902	)					(10,902	)
Noncontrolling interest — other																														—			(347	)		(347	)

Balance at September 30, 2010		8,110,370			553,787,346		(68,010,807	)		485,776,539		$	1,375,370		$	110,758	$	5,127,313		$	(44,159	)	$	(122,565	)	$	(1,872,640	)	$	4,574,077		$	—		$	4,574,077

See accompanying notes to consolidated financial statements.

SLM CORPORATION

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


	Nine Months Ended
	September 30,
	2010			2009

Operating activities
Net income	$	83,345		$	15,694
Adjustments to reconcile net income to net cash used in operating activities:
(Income) loss from discontinued operations, net of tax		(3,211	)		59,133
Gains on sales of loans and securities, net		(6,745	)		(12,752	)
Goodwill and acquired intangible assets impairment and amortization expense		689,090			29,176
Stock-based compensation cost		31,392			40,073
Unrealized (gains)/losses on derivative and hedging activities		(305,683	)		491,644
Provisions for loan losses		1,099,469			849,518
Student loans originated for sale, net		(10,959,847	)		(15,846,043	)
Decrease in restricted cash — other		48,003			44,201
(Increase) decrease in accrued interest receivable		(327,782	)		241,377
Increase (decrease) in accrued interest payable		16,724			(439,920	)
Adjustment for non-cash loss related to Retained Interest		—			333,951
Decrease in other assets		1,057,515			3,096
(Decrease) increase in other liabilities		(74,842	)		40,870

Cash used in operating activities — continuing operations		(8,735,917	)		(14,165,676	)
Cash provided by operating activities — discontinued operations		—			233,130

Total net cash used in operating activities		(8,652,572	)		(13,916,852	)

Investing activities
Student loans acquired		(6,762,110	)		(7,211,675	)
Loans purchased from securitized trusts		—			(5,030	)
Reduction of student loans:
Installment payments, claims and other		10,486,310			7,997,484
Proceeds from sales of student loans		359,955			515,140
Other loans — originated		—			(2,818	)
Other loans — repaid		117,630			237,980
Other investing activities, net		(172,218	)		(676,612	)
Purchases of available-for-sale securities		(31,801,767	)		(104,663,811	)
Proceeds from sales of available-for-sale securities		—			100,056
Proceeds from maturities of available-for-sale securities		32,834,424			104,417,273
Purchases of other securities		(101,008	)		—
Proceeds from maturities of held-to-maturity securities and other securities		111,200			68,991
Return of investment from Retained Interest		—			16,361
Decrease (increase) in restricted cash — on-balance sheet trusts		147,195			(1,318,410	)

Net cash provided by (used in) investing activities		5,219,611			(525,071	)

Financing activities
Borrowings collateralized by loans in trust — issued		5,918,441			11,572,592
Borrowings collateralized by loans in trust — repaid		(8,245,191	)		(4,196,889	)
Asset-backed commercial paper conduits, net		(2,308,644	)		(15,504,025	)
ED Participation Program, net		11,219,632			15,499,015
ED Conduit Program facility, net		1,112,730			14,189,923
Other short-term borrowings issued		—			298,294
Other short-term borrowings repaid		(176,551	)		(1,198,661	)
Other long-term borrowings issued		1,463,542			4,333,173
Other long-term borrowings repaid		(7,227,300	)		(8,335,181	)
Other financing activities, net		1,537,754			(1,006,261	)
Excess tax benefit from the exercise of stock-based awards		367			—
Common stock issued		194			6
Preferred dividends paid		(55,882	)		(83,915	)
Noncontrolling interest, net		(634	)		(9,152	)

Net cash provided by financing activities		3,238,458			15,558,919

Net (decrease) increase in cash and cash equivalents		(194,503	)		1,116,996
Cash and cash equivalents at beginning of period		6,070,013			4,070,002

Cash and cash equivalents at end of period	$	5,875,510		$	5,186,998

Cash disbursements made (refunds received) for:
Interest	$	1,762,789		$	3,070,349

Income taxes, net	$	(451,099	)	$	292,115

See accompanying notes to consolidated financial statements.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 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 and nine months ended September 30, 2010 are not necessarily indicative of the results for the year ending December 31, 2010. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”).

Reclassifications

Certain reclassifications have been made to the balances as of and for the three and nine months ended September 30, 2009 to be consistent with classifications adopted for 2010, and had no effect on net income, total assets, or total liabilities.

Recently Issued Accounting Standards

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

In June 2009, the Financial Accounting Standards Board (“FASB”) issued topic updates to Accounting Standards Codification (“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 transactions which occur after December 31, 2009. The impact of ASC 860 to future transactions will depend on how such transactions are structured. ASC 860 relates primarily to the Company’s secured borrowing facilities. All of the Company’s secured borrowing facilities entered into in 2008 and 2009, including securitization trusts, have been accounted for as on-balance sheet financing facilities. These transactions would have been accounted for in the same manner if ASC 860 had been effective during these years.

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 which entity 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 VIE and (4) requires additional disclosure. The topic update to ASC 810 is effective as of January 1, 2010.

Under ASC 810, if an entity has a variable interest in a VIE and that entity is determined to be the primary beneficiary of the VIE then that entity will consolidate the VIE. The primary beneficiary is the entity which has both: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


1.	Significant Accounting Policies (Continued)

economic performance and (2) the obligation to absorb losses or receive benefits of the entity that could potentially be significant to the VIE. As it relates to the Company’s securitized assets, the Company is the servicer of the securitized assets and owns the Residual Interest of the securitization trusts. As a result, the Company is the primary beneficiary of its securitization trusts and consolidated those trusts that were previously off-balance sheet at their historical cost basis on January 1, 2010. The historical cost basis is the basis that would exist if these securitization trusts had remained on-balance sheet since they settled. ASC 810 did not change the accounting of any other VIEs the Company had a variable interest in as of January 1, 2010. These new accounting rules will also apply to new transactions entered into from January 1, 2010 forward.

Upon prospective adoption of topic updates to ASC 810, the Company removed the $1.8 billion of Residual Interests (associated with its previously off-balance sheet securitization trusts as of December 31, 2009) from the consolidated balance sheet and the Company consolidated $35.0 billion of assets ($32.6 billion of which are student loans, net of an approximate $550 million allowance for loan loss) and $34.4 billion of liabilities (primarily trust debt), which resulted in an approximate $750 million after-tax reduction of stockholders’ equity (recorded as a cumulative effect adjustment to retained earnings). After the adoption of topic updates to ASC 810, the Company’s results of operations no longer reflect securitization servicing and Residual Interest revenue related to these securitization trusts, but instead report interest income, provisions for loan losses associated with the securitized assets and interest expense associated with the debt issued from the securitization trusts to third parties, consistent with the Company’s accounting treatment of prior on-balance securitization trusts. As of January 1, 2010, there are no longer differences between the Company’s GAAP and “Core Earnings” presentation for securitization accounting. As a result, effective January 1, 2010, the Company’s Managed and on-balance sheet (GAAP) student loan portfolios are the same.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


1.	Significant Accounting Policies (Continued)

The following table summarizes the change in the consolidated balance sheet resulting from the consolidation of the off-balance sheet securitization trusts following the adoption of topic updates to ASC 810.


	At January 1,
(Dollars in millions)	2010

FFELP Stafford Loans (net of allowance of $15)	$	5,500
FFELP Consolidation Loans (net of allowance of $10)		14,797
Private Education Loans (net of allowance of $524)		12,341

Total student loans		32,638
Restricted cash and investments		1,041
Other assets		1,370

Total assets consolidated		35,049

Long-term borrowings		34,403
Other liabilities		6

Total liabilities consolidated		34,409

Net assets consolidated on-balance sheet		640
Less: Residual Interest removed from balance sheet		1,828

Cumulative effect of accounting change before taxes		(1,188	)

Tax effect		434

Cumulative effect of accounting change after taxes	$	(754	)

Management allocates capital on a Managed Basis. As a result, this accounting change did not affect management’s view of capital adequacy for the Company. The Company’s unsecured revolving credit facility and its asset-backed credit facilities contain two principal financial covenants related to tangible net worth and net revenue. The tangible net worth covenant requires 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 $3.5 billion as of December 31, 2009. Upon adoption of topic updates to ASC 810 on January 1, 2010, consolidated tangible net worth as calculated for this covenant was $2.7 billion. Because the transition adjustment upon adoption of topic updates to ASC 810 is recorded through retained earnings, the net revenue covenant was not affected by the adoption of topic updates to ASC 810. The ongoing net revenue covenant will not be affected by ASC 810’s impact on the Company’s securitization trusts as the net revenue covenant treated all off-balance sheet trusts as on-balance sheet for purposes of calculating net revenue.

Fair Value Measurements

In January 2010, the FASB issued a topic update to ASC 820, “Fair Value Measurements and Disclosures.” The update requires separate disclosures of the amounts of significant transfers in and out of Level 1 and 2 of fair value measurements and a description of the reasons for the transfers. In addition, a reporting unit should report separately information about purchases, sales, issuances, and settlements within the reconciliation of activity in Level 3 fair value measurements. Finally, the update clarifies existing disclosure requirements regarding the level of disaggregation in reporting classes of assets and liabilities and discussion of the inputs and valuation techniques used for Level 2 and 3 fair values. This topic update is

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


1.	Significant Accounting Policies (Continued)

effective for annual and interim periods beginning January 1, 2010, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for annual and interim periods beginning January 1, 2011.

Disclosures Regarding Credit Quality of Receivables

In July 2010, the FASB issued an update to the accounting guidance for receivables. This update requires companies to provide additional disclosures about the credit quality of receivables as well as additional information related to the allowance for loan losses. These new rules are effective for the Company’s annual reporting period ending December 31, 2010. Other than requiring additional disclosures regarding the credit quality of its loan portfolio, this standard will not have an impact on the Company’s financial statements.


2.	Allowance for Loan Losses

The Company’s provisions for loan losses represent the periodic expense of maintaining an allowance sufficient to absorb probable incurred losses, net of expected 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 are susceptible to significant changes. The Company believes that the allowance for loan losses is appropriate to cover probable losses incurred in the loan portfolios as of the respective balance sheet date.

The following table summarizes the total loan loss provisions for the three and nine months ended September 30, 2010 and 2009.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009

Private Education Loans	$	329,981	$	287,315	$	1,004,214	$	732,619
FFELP Stafford and Other Student Loans		24,582		20,918		76,191		80,911
Mortgage and consumer loans		3,547		12,894		19,064		35,988

Total provisions for loan losses	$	358,110	$	321,127	$	1,099,469	$	849,518

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


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, 2010 and 2009.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009

Allowance at beginning of period	$	2,042,413		$	1,396,707		$	1,443,440		$	1,308,043
Provision for Private Education Loan losses		329,981			287,315			1,004,214			732,619
Charge-offs		(348,511	)		(292,845	)		(968,755	)		(670,603	)
Reclassification of interest reserve		11,151			10,319			32,085			31,437
Consolidation of off-balance sheet trusts⁽¹⁾		—			—			524,050			—

Allowance at end of period	$	2,035,034		$	1,401,496		$	2,035,034		$	1,401,496

Charge-offs as a percentage of average loans in repayment (annualized)		5.4	%		9.6	%		5.1	%		7.7	%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)		5.1	%		8.9	%		4.9	%		7.1	%
Allowance as a percentage of the ending total loan balance		5.3	%		5.7	%		5.3	%		5.7	%
Allowance as a percentage of ending loans in repayment		7.9	%		11.4	%		7.9	%		11.4	%
Allowance coverage of charge-offs (annualized)		1.5			1.2			1.6			1.6
Ending total loans⁽²⁾	$	38,449,556		$	24,439,749		$	38,449,556		$	24,439,749
Average loans in repayment	$	25,616,442		$	12,082,965		$	25,150,567		$	11,633,640
Ending loans in repayment	$	25,784,202		$	12,254,212		$	25,784,202		$	12,254,212


⁽¹⁾		Upon the adoption of topic updates to ASC 810 on January 1, 2010, the Company consolidated all of its previously off-balance sheet securitization trusts. (See Note 1, “Significant Accounting Policies — Recently Issued Accounting Standards — Transfers of Financial Assets and the VIE Consolidation Model” for further discussion.)

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

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


2.	Allowance for Loan Losses (Continued)

Private Education Loan Delinquencies

The table below presents the Company’s Private Education Loan delinquency trends as of September 30, 2010, December 31, 2009, and September 30, 2009.


	Private Education Loan Delinquencies
	September 30,												September 30,
	2010						December 31, 2009						2009
(Dollars in millions)	Balance			%			Balance			%			Balance			%

Loans in-school/grace/deferment⁽¹⁾	$	10,517					$	8,910					$	10,899
Loans in forbearance⁽²⁾		1,170						967						851
Loans in repayment and percentage of each status:
Loans current		22,926			88.9	%		12,421			86.4	%		10,458			85.3	%
Loans delinquent 31-60 days⁽³⁾		907			3.5			647			4.5			551			4.5
Loans delinquent 61-90 days⁽³⁾		489			1.9			340			2.4			353			2.9
Loans delinquent greater than 90 days⁽³⁾		1,462			5.7			971			6.7			892			7.3

Total Private Education Loans in repayment		25,784			100.0	%		14,379			100.0	%		12,254			100.0	%

Total Private Education Loans, gross		37,471						24,256						24,004
Private Education Loan unamortized discount		(873	)					(559	)					(543	)

Total Private Education Loans		36,598						23,697						23,461
Private Education Loan receivable for partially charged-off loans		979						499						435
Private Education Loan allowance for losses		(2,035	)					(1,443	)					(1,401	)

Private Education Loans, net	$	35,542					$	22,753					$	22,495

Percentage of Private Education Loans in repayment					68.8	%					59.3	%					51.1	%

Delinquencies as a percentage of Private Education Loans in repayment					11.1	%					13.6	%					14.7	%

Loans in forbearance as a percentage of loans in repayment and forbearance					4.3	%					6.3	%					6.5	%


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

⁽²⁾		Loans for borrowers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.

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

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


2.	Allowance for Loan Losses (Continued)

Allowance for FFELP Loan Losses

The following table summarizes changes in the allowance for loan losses for the FFELP loan portfolio for the three and nine months ended September 30, 2010 and 2009.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Allowance at beginning of period	$	188,685		$	153,038		$	161,168		$	137,543
Provision for FFELP loan losses		24,582			20,918			76,191			80,911
Charge-offs		(21,273	)		(16,977	)		(66,912	)		(60,708	)
Decrease for student loan sales and other		(2,728	)		(1,252	)		(6,330	)		(2,019	)
Consolidation of off-balance sheet trusts⁽¹⁾		—			—			25,149			—

Allowance at end of period	$	189,266		$	155,727		$	189,266		$	155,727

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)		2.2			2.3			2.1			1.9
Ending total loans, gross	$	144,090,015		$	134,087,420		$	144,090,015		$	134,087,420
Average loans in repayment	$	82,202,512		$	69,679,688		$	82,362,216		$	69,195,627
Ending loans in repayment	$	81,787,661		$	69,832,792		$	81,787,661		$	69,832,792


⁽¹⁾		Upon the adoption of topic updates to ASC 810 on January 1, 2010, the Company consolidated all of its previously off-balance sheet securitization trusts. (See Note 1, “Significant Accounting Policies — Recently Issued Accounting Standards - Transfers of Financial Assets and the VIE Consolidation Model” for further discussion.)

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, 2010, 49 percent of the FFELP loan portfolio was subject to 3 percent Risk Sharing, 50 percent was subject to 2 percent Risk Sharing and the remaining 1 percent was not subject to any Risk Sharing.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


2.	Allowance for Loan Losses (Continued)

FFELP Loan Delinquencies

The table below shows the Company’s FFELP loan delinquency trends as of September 30, 2010, December 31, 2009 and September 30, 2009.


	FFELP Loan Delinquencies
	September 30, 2010						December 31, 2009						September 30, 2009
(Dollars in millions)	Balance			%			Balance			%			Balance			%

Loans in-school/grace/deferment⁽¹⁾	$	42,852					$	35,079					$	50,795
Loans in forbearance⁽²⁾		19,450						14,121						13,459
Loans in repayment and percentage of each status:
Loans current		67,867			83.0	%		57,528			82.4	%		57,934			83.0	%
Loans delinquent 31-60 days⁽³⁾		5,054			6.2			4,250			6.1			4,225			6.0
Loans delinquent 61-90 days⁽³⁾		2,241			2.7			2,205			3.1			2,041			2.9
Loans delinquent greater than 90 days⁽³⁾		6,626			8.1			5,844			8.4			5,633			8.1

Total FFELP loans in repayment		81,788			100.0	%		69,827			100.0	%		69,833			100.0	%

Total FFELP loans, gross		144,090						119,027						134,087
FFELP loan unamortized premium		2,692						2,187						2,419

Total FFELP loans		146,782						121,214						136,506
FFELP loan allowance for losses		(189	)					(161	)					(156	)

FFELP loans, net	$	146,593					$	121,053					$	136,350

Percentage of FFELP loans in repayment					56.8	%					58.7	%					52.1	%

Delinquencies as a percentage of FFELP loans in repayment					17.0	%					17.6	%					17.0	%

FFELP loans in forbearance as a percentage of loans in repayment and forbearance					19.2	%					16.8	%					16.2	%


⁽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.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


3.	Investments

A summary of investments and restricted investments as of September 30, 2010 and December 31, 2009 follows:


	September 30, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

Investments
Available-for-sale:
U.S. Treasury securities	$	1,014	$	—	$	—		$	1,014
Other securities:
Asset-backed securities		74,846		2,112		—			76,958
Commercial paper and asset-backed commercial paper		111,661		—		—			111,661
Municipal bonds		9,558		2,440		—			11,998
Other		1,568		—		(74	)		1,494

Total investment securities available-for-sale	$	198,647	$	4,552	$	(74	)	$	203,125

Restricted Investments
Available-for sale:
U.S. Treasury securities	$	38,113	$	—	$	—		$	38,113
Guaranteed investment contracts		29,456		—		—			29,456

Total restricted investments available-for-sale	$	67,569	$	—	$	—		$	67,569

Held-to-maturity:
Guaranteed investment contracts	$	3,175	$	—	$	—		$	3,175

Total restricted investments held-to-maturity	$	3,175	$	—	$	—		$	3,175

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


3.	Investments (Continued)


	December 31, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

Investments
Available-for-sale:
U.S. Treasury securities	$	272	$	—	$	—		$	272
Other securities:
Asset-backed securities		110,336		306		(893	)		109,749
Commercial paper and asset-backed commercial paper		1,149,981		—		—			1,149,981
Municipal bonds		9,935		1,942		—			11,877
Other		1,550		—		(154	)		1,396

Total investment securities available-for-sale	$	1,272,074	$	2,248	$	(1,047	)	$	1,273,275

Restricted Investments
Available-for sale:
U.S. Treasury securities	$	25,026	$	—	$	—		$	25,026
Guaranteed investment contracts		26,951		—		—			26,951

Total restricted investments available-for-sale	$	51,977	$	—	$	—		$	51,977

Held-to-maturity:
Guaranteed investment contracts	$	3,550	$	—	$	—		$	3,550
Other		215		—		—			215

Total restricted investments held-to-maturity	$	3,765	$	—	$	—		$	3,765

In addition to the restricted investments detailed above, at September 30, 2010 and December 31, 2009, the Company had restricted cash and cash equivalents of $5.7 billion and $5.1 billion, respectively. As of September 30, 2010 and December 31, 2009, $38 million (all of which is in restricted cash and investments on the balance sheet) and $50 million ($25 million 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, including available-for-sale securities, during the three and nine months ended September 30, 2010 and 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. The cost basis for the security sale was determined through specific identification of the securities sold.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


3.	Investments (Continued)

As of September 30, 2010, the stated maturities for the investments (including restricted investments) are as follows:


	September 30, 2010
	Held-to-		Available-for-
	Maturity		Sale⁽¹⁾		Other

Year of Maturity
2010	$	—	$	152,281	$	874,497
2011		—		—		4,878
2012		—		—		—
2013		—		528		—
2014		—		—		—
2015-2019		—		11,998		57,974
After 2019		3,175		105,887		869

Total	$	3,175	$	270,694	$	938,218


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

At September 30, 2010 and December 31, 2009, the Company also had other investments of $938 million and $741 million, respectively. At September 30, 2010 and December 31, 2009, other investments included $850 million and $636 million, respectively, of receivables for cash collateral posted with derivative counterparties. Other investments also included leveraged leases which at September 30, 2010 and December 31, 2009, totaled $58 million and $66 million, respectively, that are general obligations of American Airlines and Federal Express Corporation.


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 historical allocation of goodwill to its reporting units, accumulated impairments and net goodwill for each reporting unit.


	As of September 30, 2010
			Accumulated
(Dollars in millions)	Gross		Impairments			Net

Lending	$	411	$	(24	)	$	387
Asset Performance Group (“APG”)		402		(402	)		—
Guarantor Servicing		62		(62	)		—
Upromise		140		(140	)		—
Other		1		(1	)		—

Total	$	1,016	$	(629	)	$	387

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


4.	Goodwill and Acquired Intangible Assets (Continued)


	December 31, 2009
			Accumulated
(Dollars in millions)	Gross		Impairments			Net

Lending	$	411	$	(24	)	$	387
APG		402		—			402
Guarantor Servicing		62		—			62
Upromise		140		—			140
Other		1		(1	)		—

Total	$	1,016	$	(25	)	$	991

Impairment Testing

The Company performs its goodwill impairment testing annually in the fourth quarter or more frequently if an event occurs or circumstances change such that it is more likely than not that the fair value of a reporting unit or reporting units may be below their respective carrying values.

On March 30, 2010, President Obama signed into law H.R. 4872, the Health Care and Education Reconciliation Act of 2010 (“HCERA”), which included the SAFRA Act. Effective July 1, 2010, the legislation eliminated the authority to provide new loans under FFELP and requires that all new federal loans are to be made through the Direct Student Loan Program (“DSLP”). The new law does not alter or affect the terms and conditions of existing FFELP loans. This restructuring will result in both a significant amount of restructuring expenses incurred as well as a significant reduction of on-going operating costs once the restructuring is complete. See Note 13, “Restructuring Activities” for further details.

In connection with HCERA becoming law on March 30, 2010, a triggering event occurred for the Lending, APG and Guarantor Servicing reporting units which required the Company to assess potential goodwill impairment as of March 31, 2010. As part of the impairment assessment, the Company considered the implications of the HCERA legislation to these reporting units as well as continued uncertainty in the economy and the tight credit markets during the first quarter of 2010. The impairment assessment methodology utilized either a market approach and/or a discounted cash flow analysis for each reporting unit affected by the new HCERA legislation. This assessment resulted in estimated fair values of the Company’s reporting units in excess of their carrying values at March 31, 2010. Accordingly, there was no indicated impairment for these reporting units in the first quarter of 2010.

When the Company performed its annual impairment assessment in the fourth quarter of 2009, the cash flow projections for the Lending, APG and Guarantor Servicing reporting units were valued assuming the proposed HCERA legislation was passed. There was no indicated impairment for any of the reporting units in the fourth quarter of 2009.

During the second quarter of 2010, no triggering event occurred to warrant an interim impairment assessment.

During the third quarter of 2010, as part of a broad-based assessment of possible changes to the Company’s business following the passage of HCERA the Company performed certain preliminary valuations which indicated there was possible impairment of goodwill and certain intangible assets in its Lending, APG, Upromise and Guarantor Servicing reporting units. The Company identified certain events that occurred during third quarter 2010 that it determined were triggering events because they either resulted in lower expected

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


4.	Goodwill and Acquired Intangible Assets (Continued)

future cash flows or because they provided indications that market participants would value the Company’s reporting units below previous estimates of fair value. The triggering events that occurred in the third quarter included:


	•	FFELP asset pricing information indicating market participants assume a greater uncertainty related to future cash flows and require a higher return on investment;

	•	market bids related to the sale of a non-affiliated Guarantor business indicated a higher discount rate and greater uncertainty of future cash flows assumed;

	•	the acquisition of FFELP assets by the Company that indicated a higher discount rate applied to future cash flows than previously estimated;

	•	Upromise sale of a business line that provided an indication of how market participants view risks associated with future cash flows;

	•	pricing pressures associated with new and existing business at the Upromise reporting unit; and

	•	uncertainties related to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) legislation.

Because of the triggering events that occurred during the quarter and the preliminary assessment, the Company retained a third-party appraisal firm to perform Step 1 impairment testing as prescribed in ASC 350, “Intangibles — Goodwill and Other.” The fair value of each reporting unit was determined by weighting different valuation approaches, as applicable, with the primary approach being the income approach.

The income approach measures the value of each reporting unit’s future economic benefit determined by its discounted cash flows derived from the Company’s projections plus an assumed terminal growth rate adjusted for what it believes a market participant would assume in an acquisition. These projections are generally five-year projections that reflect the inherent risk a willing buyer would consider when valuing these businesses. If a component of a reporting unit is winding down or is assumed to wind down, the projections extend through the anticipated wind down period. These estimates may differ from how the Company views the prospective cash flows associated with the individual reporting units. As previously discussed, during the third quarter, new information regarding how market participants view the risks and uncertainties associated with future cash flows resulted in the Company adjusting down its forecasted cash flows and increasing the discount rates associated with these cash flows for the APG and Guarantor Servicing operating segments, resulting in a decline in value associated with these reporting units. With regard to Upromise,the Company determined that pricing pressures and certain risks associated with growing the business as well as the likelihood that a market participant would demand a higher discount rate and assume lower future expected cash flows than the Company’s own assumptions resulted in a decline in the fair value of this reporting unit.

Under the Company’s guidance, the third-party appraisal firm developed both an asset rate of return and an equity rate of return (or discount rate) for each reporting unit incorporating such factors as the risk free rate, a market rate of return, a measure of volatility (Beta) and a company specific and capital markets risk premium, as appropriate, to adjust for volatility and uncertainty in the economy and to capture specific risk related to the respective reporting units. The Company considered whether an asset sale or an equity sale would be the most likely sale structure for each reporting unit and valued each reporting unit based on the

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


4.	Goodwill and Acquired Intangible Assets (Continued)

more likely hypothetical scenario. Resulting discount rates and growth rates used for the Lending, APG, Guarantor Servicing, and Upromise reporting units were:


	Third Quarter 2010						Fourth Quarter 2009
	Discount Rate			Growth Rate			Discount Rate			Growth Rate

Lending⁽¹⁾		13	%		0.5	%		11	%		3	%
APG⁽²⁾		14	%		2.5	%		10	%		4	%
Guarantor Servicing⁽²⁾		13	%		0	%		10	%		0	%
Upromise⁽²⁾		17	%		2.5	%		15	%		4	%


⁽¹⁾		Assumes an equity sale; therefore, the discount rate is used to value the entire reporting unit.

⁽²⁾		Assumes an asset sale; therefore, the discount rate is used to value the assets of the reporting unit.

The discount rates reflect market based estimates of capital costs and are adjusted for management’s assessment of a market participant’s view with respect to execution, concentration and other risks associated with the projected cash flows of individual reporting units. The discount rates are higher than the ones used in the 2009 annual impairment test primarily due to new information received in the third quarter of 2010 related to implied discount rates of similar transactions that priced or settled in the third quarter of 2010. In addition, the Dodd-Frank Act, which became law in the third quarter of 2010, creates uncertainty over particular parts of the business. In addition, the Upromise reporting unit had a significant reduction in future revenue expectations during the third quarter of 2010 related to contract negotiations. Management reviewed and approved the discount rates provided by the third-party appraiser including the factors incorporated to develop the discount rates for each reporting unit. For the valuation of the Lending reporting unit, which assumed an equity sale, the discount rate was applied to the reporting unit’s projected net cash flows and the residual or terminal value yielding the fair value of equity for the reporting unit. For valuations assuming an asset sale, the discount rates applicable to the individual reporting units were applied to the respective reporting units’ projected asset cash flows and residual or terminal values, as applicable, yielding the fair value of the assets for the respective reporting units. The estimated proceeds from the hypothetical asset sale were then used to payoff any liabilities of the reporting unit with the remaining cash equaling the fair value of the reporting unit’s equity.

The guideline company or market approach was also considered for the Company’s Lending reporting unit. The market approach generally measures the value of a reporting unit as compared to recent sales or offerings of comparable companies. The secondary market approach indicates value based on multiples calculated using the market value of minority interests in publicly traded comparable companies or guideline companies. Whether analyzing comparable transactions or the market value of minority interests in publicly traded guideline companies, consideration is given to the line of business and the operating performance of the comparable companies versus the reporting unit being tested.

The following table illustrates the carrying value of equity for each reporting unit and the estimated fair value determined in conjunction with Step 1 impairment testing in the third quarter of 2010.


	Carrying Value		Fair Value
(Dollars in millions)	of Equity		of Equity		$ Difference			% Difference

Lending	$	3,530	$	6,201	$	2,671			76	%
APG		641		405		(236	)		(36	)
Guarantor Servicing		97		91		(6	)		(6	)
Upromise		221		110		(111	)		(50	)

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


4.	Goodwill and Acquired Intangible Assets (Continued)

The following table illustrates the book basis of equity for each reporting unit and the estimated fair value determined in conjunction with Step 1 impairment testing in the fourth quarter of 2009.


	Carrying Value		Fair Value
(Dollars in millions)	of Equity		of Equity		$ Difference		% Difference

Lending	$	1,474	$	3,270	$	1,796		122	%
APG		1,390		1,690		300		22
Guarantor Servicing		142		221		79		56
Upromise		297		430		133		45

The estimated fair value of the Company resulting from its third-quarter 2010 Step 1 impairment test was 29 percent higher than its market capitalization as of the valuation date. The Company views this as a reasonable “control premium.” Management reviewed and approved the valuation prepared by the appraisal firm for each reporting unit, including the valuation methods employed and the key assumptions used, such as the discount rates, growth rates and control premiums, as applicable, for each reporting unit. Management also performed stress tests of key assumptions using a range of discount rates and growth rates, as applicable. Based on the valuations performed in conjunction with Step 1 impairment testing and these stress tests, there was no indicated impairment for the Lending reporting unit and there was indicated impairment for the APG, Guarantor Services and Upromise reporting units in the third quarter testing.

Under the second step of the analysis, determining the implied fair value of goodwill requires valuation of a reporting unit’s identifiable tangible and intangible assets and liabilities in a manner similar to the allocation of purchase price in a business combination. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference. As a result, the Company impaired the value of its goodwill by $402 million in its APG reporting unit, $140 million in its Upromise reporting unit and $62 million in its Guarantor Servicing reporting unit, which has been recorded as a charge in the third quarter of 2010.

Management acknowledges that the economic slowdown could adversely affect the operating results of the Company’s reporting units. If the forecasted performance of the Company’s reporting units is not achieved, or if the Company’s stock price declines to a depressed level resulting in deterioration in the Company’s total market capitalization, the fair value of the Lending reporting unit (which is the only reporting unit that has goodwill as of September 30, 2010) could be significantly reduced, and the Company may be required to record a charge, which could be material, for an impairment of goodwill.

In connection with management’s assessment of possible changes to the Company’s business, the Company is planning to redefine its operating segments and revise its reportable segments presentation in the fourth quarter of 2010, once certain decisions have been finalized with respect to how management will view the business on a going-forward basis.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


4.	Goodwill and Acquired Intangible Assets (Continued)

Goodwill by Reportable Segments

A summary of the Company’s goodwill by reportable segment is as follows:


	September 30,		December 31,
(Dollars in millions)	2010		2009

Lending	$	387	$	387
APG		—		402
Other		—		202

Total	$	387	$	991

Acquired Intangible Assets

Acquired intangible assets include the following:


			As of September 30, 2010
	Average				Accumulated
	Amortization		Cost		Impairment and
(Dollars in millions)	Period		Basis⁽¹⁾		Amortization⁽¹⁾			Net

Intangible assets subject to amortization:
Customer, services and lending relationships		13 years	$	307	$	(232	)	$	75
Software and technology		7 years		93		(90	)		3
Non-compete agreements				11		(11	)		—

Total				411		(333	)		78
Intangible assets not subject to amortization:
Trade names and trademarks		Indefinite		23		—			23

Total acquired intangible assets			$	434	$	(333	)	$	101


			As of December 31, 2009
	Average				Accumulated
	Amortization		Cost		Impairment and
(Dollars in millions)	Period		Basis⁽¹⁾		Amortization⁽¹⁾			Net

Intangible assets subject to amortization:
Customer, services, and lending relationships		12 years	$	332	$	(208	)	$	124
Software and technology		7 years		98		(89	)		9
Non-compete agreements				11		(11	)		—

Total				441		(308	)		133
Intangible assets not subject to amortization:
Trade names and trademarks		Indefinite		54		—			54

Total acquired intangible assets			$	495	$	(308	)	$	187


⁽¹⁾		Includes impairment amounts only if portion of the acquired intangible has been deemed impaired. When an acquired intangible is considered fully impaired the cost basis and any accumulated amortization related to the asset is written off.

Intangible asset impairment for the Upromise reporting unit totaled $53 million for both the three and nine months ended September 30, 2010 and $0 for the three and nine months ended September 30, 2009. Intangible asset impairment for the Lending reporting unit totaled $3 million for both the three and nine

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


4.	Goodwill and Acquired Intangible Assets (Continued)

months ended September 30, 2010 and $0 for both the three and nine months ended September 30, 2009 (see previous discussion regarding reasons for goodwill impairment testing).

The Company recorded amortization of acquired intangible assets from continuing operations totaling $10 million and $10 million for the three months ended September 30, 2010 and 2009, respectively and $29 million and $29 million for the nine months ended September 30, 2010 and 2009, respectively. The Company will continue to amortize its intangible assets with definite useful lives over their remaining estimated useful lives.


5.	Borrowings

The following table summarizes the Company’s borrowings as of September 30, 2010 and December 31, 2009.


	September 30, 2010						December 31, 2009
	Short		Long				Short		Long
(Dollars in millions)	Term		Term		Total		Term		Term		Total

Unsecured borrowings	$	3,422	$	19,177	$	22,599	$	5,185	$	22,797	$	27,982
Unsecured term bank deposits		1,618		3,263		4,881		842		4,795		5,637
FHLB-DM facility		525		—		525		—		—		—
ED Participation Program facility		20,226		—		20,226		9,006		—		9,006
ED Conduit Program facility		15,426		—		15,426		14,314		—		14,314
ABCP borrowings		1,152		4,827		5,979		—		8,801		8,801
Securitizations		—		120,720		120,720		—		89,200		89,200
Indentured trusts		2		1,330		1,332		64		1,533		1,597
Other⁽¹⁾		2,745		—		2,745		1,472		—		1,472

Total before hedge accounting adjustments		45,116		149,317		194,433		30,883		127,126		158,009
Hedge accounting adjustments		272		3,687		3,959		14		3,420		3,434

Total	$	45,388	$	153,004	$	198,392	$	30,897	$	130,546	$	161,443


⁽¹⁾		At September 30, 2010, other primarily consists of $1.6 billion of cash collateral held related to derivative exposures that are recorded as a short-term debt obligation, as well as $1.1 billion of unsecured other bank deposits. At December 31, 2009, other primarily consisted of cash collateral held related to derivative exposures that are recorded as a short-term debt obligation.

Secured Borrowings

VIEs are required to be consolidated by their primary beneficiaries. The criteria to be considered the primary beneficiary changed on January 1, 2010 upon the adoption of topic updates to ASC 810 (see Note 1, “Significant Accounting Policies — Recently Issued Accounting Standards - Transfers of Financial Assets and the VIE Consolidation Model” for further discussion). 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.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


5.	Borrowings (Continued)

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 Company is the primary beneficiary of and currently consolidates the following financing VIEs as of September 30, 2010 and December 31, 2009:


	September 30, 2010
	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	$	20,226	$	—	$	20,226	$	20,656	$	162	$	434	$	21,252
ED Conduit Program facility		15,426		—		15,426		15,515		501		434		16,450
ABCP borrowings		1,152		4,827		5,979		6,418		94		54		6,566
Securitizations		—		120,720		120,720		124,269		4,605		3,436		132,310
Indentured trusts		2		1,330		1,332		1,608		160		16		1,784

Total before hedge accounting adjustments		36,806		126,877		163,683		168,466		5,522		4,374		178,362
Hedge accounting adjustments		—		1,597		1,597		—		—		—		—

Total	$	36,806	$	128,474	$	165,280	$	168,466	$	5,522	$	4,374	$	178,362


	December 31, 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	$	9,006	$	—	$	9,006	$	9,397	$	115	$	61	$	9,573
ED Conduit Program facility		14,314		—		14,314		14,594		478		372		15,444
ABCP borrowings		—		8,801		8,801		9,929		204		100		10,233
Securitizations		—		89,200		89,200		93,021		3,627		3,083		99,731
Indentured trusts		64		1,533		1,597		1,898		172		24		2,094

Total before hedge accounting adjustments		23,384		99,534		122,918		128,839		4,596		3,640		137,075
Hedge accounting adjustments		—		1,479		1,479		—		—		—		—

Total	$	23,384	$	101,013	$	124,397	$	128,839	$	4,596	$	3,640	$	137,075

The Department of Education (“ED”) Funding Programs

In August 2008, ED implemented the Purchase Program and the Participation Program pursuant to The Ensuring Continued Access to Student Loans Act of 2008 (“ECASLA”). Under the Purchase Program, ED

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


5.	Borrowings (Continued)

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 equal to the preceding quarter commercial paper rate plus 0.50 percent on the principal amount of participation interests outstanding. Loans eligible for the Participation or Purchase Programs are limited to FFELP Stafford or PLUS Loans, first disbursed on or after May 1, 2008 but no later than July 1, 2010, with no ongoing borrower benefits other than permitted rate reductions of 0.25 percent for automatic payment processing. In October 2010, the Company sold $20.4 billion of loans to ED and paid off $20.3 billion of advances outstanding under the Participation Program which concludes participation in the program.

Also pursuant to ECASLA, on January 15, 2009, ED published summary terms under which it will purchase eligible FFELP Stafford and PLUS Loans from a conduit vehicle established to provide funding for eligible student lenders (the “ED Conduit Program”). Loans eligible for the ED Conduit Program must be first disbursed on or after October 1, 2003, but not later than July 1, 2009, and fully disbursed before September 30, 2009, and meet certain other requirements, including those relating to borrower benefits. The ED Conduit Program was launched on May 11, 2009 and accepted eligible loans through July 1, 2010. The ED Conduit Program expires 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. If the conduit does not have sufficient funds to make the required payments on the notes issued by the conduit, then the notes will be repaid with funds from the Federal Financing Bank (“FFB”). The FFB will hold the notes for a short period of time and, if at the end of that time, the notes still cannot be paid off, the underlying FFELP loans that serve as collateral to the ED Conduit will be sold to ED through a put agreement at a price of 97 percent of the face amount of the loans. As of September 30, 2010, approximately $15.2 billion face amount of the Company’s Stafford and PLUS Loans were funded through the ED Conduit Program. For the third quarter of 2010, the average interest rate paid on this facility was approximately 0.77 percent.

Asset-Backed Financing Facilities

During the first quarter of 2008, the Company entered into three new asset-backed commercial paper financing facilities (the “2008 Asset-Backed Financing Facilities”) to fund FFELP and Private Education Loans. In 2009, the FFELP facilities were subsequently amended and reduced and the Private Education facility was retired.

On January 15, 2010, the Company terminated the 2008 Asset-Backed Financing Facilities for FFELP and entered into new multi-year ABCP facilities (the “2010 Facility”) which will continue to provide funding for the Company’s federally guaranteed student loans. The 2010 Facility provides for maximum funding of $10 billion for the first year, $5 billion for the second year and $2 billion for the third year. Upfront fees related to the 2010 Facility were approximately $4 million. The underlying cost of borrowing under the 2010 Facility for the first year is expected to be commercial paper issuance cost plus 0.50 percent, excluding up-front commitment and unused fees.

Borrowings under the 2010 Facility are non-recourse to the Company. The maximum amount the Company may borrow under the 2010 Facility is limited based on certain factors, including market conditions and the fair value of student loans in the facility. In addition to the funding limits described above, funding under the 2010 Facility is subject to usual and customary conditions. The 2010 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 facility. Increases in the borrowing rate of up to LIBOR

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


5.	Borrowings (Continued)

plus 4.50 percent could occur if certain asset coverage ratio thresholds are not met. Failure to pay off the 2010 Facility on the maturity date or to reduce amounts outstanding below the annual maximum step downs will result in a 90-day extension of the 2010 Facility with the interest rate increasing from LIBOR plus 2.00 percent to LIBOR plus 3.00 percent over that period. If, at the end of the 90-day extension, these required paydown amounts have not been made, the collateral can be foreclosed upon. As of September 30, 2010, there was approximately $6.0 billion outstanding in this facility. The book basis of the assets securing this facility at September 30, 2010 was $6.6 billion.

Securitizations

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. The Term Asset-Backed Securities Loan Facility (“TALF”) was initiated on March 17, 2009 and provided 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 Education Loans first disbursed since May 1, 2007. For student loan collateral, TALF expired on March 31, 2010.

In 2009, the Company completed four FFELP long-term ABS transactions totaling $5.9 billion. The FFELP transactions were composed primarily of FFELP Consolidation Loans which were not eligible for the ED Conduit Program or TALF.

During 2009, the Company completed $7.5 billion of Private Education Loan term ABS transactions, all of which were private placement transactions. On January 6, 2009, the Company closed a $1.5 billion 12.5 year ABS based facility (“Total Return Swap Facility”). This facility is used to provide up to $1.5 billion term financing for Private Education Asset-Backed Securities. The fully utilized cost of financing obtained under this facility is expected to be LIBOR plus 5.75 percent. In connection with this facility, the Company completed one Private Education Loan term ABS transaction totaling $1.5 billion in the first quarter of 2009. The net funding received under the ABS based facility for this issuance was $1.1 billion. The remaining $6.0 billion of Private Education Loan term ABS transactions were TALF-eligible.

On March 3, 2010, the Company priced a $1.6 billion Private Education Loan term ABS transaction which was TALF-eligible. The notes settled on March 11, 2010 and the issuance included one $149 million tranche bearing a coupon of Prime minus 0.05 percent and a second $1.401 billion tranche bearing a coupon of 1-month LIBOR plus 3.25 percent.

On April 12, 2010, the Company priced a $1.2 billion FFELP long-term ABS transaction. The transaction settled on April 15, 2010 and includes $1.2 billion A Notes bearing a coupon of 1-month LIBOR plus 0.40 percent and $37 million B Notes bearing a coupon of 1-month LIBOR plus 0.90 percent. The B Notes were purchased by the Company in their entirety on the settlement date. This transaction was composed primarily of FFELP Stafford and PLUS loans.

On July 22, 2010, the Company redeemed its $1.5 billion SLM Private Education Loan Trust 2009-A ABS issue and closed new offerings of its $869 million SLM 2010-B and $1.7 billion SLM 2010-C Private Education Loan Trust ABS issues. Approximately $875 million of the 2010-B and 2010-C bonds were issued at a weighted average coupon of 1-month LIBOR plus 2.23 percent; the remaining $1.7 billion of bonds were financed under the Company’s Total Return Swap Facility. These concurrent transactions raised approximately $1.0 billion of net additional cash for the Company.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


5.	Borrowings (Continued)

On August 18, 2010, the Company priced a $760 million FFELP ABS transaction. The transaction settled on August 26, 2010 and includes $738 million A Notes bearing a coupon of 1-month LIBOR plus 0.50 percent and $22 million B Notes bearing a coupon of 1-month LIBOR plus 0.90 percent. The B Notes were purchased by the Company in their entirety on the settlement date. This transaction was composed primarily of FFELP Stafford and PLUS loans.

The Company has $5.3 billion face amount of Private Education Loan securitization bonds outstanding at September 30, 2010, where the Company has the ability to call the bonds at a discount to par between 2011 and 2014. 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 that 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 adjustment. The Company has accreted approximately $140 million, cumulatively, and $27 million in the third quarter of 2010 as a reduction of interest expense.

Auction Rate Securities

At September 30, 2010, the Company had $3.3 billion of taxable and $1.0 billion of tax-exempt auction rate securities outstanding in securitizations and indentured trusts, respectively. Since February 2008, problems in the auction rate securities market as a whole led to failures of the auctions pursuant to which certain of the Company’s auction rate securities’ interest rates are set. As a result, $3.4 billion of the Company’s auction rate securities as of September 30, 2010 bore interest at the maximum rate allowable under their terms. The maximum allowable interest rate on the Company’s taxable auction rate securities is generally LIBOR plus 1.50 percent. The maximum allowable interest rate on many of the Company’s tax-exempt auction rate securities is a formula driven rate, which produced various maximum rates up to 0.81 percent during the third quarter of 2010. As of September 30, 2010, $0.9 billion of auction rate securities with shorter weighted average terms to maturity have had successful auctions, resulting in an average rate of 1.67 percent.

Indentured Trusts

The Company has secured assets and outstanding bonds in indentured trusts resulting from the acquisition of various student loan providers in prior periods. The indentures were created and bonds issued to finance the acquisition of student loans guaranteed under the Higher Education Act. The bonds are limited obligations of the Company and are secured by and payable from payments associated with the underlying secured loans.

Federal Home Loan Bank of Des Moines (“FHLB-DM”)

On January 15, 2010, HICA Education Loan Corporation (“HICA”), a subsidiary of the Company, entered into a lending agreement with the FHLB-DM. Under the agreement, the FHLB-DM will provide advances backed by Federal Housing Finance Agency approved collateral which includes federally-guaranteed student loans (but does not include Private Education Loans). The initial borrowing of $25 million at a rate of 0.23 percent under this facility occurred on January 15, 2010 and matured on January 22, 2010. The amount, price and tenor of future advances will vary and will be determined at the time of each borrowing. The maximum amount that can be borrowed, as of September 30, 2010, subject to available collateral, is

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


5.	Borrowings (Continued)

approximately $10 billion. As of September 30, 2010, borrowing under the facility totaled $525 million. The Company has provided a guarantee to the FHLB-DM for the performance and payment of HICA’s obligations.

Other Funding Sources

Sallie Mae Bank

During the fourth quarter of 2008, Sallie Mae Bank, the Company’s Utah industrial bank subsidiary, began expanding its deposit base to fund new Private Education Loan originations. Sallie Mae Bank raises deposits through intermediaries in the retail brokered Certificate of Deposit (“CD”) market and through retail deposit channels. As of September 30, 2010, bank deposits totaled $6.0 billion of which $4.9 billion were brokered term deposits, $0.8 billion were retail deposits and $0.3 billion were other deposits. In addition, the bank has deposits from affiliates totaling $0.5 billion that eliminate in the Company’s consolidated balance sheet. Cash and liquid investments totaled $2.7 billion as of September 30, 2010.

Under Sallie Mae Bank’s 2010 business plan submitted to its regulators, Sallie Mae Bank is permitted to declare and pay a dividend to its parent, SLM Corporation. The dividend must be permitted by Utah law and the Bank must be in compliance with its capital standards at the time of payment and be projected to maintain sufficient capital over a period of time. On October 28, 2010, Sallie Mae Bank paid a cash dividend of $400 million to the Company.

In addition to its deposit base, Sallie Mae Bank has borrowing capacity with the Federal Reserve Bank (“FRB”) through a collateralized lending facility. Borrowing capacity is limited by the availability of acceptable collateral. As of September 30, 2010, borrowing capacity was approximately $0.6 billion and there were no outstanding borrowings.

Unsecured Revolving Credit Facility

As of September 30, 2010, the Company had $1.6 billion in an unsecured revolving credit facility which provides liquidity support for general corporate purposes. This facility matures in October 2011. On May 5, 2010, the $1.9 billion revolving credit facility maturing in October 2010 was terminated.

The principal financial covenants in the unsecured revolving credit facility 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 $3.3 billion as of September 30, 2010. The covenants also require the Company to meet either a minimum interest coverage ratio or a minimum net adjusted revenue test based on the four preceding quarters’ adjusted “Core Earnings” financial performance. The Company was compliant with both of the minimum interest coverage ratio and the minimum net adjusted revenue tests as of the quarter ended September 30, 2010. 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, the revolving credit facility maturing October 2011 remains available to be drawn upon for general corporate purposes.


6.	Student Loan Securitization

The Company securitizes its FFELP Stafford loans, FFELP Consolidation Loans and Private Education Loan assets. Prior to the adoption of topic updates to the FASB’s ASC 810 on January 1, 2010, for transactions qualifying as sales, the Company retained a Residual Interest and servicing rights (as the Company retained the servicing responsibilities), all of which were 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

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


6.	Student Loan Securitization (Continued)

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. As a result of adopting the topic updates to ASC 810, the Company removed the $1.8 billion of Residual Interests (associated with its previously off-balance sheet securitization trusts as of December 31, 2009) from the consolidated balance sheet (see Note 1, “Significant Accounting Policies — Recently Issued Accounting Standards - Transfers of Financial Assets and the VIE Consolidation Model” for further details). While this accounting has changed, the Company’s economic interest in these assets remains unchanged.

Securitization Activity

The following table summarizes the Company’s securitization activity for the three and nine months ended September 30, 2010 and 2009. The securitizations in the periods presented below were accounted for as financings under ASC 860.


	Three Months Ended September 30,								Nine Months Ended September 30,
	2010				2009				2010				2009
			Loan				Loan				Loan				Loan
	No. of		Amount		No. of		Amount		No. of		Amount		No. of		Amount
(Dollars in millions)	Transactions		Securitized		Transactions		Securitized		Transactions		Securitized		Transactions		Securitized

Securitizations:
FFELP Stafford/PLUS Loans		1	$	754		—	$	—		2	$	1,965		—	$	—
FFELP Consolidation Loans		—		—		—		—		—		—		2		4,524
Private Education Loans		2		4,257		2		3,766		3		6,186		4		10,184

Total securitizations		3	$	5,011		2	$	3,766		5	$	8,151		6	$	14,708

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


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

Net proceeds from new securitizations completed during the period	$	—		$	—
Cash distributions from trusts related to Residual Interests		100			368
Servicing fees received⁽¹⁾		55			171
Purchases of previously transferred financial assets for representation and warranty violations		(1	)		(6	)
Reimbursements of borrower benefits		(9	)		(26	)
Purchases of delinquent Private Education Loans from securitization trusts using delinquent loan call option		—			—
Purchases of loans using clean-up call option		—			—


⁽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.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


6.	Student Loan Securitization (Continued)

Retained Interest in Securitized Receivables

The following tables summarize the fair value of the Company’s Residual Interests, included in the Company’s Retained Interest (and the assumptions used to value such Residual Interests), along with the underlying off-balance sheet student loans that relate to those securitizations in transactions that were treated as sales as of December 31, 2009. As noted previously, the Residual Interest was removed from the balance sheet on January 1, 2010.


	As of December 31, 2009
	FFELP			Consolidation			Private
	Stafford and			Loan			Education
(Dollars in millions)	PLUS			Trusts⁽¹⁾			Loan Trusts			Total

Fair value of Residual Interests	$	243		$	791		$	794		$	1,828
Underlying securitized loan balance		5,377			14,369			12,986			32,732
Weighted average life		3.3 yrs.			9.0 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	%		5.31	%
Residual cash flows discount rate		10.6	%		12.3	%		27.5	%


⁽¹⁾		Includes $569 million related to the fair value of the Embedded Floor Income as of December 31, 2009.

⁽²⁾		The Company uses Constant Prepayment Rate (“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 12.2 percent at December 31, 2009. 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 9.3 percent at December 31, 2009.

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

The $13 million unrealized mark-to-market gain in the third quarter of 2009 was primarily a result of decreases in the discount rates used to value the Residual Interests, increases in the fair value of the Embedded Fixed Rate Floor Income component of the Residual Interest and reductions in the life of loan CPR which were partially offset by higher than modeled defaults on Private Education Loans.

The $338 million mark-to-market loss for the nine months ended September 30, 2009 was primarily due to:


	•	Higher than modeled Private Education Loan defaults resulted in a $262 million unrealized mark-to-market loss.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


6.	Student Loan Securitization (Continued)


	•	Life of loan default rate assumptions for Private Education Loans were increased as a result of the continued weakening of the U.S. economy. This resulted in a $49 million unrealized mark-to-market loss.

	•	The discount rate risk premium assumption related to the Private Education Loan Residual Interests was increased by 500 basis points to take into account the level of cash flow uncertainty and lack of liquidity that existed with the Residual Interests as of September 30, 2009. This resulted in a $126 million unrealized mark-to-market loss.

	•	Decreases in life of loan CPR speeds used to value the Residual Interests resulted in a $62 million mark-to-market gain.

The table below shows the Company’s off-balance sheet Private Education Loan delinquencies as of September 30, 2009.


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

Loans in-school/grace/deferment⁽¹⁾	$	3,148
Loans in forbearance⁽²⁾		474
Loans in repayment and percentage of each status:
Loans current		8,516		90.0	%
Loans delinquent 31-60 days⁽³⁾		312		3.3
Loans delinquent 61-90 days⁽³⁾		161		1.7
Loans delinquent greater than 90 days⁽³⁾		469		5.0

Total off-balance sheet Private Education Loans in repayment		9,458		100.0	%

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


⁽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 requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardships or other factors, consistent with established loan program servicing policies and procedures.

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

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


6.	Student Loan Securitization (Continued)

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.


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

Charge-offs	$	150		$	329
Charge-offs as a percentage of average loans in repayment (annualized)		6.2	%		4.6	%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)		5.9	%		4.3	%
Ending off-balance sheet total Private Education Loans⁽¹⁾	$	13,280		$	13,280
Average off-balance sheet Private Education Loans in repayment	$	9,585		$	9,543
Ending off-balance sheet Private Education Loans in repayment	$	9,458		$	9,458


⁽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 are used as part of the Company’s interest rate and foreign currency risk management strategy and 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. (For a full discussion of the Company’s risk management strategy and use of derivatives, please see the Company’s 2009 Form 10-K, Note 9, “Derivative Financial Instruments,” to the consolidated financial statements.) The accounting for 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.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


7.	Derivative Financial Instruments (Continued)

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.

Summary of Derivative Financial Statement Impact

The following tables summarize the fair values and notional amounts of all derivative instruments at September 30, 2010 and December 31, 2009, and their impact on other comprehensive income and earnings for the three and nine months ended September 30, 2010 and 2009.

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	2010			2009			2010			2009			2010			2009			2010			2009

Fair Values⁽¹⁾
Derivative Assets
Interest rate swaps	Interest rate	$	—		$	—		$	1,447		$	684		$	208		$	133		$	1,655		$	817
Cross currency interest rate swaps	Foreign currency and interest rate		—			—			2,594			2,932			94			44			2,688			2,976
Other⁽²⁾	Interest rate		—			—			—			—			32			—			32			—

Total derivative assets⁽³⁾			—			—			4,041			3,616			334			177			4,375			3,793
Derivative Liabilities
Interest rate swaps	Interest rate		(92	)		(78	)		—			(6	)		(282	)		(639	)		(374	)		(723	)
Floor Income Contracts	Interest rate		—			—			—			—			(1,578	)		(1,234	)		(1,578	)		(1,234	)
Cross currency interest rate swaps	Foreign currency and interest rate		—			—			(207	)		(192	)		(1	)		(1	)		(208	)		(193	)
Other⁽²⁾	Interest rate		—			—			—			—			(1	)		(20	)		(1	)		(20	)

Total derivative liabilities⁽³⁾			(92	)		(78	)		(207	)		(198	)		(1,862	)		(1,894	)		(2,161	)		(2,170	)

Net total derivatives		$	(92	)	$	(78	)	$	3,834		$	3,418		$	(1,528	)	$	(1,717	)	$	2,214		$	1,623


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

⁽²⁾		“Other” includes the fair value of Euro-dollar futures contracts, the embedded derivatives in asset-backed financings, and derivatives related to the Company’s Total Return Swap Facility. The embedded derivatives are required to be accounted for as derivatives.

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


	Other Assets						Other Liabilities
	September 30,			December 31,			September 30,			December 31,
	2010			2009			2010			2009

Gross position	$	4,375		$	3,793		$	(2,161	)	$	(2,170	)
Impact of master netting agreements		(1,084	)		(1,009	)		1,084			1,009

Derivative values with impact of master netting agreements (as carried on balance sheet)		3,291			2,784			(1,077	)		(1,161	)
Cash collateral (held) pledged		(1,666	)		(1,268	)		850			636

Net position	$	1,625		$	1,516		$	(227	)	$	(525	)

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at September 30, 2010 and for the three and nine months ended

September 30, 2010 and 2009 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)


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)

2010

2009

2010

2009

2010

2009

2010

2009

Notional Values

Interest rate swaps

1.7

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