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 March 31, 2007 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer 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 April 30, 2007

Voting common stock, $.20 par value		411,416,060 shares

GLOSSARY

Listed below are definitions of key terms that are used throughout this document.

Borrower Benefits — Borrower Benefits are financial incentives offered to borrowers who qualify based on pre-determined qualifying factors, which are generally tied directly to making on-time monthly payments. The impact of Borrower Benefits is dependent on the estimate of the number of borrowers who will eventually qualify for these benefits and the amount of the financial benefit offered to the borrower. We occasionally change Borrower Benefits programs in both amount and qualification factors. These programmatic changes must be reflected in the estimate of the Borrower Benefits discount.

Consolidation Loan Rebate Fee — All holders of FFELP Consolidation Loans are required to pay to the U.S. Department of Education (“ED”) an annual 105 basis point Consolidation Loan Rebate Fee on all outstanding principal and accrued interest balances of FFELP Consolidation Loans purchased or originated after October 1, 1993, except for loans for which consolidation applications were received between October 1, 1998 and January 31, 1999, where the Consolidation Loan Rebate Fee is 62 basis points.

Constant Prepayment Rate (“CPR”) — A variable in life of loan estimates that measures the rate at which loans in the portfolio pay before their stated maturity. The CPR is directly correlated to the average life of the portfolio. CPR equals the percentage of loans that prepay annually as a percentage of the beginning of period balance.

“Core Earnings” — In accordance with the Rules and Regulations of the Securities and Exchange Commission (“SEC”), we prepare financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”). In addition to evaluating the Company’s GAAP-based financial information, management evaluates the Company’s business segments on a basis that, as allowed under the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” differs from GAAP. We refer to management’s basis of evaluating our segment results as “Core Earnings” presentations for each business segment and we refer to these performance measures in our presentations with credit rating agencies and lenders. While “Core Earnings” results are not a substitute for reported results under GAAP, we rely on “Core Earnings” performance measures in operating each business segment because we believe these measures provide additional information regarding the operational and performance indicators that are most closely assessed by management.

Our “Core Earnings” performance measures are the primary financial performance measures used by management to evaluate performance and to allocate resources. Accordingly, financial information is reported to management on a “Core Earnings” basis by reportable segment, as these are the measures used regularly by our chief operating decision maker. Our “Core Earnings” performance measures are used in developing our financial plans and tracking results, and also in establishing corporate performance targets and determining incentive compensation. Management believes this information provides additional insight into the financial performance of the Company’s core business activities. Our “Core Earnings” performance measures are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. “Core Earnings” net income reflects only current period adjustments to GAAP net income. Accordingly, the Company’s “Core Earnings” presentation does not represent another comprehensive basis of accounting.

See “NOTE 11 TO THE CONSOLIDATED FINANCIAL STATEMENTS — Segment Reporting” and “MANAGEMENT’S DISCUSSION AND ANALYSIS — BUSINESS SEGMENTS — Limitations of ‘Core Earnings’” for further discussion of the differences between “Core Earnings” and GAAP, as well as reconciliations between “Core Earnings” and GAAP.

In prior filings with the SEC of SLM Corporation’s Annual Report on Form 10-K and quarterly report on Form 10-Q, “Core Earnings” has been labeled as “‘Core’ net income” or “Managed net income” in certain instances.

Direct Loans — Student loans originated directly by ED under the FDLP.

ED — The U.S. Department of Education.

Embedded Fixed Rate/Variable Rate Floor Income — Embedded Floor Income is Floor Income (see definition below) that is earned on off-balance sheet student loans that are in securitization trusts sponsored by us. At the time of the securitization, the value of Embedded Fixed Rate Floor Income is included in the initial valuation of the Residual Interest (see definition below) and the gain or loss on sale of the student loans. Embedded Floor Income is also included in the quarterly fair value adjustments of the Residual Interest.

Exceptional Performer (“EP”) Designation — The EP designation is determined by ED in recognition of a servicer meeting certain performance standards set by ED in servicing FFELP loans. Upon receiving the EP designation, the EP servicer receives 99 percent reimbursement on default claims on federally guaranteed student loans for all loans serviced for a period of at least 270 days before the date of default and will no longer be subject to the three percent Risk Sharing (see definition below) on these loans. The EP servicer is entitled to receive this benefit as long as it remains in compliance with the required servicing standards, which are assessed on an annual and quarterly basis through compliance audits and other criteria. The annual assessment is in part based upon subjective factors which alone may form the basis for an ED determination to withdraw the designation. If the designation is withdrawn, the three percent Risk Sharing may be applied retroactively to the date of the occurrence that resulted in noncompliance.

FDLP — The William D. Ford Federal Direct Student Loan Program.

FFELP — The Federal Family Education Loan Program, formerly the Guaranteed Student Loan Program.

FFELP Consolidation Loans — Under the Federal Family Education Loan Program (“FFELP”) borrowers with multiple eligible student loans may consolidate them into a single student loan with one lender at a fixed rate for the life of the loan. The new note is considered a FFELP Consolidation Loan. Typically a borrower may consolidate his student loans only once unless the borrower has another eligible loan to consolidate with the existing FFELP Consolidation Loan. The borrower rate on a FFELP Consolidation Loan is fixed for the term of the loan and is set by the weighted average interest rate of the loans being consolidated, rounded up to the nearest 1/8th of a percent, not to exceed 8.25 percent. In low interest rate environments, FFELP Consolidation Loans provide an attractive refinancing opportunity to certain borrowers because they allow borrowers to consolidate variable rate loans into a long-term fixed rate loan. Holders of FFELP Consolidation Loans are eligible to earn interest under the Special Allowance Payment (“SAP”) formula (see definition below).

FFELP Stafford and Other Student Loans — Education loans to students or parents of students that are guaranteed or reinsured under the FFELP. The loans are primarily Stafford loans but also include PLUS and HEAL loans.

Fixed Rate Floor Income — We refer to Floor Income (see definition below) associated with student loans whose borrower rate is fixed to term (primarily FFELP Consolidation Loans and Stafford Loans originated on or after July 1, 2006) as Fixed Rate Floor Income.

Floor Income — FFELP student loans generally earn interest at the higher of a floating rate based on the Special Allowance Payment or SAP formula (see definition below) set by ED and the borrower rate, which is fixed over a period of time. We generally finance our student loan portfolio with floating rate debt over all interest rate levels. In low and/or declining interest rate environments, when the fixed borrower rate is higher than the rate produced by the SAP formula, our student loans earn at a fixed rate while the interest on our floating rate debt continues to decline. In these interest rate environments, we earn additional spread income that we refer to as Floor Income. Depending on the type of the student loan and when it was originated, the borrower rate is either fixed to term or is reset to a market rate each July 1. As a result, for loans where the borrower rate is fixed to term, we may earn Floor Income for an extended period of time, and for those loans where the borrower interest rate is reset annually on July 1, we may earn Floor Income to the next reset date. In accordance with new legislation enacted in 2006, lenders are required to rebate Floor Income to ED for all new FFELP loans disbursed on or after April 1, 2006.

The following example shows the mechanics of Floor Income for a typical fixed rate FFELP Consolidation Loan (with a commercial paper-based SAP spread of 2.64 percent):


Fixed Borrower Rate	7.25	%
SAP Spread over Commercial Paper Rate	(2.64	)%

Floor Strike Rate⁽¹⁾	4.61	%


⁽¹⁾		The interest rate at which the underlying index (Treasury bill or commercial paper) plus the fixed SAP spread equals the fixed borrower rate. Floor Income is earned anytime the interest rate of the underlying index declines below this rate.

Based on this example, if the quarterly average commercial paper rate is over 4.61 percent, the holder of the student loan will earn at a floating rate based on the SAP formula, which in this example is a fixed spread to commercial paper of 2.64 percent. On the other hand, if the quarterly average commercial paper rate is below 4.61 percent, the SAP formula will produce a rate below the fixed borrower rate of 7.25 percent and the loan holder earns at the borrower rate of 7.25 percent. The difference between the fixed borrower rate and the lender’s expected yield based on the SAP formula is referred to as Floor Income. Our student loan assets are generally funded with floating rate debt, so when student loans are earning at the fixed borrower rate, decreases in interest rates may increase Floor Income.


*Graphic Depiction of Floor Income:*

Floor Income Contracts — We enter into contracts with counterparties under which, in exchange for an upfront fee representing the present value of the Floor Income that we expect to earn on a notional amount of underlying student loans being economically hedged, we will pay the counterparties the Floor Income earned on that notional amount over the life of the Floor Income Contract. Specifically, we agree to pay the counterparty the difference, if positive, between the fixed borrower rate less the SAP (see definition below) spread and the average of the applicable interest rate index on that notional amount, regardless of the actual balance of underlying student loans, over the life of the contract. The contracts generally do not extend over the life of the underlying student loans. This contract effectively locks in the amount of Floor Income we will earn over the period of the contract. Floor Income Contracts are not considered effective hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and each quarter we must record the change in fair value of these contracts through income.

GSE — The Student Loan Marketing Association was a federally chartered government-sponsored enterprise and wholly owned subsidiary of SLM Corporation that was dissolved under the terms of the Privatization Act (see definition below) on December 29, 2004.

HEA — The Higher Education Act of 1965, as amended.

Managed Basis — We generally analyze the performance of our student loan portfolio on a Managed Basis, under which we view both on-balance sheet student loans and off-balance sheet student loans owned by the securitization trusts as a single portfolio, and the related on-balance sheet financings are combined with off-balance sheet debt. When the term Managed is capitalized in this document, it is referring to Managed Basis.

Preferred Lender List — Most higher education institutions select a small number of lenders to recommend to their students and parents. This recommended list is referred to as the Preferred Lender List.

Preferred Channel Originations — Preferred Channel Originations are comprised of: 1) student loans that are originated by lenders with forward purchase commitment agreements with Sallie Mae and are committed for sale to Sallie Mae, such that we either own them from inception or, in most cases, acquire them soon after origination, and 2) loans that are originated by internally marketed Sallie Mae brands.

Private Education Loans — Education loans to students or parents of students that are not guaranteed or reinsured under the FFELP or any other federal or private student loan program. Private Education Loans include loans for traditional higher education, undergraduate and graduate degrees, and for alternative education, such as career training, private kindergarten through secondary education schools and tutorial schools. Traditional higher education loans have repayment terms similar to FFELP loans, whereby repayments begin after the borrower leaves school. Repayment for alternative education or career training loans generally begins immediately.

Privatization Act — The Student Loan Marketing Association Reorganization Act of 1996.

Reconciliation Legislation — The Higher Education Reconciliation Act of 2005, which reauthorized the student loan programs of the HEA and generally became effective as of July 1, 2006.

Residual Interest — When we securitize student loans, we retain the right to receive cash flows from the student loans sold to trusts we sponsor in excess of amounts needed to pay servicing, derivative costs (if any), other fees, and the principal and interest on the bonds backed by the student loans. The Residual Interest, which may also include reserve and other cash accounts, is the present value of these future expected cash flows, which includes the present value of Embedded Fixed Rate Floor Income described above. We value the Residual Interest at the time of sale of the student loans to the trust and at the end of each subsequent quarter.

Retained Interest — The Retained Interest includes the Residual Interest (defined above) and servicing rights (as the Company retains the servicing responsibilities).

Risk Sharing — When a FFELP loan defaults, the federal government guarantees 97 percent of the principal balance plus accrued interest (98 percent on loans disbursed before July 1, 2006) and the holder of the loan generally must absorb the remaining three percent not guaranteed as a Risk Sharing loss on the loan. FFELP student loans originated after October 1, 1993 are subject to Risk Sharing on loan default claim payments unless the default results from the borrower’s death, disability or bankruptcy. FFELP loans serviced by a servicer that has EP designation (see definition above) from ED are subject to one-percent Risk Sharing for claims filed on or after July 1, 2006.

Special Allowance Payment (“SAP”) — FFELP student loans originated prior to April 1, 2006 generally earn interest at the greater of the borrower rate or a floating rate determined by reference to the average of the applicable floating rates (91-day Treasury bill rate or commercial paper) in a calendar quarter, plus a fixed spread that is dependent upon when the loan was originated and the loan’s repayment status. If the resulting floating rate exceeds the borrower rate, ED pays the difference directly to us. This payment is referred to as the Special Allowance Payment or SAP and the formula used to determine the floating rate is the SAP formula. We refer to the fixed spread to the underlying index as the SAP spread. For loans disbursed after April 1, 2006, FFELP loans effectively only earn at the SAP rate, as the excess interest earned when the borrower rate exceeds the SAP rate (Floor Income) must be refunded to ED.

Variable rate PLUS Loans and SLS Loans earn SAP only if the variable rate, which is reset annually, exceeds the applicable maximum borrower rate. For PLUS loans disbursed on or after January 1, 2000, this limitation on SAP was repealed effective April 1, 2006.

Title IV Programs and Title IV Loans — Student loan programs created under Title IV of the HEA, including the FFELP and the FDLP, and student loans originated under those programs, respectively.

Variable Rate Floor Income — For FFELP Stafford student loans whose borrower interest rate resets annually on July 1, we may earn Floor Income or Embedded Floor Income (see definitions above) based on a calculation of the difference between the borrower rate and the then current interest rate. We refer to this as Variable Rate Floor Income because Floor Income is earned only through the next reset date.

Wholesale Consolidation Channel — During 2006, we implemented a new loan acquisition strategy under which we began purchasing a significant amount of FFELP Consolidation Loans, primarily via the spot market, which augments our traditional FFELP Consolidation Loan origination process. We refer to this new loan acquisition strategy as our Wholesale Consolidation Channel. FFELP Consolidation Loans acquired through this channel are considered incremental volume to our core acquisition channels, which are focused on the retail marketplace with an emphasis on our brand strategy.

Wind-Down — The dissolution of the GSE under the terms of the Privatization Act (see definitions above).

SLM CORPORATION

FORM 10-Q

INDEX

March 31, 2007


Part I. Financial Information
	Item 1.	Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	90
	Item 4.	Controls and Procedures	92

Part II. Other Information
	Item 1.	Legal Proceedings	93
	Item 1A.	Risk Factors	93
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	94
	Item 3.	Defaults Upon Senior Securities	94
	Item 4.	Submission of Matters to a Vote of Security Holders	94
	Item 5.	Other Information	94
	Item 6.	Exhibits	94
Signatures			95
EX-3.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

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


	March 31,		December 31,
	2007		2006
	(Unaudited)

Assets
FFELP Stafford and Other Student Loans (net of allowance for losses of $10,192 and $8,701, respectively)	$	28,561,670	$	24,840,464
FFELP Consolidation Loans (net of allowance for losses of $12,087 and $11,614, respectively)		66,170,098		61,324,008
Private Education Loans (net of allowance for losses of $369,072 and $308,346, respectively)		9,849,481		9,755,289
Other loans (net of allowance for losses of $19,803 and $20,394, respectively)		1,350,416		1,308,832
Investments
Available-for-sale		2,342,845		2,464,121
Other		94,215		99,330

Total investments		2,437,060		2,563,451
Cash and cash equivalents		3,679,108		2,621,222
Restricted cash and investments		3,719,020		3,423,326
Retained Interest in off-balance sheet securitized loans		3,643,322		3,341,591
Goodwill and acquired intangible assets, net		1,364,016		1,371,606
Other assets		6,102,275		5,585,943

Total assets	$	126,876,466	$	116,135,732


Liabilities
Short-term borrowings	$	4,428,980	$	3,528,263
Long-term borrowings		114,070,797		104,558,531
Other liabilities		3,990,878		3,679,781

Total liabilities		122,490,655		111,766,575

Commitments and contingencies

Minority interest in subsidiaries		9,029		9,115

Stockholders’ equity
Preferred stock, par value $.20 per share, 20,000 shares authorized; Series A: 3,300 and 3,300 shares issued, respectively, at stated value of $50 per share; Series B: 4,000 and 4,000 shares issued, respectively, at stated value of $100 per share		565,000		565,000
Common stock, par value $.20 per share, 1,125,000 shares authorized; 434,587 and 433,113 shares issued, respectively		86,918		86,623
Additional paid-in capital		2,638,334		2,565,211
Accumulated other comprehensive income (net of tax of $158,417 and $183,684, respectively)		300,884		349,111
Retained earnings		1,833,359		1,834,718

Stockholders’ equity before treasury stock		5,424,495		5,400,663
Common stock held in treasury: 22,650 and 22,496 shares, respectively		1,047,713		1,040,621

Total stockholders’ equity		4,376,782		4,360,042

Total liabilities and stockholders’ equity	$	126,876,466	$	116,135,732

See accompanying notes to consolidated financial statements.

SLM CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars and shares in thousands, except per share amounts)


	Three Months Ended
	March 31,
	2007			2006
	(Unaudited)			(Unaudited)

Interest income:
FFELP Stafford and Other Student Loans	$	450,762		$	298,500
FFELP Consolidation Loans		1,014,846			821,335
Private Education Loans		338,421			241,353
Other loans		27,973			23,307
Cash and investments		113,904			95,810

Total interest income		1,945,906			1,480,305
Total interest expense		1,532,090			1,092,784

Net interest income		413,816			387,521
Less: provisions for losses		150,330			60,319

Net interest income after provisions for losses		263,486			327,202

Other income:
Gains on student loan securitizations		367,300			30,023
Servicing and securitization revenue		251,938			98,931
Losses on securities, net		(30,967	)		(2,948	)
Gains (losses) on derivative and hedging activities, net		(356,969	)		(86,739	)
Guarantor servicing fees		39,241			26,907
Debt management fees		87,322			91,612
Collections revenue		65,562			56,681
Other		96,433			71,376

Total other income		519,860			285,843
Operating expenses:
Salaries and benefits		186,350			175,340
Other		169,824			147,969

Total operating expenses		356,174			323,309

Income before income taxes and minority interest in net earnings of subsidiaries		427,172			289,736
Income taxes		310,014			137,045

Income before minority interest in net earnings of subsidiaries		117,158			152,691
Minority interest in net earnings of subsidiaries		1,005			1,090

Net income		116,153			151,601
Preferred stock dividends		9,093			8,301

Net income attributable to common stock	$	107,060		$	143,300

Basic earnings per common share	$	.26		$	.35

Average common shares outstanding		411,040			412,675

Diluted earnings per common share	$	.26		$	.34

Average common and common equivalent shares outstanding		418,449			422,974

Dividends per common share	$	.25		$	.22

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’
	Shares		Issued		Treasury			Outstanding			Stock		Stock		Capital		Income (Loss)			Earnings			Stock			Equity

Balance at December 31, 2005		7,300,000		426,483,527		(13,346,717	)		413,136,810		$	565,000	$	85,297	$	2,233,647	$	367,910		$	1,111,743		$	(572,172	)	$	3,791,425

Comprehensive income:

Net income																					151,601						151,601

Other comprehensive income, net of tax:

Change in unrealized gains (losses) on investments, net of tax																		(44,950	)								(44,950	)

Change in unrealized gains (losses) on derivatives, net of tax																		5,531									5,531

Minimum pension liability																		5									5


Comprehensive income																											112,187

Cash dividends:

Common stock ($.22 per share)																					(91,473	)					(91,473	)

Preferred stock, series A ($.87 per share)																					(2,875	)					(2,875	)

Preferred stock, series B ($1.30 per share)																					(5,267	)					(5,267	)

Issuance of common shares				2,845,835		46,002			2,891,837					569		83,036								2,568			86,173

Preferred stock issuance costs and related amortization																159					(159	)					—

Tax benefit related to employee stock option and purchase plans																27,061											27,061

Stock-based compensation cost																20,349											20,349

Repurchase of common shares:

Equity forwards:

Exercise cost, cash						(2,447,832	)		(2,447,832	)														(133,994	)		(133,994	)

(Gain) loss on settlement						—			—															(806	)		(806	)

Benefit plans						(850,608	)		(850,608	)														(47,852	)		(47,852	)


Balance at March 31, 2006		7,300,000		429,329,362		(16,599,155	)		412,730,207		$	565,000	$	85,866	$	2,364,252	$	328,496		$	1,163,570		$	(752,256	)	$	3,754,928

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			Stockholder’s
	Shares		Issued		Treasury			Outstanding			Stock		Stock		Capital		Income (Losses)			Earnings			Stock			Equity

Balance at December 31, 2006		7,300,000		433,112,982		(22,496,170	)		410,616,812		$	565,000	$	86,623	$	2,565,211	$	349,111		$	1,834,718		$	(1,040,621	)	$	4,360,042

Comprehensive income:

Net income																					116,153						116,153

Other comprehensive income, net of tax:

Change in unrealized gains (losses) on investments, net of tax																		(48,188	)								(48,188	)

Change in unrealized gains (losses) on derivatives, net of tax																		483									483

Defined benefit pension plans adjustment, net of tax																		(522	)								(522	)


Comprehensive income																											67,926

Cash dividends:

Common stock ($.25 per share)																					(102,658	)					(102,658	)

Preferred stock, series A ($.87 per share)																					(2,875	)					(2,875	)

Preferred stock, series B ($1.52 per share)																					(6,058	)					(6,058	)

Issuance of common shares				1,473,681		35,123			1,508,804					295		47,420								1,574			49,289

Preferred stock issuance costs and related amortization																160					(160	)					—

Tax benefit related to employee stock option and purchase plans																8,648											8,648

Stock-based compensation cost																16,895											16,895

Cumulative effect of accounting change																					(5,761	)					(5,761	)

Repurchase of common shares:

Benefit plans						(188,919	)		(188,919	)														(8,666	)		(8,666	)


Balance at March 31, 2007		7,300,000		434,586,663		(22,649,966	)		411,936,697		$	565,000	$	86,918	$	2,638,334	$	300,884		$	1,833,359		$	(1,047,713	)	$	4,376,782

See accompanying notes to consolidated financial statements.

SLM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)


	Three Months Ended
	March 31,
				Restated
	2007			2006
	(Unaudited)			(Unaudited)
Operating activities
Net income	$	116,153		$	151,601
Adjustments to reconcile net income to net cash used in operating activities:
Gains on student loan securitizations		(367,300	)		(30,023	)
Losses on securities, net		30,967			2,948
Stock-based compensation cost		26,101			22,768
Unrealized (gains)/losses on derivative and hedging activities, excluding equity forwards		(80,240	)		(83,332	)
Unrealized (gains)/losses on derivative and hedging activities — equity forwards		412,206			122,411
Provisions for losses		150,330			60,319
Minority interest, net		(1,609	)		(1,674	)
Mortgage loans originated		(226,208	)		(349,332	)
Proceeds from sales of mortgage loans		250,156			368,008
Decrease (increase) in restricted cash-other		22,202			(63,629	)
(Increase) in accrued interest receivable		(350,454	)		(233,427	)
Increase in accrued interest payable		107,183			30,253
Adjustment for non-cash (income)/loss related to Retained Interest		(67,836	)		52,524
(Increase) in other assets, goodwill and acquired intangible assets, net		(29,291	)		(66,988	)
Increase (decrease) in other liabilities		197,456			(193,826	)

Total adjustments		73,663			(363,000	)

Net cash provided by (used in) operating activities		189,816			(211,399	)

Investing activities
Student loans acquired		(12,278,480	)		(8,322,746	)
Loans purchased from securitized trusts (primarily loan consolidations)		(1,347,297	)		(1,338,498	)
Reduction of student loans:
Installment payments		2,900,029			2,494,862
Proceeds from securitization of student loans treated as sales		1,976,599			7,985,275
Proceeds from sales of student loans		4,184			9,214
Other loans originated		(965,223	)		(289,585	)
Other loans repaid		897,602			295,396
Other investing activities, net		(58,236	)		(33,065	)
Purchases of available-for-sale securities		(15,448,651	)		(10,263,898	)
Proceeds from sales of available-for-sale securities		73,143			—
Proceeds from maturities of available-for-sale securities		15,567,592			10,811,460
Purchases of held-to-maturity and other securities		(540	)		(235,804	)
Proceeds from maturities of held-to-maturity securities and other securities		7,065			176,344
(Increase) decrease in restricted cash — on-balance sheet trusts		(379,218	)		100,961
Return of investment from Retained Interest		62,455			36,580

Net cash (used in) provided by investing activities		(8,988,976	)		1,426,496

Financing activities
Short-term borrowings issued		1,204,049			15,290,752
Short-term borrowings repaid		(957,381	)		(15,297,685	)
Long-term borrowings issued		1,567,602			1,653,839
Long-term borrowings repaid		(1,312,003	)		(1,763,784	)
Borrowings collateralized by loans in trust issued		11,203,950			—
Borrowings collateralized by loans in trust — activity		(1,638,925	)		(1,082,549	)
Other financing activities, net		(8,395	)		(22,681	)
Excess tax benefit from the exercise of stock-based awards		4,331			17,108
Common stock issued		35,423			71,942
Net settlements on equity forward contracts		(121,348	)		(13,855	)
Common stock repurchased		(8,666	)		(181,846	)
Common dividends paid		(102,658	)		(91,473	)
Preferred dividends paid		(8,933	)		(8,142	)

Net cash provided by (used in) financing activities		9,857,046			(1,428,374	)

Net increase (decrease) in cash and cash equivalents		1,057,886			(213,277	)
Cash and cash equivalents at beginning of period		2,621,222			2,498,655

Cash and cash equivalents at end of period	$	3,679,108		$	2,285,378

Cash disbursements made for:
Interest	$	1,477,775		$	1,022,758

Income taxes	$	159,962		$	148,597

See accompanying notes to consolidated financial statements.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 2007 and for the three months ended
March 31, 2007 and 2006 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”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of the results for the interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three months ended March 31, 2007 are not necessarily indicative of the results for the year ending December 31, 2007. The consolidated balance sheet at December 31, 2006, as presented, was derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2006. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s 2006 Annual Report on Form 10-K.

Reclassifications

Certain reclassifications have been made to the balances as of and for the three months ended March 31, 2006 to be consistent with classifications adopted for 2007.

Restatement of Quarterly Consolidated Statements of Cash Flows (unaudited)

The Company restated its 2006 quarterly consolidated statements of cash flows as more fully described within the Company’s 2006 Annual Report on Form 10-K at Note 2, “Significant Accounting Policies — Statement of Cash Flows — Restatement of the Consolidated Statements of Cash Flows” and Note 21, “Restatement of Quarterly Consolidated Statements of Cash Flows (unaudited).” The restatements solely affected the classification of items in operating, investing and financing activities, and had no impact on the net increase (decrease) in cash and cash equivalents set forth in the consolidated statements of cash flows for any of the previously reported periods. The restatements did not affect the Company’s consolidated balance sheets, consolidated statements of income or consolidated statements of changes in stockholders’ equity. Accordingly, the Company’s historical revenues, net income, earnings per share, total assets and total stockholders’ equity remain unchanged.

Recently Issued Accounting Pronouncements

The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value (on an instrument by instrument basis) improving financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Most recognized financial assets and liabilities are eligible items for the measurement option established by the statement. There are a few exceptions, including an investment in a subsidiary or an

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)


1.	Significant Accounting Policies (Continued)

interest in a variable interest entity that is required to be consolidated, certain obligations related to post-employment benefits, assets or liabilities recognized under leases, various deposits and financial instruments classified as shareholder’s equity. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each reporting date. The Company is currently evaluating the impact of this standard on its financial statements. The statement will be effective beginning January 1, 2008.

Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. This statement defines fair value, establishes a framework for measuring fair value within GAAP, and expands disclosures about fair value measurements. This statement applies to other accounting pronouncements that require or permit fair value measurements. Accordingly, this statement does not change which types of instruments are carried at fair value, but rather establishes the framework for measuring fair value. The Company is currently evaluating the potential impact of SFAS No. 157 on its financial statements.

Accounting for Servicing of Financial Assets

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets,” which amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This statement was effective for the Company beginning January 1, 2007.

This statement:


	•	Requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset as the result of (i) a transfer of the servicer’s financial assets that meet the requirement for sale accounting; (ii) a transfer of the servicer’s financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale or trading securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”; or (iii) an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates.

	•	Requires all separately recognized servicing assets or liabilities to be initially measured at fair value, if practicable.

	•	Permits an entity to either (i) amortize servicing assets or liabilities in proportion to and over the period of estimated net servicing income or loss and assess servicing assets or liabilities for impairment or increased obligation based on fair value at each reporting date (amortization method); or (ii) measure servicing assets or liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur (fair value measurement method). The method must be chosen for each separately recognized class of servicing asset or liability.

	•	At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under SFAS No. 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value.


1.	Significant Accounting Policies (Continued)


	•	Requires separate presentation of servicing assets and liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and liabilities.

The adoption of SFAS No. 156 did not have a material impact on the Company’s financial statements as the Company did not elect to carry its servicing rights at fair value through earnings.

Accounting for Certain Hybrid Financial Instruments

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140. This statement was effective for the Company beginning January 1, 2007.

This statement:


	•	Requires that all interests in securitized financial assets be evaluated to determine if the interests are free standing derivatives or if the interests contain an embedded derivative;

	•	Clarifies which interest-only strips and principal-only strips are exempt from the requirements of SFAS No. 133;

	•	Clarifies that the concentrations of credit risk in the form of subordination are not an embedded derivative; and

	•	Allows a hybrid financial instrument containing an embedded derivative that would have required bifurcation under SFAS No. 133 to be measured at fair value as one instrument on a case by case basis;

	•	Amends SFAS Statement No. 140 to eliminate the prohibition of a qualifying special purpose entity from holding a derivative financial instrument that pertains to beneficial interests other than another derivative financial instrument.

In January 2007, the FASB issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” Implementation Issues No. B39, “Embedded Derivatives: Application of Paragraph 13(b) to Call Options That Are Exercisable Only by the Debtor (Amended),” and No. B40, “Embedded Derivatives: Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets.” The guidance clarifies various aspects of SFAS No. 155 and will require the Company to either (1) separately record embedded derivatives that may reside in the Company’s Residual Interest and on-balance sheet securitization debt, or (2) if embedded derivatives exist that require bifurcation, mark-to-market through income changes in the fair value of the Company’s Residual Interest and on-balance sheet securitization debt in their entirety. This standard is prospectively applied in 2007 for new securitizations and does not apply to the Company’s existing Residual Interest or on-balance sheet securitization debt that settled prior to 2007.

If material embedded derivatives exist within the Residual Interest that require bifurcation, the Company will most likely elect to carry the entire Residual Interest at fair value with subsequent changes in fair value recorded in earnings. This could have a material impact on earnings, as prior to the adoption of SFAS No. 155, changes in the fair value of these Residual Interests would have been recorded through other comprehensive income (except for impairment which is recorded through income). The Company elected this option related to the Private Education Loan securitization which settled in the first quarter of 2007 and as a result, recorded a $79 million unrealized gain through earnings that, prior to the adoption of SFAS No. 155, would have been recorded through other comprehensive income. The Company has concluded, based on its current


1.	Significant Accounting Policies (Continued)

securitization deal structures, that its on-balance sheet securitization debt will not be materially impacted upon the adoption of SFAS No. 155 as embedded derivatives will not have a material value. Accordingly, there was no impact in the first quarter of 2007.


2.	Allowance for Student Loan Losses

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

The following table summarizes changes in the allowance for student loan losses for both the Private Education Loan and federally insured student loan portfolios for the three months ended March 31, 2007 and 2006.


	Three Months Ended
	March 31,
	2007			2006

Balance at beginning of period	$	328,661		$	219,062
Provisions for student loan losses		147,195			57,799

Charge-offs		(85,812	)		(33,388	)
Recoveries		6,790			6,389

Net charge-offs		(79,022	)		(26,999	)

Balance before reductions for student loan sales and securitizations		396,834			249,862
Reductions for student loan sales and securitizations		(5,483	)		(2,185	)

Balance at end of period	$	391,351		$	247,677

In addition to the provisions for student loan losses, provisions for other losses totaled $3 million and $2 million for the three months ended March 31, 2007 and 2006, respectively.


2.	Allowance for Student Loan Losses (Continued)

The following table summarizes changes in the allowance for student loan losses for Private Education Loans for the three months ended March 31, 2007 and 2006.


	Three Months
	Ended
	March 31,
	2007			2006

Balance at beginning of period	$	308,346		$	204,112
Provision for Private Education Loan losses		141,627			54,372

Charge-offs		(81,911	)		(32,726	)
Recoveries		6,790			6,389

Net charge-offs		(75,121	)		(26,337	)

Balance before securitization of Private Education Loans		374,852			232,147
Reduction for securitization of Private Education Loans		(5,780	)		—

Balance at end of period	$	369,072		$	232,147

Net charge-offs as a percentage of average loans in repayment (annualized)		6.27	%		2.83	%
Allowance as a percentage of the ending total loan balance		3.61	%		2.43	%
Allowance as a percentage of ending loans in repayment		7.58	%		5.96	%
Allowance coverage of net charge-offs (annualized)		1.21			2.17
Average total loans	$	11,354,166		$	9,015,727
Ending total loans	$	10,218,554		$	9,543,311
Average loans in repayment	$	4,859,260		$	3,780,100
Ending loans in repayment	$	4,867,215		$	3,897,945


2.	Allowance for Student Loan Losses (Continued)

Delinquencies

The table below presents the Company’s Private Education Loan delinquency trends as of March 31, 2007, December 31, 2006, and March 31, 2006. Delinquencies have the potential to adversely impact earnings if the account charges off and results in increased servicing and collection costs.


	March 31,						December 31,						March 31,
	2007						2006						2006
(Dollars in millions)	Balance			%			Balance			%			Balance			%

Loans in-school/grace/deferment⁽¹⁾	$	5,220					$	5,218					$	5,573
Loans in forbearance⁽²⁾		494						359						412
Loans in repayment and percentage of each status:
Loans current		4,260			87.5	%		4,214			86.9	%		3,487			89.4	%
Loans delinquent 31-60 days⁽³⁾		184			3.8			250			5.1			170			4.4
Loans delinquent 61-90 days⁽³⁾		131			2.7			132			2.7			106			2.7
Loans delinquent greater than 90 days⁽³⁾		292			6.0			255			5.3			135			3.5

Total Private Education Loans in repayment		4,867			100	%		4,851			100	%		3,898			100	%

Total Private Education Loans, gross		10,581						10,428						9,883
Private Education Loan unamortized discount		(363	)					(365	)					(340	)

Total Private Education Loans		10,218						10,063						9,543
Private Education Loan allowance for losses		(369	)					(308	)					(232	)

Private Education Loans, net	$	9,849					$	9,755					$	9,311

Percentage of Private Education Loans in repayment		46.0	%					46.5	%					39.4	%

Delinquencies as a percentage of Private
Education Loans in repayment		12.5	%					13.1	%					10.6	%


⁽¹⁾	Loans for borrowers who still 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 the established loan program servicing procedures and policies.

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


3.	Goodwill and Acquired Intangible Assets

Intangible assets include the following:


	Average		As of March 31, 2007
	Amortization				Accumulated
(Dollars in millions)	Period		Gross		Amortization			Net

Intangible assets subject to amortization:
Customer, services, and lending relationships		12 years	$	374	$	(126	)	$	248
Tax exempt bond funding		10 years		—		—			—
Software and technology		7 years		95		(66	)		29
Non-compete agreements		2 years		12		(9	)		3

Total				481		(201	)		280

Intangible assets not subject to amortization:
Trade name and trademark		Indefinite		115		—			115

Total acquired intangible assets			$	596	$	(201	)	$	395


	Average		As of December 31, 2006
	Amortization				Accumulated
(Dollars in millions)	Period		Gross		Amortization			Net

Intangible assets subject to amortization:
Customer, services, and lending relationships		12 years	$	367	$	(115	)	$	252
Tax exempt bond funding		10 years		46		(37	)		9
Software and technology		7 years		94		(62	)		32
Non-compete agreements		2 years		12		(9	)		3

Total				519		(223	)		296

Intangible assets not subject to amortization:
Trade name and trademark		Indefinite		106		—			106

Total acquired intangible assets			$	625	$	(223	)	$	402

The Company recorded amortization of acquired intangibles totaling $15 million and $14 million for the three months ended March 31, 2007 and 2006, respectively. The Company will continue to amortize its intangible assets with definite useful lives over their remaining estimated useful lives.

In connection with the Company’s acquisition of Southwest Student Services Corporation and Washington Transferee Corporation, the Company acquired certain tax exempt bonds that enable the Company to earn a 9.5 percent Special Allowance Payment (“SAP”) rate on student loans funded by those bonds in indentured trusts. In the first quarter of 2007, the Company recognized an impairment of $9 million due to changes that restrict the loans on which the Company is entitled to earn a 9.5 percent yield. The impaired intangible asset is reported in the Lending segment and the impairment charge is included in operating expense in the Lending segment.


3.	Goodwill and Acquired Intangible Assets (Continued)

A summary of changes in the Company’s goodwill by reportable segment (see Note 11, “Segment Reporting”) is as follows:


	December 31,					March 31,
(Dollars in millions)	2006		Adjustments			2007

Lending	$	406	$	—		$	406
Debt Management Operations		349		10			359
Corporate and Other		215		(9	)		206

Total	$	970	$	1		$	971

Acquisitions are accounted for under the purchase method of accounting as defined in SFAS No. 141, “Business Combinations.” The Company allocates the purchase price to the fair value of the acquired tangible assets, liabilities and identifiable intangible assets as of the acquisition date as determined by an independent appraiser. Goodwill associated with the Company’s acquisitions is reviewed for impairment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” addressed further in Note 2, “Significant Accounting Policies,” within the Company’s 2006 Annual Report on Form 10-K.


4.	Student Loan Securitization

Securitization Activity

The Company securitizes its student loan assets and for transactions qualifying as sales, retains a Residual Interest and servicing rights (as the Company retains the servicing responsibilities), all of which are referred to as the Company’s Retained Interest in off-balance sheet securitized loans. The Residual Interest is the right to receive cash flows from the student loans and reserve accounts in excess of the amounts needed to pay servicing, derivative costs (if any), other fees, and the principal and interest on the bonds backed by the student loans. The investors of the securitization trusts have no recourse to the Company’s other assets should there be a failure of the trusts to pay when due.


4.	Student Loan Securitization (Continued)

The following table summarizes the Company’s securitization activity for the three months ended March 31, 2007 and 2006. Those securitizations listed as sales are off-balance sheet transactions and those listed as financings remain on-balance sheet.


	Three Months Ended March 31,
	2007									2006
			Loan		Pre-							Loan		Pre-
	No. of		Amount		Tax		Gain			No. of		Amount		Tax		Gain
(Dollars in millions)	Transactions		Securitized		Gain		%			Transactions		Securitized		Gain		%

Securitization sales:
FFELP Stafford/PLUS loans		—	$	—	$	—		—	%		2	$	5,004	$	17		.3	%
FFELP Consolidation Loans		—		—		—		—			1		3,002		13		.4
Private Education Loans		1		2,000		367		18.4			—		—		—		—

Total securitizations — sales		1		2,000	$	367		18.4	%		3		8,006	$	30		.4	%

Securitization financings:
FFELP Stafford/PLUS Loans⁽¹⁾		2		7,004							—		—
FFELP Consolidation Loans⁽¹⁾		1		4,002							—		—

Total securitizations — financings		3		11,006							—		—

Total securitizations		4	$	13,006							3	$	8,006


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


4.	Student Loan Securitization (Continued)

Key economic assumptions used in estimating the fair value of Residual Interests at the date of securitization resulting from the student loan securitization sale transactions completed during the three months ended March 31, 2007 and 2006 were as follows:


	Three Months Ended March 31,
	2007						2006
			FFELP		Private				FFELP		Private
	FFELP		Consolidation		Education		FFELP		Consolidation		Education
	Stafford⁽¹⁾		Loans⁽¹⁾		Loans		Stafford		Loans		Loans⁽¹⁾

Prepayment speed (annual rate)⁽²⁾		—		—		—		*		6%		—
Interim status		—		—		0%		—		—		—
Repayment status		—		—		4-7%		—		—		—
Life of loan repayment status		—		—		6%		—		—		—
Weighted average life		—		—		9.4 yrs.		3.7 yrs.		8.3 yrs.		—
Expected credit losses (% of principal securitized)		—		—		4.69%		.15%		.27%		—
Residual cash flows discounted at (weighted average)		—		—		12.5%		12.4%		10.5%		—


⁽¹⁾		No securitizations qualified for sale treatment in the period.

⁽²⁾		Effective December 31, 2006, the Company implemented Constant Prepayment Rates (“CPR”) curves for Residual Interest valuations that are based on the number of months since entering repayment that better reflect the CPR as the loan seasons. Under this methodology, a different CPR is applied to each year of a loan’s seasoning. Previously, the Company applied a CPR that was based on a static life of loan assumption, irrespective of seasoning, or, in the case of FFELP Stafford and PLUS loans, the Company used a vector approach in applying the CPR. The repayment status CPR depends on the number of months since first entering repayment or as the loans seasons through the portfolio. 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.

*		CPR of 20 percent for 2006, 15 percent for 2007 and 10 percent thereafter.

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


4.	Student Loan Securitization (Continued)

underlying off-balance sheet student loans that relate to those securitizations in transactions that were treated as sales as of March 31, 2007 and 2006.


	As of March 31, 2007
	FFELP		Consolidation		Private
	Stafford and		Loan		Education
Dollars in millions	PLUS		Trusts⁽¹⁾		Loan Trusts		Total

Fair value of Residual Interests⁽²⁾	$	637	$	671	$	2,336	$	3,644
Underlying securitized loan balance⁽³⁾		13,058		17,268		14,807		45,133
Weighted average life		2.8 yrs.		7.2 yrs.		7.4 yrs.
Prepayment speed (annual rate)⁽⁴⁾
Interim status		0%		N/A		0%
Repayment status		0-43%		3-9%		4-7%
Life of loan — repayment status		24%		6%		6%
Expected credit losses (% of student loan principal)		.07%		.06%		4.39%
Residual cash flows discount rate		12.4%		10.5%		12.5%


	As of December 31, 2006
	FFELP		Consolidation		Private
	Stafford and		Loan		Education
Dollars in millions	PLUS		Trusts⁽¹⁾		Loan Trusts		Total

Fair value of Residual Interests⁽²⁾	$	701	$	676	$	1,965	$	3,342
Underlying securitized loan balance⁽³⁾		14,794		17,817		13,222		45,833
Weighted average life		2.9 yrs.		7.3 yrs.		7.2 yrs.
Prepayment speed (annual rate)⁽⁴⁾
Interim status		0%		N/A		0%
Repayment status		0-43%		3-9%		4-7%
Life of loan — repayment status		24%		6%		6%
Expected credit losses (% of student loan principal)		.06%		.07%		4.36%
Residual cash flows discount rate		12.6%		10.5%		12.6%


⁽¹⁾		Includes $147 million and $151 million related to the fair value of the Embedded Floor Income as of March 31, 2007 and December 31, 2006, respectively. Changes in the fair value of the Embedded Floor Income are primarily due to changes in the interest rates and the paydown of the underlying loans.

⁽²⁾		At March 31, 2007 and December 31, 2006, the Company had unrealized gains (pre-tax) in accumulated other comprehensive income of $332 million and $389 million, respectively, which related to the Retained Interests.

⁽³⁾		In addition to student loans in off-balance sheet trusts, the Company had $58.2 billion and $48.6 billion of securitized student loans outstanding (face amount) as of March 31, 2007 and December 31, 2006, respectively, in on-balance sheet securitization trusts.

⁽⁴⁾		Effective December 31, 2006, the Company implemented 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. Previously, the Company applied a CPR that was based on a static life of loan assumption, and, in the case of FFELP Stafford and PLUS loans, the Company applied a vector approach, irrespective of seasoning. Repayment status CPR used is based on the number of months since first entering repayment (seasoning). Life of loan CPR is related to repayment status only and does not include the impact of the loan while in interim status. The CPR assumption used for all periods includes the impact of projected defaults.


4.	Student Loan Securitization (Continued)

The Company recorded $11 million and $52 million of impairment related to the Retained Interests for the three months ended March 31, 2007 and 2006, respectively. The impairment charges were primarily the result of FFELP Stafford loans prepaying faster than projected through loan consolidation ($11 million and $24 million for the three months ended March 31, 2007 and 2006, respectively). The impairment for the quarter ended March 31, 2006 also related to the Floor Income component of the Company’s Retained Interest due to increases in interest rates during the period ($28 million).

The table below shows the Company’s off-balance sheet Private Education Loan delinquency trends as of March 31, 2007, December 31, 2006 and March 31, 2006.


	March 31,					December 31,					March 31,
	2007					2006					2006
(Dollars in millions)	Balance		%			Balance		%			Balance		%

Loans in-school/grace/deferment⁽¹⁾	$	6,821				$	5,608				$	3,456
Loans in forbearance⁽²⁾		1,147					822					784
Loans in repayment and percentage of each status:
Loans current		6,475		94.7	%		6,419		94.5	%		4,389		95.5	%
Loans delinquent 31-60 days⁽³⁾		145		2.1			222		3.3			106		2.3
Loans delinquent 61-90 days⁽³⁾		88		1.3			60		.9			46		1.0
Loans delinquent greater than 90 days⁽³⁾		131		1.9			91		1.3			55		1.2

Total off-balance sheet Private Education Loans in repayment		6,839		100	%		6,792		100	%		4,596		100	%

Total off-balance sheet Private Education Loans, gross	$	14,807				$	13,222				$	8,836


⁽¹⁾		Loans for borrowers who still 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 the established loan program servicing procedures and programs.

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

5. Derivative Financial Instruments

Summary of Derivative Financial Statement Impact

The following tables summarize the fair values and notional amounts or number of contracts of all derivative instruments at March 31, 2007 and December 31, 2006 and their impact on other comprehensive income and earnings for the three months ended March 31, 2007 and 2006. At March 31, 2007 and December 31, 2006, $618 million (of which $76 million is in restricted cash and investments on the balance sheet) and $418 million (of which $53 million is in restricted cash and investments on the balance sheet) fair

5. Derivative Financial Instruments (Continued)

value, respectively, of available-for-sale investment securities and $13 million and $28 million, respectively, of cash were pledged as collateral against these derivative instruments.


	Cash Flow						Fair Value						Trading						Total
	March 31,			December 31,			March 31,			December 31,			March 31,			December 31,			March 31,			December 31,
(Dollars in millions)	2007			2006			2007			2006			2007			2006			2007			2006

Fair Values⁽¹⁾
Interest rate swaps	$	(10	)	$	(9	)	$	(306	)	$	(355	)	$	(50	)	$	(111	)	$	(366	)	$	(475	)
Floor/Cap contracts		—			—			—			—			(196	)		(200	)		(196	)		(200	)
Futures		—			—			—			—			—			—			—			—
Equity forwards		—			—			—			—			(504	)		(213	)		(504	)		(213	)
Cross currency interest rate swaps		—			—			1,640			1,440			—			—			1,640			1,440

Total	$	(10	)	$	(9	)	$	1,334		$	1,085		$	(750	)	$	(524	)	$	574		$	552

(Dollars in billions)
Notional Values
Interest rate swaps	$	2.4		$	2.1		$	15.6		$	15.6		$	187.5		$	162.0		$	205.5		$	179.7
Floor/Cap contracts		—			—			—			—			22.8			21.5			22.8			21.5
Futures		.1			.1			—			—			.6			.6			.7			.7
Cross currency interest rate swaps		—			—			23.1			23.0			—			—			23.1			23.0
Other⁽²⁾		—			—			—			—			2.3			2.0			2.3			2.0

Total	$	2.5		$	2.2		$	38.7		$	38.6		$	213.2		$	186.1		$	254.4		$	226.9

(Shares in millions)
Contracts
Equity forwards		—			—			—			—			48.2			48.2			48.2			48.2


⁽¹⁾		Fair values reported are exclusive of collateral held and/or pledged.

⁽²⁾		“Other” consists of an embedded derivative ($2 billion notional) bifurcated from the convertible debenture issuance that relates primarily to certain contingent interest and conversion features of the debt. In addition, beginning in the first quarter of 2007, “Other” also includes embedded derivatives bifurcated from newly issued on-balance sheet securitization debt, as a result of adopting SFAS No. 155 (see Note 1, “Significant Accounting Policies — Accounting for Certain Hybrid Financial Instruments”). All of the embedded derivatives have had a de minimis fair value since bifurcation.

5. Derivative Financial Instruments (Continued)


	Three Months Ended March 31,
	Cash Flow						Fair Value				Trading						Total
(Dollars in millions)	2007			2006			2007		2006		2007			2006			2007			2006

Changes to accumulated other comprehensive income, net of tax
Change in fair value to cash flow hedges	$	—		$	2		$	—	$	—	$	—		$	—		$	—		$	2
Amortization of effective hedges⁽¹⁾		1			4			—		—		—			—			1			4

Change in accumulated other comprehensive income, net	$	1		$	6		$	—	$	—	$	—		$	—		$	1		$	6

Earnings Summary
Amortization of closed futures contracts’ gains/losses in interest expense⁽²⁾	$	(2	)	$	(6	)	$	—	$	—	$	—		$	—		$	(2	)	$	(6	)
Gains (losses) on derivative and hedging activities — Realized⁽³⁾		—			—			—		—		(25	)		(48	)		(25	)		(48	)
Gains (losses) on derivative and hedging activities — Unrealized⁽⁴⁾		—			—			15		22		(347	)		(61	)		(332	)		(39	)

Total earnings impact	$	(2	)	$	(6	)	$	15	$	22	$	(372	)	$	(109	)	$	(359	)	$	(93	)


	⁽¹⁾	The Company expects to amortize $.3 million of after-tax net losses from accumulated other comprehensive income to earnings during the next 12 months related to closed futures contracts that were hedging the forecasted issuance of debt instruments that are outstanding as of March 31, 2007.

	⁽²⁾	For futures contracts that qualify as SFAS No. 133 hedges where the hedged transaction occurs.

	⁽³⁾	Includes net settlement income/expense related to trading derivatives and realized gains and losses related to derivative dispositions.

	⁽⁴⁾	The change in the fair value of cash flow and fair value hedges represents amounts related to ineffectiveness.


6.	Stockholders’ Equity

The following table summarizes the Company’s common share repurchases, issuances and equity forward activity for the three months ended March 31, 2007 and 2006.


	Three Months
	Ended
	March 31,
(Shares in millions)	2007		2006

Common shares repurchased:
Equity forwards		—		2.5
Benefit plans⁽¹⁾		.2		.8

Total shares repurchased		.2		3.3

Average purchase price per share	$	45.87	$	55.13

Common shares issued		1.5		2.9

Equity forward contracts:
Outstanding at beginning of period		48.2		42.7
New contracts		—		2.5
Exercises		—		(2.5	)

Outstanding at end of period		48.2		42.7

Authority remaining at end of period to repurchase or enter into equity forwards		15.7		16.2


	⁽¹⁾	Includes shares withheld from stock option exercises and vesting of performance stock for employees’ tax withholding obligations and shares tendered by employees to satisfy option exercise costs.

As of March 31, 2007, the expiration dates and range and weighted average purchase prices for outstanding equity forward contracts were as follows:


				Weighted
Year of Maturity	Outstanding		Range of	Average
(Contracts in millions of shares)	Contracts		Purchase Prices	Purchase Price

2008		7.3	$43.50 - $44.00	$	43.80
2009		14.7	46.00 - 54.74		53.66
2010		15.0	54.74		54.74
2011		9.1	49.75 - 53.76		51.91
2012		2.1	46.30 - 46.70		46.40

		48.2		$	51.86

The closing price of the Company’s common stock on March 30, 2007 was $40.90. Should the market value of the Company’s stock fall below certain initial trigger prices, the counterparty to the contract has a right to terminate the contract and settle all or a portion at the original contract price. For equity forward contracts outstanding at March 31, 2007, these initial trigger prices range from $23.93 per share to $30.11 per share.


6.	Stockholders’ Equity (Continued)

In February 2007, the Company made payments to certain counterparties to lower the notional amounts on some of its outstanding equity forward contracts. Also in February 2007, the Company agreed with a counterparty to amend the trigger prices on its outstanding equity forward contracts. In total, the Company amended the terms of the contracts covering 18.5 million shares. As a result of these transactions, the Company’s aggregate position on equity forward contracts is 48.2 million shares at an average strike price of $51.86. The highest trigger price on all outstanding equity forward contracts is now $30.11, down from $35.58 before the amendments.

Accumulated Other Comprehensive Income

Accumulated other comprehensive income includes the after-tax change in unrealized gains and losses on available-for-sale investments, unrealized gains and losses on derivatives qualifying as cash flow hedges, and the defined benefit pension plans adjustment. The following table presents the cumulative balances of the components of other comprehensive income as of March 31, 2007, December 31, 2006 and March 31, 2006.


	March 31,			December 31,			March 31,
	2007			2006			2006

Net unrealized gains (losses) on investments⁽¹⁾	$	292,175		$	340,363		$	337,365
Net unrealized gains (losses) on derivatives⁽²⁾		(7,087	)		(7,570	)		(7,029	)
Defined benefit pension plans:
Net prior service cost		(23	)		(24	)		—
Net gain		15,819			16,342			—

Total defined benefit pension plans⁽³⁾		15,796			16,318			—
Minimum pension liability adjustment⁽⁴⁾		—			—			(1,840	)

Total accumulated other comprehensive income	$	300,884		$	349,111		$	328,496


	⁽¹⁾	Net of tax expense of $153,159, $179,244 and $179,281 as of March 31, 2007, December 31, 2006 and March 31, 2006, respectively.

	⁽²⁾	Net of tax benefit of $4,051, $4,347 and $4,007 as of March 31, 2007, December 31, 2006 and March 31, 2006, respectively.

	⁽³⁾	Net of tax expense of $9,309 and $8,787 as of March 31, 2007 and December 31, 2006, respectively.

	⁽⁴⁾	Net of tax benefit of $991 as of March 31, 2006.


7.	Earnings per Common Share

Basic earnings per common share (“EPS”) are calculated using the weighted average number of shares of common stock outstanding during each period. A reconciliation of the numerators and denominators of the basic and diluted EPS calculations is as follows for the three months ended March 31, 2007 and 2006:


	Three Months Ended
	March 31,
	2007		2006

Numerator:
Net income attributable to common stock	$	107,060	$	143,300
Adjusted for debt expense of convertible debentures (“Co-Cos”), net of taxes⁽¹⁾		—		—
Adjusted for non-taxable unrealized gains on equity forwards⁽²⁾		—		—

Net income attributable to common stock, adjusted	$	107,060	$	143,300

Denominator (shares in thousands):
Weighted average shares used to compute basic EPS		411,040		412,675
Effect of dilutive securities:
Dilutive effect of Co-Cos		—		—
Dilutive effect of stock options, nonvested deferred compensation, nonvested restricted stock, restricted stock units, Employee Stock Purchase Plan (“ESPP”) and equity forwards⁽³⁾⁽⁴⁾		7,409		10,299

Dilutive potential common shares⁽⁵⁾		7,409		10,299

Weighted average shares used to compute diluted EPS		418,449		422,974

Net earnings per share:
Basic EPS	$	.26	$	.35
Dilutive effect of Co-Cos⁽¹⁾		—		—
Dilutive effect of equity forwards⁽²⁾⁽⁴⁾		—		—
Dilutive effect of stock options, nonvested deferred compensation, nonvested restricted stock, restricted stock units, and ESPP⁽³⁾		—		(.01	)

Diluted EPS	$	.26	$	.34


	⁽¹⁾	Emerging Issues Task Force (“EITF”) Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” requires the shares underlying Co-Cos to be included in diluted EPS computations regardless of whether the market price trigger or the conversion price has been met, using the “if-converted” method.

	⁽²⁾	SFAS No. 128, “Earnings per Share,” and the additional guidance provided by EITF Topic No. D-72, “Effect of Contracts That May Be Settled in Stock or Cash on the Computation of Diluted Earnings per Share,” require both the denominator and the numerator to be adjusted in calculating the potential impact of the Company’s equity forward contracts on diluted EPS. Under this guidance, when certain conditions are satisfied, the impact can be dilutive when: (1) the average share price during the period is lower than the respective strike prices on the Company’s equity forward contracts, and (2) the Company recorded an unrealized gain or loss on derivative and hedging activities related to its equity forward contracts.

	⁽³⁾	Reflects the potential dilutive effect of additional common shares that are issuable upon exercise of outstanding stock options, nonvested deferred compensation, nonvested restricted stock, restricted stock units, and the outstanding commitment to issue shares under the ESPP, determined by the treasury stock method.

	⁽⁴⁾	Reflects the potential dilutive effect of equity forward contracts, determined by the reverse treasury stock method.

	⁽⁵⁾	For the three months ended March 31, 2007 and 2006, stock options and equity forwards of approximately 65 million shares and 47 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were antidilutive.


8.	Pension Plans

Components of Net Periodic Pension Cost

Net periodic pension cost included the following components:


	Three Months Ended
	March 31,
	2007			2006

Service cost — benefits earned during the period	$	1,775		$	2,073
Interest cost on projected benefit obligations		3,084			2,862
Expected return on plan assets		(4,494	)		(4,069	)
Net amortization and deferral		(180	)		122

Total net periodic pension cost	$	185		$	988

Employer Contributions

The Company previously disclosed in its financial statements for the year ended December 31, 2006 that it did not expect to contribute to its qualified pension plan (the “Qualified Plan”) in 2007. As of March 31, 2007, the Company had made no contributions to its Qualified Plan.


9.	Income Taxes

The following table summarizes the Company’s unrecognized tax benefits:


	As of January 1, 2007

Gross amount of unrecognized tax benefits	$	113,334
Total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate		38,325
Total amount of interest and penalties recognized in the statement of operations and the statement of financial position		16,418

The Company adopted the provisions of the FASB’s Financial Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $6 million increase in its liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. In addition, unrecognized tax benefits of $3 million are currently treated as a pending refund claim, reducing the above balance of total unrecognized tax benefits that if recognized would affect the effective tax rate.

In the first quarter of 2007, the Company adjusted its federal unrecognized tax benefits to reflect the expected outcome of several issues being negotiated with the IRS as a part of the current exam cycle, primarily regarding the timing of recognition of certain income and deduction items. Several other less significant amounts of uncertain tax benefits were also added during the first quarter. In total, as of March 31, the Company has gross unrecognized tax benefits of $166 million, as well as total interest and penalties recognized in the statement of operations of $22 million.


9.	Income Taxes (Continued)

Reasonably Possible Significant Increases/ Decreases within Twelve Months

1. U.S. Federal Tax Uncertainties

The current exam of the Company’s 2003 and 2004 U.S. Federal tax return is scheduled to conclude in the second or third quarter of 2007, pending any appeals that may be filed by the Company on unagreed items. It is possible that additional government reviews of the exam results could extend the scheduled time period for conclusion of the exam. Multiple uncertainties are under review during the current exam. An estimate of the range of the possible change to the balance of the Company’s unrecognized tax benefits that may result from conclusion of the exam cannot at this time be made, pending completion of the current exam.

In addition, it is expected that during the second half of 2007, the IRS will commence the examination of the Company’s 2005 and 2006 federal income tax returns. It is reasonably possible that issues which arise during the exam may create the need for an increase in unrecognized tax benefits. Until the exam commences, an estimate of any such amounts cannot currently be made.

2. Other Tax Uncertainties

In the event that the Company is not contacted for exam by additional tax authorities by the end of 2007, it is reasonably possible that there will be a decrease in the Company’s unrecognized tax position liability, due to the tolling of various statute of limitations periods. Such change could be approximately $3 million to $5 million.

Tax Years Remaining Subject to Exam

The Company or one of its subsidiaries files income tax returns at the U.S. federal level, in most U.S. states, and various foreign jurisdictions. U.S. federal income tax returns filed for years prior to 2003 have been audited and are now resolved. As shown in the table below, the Company’s primary operating subsidiary has been audited by the listed states through the year shown, again with all issues resolved. Other combinations of subsidiaries, tax years, and jurisdictions remain open for review, subject to statute of limitations periods (typically 3 to 4 prior years).


State	Year audited through

New York		2003
Texas		2004
Pennsylvania		2000
Florida		2000
Indiana		2000
California		2002
Missouri		2003

The Company recognizes interest accrued related to unrecognized tax benefits in income tax expense, and penalties in operating expenses.


10.	Contingencies

Chae, et. al. v. SLM Corporation et. al.

On April 14, 2007, the Company was served with a putative class action suit by several borrowers in federal court in California. The complaint alleges violations of California Business & Professions Code 17200, breach of contract, breach of covenant of good faith and fair dealing, violation of consumer legal remedies act and unjust enrichment. The complaint challenges the Company’s FFELP billing practices as they relate to use of the simple daily interest method for calculating interest. The Company believes the complaint is without merit and it intends to vigorously defend this action.

The Company is also subject to various claims, lawsuits and other actions that arise in the normal course of business. Most of these matters are claims by borrowers disputing the manner in which their loans have been processed or the accuracy of the Company’s reports to credit bureaus. In addition, the collections subsidiaries in the Company’s debt management operations group are routinely named in individual plaintiff or class action lawsuits in which the plaintiffs allege that the Company has violated a federal or state law in the process of collecting their account. Management believes that these claims, lawsuits and other actions will not have a material adverse effect on its business, financial condition or results of operations. Finally, from time to time, the Company receives information and document requests from state attorneys general concerning certain of its business practices. The Company’s practice has been and continues to be to cooperate with the state attorneys general and to be responsive to any such requests.


11.	Segment Reporting

The Company has two primary operating segments as defined in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”— the Lending and Debt Management Operations (“DMO”) segments. The Lending and DMO operating segments meet the quantitative thresholds for reportable segments identified in SFAS No. 131. Accordingly, the results of operations of the Company’s Lending and DMO segments are presented below. The Company has smaller operating segments including the Guarantor Servicing and Student Loan Servicing operating segments as well as certain other products and services provided to colleges and universities which do not meet the quantitative thresholds identified in SFAS No. 131. Therefore, the results of operations for these operating segments and the revenues and expenses associated with these other products and services are combined with corporate overhead and other corporate activities within the Corporate and Other reporting segment.

The management reporting process measures the performance of the Company’s operating segments based on the management structure of the Company as well as the methodology used by management to evaluate performance and allocate resources. Management, including the Company’s chief operating decision maker, evaluates the performance of the Company’s operating segments based on their profitability. As discussed further below, management measures the profitability of the Company’s operating segments based on “Core Earnings” net income. Accordingly, information regarding the Company’s reportable segments is provided based on a “Core Earnings” basis. The Company’s “Core Earnings” performance measures are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. “Core Earnings” net income reflects only current period adjustments to GAAP net income as described below. Unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting. The management reporting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The Company’s operating segments are defined by the products and services they offer or the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by


11.	Segment Reporting (Continued)

management. Intersegment revenues and expenses are netted within the appropriate financial statement line items consistent with the income statement presentation provided to management. Changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial information.

The Company’s principal operations are located in the United States, and its results of operations and long-lived assets in geographic regions outside of the United States are not significant. In the Lending segment, no individual customer accounted for more than 10 percent of its total revenue during the three months ended March 31, 2007 and 2006. United Student Aid Funds, Inc. (“USA Funds”) is the Company’s largest customer in both the DMO and Corporate and Other segments. During the three months ending March 31, 2007 and 2006, it accounted for 25 percent and 38 percent, respectively, of the aggregate revenues generated by the Company’s DMO and Corporate and Other segments. No other customers accounted for more than 10 percent of total revenues in those segments for the years mentioned.

Lending

In the Company’s Lending business segment, the Company originates and acquires both federally guaranteed student loans, which are administered by the U.S. Department of Education (“ED”), and Private Education Loans, which are not federally guaranteed. Private Education Loans are primarily used by borrowers to supplement FFELP loans to meet the rising cost of education. The Company manages student loans for nearly 10 million student and parent customers; its Managed student loan portfolio totaled $150.0 billion at March 31, 2007, of which $125.8 billion or 84 percent are federally insured. In addition to education lending, the Company also originates mortgage and consumer loans with the intent of selling the majority of such loans. During the three months ended March 31, 2007, the Company originated $310 million in mortgage and consumer loans of which $226 million pertained to mortgages in the held for sale portfolio. The Company’s mortgage and consumer loan portfolio totaled $597 million at March 31, 2007.

In addition to its federally insured FFELP products, the Company originates and acquires Private Education Loans which consist of two general types: (1) those that are designed to bridge the gap between the cost of higher education and the amount financed through either capped federally insured loans or the borrowers’ resources, and (2) those that are used to meet the needs of students who attend non-Title IV eligible institutions where FFELP loans are not available (such as career training, distance learning and lifelong learning programs). Most higher education Private Education Loans are made in conjunction with a FFELP Stafford loan and as such are marketed through the same channel as FFELP loans by the same sales force. Unlike FFELP loans, Private Education Loans are subject to the full credit risk of the borrower. The Company manages this additional risk through industry-tested loan underwriting standards and a combination of higher interest rates and loan origination fees that compensate the Company for the higher risk.

DMO

The Company’s DMO operating segment provides a wide range of accounts receivable and collections services including student loan default aversion services, defaulted student loan portfolio management services, contingency collections services for student loans and other asset classes, and accounts receivable management and collection for purchased portfolios of receivables that are delinquent or have been charged off by their original creditors as well as sub-performing and non-performing mortgage loans. The Company’s DMO operating segment serves the student loan marketplace through a broad array of default management services


11.	Segment Reporting (Continued)

on a contingency fee or other pay-for-performance basis to 14 FFELP guarantors and for campus based programs.

In addition to collecting on its own purchased receivables and mortgage loans, the DMO operating segment provides receivable management and collection services for large federal agencies, credit card clients and other holders of consumer debt.

Corporate and Other

The Company’s Corporate and Other business segment includes the aggregate activity of its smaller operating segments primarily its Guarantor Servicing, student loan servicing operating segments, and its recently acquired Upromise operating segments. Corporate and Other also includes several smaller products and services, as well as corporate overhead.

In the Guarantor Servicing operating segment, the Company provides a full complement of administrative services to FFELP guarantors including guarantee issuance, account maintenance, and guarantee fulfillment. In the Loan Servicing operating segment, the Company provides a full complement of activities required to service student loans on behalf of lenders who are unrelated to the Company. Such servicing activities generally commence once a loan has been fully disbursed and include sending out payment coupons to borrowers, processing borrower payments, originating and disbursing FFELP Consolidation Loans on behalf of the lender, and other administrative activities required by ED.

Upromise markets and administers saving-for-college plans and also provides administration services for college savings plans. The Company’s other products and services include comprehensive financing and loan delivery solutions that it provides to college financial aid offices and students to streamline the financial aid process. Corporate overhead includes all of the typical headquarter functions such as executive management, accounting and finance, human resources and marketing.

Measure of Profitability

The tables below include the condensed operating results for each of the Company’s reportable segments. Management, including the chief operating decision maker, evaluates the Company on certain performance measures that the Company refers to as “Core Earnings” performance measures for each operating segment. While “Core Earnings” results are not a substitute for reported results under GAAP, the Company relies on “Core Earnings” performance measures to manage each operating segment because it believes these measures provide additional information regarding the operational and performance indicators that are most closely assessed by management.

“Core Earnings” performance measures are the primary financial performance measures used by management to develop the Company’s financial plans, track results, and establish corporate performance targets and incentive compensation. Management believes this information provides additional insight into the financial performance of the core business activities of its operating segments. Accordingly, the tables presented below reflect “Core Earnings” operating measures reviewed and utilized by management to manage the business. Reconciliation of the “Core Earnings” segment totals to the Company’s consolidated operating results in accordance with GAAP is also included in the tables below.


11.	Segment Reporting (Continued)

Segment Results and Reconciliations to GAAP


	Three Months Ended March 31, 2007
						Corporate			Total “Core					Total
(Dollars in millions)	Lending		DMO			and Other			Earnings”		Adjustments⁽³⁾			GAAP

Interest income:
FFELP Stafford and Other Student Loans	$	695	$	—		$	—		$	695	$	(244	)	$	451
FFELP Consolidation Loans		1,331		—			—			1,331		(316	)		1,015
Private Education Loans		658		—			—			658		(320	)		338
Other loans		28		—			—			28		—			28
Cash and investments		162		—			2			164		(50	)		114

Total interest income		2,874		—			2			2,876		(930	)		1,946
Total interest expense		2,220		7			5			2,232		(700	)		1,532

Net interest income		654		(7	)		(3	)		644		(230	)		414
Less: provisions for losses		198		—			1			199		(49	)		150

Net interest income after provisions for losses		456		(7	)		(4	)		445		(181	)		264
Fee income		—		87			39			126		—			126
Collections revenue		—		65			—			65		1			66
Other income		44		—			52			96		231			327

Total other income		44		152			91			287		232			519
Operating expenses⁽¹⁾		171		93			68			332		24			356

Income before income taxes and minority interest in net earnings of subsidiaries		329		52			19			400		27			427
Income tax expense⁽²⁾		122		19			7			148		162			310
Minority interest in net earnings of subsidiaries		—		1			—			1		—			1

Net income	$	207	$	32		$	12		$	251	$	(135	)	$	116


⁽¹⁾		Operating expenses for the Lending, DMO, and Corporate and Other business segments include $9 million, $3 million, and $4 million, respectively, of stock option compensation expense due to the implementation of SFAS No. 123(R) in the first quarter of 2006.

⁽²⁾		Income taxes are based on a percentage of net income before tax for the individual reportable segment.

⁽³⁾		“Core Earnings” adjustments to GAAP:


	Three Months Ended March 31, 2007
	Net Impact of			Net Impact of						Net impact
	Securitization			Derivative			Net Impact of			of Acquired
(Dollars in millions)	Accounting			Accounting			Floor Income			Intangibles			Total

Net interest income	$	(216	)	$	25		$	(39	)	$	—		$	(230	)
Less: provisions for losses		(49	)		—			—			—			(49	)

Net interest income after provisions for losses		(167	)		25			(39	)		—			(181	)
Fee income		—			—			—			—			—
Collections revenue		1			—			—			—			1
Other income		588			(357	)		—			—			231

Total other income		589			(357	)		—			—			232
Operating expenses		—			—			—			24			24

Total pre-tax “Core Earnings” adjustments to GAAP	$	422		$	(332	)	$	(39	)	$	(24	)		27

Income tax expense														162
Minority interest in net earnings of subsidiaries														—

Total “Core Earnings” adjustments to GAAP													$	(135	)


11.	Segment Reporting (Continued)


	Three Months Ended March 31, 2006
						Corporate			Total “Core					Total
(Dollars in millions)	Lending		DMO			and Other			Earnings”		Adjustments⁽³⁾			GAAP

Interest income:
FFELP Stafford and Other Student Loans	$	650	$	—		$	—		$	650	$	(351	)	$	299
FFELP Consolidation Loans		1,028		—			—			1,028		(207	)		821
Private Education Loans		429		—			—			429		(188	)		241
Other loans		23		—			—			23		—			23
Cash and investments		131		—			1			132		(36	)		96

Total interest income		2,261		—			1			2,262		(782	)		1,480
Total interest expense		1,660		5			1			1,666		(573	)		1,093

Net interest income		601		(5	)		—			596		(209	)		387
Less: provisions for losses		75		—			—			75		(15	)		60

Net interest income after provisions for losses		526		(5	)		—			521		(194	)		327
Fee income		—		92			27			119		—			119
Collections revenue		—		56			—			56		—			56
Other income		40		—			30			70		41			111

Total other income		40		148			57			245		41			286
Operating expenses⁽¹⁾		161		89			59			309		14			323

Income before income taxes and minority interest in net earnings of subsidiaries		405		54			(2	)		457		(167	)		290
Income tax expense⁽²⁾		150		20			(1	)		169		(32	)		137
Minority interest in net earnings of subsidiaries		—		1			—			1		—			1

Net income	$	255	$	33		$	(1	)	$	287	$	(135	)	$	152


⁽¹⁾		Operating expenses for the Lending, DMO, and Corporate and Other business segments include $10 million, $3 million, and $5 million, respectively, of stock option compensation expense due to the implementation of SFAS No. 123(R) in the first quarter of 2006.

⁽²⁾		Income taxes are based on a percentage of net income before tax for the individual reportable segment.

⁽³⁾		“Core Earnings” adjustments to GAAP:


	Three Months Ended March 31, 2006
	Net Impact of			Net Impact of						Net Impact
	Securitization			Derivative			Net Impact of			of Acquired
(Dollars in millions)	Accounting			Accounting			Floor Income			Intangibles			Total

Net interest income	$	(205	)	$	48		$	(52	)	$	—		$	(209	)
Less: provisions for losses		(15	)		—			—			—			(15	)

Net interest income after provisions for losses		(190	)		48			(52	)		—			(194	)
Fee income		—			—			—			—			—
Collections revenue		—			—			—			—			—
Other income		128			(87	)		—			—			41

Total other income		128			(87	)		—			—			41
Operating expenses		—			—			—			14			14

Total pre-tax “Core Earnings” adjustments to GAAP	$	(62	)	$	(39	)	$	(52	)	$	(14	)		(167	)

Income tax expense														(32	)

Total “Core Earnings” adjustments to GAAP													$	(135	)


11.	Segment Reporting (Continued)

Summary of “Core Earnings” Adjustments to GAAP

The adjustments required to reconcile from the Company’s “Core Earnings” results to its GAAP results of operations relate to differing treatments for securitization transactions, derivatives, Floor Income related to the Company’s student loans, and certain other items that management does not consider in evaluating the Company’s operating results. The following table reflects aggregate adjustments associated with these areas for the three months ended March 31, 2007 and 2006.


	Three Months Ended
	March 31,
(Dollars in millions)	2007			2006

“Core Earnings” adjustments to GAAP:
Net impact of securitization accounting⁽¹⁾	$	422		$	(62	)
Net impact of derivative accounting⁽²⁾		(332	)		(39	)
Net impact of Floor Income⁽³⁾		(39	)		(52	)
Net impact of acquired intangibles⁽⁴⁾		(24	)		(14	)
Net tax effect⁽⁵⁾		(162	)		32

Total “Core Earnings” adjustments to GAAP	$	(135	)	$	(135	)


⁽¹⁾		Securitization: Under GAAP, certain securitization transactions in the Company’s Lending operating segment are accounted for as sales of assets. Under the Company’s “Core Earnings” presentation for the Lending operating segment, the Company presents all securitization transactions on a “Core Earnings” basis as long-term non-recourse financings. The upfront “gains” on sale from securitization transactions as well as ongoing “servicing and securitization revenue” presented in accordance with GAAP are excluded from “Core Earnings” net income and replaced by the interest income, provisions for loan losses, and interest expense as they are earned or incurred on the securitization loans. The Company also excludes transactions with its off-balance sheet trusts from “Core Earnings” net income as they are considered intercompany transactions on a “Core Earnings” basis.

⁽²⁾		Derivative accounting: “Core Earnings” net income excludes periodic unrealized gains and losses arising primarily in the Company’s Lending operating segment, and to a lesser degree in the Company’s Corporate and Other reportable segment, that are caused primarily by the one-sided mark-to-market derivative valuations prescribed by SFAS No. 133 on derivatives that do not qualify for “hedge treatment” under GAAP. Under the Company’s “Core Earnings” presentation, the Company recognizes the economic effect of these hedges, which generally results in any cash paid or received being recognized ratably as an expense or revenue over the hedged item’s life. “Core Earnings” net income also excludes the gain or loss on equity forward contracts that under SFAS No. 133, are required to be accounted for as derivatives and are marked-to-market through GAAP net income.

⁽³⁾		Floor Income: The timing and amount (if any) of Floor Income earned in the Company’s Lending operating segment is uncertain and in excess of expected spreads. Therefore, the Company excludes such income from “Core Earnings” net income when it is not economically hedged. The Company employs derivatives, primarily Floor Income Contracts and futures, to economically hedge Floor Income. As discussed above in “Derivative Accounting,” these derivatives do not qualify as effective accounting hedges and therefore, under GAAP, are marked-to-market through the “gains (losses) on derivative and hedging activities, net” line on the income statement with no offsetting gain or loss recorded for the economically hedged items. For “Core Earnings” net income, the Company reverses the fair value adjustments on the Floor Income Contracts and futures economically hedging Floor Income and includes the amortization of net premiums received (net of Eurodollar futures contracts’ realized gains or losses) in income.

⁽⁴⁾		Acquired Intangibles: The Company excludes goodwill and intangible impairment and amortization of acquired intangibles.

⁽⁵⁾		Net Tax Effect: Such tax effect is based upon the Company’s “Core Earnings” effective tax rate for the year. The net tax effect results primarily from the exclusion of the permanent income tax impact of the equity forward contracts.


12.	Subsequent Event

On April 16, 2007, the Company announced that an investor group (“the Investor Group”) led by J.C. Flowers & Co. (“J.C. Flowers”) signed a definitive agreement to acquire the Company for approximately $25.2 billion or $60.00 per share of common stock. When the transaction is complete, J.C. Flowers and certain other private equity investors including Friedman Fleischer & Lowe; will invest approximately $4.4 billion and own 50.2 percent, and Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM) each will invest approximately $2.2 billion and each will own 24.9 percent. The Company’s independent board members unanimously approved the agreement and recommended that its shareholders approve the agreement. (See also the “Merger Agreement” filed with the Securities and Exchange Commission (“SEC”) on the Company’s Current Report on Form 8-K, dated April 18, 2007.)

The Investor Group has stated that it is committed to supporting the Company’s focus on transparency among lenders, schools and students and on corporate responsibility. The Company will be subject to oversight by Congress and the Department of Education, and will continue to be subject to all applicable federal and state laws, including the Higher Education Act.

The transaction will require the approval of the Company’s stockholders, is subject to required regulatory approvals and other closing conditions, and, under very limited circumstances, may be terminated by the Investor Group. The transaction is expected to close in late 2007. The consummation of the transaction is subject to regulatory review and the expiration of the waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Company will not pay further dividends on its common stock prior to consummation of the proposed transaction.

In connection with negotiations to purchase the Company, the Company’s preliminary financial results for the first quarter of 2007 were shared with representatives of the Investor Group.

Financing Considerations Related to the Transaction

Following the closing, the Company will continue to have publicly traded debt securities and as a result will continue comprehensive financial reporting about its business, financial condition and results of operations. Bank of America and JPMorgan Chase are committed to provide debt financing for the transaction and to provide additional liquidity to the Company prior to and after the closing date, subject to customary terms and conditions.

A portion of the Company’s existing unsecured debt will remain outstanding, and such outstanding debt will not be equally and ratably secured with the new acquisition-related debt. The acquisition financing will be structured with the intent to accommodate the repayment of any outstanding debt as it matures. The Company expects this transaction to have no material impact on its outstanding asset-backed debt and to remain an active participant in the asset-backed securities market.

On April 16, 2007, after the Company announced the transaction, Moody’s Investor Services, Standard & Poor’s and Fitch Ratings placed the long and short-term ratings on the Company’s senior unsecured debt under review for possible downgrade. In addition, following the announcement, secondary market credit spreads on the Company’s outstanding senior unsecured bonds widened significantly, limiting access to new sources of senior unsecured funds at borrowing costs comparable to those available before the announcement.

On April 30, 2007, Bank of America and JPMorgan Chase provided the Company with a new, $30 billion asset-backed commercial paper conduit facility. This additional liquidity, combined with the Company’s existing liquidity, is anticipated to be sufficient to meet the Company’s cash needs beyond the expected closing


12.	Subsequent Event (Continued)

date of the announced transaction, even if no additional securities are issued by the Company during that time. However, the Company does expect to resume issuance of the Company’s traditional asset-backed securities within the next few months.

Accounting Considerations Related to the Transaction

Upon closing, the transaction will be accounted for using the purchase accounting method, and purchase accounting adjustments will be pushed down to the Company. Under purchase accounting, the total cost of the acquisition will be allocated to the Company’s identifiable assets and liabilities based on their respective fair values. Thus, all the assets and liabilities will have a new basis of accounting and therefore previous unamortized premiums, discounts and reserves related to those assets and liabilities will be written-off once the transaction closes. The excess of the purchase price over the estimated fair value of the identifiable assets and liabilities will be recognized as goodwill. Since the Company is the acquired enterprise, expenses incurred in connection with the transaction will be expensed. Transaction fees that are contingent upon the closing will be recognized when the transaction closes. Transaction fees that are not contingent on the closing will be expensed as incurred. Vesting accelerates on all stock-based compensation awards, and as a result, all deferred compensation related to those awards will be expensed upon closing of the transaction.

At March 31, 2007, the Company had approximately $2 billion Contingently Convertible Debentures (“Co-Cos”) outstanding. The Co-Cos are eligible to be called at par on or after July 25, 2007, under certain circumstances. At March 31, 2007, the Company classified its $2 billion outstanding Co-Cos as a long-term obligation because as of that date, the Company believed that a successful remarketing of the Co-Cos in July 2007 was probable. Upon announcement of the transaction on April 16, 2007, the Company deemed that a successful remarketing of the bonds in July 2007 was no longer probable. The Company expects to classify the Co-Cos as a short-term obligation at June 30, 2007 if at that time the Company believes that a successful remarketing of the bonds will not occur in July 2007, as the investors will have the option to put the bonds back to the Company at such time. Additionally, in the definitive agreement to acquire the Company signed on April 16, 2007, the Company agreed to redeem the Co-Cos on July 25, 2007 after receiving written notice from the Investor Group upon certain conditions.


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three months ended March 31, 2007 and 2006
(Dollars in millions, except per share amounts, unless otherwise noted)

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

This quarterly report contains forward-looking statements and information that are based on management’s current expectations as of the date of this document. When used in this report, the words “anticipate,” “believe,” “estimate,” “intend” and “expect” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause the actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement (see “SUBSEQUENT EVENT” that describes the definitive agreement for an investor group to acquire the Company (“the Merger”)); the outcome of any legal proceedings that may be instituted against us and others relating to the merger agreement; the inability to complete the Merger due to the failure to obtain shareholder approval or the failure to satisfy other conditions to completion of the Merger; the failure to obtain the necessary debt financing arrangements set forth in commitment letters received in connection with the Merger; the effect of the announcement of the Merger on our customer relationships, operating results and business generally; the amount of the costs, fees, expenses and charges related to the Merger and the actual terms of certain financings that will be obtained for the Merger; the impact of the substantial indebtedness incurred to finance the consummation of the Merger; changes in the terms of student loans and the educational credit marketplace arising from the implementation of applicable laws and regulations and from changes in these laws and regulations, which may reduce the volume, average term and yields on student loans under the Federal Family Education Loan Program (“FFELP”) or result in loans being originated or refinanced under non-FFELP programs or may affect the terms upon which banks and others agree to sell FFELP loans to SLM Corporation, more commonly known as Sallie Mae, and its subsidiaries (collectively, “the Company”). In addition, a larger than expected increase in third party consolidations of our FFELP loans could materially adversely affect our results of operations. The Company could also be affected by changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; incorrect estimates or assumptions by management in connection with the preparation of our consolidated financial statements; changes in the composition of our Managed FFELP and Private Education Loan portfolios; a significant decrease in our common stock price, which may result in counterparties terminating equity forward positions with us, which, in turn, could have a materially dilutive effect on our common stock; changes in the general interest rate environment and in the securitization markets for education loans, which may increase the costs or limit the availability of financings necessary to initiate, purchase or carry education loans; losses from loan defaults; changes in prepayment rates and credit spreads; and changes in the demand for debt management services and new laws or changes in existing laws that govern debt management services.

OVERVIEW

We are the largest source of funding, delivery and servicing support for education loans in the United States. Our primary business is to originate, acquire and hold both federally guaranteed student loans and Private Education Loans, which are not federally guaranteed or privately insured. The primary source of our earnings is from net interest income earned on those student loans as well as gains on the sales of such loans in securitization transactions. We also earn fees for pre-default and post-default receivables management services on student loans, such that we are engaged in every phase of the student loan life cycle — from originating and servicing student loans to default prevention and ultimately the collection on defaulted student loans. Through recent acquisitions, we have expanded our receivables management services to a number of different asset classes outside of student loans. We also provide a wide range of other financial services, processing capabilities and information technology to meet the needs of educational institutions, lenders,

students and their families, and guarantee agencies. SLM Corporation, more commonly known as Sallie Mae, is a holding company that operates through a number of subsidiaries. References in this report to the “Company” refer to SLM Corporation and its subsidiaries.

We have used both internal growth and strategic acquisitions to attain our leadership position in the education finance marketplace. Our sales force, which delivers our products on campuses across the country, is the largest in the student loan industry. The core of our marketing strategy is to promote our on-campus brands, which generate student loan originations through our Preferred Channel. Loans generated through our Preferred Channel are more profitable than loans acquired through other acquisition channels because we own them earlier in the student loan’s life and generally incur lower costs to acquire such loans. We have built brand leadership through the Sallie Mae name, the brands of our subsidiaries and those of our lender partners. These sales and marketing efforts are supported by the largest and most diversified servicing capabilities in the industry, providing an unmatched array of services to financial aid offices. In recent years, borrowers have been consolidating their FFELP Stafford loans into FFELP Consolidation Loans in much greater numbers such that FFELP Consolidation Loans now constitute 56 percent of our Managed loan portfolio. FFELP Consolidation Loans are marketed directly to consumers and we believe they will continue to be an important loan acquisition channel.

We have expanded into a number of fee-based businesses, most notably, our Debt Management Operations (“DMO”) business. Our DMO business provides a wide range of accounts receivable and collections services including student loan default aversion services, defaulted student loan portfolio management services, contingency collections services for student loans and other asset classes, and accounts receivable management and collection for purchased portfolios of receivables that are delinquent or have been charged off by their original creditors. We also purchase and manage portfolios of sub-performing and non-performing mortgage loans.

We manage our business through two primary operating segments: the Lending operating segment and the DMO operating segment. Accordingly, the results of operations of the Company’s Lending and DMO segments are presented separately below under “BUSINESS SEGMENTS.” These operating segments are considered reportable segments under the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” based on quantitative thresholds applied to the Company’s financial statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A discussion of the Company’s critical accounting policies, which include premiums, discounts and Borrower Benefits, securitization accounting and Retained Interests, provisions for loan losses, derivative accounting and the effects of Consolidation Loan activity on estimates, can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. There have been no material changes to these policies during the first quarter of 2007.

SELECTED FINANCIAL DATA

Condensed Statements of Income


	Three Months
	Ended						Increase
	March 31,						(Decrease)
	2007			2006			$			%

Net interest income	$	414		$	387		$	27			7	%
Less: provisions for losses		150			60			90			150

Net interest income after provisions for losses		264			327			(63	)		(19	)
Gains on student loan securitizations		367			30			337			1123
Servicing and securitization revenue		252			99			153			155
Losses on securities, net		(31	)		—			(31	)		(100	)
Gains (losses) on derivative and hedging activities, net		(357	)		(87	)		(270	)		(310	)
Guarantor servicing fees		39			27			12			44
Debt management fees		87			92			(5	)		(5	)
Collections revenue		66			56			10			18
Other income		96			69			27			39
Operating expenses		356			323			33			10

Pre-tax income		427			290			137			47	%
Income taxes		310			137			173			126
Minority interest in net earnings of subsidiaries		1			1			—			—

Net income		116			152			(36	)		(24	)
Preferred stock dividends		9			9			—			—

Net income attributable to common stock	$	107		$	143		$	(36	)		(25	)%

Basic earnings per common share	$	.26		$	.35		$	(.09	)		(26	)%

Diluted earnings per common share	$	.26		$	.34		$	(.08	)		(24	)%

Dividends per common share	$	.25		$	.22		$	.03			14	%

Condensed Balance Sheets


					Increase
	March 31,		December 31,		(Decrease)
	2007		2006		$			%


Assets
FFELP Stafford and Other Student Loans, net	$	28,562	$	24,841	$	3,721			15	%
FFELP Consolidation Loans, net		66,170		61,324		4,846			8
Private Education Loans, net		9,849		9,755		94			1
Other loans, net		1,351		1,309		42			3
Cash and investments		6,116		5,185		931			18
Restricted cash and investments		3,719		3,423		296			9
Retained Interest in off-balance sheet securitized loans		3,643		3,341		302			9
Goodwill and acquired intangible assets, net		1,364		1,372		(8	)		(1	)
Other assets		6,102		5,586		516			9

Total assets	$	126,876	$	116,136	$	10,740			9	%


Liabilities and Stockholders’ Equity
Short-term borrowings	$	4,429	$	3,528	$	901			26	%
Long-term borrowings		114,071		104,559		9,512			9
Other liabilities		3,991		3,680		311			8

Total liabilities		122,491		111,767		10,724			10

Minority interest in subsidiaries		9		9		—			—
Stockholders’ equity before treasury stock		5,424		5,401		23			—
Common stock held in treasury		1,048		1,041		7			1

Total stockholders’ equity		4,376		4,360		16			—

Total liabilities and stockholders’ equity	$	126,876	$	116,136	$	10,740			9	%

RESULTS OF OPERATIONS

Consolidated Earnings Summary

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

For the three months ended March 31, 2007, net income of $116 million ($.26 diluted earnings per share) was a decrease of 24 percent from net income of $152 million ($.34 diluted earnings per share) for the three months ended March 31, 2006. First quarter 2007 pre-tax income of $427 million was a 47 percent increase from $290 million earned in the first quarter of 2006. The decrease in current quarter over year-ago quarter, after-tax net income versus the increase in pre-tax net income is driven by fluctuations in the unrealized gains and losses on equity forward contracts as described above. Excluding the unrealized loss on equity forward contracts of $412 million in the first quarter of 2007 and $122 million in the first quarter of 2006, taxable income increased the effective tax rate from 47 percent in the first quarter of 2006 to 73 percent in the first quarter of 2007.

The increase in the pre-tax results of the first quarter of 2007 versus the year-ago quarter was primarily due to an increase in securitization gains of $337 million, partially offset by an increase in the net losses on derivative and hedging activities of $270 million. In the first quarter of 2007, we recognized a pre-tax securitization gain of $367 million from one Private Education Loan securitization compared to pre-tax securitization gains of $30 million in the first quarter of 2006, as the result of two FFELP Stafford securitizations and one FFELP Consolidation Loan securitization. The year-over-year increase in net losses on derivative and hedging activities is primarily due to the $290 million increase in the unrealized loss on equity

forward contracts as discussed above and to a decrease of $139 million in the unrealized gains on our Floor Income Contracts. The negative impact on pre-tax income from these items is partially offset by a positive impact from basis swaps which swung from an unrealized loss of $82 million in the first quarter of 2006 to an unrealized gain of $60 million in the first quarter of 2007.

Net interest income after provisions for loan losses decreased by $63 million versus the first quarter of 2006. The decrease is due to the year-over-year increase in the provision for Private Education Loan losses of $90 million, which offset the year-over-year $27 million increase in net interest income. The increase in the provisions for loan losses reflects a further seasoning of the portfolio and an increase in delinquencies and charge-offs related to lower collections caused by operational challenges encountered from the relocation of one of the Company’s call centers. The $27 million, or 7 percent, year-over-year increase in net interest income is primarily due to a $19.8 billion increase in average interest earning assets, offset by a 22 basis point decrease in the net interest margin. The year-over-year decrease in the net interest margin is due to higher average interest rates which reduced Floor Income by $10 million, a higher provision for interest reserves as a result of the increase in delinquencies noted above, and an increase in the average balance of cash and investments.

In the first quarter of 2007, servicing and securitization income was $252 million, a $153 million increase over the year-ago quarter. This increase can primarily be attributed to a year-over-year decrease of $41 million in impairments to our Retained Interests. The prior year impairments were primarily caused by the effect of higher than expected FFELP Consolidation Loan activity on our off-balance sheet FFELP Stafford securitizations. The remaining increase in securitization revenue is due to the increase of higher yielding Private Education Loan Residual Interests, and the adoption of SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments” in the first quarter of 2007. Under SFAS No. 155, the Company has elected to recognize the unrealized fair value adjustment to our Residual Interests in earnings. For securitizations closed prior to December 31, 2006, this adjustment was recorded in other comprehensive income.

In the first quarter of 2007, fee and other income and collections revenue totaled $289 million, an increase of 17 percent over the year-ago quarter. This increase was primarily driven by revenue from Upromise, acquired in August 2006 and to higher guarantor servicing fees.

Our Managed student loan portfolio grew by $23.1 billion (or 18 percent), from $126.9 billion at March 31, 2006 to $150.0 billion at March 31, 2007. In the first quarter of 2007, we acquired $12.5 billion of student loans, a 46 percent increase over the $8.6 billion acquired in the year-ago period. The first quarter 2007 acquisitions included $2.4 billion in Private Education Loans, a 24 percent increase over the $2.0 billion acquired in the year-ago period. In the quarter ended March 31, 2007, we originated $8.0 billion of student loans through our Preferred Channel, an increase of 5 percent over the $7.6 billion originated in the year-ago quarter.

NET INTEREST INCOME

Average Balance Sheets

The following table reflects the rates earned on interest earning assets and paid on interest bearing liabilities for the three months ended March 31, 2007 and 2006. This table reflects the net interest margin for the entire Company on a consolidated basis.


	Three Months Ended March 31,
	2007					2006
	Balance		Rate			Balance		Rate

Average Assets
FFELP Stafford and Other Student Loans	$	26,885		6.80	%	$	19,522		6.20	%
FFELP Consolidation Loans		63,260		6.51			54,312		6.13
Private Education Loans		11,354		12.09			9,016		10.86
Other loans		1,365		8.31			1,172		8.14
Cash and investments		7,958		5.81			7,042		5.52

Total interest earning assets		110,822		7.12	%		91,064		6.59	%

Non-interest earning assets		9,095					7,963

Total assets	$	119,917				$	99,027

Average Liabilities and Stockholders’ Equity
Short-term borrowings	$	3,220		5.89	%	$	4,174		4.78	%
Long-term borrowings		107,950		5.58			87,327		4.85

Total interest bearing liabilities		111,170		5.59	%		91,501		4.84	%

Non-interest bearing liabilities		4,483					3,703
Stockholders’ equity		4,264					3,823

Total liabilities and stockholders’ equity	$	119,917				$	99,027

Net interest margin				1.51	%				1.73	%

Rate/Volume Analysis

The following rate/volume analysis illustrates the relative contribution of changes in interest rates and asset volumes.


			Increase
			(Decrease)
			Attributable to
	Increase		Change in
	(Decrease)		Rate			Volume

Three months ended March 31, 2007 vs. three months ended March 31, 2006
Interest income	$	465	$	138		$	327
Interest expense		439		204			235

Net interest income	$	26	$	(66	)	$	92

The decrease in the net interest margin for the three months ended March 31, 2007 versus the year-ago quarter, was primarily due to fluctuations in the student loan spread as discussed under “Student Loans — Student Loan Spread — Student Loan Spread Analysis — On-Balance Sheet.”

Student Loans

For both federally insured and Private Education Loans, we account for premiums paid, discounts received and certain origination costs incurred on the origination and acquisition of student loans in accordance with SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” The unamortized portion of the premiums and discounts is included in the carrying value of the student loan on the consolidated balance sheet. We recognize income on our student loan portfolio based on the expected yield of the student loan after giving effect to the amortization of purchase premiums and the accretion of student loan discounts, as well as interest rate reductions and rebates expected to be earned through Borrower Benefits programs. Discounts on Private Education Loans are deferred and accreted to income over the lives of the student loans. In the table below, this accretion of discounts is netted with the amortization of the premiums.

Student Loan Spread

An important performance measure closely monitored by management is the student loan spread. The student loan spread is the difference between the income earned on the student loan assets and the interest paid on the debt funding those assets. A number of factors can affect the overall student loan spread such as:


	•	the mix of student loans in the portfolio, with FFELP Consolidation Loans having the lowest spread and Private Education Loans having the highest spread;

	•	the premiums paid, borrower fees charged and capitalized costs incurred to acquire student loans which impact the spread through subsequent amortization;

	•	the type and level of Borrower Benefits programs for which the student loans are eligible;

	•	the estimate of uncollectible accrued interest in the period provided through interest income;

	•	the level of Floor Income and, when considering the “Core Earnings” basis student loan spread, the amount of Floor Income-eligible loans that have been hedged through Floor Income Contracts; and

	•	funding and hedging costs.

Wholesale Consolidation Loans

During 2006, we implemented a new loan acquisition strategy under which we began purchasing FFELP Consolidation Loans outside of our normal origination channels, primarily via the spot market. We refer to this new loan acquisition strategy as our Wholesale Consolidation Channel. FFELP Consolidation Loans acquired through this channel are considered incremental volume to our core acquisition channels, which are focused on the retail marketplace with an emphasis on our internal brand strategy. Wholesale Consolidation Loans generally command significantly higher premiums than our originated FFELP Consolidation Loans, and as a result, Wholesale Consolidation Loans have lower spreads. Since Wholesale Consolidation Loans are acquired outside of our core loan acquisition channels and have different yields and return expectations than the rest of our FFELP Consolidation Loan portfolio, we have excluded the impact of the Wholesale Consolidation Loan volume from the student loan spread analysis to provide more meaningful period-over-period comparisons on the performance of our student loan portfolio.

The average balance of our Wholesale Consolidation Loan portfolio was $4.6 billion for the first quarter of 2007. Had the impact of the Wholesale Consolidation Loan volume been included in the on-balance sheet student loan spread it would have reduced the spread by approximately 7 basis points for the first quarter of 2007. As of March 31, 2007, Wholesale Consolidation Loans totaled $6.7 billion, or 10 percent, of our total on-balance sheet FFELP Consolidation Loan portfolio.

The student loan spread is highly susceptible to liquidity, funding and interest rate risk. These risks are discussed separately in our 2006 Annual Report on Form 10-K at “LIQUIDITY AND CAPITAL RESOURCES” and in the “RISK FACTORS” discussion.

Student Loan Spread Analysis — On-Balance Sheet

The following table analyzes the reported earnings from student loans on-balance sheet. For an analysis of our student loan spread for the entire portfolio of Managed student loans on a similar basis to the on-balance sheet analysis, see “LENDING BUSINESS SEGMENT — Student Loan Spread Analysis — ‘Core Earnings’ Basis.”


	Three Months Ended
	March 31,
	2007			2006

On-Balance Sheet
Student loan yield, before Floor Income		8.17	%		7.51	%
Gross Floor Income		.02			.07
Consolidation Loan Rebate Fees		(.63	)		(.68	)
Borrower Benefits		(.13	)		(.11	)
Premium and discount amortization		(.15	)		(.12	)

Student loan net yield		7.28			6.67
Student loan cost of funds		(5.57	)		(4.84	)

Student loan spread⁽¹⁾		1.71	%		1.83	%

Average Balances
On-balance sheet student loans⁽¹⁾	$	96,866		$	82,850


⁽¹⁾	Excludes the impact of the Wholesale Consolidation Loan portfolio on the student loan spread and average balances for the three months ended March 31, 2007.

Discussion of Student Loan Spread — Effects of Floor Income and Derivative Accounting

In low interest rate environments, one of the primary drivers of fluctuations in our on-balance sheet student loan spread is the level of gross Floor Income (Floor Income earned before payments on Floor Income Contracts) earned in the period. Short-term interest rates have increased to a level that significantly reduced the level of gross Floor Income earned in the periods presented. We believe that we have economically hedged most of the Floor Income through the sale of Floor Income Contracts, under which we receive an upfront fee and agree to pay the counterparty the Floor Income earned on a notional amount of student loans. These contracts do not qualify for hedge accounting treatment and as a result the payments on the Floor Income Contracts are included on the income statement with “gains (losses) on derivative and hedging activities, net” rather than in student loan interest income.

In addition to Floor Income Contracts, we also extensively use basis swaps to manage our basis risk associated with interest rate sensitive assets and liabilities. These swaps generally do not qualify as accounting hedges and are likewise required to be accounted for in the “gains (losses) on derivative and hedging activities, net” line on the income statement. As a result, they are not considered in the calculation of the cost of funds in the above table.

Discussion of Student Loan Spread — Other Quarter-over-Quarter Fluctuations

We estimate the amount of Private Education Loan accrued interest in a period th