Edgar Filing: SLM CORP

e10vq

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

Form 10-Q


(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended June 30, 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 (State or other jurisdiction of incorporation or organization)		52-2013874 (I.R.S. Employer Identification No.)


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

(703) 810-3000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 July 31, 2007

Voting common stock, $.20 par value		412,214,394 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.

Merger — On April 16, 2007, the Company announced that an investor group (“Investor Group”) led by J.C. Flowers & Co. (“J.C. Flowers”) signed a definitive agreement (“Merger Agreement”) to acquire the Company for approximately $25.3 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 remainder of the purchase price is anticipated to be funded by debt. The Company’s independent board members unanimously approved the agreement and recommended that its shareholders approve the agreement. (See also “Merger Agreement” filed with the SEC on the Company’s Current Report on Form 8-K, dated April 18, 2007.) Pursuant to the Merger Agreement, the Company will not pay dividends on its common stock prior to the consummation of the proposed transaction.

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 Consolidation Loans — Borrowers with multiple Private Education Loans (defined below) may consolidate them into a single loan with Sallie Mae. The interest rate on the new loan is variable rate with the spread set at the lower of the average weighted spread of the underlying loans (available only to Sallie Mae customers) or a new spread as a result of favorable underwriting criteria.

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 Loans — During 2006, we implemented a 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. Wholesale Consolidation Loans are considered incremental volume to our core acquisition channels, which are focused on the retail marketplace with an emphasis on our brand strategy.

SLM CORPORATION

FORM 10-Q
INDEX
June 30, 2007


Part I. Financial Information
	Item 1.	Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	107
	Item 4.	Controls and Procedures	109

Part II. Other Information
	Item 1.	Legal Proceedings	110
	Item 1A.	Risk Factors	110
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	111
	Item 3.	Defaults Upon Senior Securities	111
	Item 4.	Submission of Matters to a Vote of Security Holders	112
	Item 5.	Other Information	112
	Item 6.	Exhibits	113
Signatures			114
EX-10.28
EX-10.29
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)


	June 30,		December 31,
	2007		2006
	(Unaudited)

Assets
FFELP Stafford and Other Student Loans (net of allowance for losses of $11,337 and $8,701, respectively)	$	31,503,088	$	24,840,464
FFELP Consolidation Loans (net of allowance for losses of $12,746 and $11,614, respectively)		68,109,269		61,324,008
Private Education Loans (net of allowance for losses of $427,904 and $308,346, respectively)		11,013,668		9,755,289
Other loans (net of allowance for losses of $19,989 and $20,394, respectively)		1,178,052		1,308,832
Investments
Available-for-sale		1,795,397		2,464,121
Other		89,986		99,330

Total investments		1,885,383		2,563,451
Cash and cash equivalents		2,680,223		2,621,222
Restricted cash and investments		4,300,826		3,423,326
Retained Interest in off-balance sheet securitized loans		3,448,045		3,341,591
Goodwill and acquired intangible assets, net		1,356,620		1,371,606
Other assets		7,327,108		5,585,943

Total assets	$	132,802,282	$	116,135,732

Liabilities
Short-term borrowings	$	9,758,465	$	3,528,263
Long-term borrowings		114,365,577		104,558,531
Other liabilities		3,320,098		3,679,781

Total liabilities		127,444,140		111,766,575

Commitments and contingencies

Minority interest in subsidiaries		10,081		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; 436,095 and 433,113 shares issued, respectively		87,219		86,623
Additional paid-in capital		2,721,554		2,565,211
Accumulated other comprehensive income (net of tax of $139,275 and $183,684, respectively)		265,388		349,111
Retained earnings		2,790,674		1,834,718

Stockholders’ equity before treasury stock		6,429,835		5,400,663
Common stock held in treasury: 23,477 and 22,496 shares, respectively		1,081,774		1,040,621

Total stockholders’ equity		5,348,061		4,360,042

Total liabilities and stockholders’ equity	$	132,802,282	$	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						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Interest income:
FFELP Stafford and Other Student Loans	$	511,300		$	337,090		$	962,062		$	635,590
FFELP Consolidation Loans		1,087,254			841,591			2,102,100			1,662,926
Private Education Loans		329,351			233,696			667,772			475,049
Other loans		26,453			23,541			54,426			46,848
Cash and investments		141,524			124,954			255,428			220,764

Total interest income		2,095,882			1,560,872			4,041,788			3,041,177
Total interest expense		1,697,229			1,204,067			3,229,319			2,296,851

Net interest income		398,653			356,805			812,469			744,326
Less: provisions for loan losses		148,200			67,396			298,530			127,715

Net interest income after provisions for loan losses		250,453			289,409			513,939			616,611

Other income:
Gains on student loan securitizations		—			671,262			367,300			701,285
Servicing and securitization revenue		132,987			82,842			384,925			181,773
Losses on loans and securities, net		(10,921	)		(8,524	)		(41,888	)		(11,472	)
Gains (losses) on derivative and hedging activities, net		821,566			122,719			464,597			35,980
Guarantor servicing fees		30,273			33,256			69,514			60,163
Debt management fees		80,237			90,161			167,559			181,773
Collections revenue		77,092			67,357			142,654			124,038
Other		89,004			75,081			185,437			146,457

Total other income		1,220,238			1,134,154			1,740,098			1,419,997
Operating expenses:
Salaries and benefits		191,632			168,727			377,982			344,067
Other		207,168			147,875			376,992			295,844

Total operating expenses		398,800			316,602			754,974			639,911

Income before income taxes and minority interest in net earnings of subsidiaries		1,071,891			1,106,961			1,499,063			1,396,697
Income taxes		104,724			381,828			414,738			518,873

Income before minority interest in net earnings of subsidiaries		967,167			725,133			1,084,325			877,824
Minority interest in net earnings of subsidiaries		696			1,355			1,701			2,445

Net income		966,471			723,778			1,082,624			875,379
Preferred stock dividends		9,156			8,787			18,249			17,088

Net income attributable to common stock	$	957,315		$	714,991		$	1,064,375		$	858,291

Basic earnings per common share	$	2.32		$	1.74		$	2.59		$	2.08

Average common shares outstanding		411,870			410,957			411,457			411,811

Diluted earnings per common share	$	1.03		$	1.52		$	1.82		$	1.96

Average common and common equivalent shares outstanding		452,406			454,314			454,139			453,803

Dividends per common share	$	—		$	.25		$	.25		$	.47

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 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
Comprehensive income:
Net income																					723,778						723,778
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments, net of tax																		38,138									38,138
Change in unrealized gains (losses) on derivatives, net of tax																		3,570									3,570

Comprehensive income																											765,486
Cash dividends:
Common stock ($.25 per share)																					(102,613	)					(102,613	)
Preferred stock, series A ($.87 per share)																					(2,875	)					(2,875	)
Preferred stock, series B ($1.44 per share)																					(5,750	)					(5,750	)
Issuance of common shares				1,424,153		7,747			1,431,900					285		48,915								407			49,607
Preferred stock issuance costs and related amortization																162					(162	)					—
Tax benefit related to employee stock option and purchase plans																10,898											10,898
Stock-based compensation cost																16,338											16,338
Repurchase of common shares:
Equity forwards:
Exercise cost, cash						(2,086,571	)		(2,086,571	)														(114,219	)		(114,219	)
(Gain) loss on settlement						—			—															7,887			7,887
Benefit plans						(400,509	)		(400,509	)														(19,919	)		(19,919	)

Balance at June 30, 2006		7,300,000		430,753,515		(19,078,488	)		411,675,027		$	565,000	$	86,151	$	2,440,565	$	370,204		$	1,775,948		$	(878,100	)	$	4,359,768

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
Comprehensive income:
Net income																					966,471						966,471
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments, net of tax																		(41,912	)								(41,912	)
Change in unrealized gains (losses) on derivatives, net of tax																		6,416									6,416

Comprehensive income																											930,975
Cash dividends:
Preferred stock, series A ($.87 per share)																					(2,875	)					(2,875	)
Preferred stock, series B ($1.55 per share)																					(6,120	)					(6,120	)
Issuance of common shares				1,508,640		241			1,508,881					301		46,774								10			47,085
Preferred stock issuance costs and related amortization																161					(161	)					—
Tax benefit related to employee stock option and purchase plans																6,826											6,826
Stock-based compensation cost																29,459											29,459
Repurchase of common shares:
Benefit plans						(827,319	)		(827,319	)														(34,071	)		(34,071	)

Balance at June 30, 2007		7,300,000		436,095,303		(23,477,044	)		412,618,259		$	565,000	$	87,219	$	2,721,554	$	265,388		$	2,790,674		$	(1,081,774	)	$	5,348,061

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)


	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																					875,379						875,379
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments, net of tax																		(6,812	)								(6,812	)
Change in unrealized gains (losses) on derivatives, net of tax																		9,101									9,101
Minimum pension liability adjustment																		5									5

Comprehensive income																											877,673
Cash dividends:
Common stock ($.47 per share)																					(194,086	)					(194,086	)
Preferred stock, series A ($1.74 per share)																					(5,750	)					(5,750	)
Preferred stock, series B ($2.74 per share)																					(11,017	)					(11,017	)
Issuance of common shares				4,269,988		53,749			4,323,737					854		131,951								2,975			135,780
Preferred stock issuance costs and related amortization																321					(321	)					—
Tax benefit related to employee stock option and purchase plans																37,959											37,959
Stock-based compensation cost																36,687											36,687
Repurchase of common shares:
Equity forwards:
Exercise cost, cash						(4,534,403	)		(4,534,403	)														(248,213	)		(248,213	)
(Gain) loss on settlement						—			—															7,081			7,081
Benefit plans						(1,251,117	)		(1,251,117	)														(67,771	)		(67,771	)

Balance at June 30, 2006		7,300,000		430,753,515		(19,078,488	)		411,675,027		$	565,000	$	86,151	$	2,440,565	$	370,204		$	1,775,948		$	(878,100	)	$	4,359,768

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																					1,082,624						1,082,624
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments, net of tax																		(90,100	)								(90,100	)
Change in unrealized gains (losses) on derivatives, net of tax																		6,899									6,899
Minimum pension liability adjustment																		(522	)								(522	)

Comprehensive income																											998,901
Cash dividends:
Common stock ($.25 per share)																					(102,658	)					(102,658	)
Preferred stock, series A ($1.74 per share)																					(5,750	)					(5,750	)
Preferred stock, series B ($3.07 per share)																					(12,178	)					(12,178	)
Issuance of common shares				2,982,321		35,364			3,017,685					596		94,194								1,584			96,374
Preferred stock issuance costs and related amortization																321					(321	)					—
Tax benefit related to employee stock option and purchase plans																15,474											15,474
Stock-based compensation cost																46,354											46,354
Cumulative effect of accounting change																					(5,761	)					(5,761	)
Repurchase of common shares:
Benefit plans						(1,016,238	)		(1,016,238	)														(42,737	)		(42,737	)

Balance at June 30, 2007		7,300,000		436,095,303		(23,477,044	)		412,618,259		$	565,000	$	87,219	$	2,721,554	$	265,388		$	2,790,674		$	(1,081,774	)	$	5,348,061

See accompanying notes to consolidated financial statements.

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


	Six Months Ended
	June 30,
				Restated
	2007			2006
	(Unaudited)			(Unaudited)

Operating activities
Net income	$	1,082,624		$	875,379
Adjustments to reconcile net income to net cash used in operating activities:
Gains on student loan securitizations		(367,300	)		(701,285	)
Losses on sales of loans and securities, net		41,888			11,472
Stock-based compensation cost		52,840			41,614
Unrealized (gains)/losses on derivative and hedging activities, excluding equity forwards		(125,946	)		(208,045	)
Unrealized (gains)/losses on derivative and hedging activities — equity forwards		(383,969	)		82,693
Provisions for loan losses		298,530			127,715
Minority interest, net		(190	)		(3,408	)
Mortgage loans originated		(441,376	)		(718,223	)
Proceeds from sales of mortgage loans		469,125			719,490
Decrease (increase) in restricted cash-other		27,059			(82,166	)
(Increase) in accrued interest receivable		(677,935	)		(473,161	)
Increase in accrued interest payable		203,375			102,612
Adjustment for non-cash (income)/loss related to Retained Interest		(10,255	)		144,020
(Increase) in other assets, goodwill and acquired intangible assets, net		(232,429	)		(94,519	)
(Decrease) in other liabilities		(245,656	)		(218,910	)

Total adjustments		(1,392,239	)		(1,270,101	)

Net cash (used in) operating activities		(309,615	)		(394,722	)

Investing activities
Student loans acquired		(20,428,723	)		(15,999,045	)
Loans purchased from securitized trusts (primarily loan consolidations)		(3,045,904	)		(3,451,932	)
Reduction of student loans:
Installment payments		5,729,724			5,209,648
Proceeds from securitization of student loans treated as sales		1,976,599			14,439,628
Proceeds from sales of student loans		777,154			91,050
Other loans originated		(1,677,791	)		(516,283	)
Other loans repaid		1,767,690			602,757
Other investing activities, net		(133,358	)		(52,036	)
Purchases of available-for-sale securities		(23,921,722	)		(31,993,437	)
Proceeds from sales of available-for-sale securities		73,197			2,455
Proceeds from maturities of available-for-sale securities		24,683,374			31,589,192
Purchases of held-to-maturity and other securities		(540	)		(339,187	)
Proceeds from maturities of held-to-maturity securities and other securities		10,683			446,160
(Increase) in restricted cash — on-balance sheet trusts		(1,071,161	)		(344,173	)
Return of investment from Retained Interest		144,923			55,688

Net cash (used in) investing activities		(15,115,855	)		(259,515	)

Financing activities
Short-term borrowings issued		3,019,225			15,351,431
Short-term borrowings repaid		(2,802,000	)		(15,358,062	)
Long-term borrowings issued		1,567,602			4,686,236
Long-term borrowings repaid		(2,592,983	)		(3,516,290	)
Borrowings collateralized by loans in trust issued		16,367,492			3,091,347
Borrowings collateralized by loans in trust — activity		142,155			(2,252,700	)
Other financing activities, net		16,557			(46,911	)
Excess tax benefit from the exercise of stock-based awards		8,832			23,846
Common stock issued		73,220			119,660
Net settlements on equity forward contracts		(152,306	)		(28,522	)
Common stock repurchased		(42,737	)		(315,984	)
Common dividends paid		(102,658	)		(194,086	)
Preferred dividends paid		(17,928	)		(16,767	)

Net cash provided by financing activities		15,484,471			1,543,198

Net increase in cash and cash equivalents		59,001			888,961
Cash and cash equivalents at beginning of period		2,621,222			2,498,655

Cash and cash equivalents at end of period	$	2,680,223		$	3,387,616

Cash disbursements made for:
Interest	$	3,082,619		$	2,066,876

Income taxes	$	528,768		$	570,492

See accompanying notes to consolidated financial statements.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2007 and for the three and six months ended
June 30, 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 and six months ended June 30, 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 and six months ended June 30, 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 June 30, 2007 and for the three and six months ended
June 30, 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, has recorded related unrealized gains/losses through earnings that, prior to the adoption of SFAS No. 155, would have been recorded through other comprehensive income.


1.	Significant Accounting Policies (Continued)

The Company has concluded, based on its current 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 for the six months ended June 30, 2007, as it relates to on-balance sheet securitization debt.


2.	Allowance for Student Loan Losses

The Company’s provisions for student 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 and six months ended June 30, 2007 and 2006.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006

Balance at beginning of period	$	391,351		$	247,677		$	328,661		$	219,062
Provisions for student loan losses		144,971			64,817			292,166			122,616
Charge-offs		(92,493	)		(36,765	)		(178,305	)		(70,153	)
Recoveries		7,826			6,040			14,616			12,429

Net charge-offs		(84,667	)		(30,725	)		(163,689	)		(57,724	)

Balance before reductions for student loan sales and securitizations		451,655			281,769			457,138			283,954
Adjustments for student loan sales and securitizations		332			(13,207	)		(5,151	)		(15,392	)

Balance at end of period	$	451,987		$	268,562		$	451,987		$	268,562

In addition to the provisions for student loan losses, provisions for other loan losses totaled $3 million for both the three months ended June 30, 2007 and 2006, and $6 million and $5 million for the six months ended June 30, 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 and six months ended June 30, 2007 and 2006. The provision for the three months ended June 30, 2007, includes an update to the Company’s projected default rates reflecting an increased gross charge-off expectation somewhat offset by an increase in expected life-of-loan recoveries. For the three months ended June 30, 2007, the net effect of these changes in estimates included in the provision expense is $58 million.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006

Balance at beginning of period	$	369,072		$	232,147		$	308,346		$	204,112
Provision for Private Education Loan losses		138,779			62,212			280,406			116,584



Charge-offs		(87,773	)		(35,993	)		(169,684	)		(68,719	)
Recoveries		7,826			6,040			14,616			12,429

Net charge-offs		(79,947	)		(29,953	)		(155,068	)		(56,290	)

Balance before securitization of Private Education Loans		427,904			264,406			433,684			264,406
Reduction for securitization of Private Education Loans		—			(12,824	)		(5,780	)		(12,824	)

Balance at end of period	$	427,904		$	251,582		$	427,904		$	251,582

Net charge-offs as a percentage of average loans in repayment (annualized)		6.19	%		3.13	%		6.04	%		3.05	%
Allowance as a percentage of the ending total loan balance		3.74	%		3.55	%		3.74	%		3.55	%
Allowance as a percentage of ending loans in repayment		7.79	%		6.66	%		7.79	%		6.66	%
Allowance coverage of net charge-offs (annualized)		1.33			2.09			1.37			2.22
Average total loans	$	10,917,155		$	7,960,694		$	11,134,453		$	8,485,296
Ending total loans	$	11,441,572		$	7,084,425		$	11,441,572		$	7,084,425
Average loans in repayment	$	5,181,847		$	3,837,596		$	5,173,892		$	3,719,751
Ending loans in repayment	$	5,496,478		$	3,777,247		$	5,496,478		$	3,777,247


2.	Allowance for Student Loan Losses (Continued)

Delinquencies

The table below presents the Company’s Private Education Loan delinquency trends as of June 30, 2007, December 31, 2006, and June 30, 2006. Delinquencies have the potential to adversely impact earnings if the account charges off and results in increased servicing and collection costs.


	June 30,						December 31,						June 30,
	2007						2006						2006
(Dollars in millions)	Balance			%			Balance			%			Balance			%

Loans in-school/grace/deferment⁽¹⁾	$	5,789					$	5,218					$	3,305
Loans in forbearance⁽²⁾		544						359						299
Loans in repayment and percentage of each status:
Loans current		4,873			88.7	%		4,214			86.9	%		3,353			88.8	%
Loans delinquent 31-60 days⁽³⁾		243			4.4			250			5.1			176			4.7
Loans delinquent 61-90 days⁽³⁾		131			2.4			132			2.7			100			2.6
Loans delinquent greater than 90 days⁽³⁾		249			4.5			255			5.3			148			3.9

Total Private Education Loans in repayment		5,496			100	%		4,851			100	%		3,777			100	%

Total Private Education Loans, gross		11,829						10,428						7,381
Private Education Loan unamortized discount		(387	)					(365	)					(296	)

Total Private Education Loans		11,442						10,063						7,085
Private Education Loan allowance for losses		(428	)					(308	)					(252	)

Private Education Loans, net	$	11,014					$	9,755					$	6,833

Percentage of Private Education Loans in repayment		46.5	%					46.5	%					51.2	%

Delinquencies as a percentage of Private Education Loans in repayment		11.3	%					13.1	%					11.2	%


⁽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 June 30, 2007
	Amortization				Accumulated
(Dollars in millions)	Period		Gross		Amortization			Net

Intangible assets subject to amortization:
Customer, services, and lending relationships		12 years	$	375	$	(139	)	$	236
Tax exempt bond funding		10 years		—		—			—
Software and technology		7 years		95		(70	)		25
Non-compete agreements		2 years		12		(10	)		2

Total				482		(219	)		263

Intangible assets not subject to amortization:
Trade name and trademark		Indefinite		116		—			116

Total acquired intangible assets			$	598	$	(219	)	$	379


	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 intangible impairment and amortization of acquired intangibles totaling $17 million and $18 million for the three months ended June 30, 2007 and 2006, respectively, and $40 million and $32 million for the six months ended June 30, 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,					June 30,
(Dollars in millions)	2006		Adjustments			2007

Lending	$	406	$	1		$	407
Debt Management Operations		349		14			363
Corporate and Other		215		(8	)		207

Total	$	970	$	7		$	977

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 and six months ended June 30, 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 June 30,
	2007									2006
			Loan		Pre-							Loan		Pre-
	No. of		Amount		Tax					No. of		Amount		Tax
(Dollars in millions)	Transactions		Securitized		Gain		Gain%			Transactions		Securitized		Gain		Gain%

Securitizations sales:
FFELP Stafford/PLUS loans		—	$	—	$	—		—	%		—	$	—	$	—		—	%
FFELP Consolidation Loans		—		—		—		—			1		2,500		23		.9
Private Education Loans		—		—		—		—			2		4,000		648		16.2

Total securitizations sales		—		—	$	—		—	%		3		6,500	$	671		10.3	%

Securitization financings:
FFELP Stafford/PLUS Loans⁽¹⁾		—		—							—		—
FFELP Consolidation Loans⁽¹⁾		1		4,985							1		3,001

Total securitizations financings		1		4,985							1		3,001

Total securitizations		1	$	4,985							4	$	9,501


	Six Months Ended June 30,
	2007									2006
			Loan		Pre-							Loan		Pre-
	No. of		Amount		Tax					No. of		Amount		Tax
(Dollars in millions)	Transactions		Securitized		Gain		Gain%			Transactions		Securitized		Gain		Gain%

Securitizations sales:
FFELP Stafford/PLUS loans		—	$	—	$	—		—	%		2	$	5,004	$	17		.3	%
FFELP Consolidation Loans		—		—		—		—			2		5,502		36		.7
Private Education Loans		1		2,000		367		18.4			2		4,000		648		16.2

Total securitizations sales		1		2,000	$	367		18.4	%		6		14,506	$	701		4.8	%

Securitization financings:
FFELP Stafford/PLUS Loans⁽¹⁾		2		7,004							—		—
FFELP Consolidation Loans⁽¹⁾		2		8,987							1		3,001

Total securitizations financings		4		15,991							1		3,001

Total securitizations		5	$	17,991							7	$	17,507


⁽¹⁾		In certain securitizations there are terms within the deal structure that result in such securitizations not qualifying for sale treatment and accordingly, they are accounted for on-balance sheet as 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 and six months ended June 30, 2007 and 2006 were as follows:


	Three Months Ended June 30,
	2007						2006
			FFELP		Private				FFELP			Private
	FFELP		Consolidation		Education		FFELP		Consolidation			Education
	Stafford⁽¹⁾		Loans⁽¹⁾		Loans⁽¹⁾		Stafford⁽¹⁾		Loans			Loans

Prepayment speed (annual rate)⁽²⁾		—		—		—		—		6	%		4	%
Interim status		—		—		—		—		—			—
Repayment status		—		—		—		—		—			—
Life of loan repayment status		—		—		—		—		—			—
Weighted average life		—		—		—		—		8.5 yrs.			9.4 yrs.
Expected credit losses (% of principal securitized)		—		—		—		—		.27	%		4.79	%
Residual cash flows discounted at (weighted average)		—		—		—		—		10.8	%		13.0	%


	Six Months Ended June 30,
	2007							2006
			FFELP		Private						FFELP			Private
	FFELP		Consolidation		Education			FFELP			Consolidation			Education
	Stafford⁽¹⁾		Loans⁽¹⁾		Loans			Stafford			Loans			Loans

Prepayment speed (annual rate)⁽²⁾		—		—		—			*			6	%		4	%
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.			9.4 yrs.
Expected credit losses (% of principal securitized)		—		—		4.69	%		.15	%		.27	%		4.79	%
Residual cash flows discounted at (weighted average)		—		—		12.5	%		12.4	%		10.6	%		13.0	%


⁽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.


4.	Student Loan Securitization (Continued)

Retained Interest in Securitized Receivables

The following tables summarize the fair value of the Company’s Residual Interests, included in the Company’s Retained Interest (and the assumptions used to value such Residual Interests), along with the underlying off-balance sheet student loans that relate to those securitizations in transactions that were treated as sales as of June 30, 2007 and December 31, 2006.


	As of June 30, 2007
	FFELP			Consolidation			Private
	Stafford and			Loan			Education
	PLUS			Trusts⁽¹⁾			Loan Trusts⁽⁶⁾			Total

Fair value of Residual Interests⁽²⁾	$	550		$	616		$	2,282		$	3,448
Underlying securitized loan balance⁽³⁾		11,176			16,683			14,573			42,432
Weighted average life		2.9 yrs.			7.2 yrs.			7.3 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)⁽⁵⁾		.05	%		.07	%		4.04	%
Residual cash flows discount rate		12.8	%		11.0	%		13.0	%


	As of December 31, 2006
	FFELP			Consolidation			Private
	Stafford and			Loan			Education
	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 $94 million and $151 million related to the fair value of the Embedded Floor Income as of June 30, 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 June 30, 2007 and December 31, 2006, the Company had unrealized gains (pre-tax) in accumulated other comprehensive income of $286 million and $389 million, respectively, that related to the Retained Interests.
⁽³⁾		In addition to student loans in off-balance sheet trusts, the Company had $61.4 billion and $48.6 billion of securitized student loans outstanding (face amount) as of June 30, 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.
⁽⁵⁾		The Company increased its recovery rate assumption on defaulted Private Education Loans from 22 percent to 27 percent as of June 30, 2007.
⁽⁶⁾		As discussed in Note 1, “Significant Accounting Policies — Accounting for Certain Hybrid Financial Instruments” the Company adopted SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” effective January 1, 2007. As a result, the Company elected to carry the Residual Interest on the Private Education Loan securitization which settled in the first quarter of 2007 at fair value with subsequent changes in fair value recorded in earnings. The fair value of this Residual Interest at June 30, 2007 was $429 million inclusive of a net $57 million fair value gain adjustment recorded since settlement.


4.	Student Loan Securitization (Continued)

The Company recorded impairments to the Retained Interests of $35 million and $91 million, respectively, for the three months ended June 30, 2007 and 2006, and $46 million and $143 million, respectively, for the six months ended June 30, 2007 and 2006. The impairment charges were the result of FFELP loans prepaying faster than projected through loan consolidations ($11 million and $68 million for the three months ended June 30, 2007 and 2006, respectively, and $22 million and $92 million for the six months ended June 30, 2007 and 2006, respectively) as well as impairment to the Floor Income component of the Company’s Retained Interest due to increases in interest rates during the period ($24 million and $23 million for the three months ended June 30, 2007 and 2006, respectively, and $24 million and $51 million for the six months ended June 30, 2007 and 2006, respectively).

The table below shows the Company’s off-balance sheet Private Education Loan delinquency trends as of June 30, 2007, December 31, 2006 and June 30, 2006.


	June 30,					December 31,					June 30,
	2007					2006					2006
(Dollars in millions)	Balance		%			Balance		%			Balance		%

Loans in-school/grace/deferment⁽¹⁾	$	6,136				$	5,608				$	6,074
Loans in forbearance⁽²⁾		1,093					822					751
Loans in repayment and percentage of each status:
Loans current		7,002		95.3	%		6,419		94.5	%		5,483		95.7	%
Loans delinquent 31-60 days⁽³⁾		196		2.7			222		3.3			151		2.6
Loans delinquent 61-90 days⁽³⁾		66		.9			60		.9			50		.9
Loans delinquent greater than 90 days⁽³⁾		80		1.1			91		1.3			47		.8

Total off-balance sheet Private Education Loans in repayment		7,344		100	%		6,792		100	%		5,731		100	%

Total off-balance sheet Private Education Loans, gross	$	14,573				$	13,222				$	12,556


	⁽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 June 30, 2007 and December 31, 2006 and their impact on other comprehensive income and earnings for the three and six months ended June 30, 2007 and 2006. At June 30, 2007 and December 31, 2006, $714 million (of which $58 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 $163 million and $28 million, respectively, of cash were pledged as collateral against these derivative instruments.


	Cash Flow					Fair Value						Trading						Total
	June 30,		December 31,			June 30,			December 31,			June 30,			December 31,			June 30,			December 31,
(Dollars in millions)	2007		2006			2007			2006			2007			2006			2007			2006

Fair Values⁽¹⁾
Interest rate swaps	$	—	$	(9	)	$	(543	)	$	(355	)	$	(89	)	$	(111	)	$	(632	)	$	(475	)
Floor/Cap contracts		—		—			—			—			(116	)		(200	)		(116	)		(200	)
Futures		—		—			—			—			—			—			—			—
Equity forwards		—		—			—			—			324			(213	)		324			(213	)
Cross currency interest rate swaps		—		—			1,847			1,440			—			—			1,847			1,440

Total	$	—	$	(9	)	$	1,304		$	1,085		$	119		$	(524	)	$	1,423		$	552

(Dollars in billions)
Notional Values
Interest rate swaps	$	2.1	$	2.1		$	15.6		$	15.6		$	190.7		$	162.0		$	208.4		$	179.7
Floor/Cap contracts		—		—			—			—			21.1			21.5			21.1			21.5
Futures		—		.1			—			—			.6			.6			.6			.7
Cross currency interest rate swaps		—		—			23.8			23.0			—			—			23.8			23.0
Other⁽²⁾		—		—			—			—			2.5			2.0			2.5			2.0

Total	$	2.1	$	2.2		$	39.4		$	38.6		$	214.9		$	186.1		$	256.4		$	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 June 30,
	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	$	6	$	—		$	—	$	—	$	—		$	—		$	6		$	—
Amortization of effective hedges⁽¹⁾		—		4			—		—		—			—			—			4

Change in accumulated other comprehensive income, net	$	6	$	4		$	—	$	—	$	—		$	—		$	6		$	4

Earnings Summary
Amortization of closed futures contracts’ gains/losses in interest expense⁽²⁾	$	—	$	(5	)	$	—	$	—	$	—		$	—		$	—		$	(5	)
Gains (losses) on derivative and hedging activities — Realized⁽³⁾		—		—			—		—		(20	)		(41	)		(20	)		(41	)
Gains (losses) on derivative and hedging activities — Unrealized⁽⁴⁾		—		—			1		21		841			143			842			164

Total earnings impact	$	—	$	(5	)	$	1	$	21	$	821		$	102		$	822		$	118


	Six Months Ended June 30,
	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	$	6		$	2		$	—	$	—	$	—		$	—		$	6		$	2
Amortization of effective hedges⁽¹⁾		1			7			—		—		—			—			1			7

Change in accumulated other comprehensive income, net	$	7		$	9		$	—	$	—	$	—		$	—		$	7		$	9

Earnings Summary
Amortization of closed futures contracts’ gains/losses in interest expense⁽²⁾	$	(2	)	$	(11	)	$	—	$	—	$	—		$	—		$	(2	)	$	(11	)
Gains (losses) on derivative and hedging activities — Realized⁽³⁾		—			—			—		—		(45	)		(89	)		(45	)		(89	)
Gains (losses) on derivative and hedging activities — Unrealized⁽⁴⁾		—			—			16		43		494			82			510			125

Total earnings impact	$	(2	)	$	(11	)	$	16	$	43	$	449		$	(7	)	$	463		$	25


⁽¹⁾	The Company expects to amortize $.1 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 June 30, 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.

The Company hedges the full fair value of certain fixed rate U.S. dollar denominated unsecured debt for SFAS No. 133 hedge accounting purposes. The widening of the Company’s credit spreads due to the

5. Derivative Financial Instruments (Continued)

Merger announcement (see Note 12, “Merger Related Developments”) resulted in certain hedge relationships no longer qualifying for hedge accounting as full fair value hedges. Those relationships which no longer qualify for hedge accounting as full fair value hedges were terminated and re-designated as hedges of changes in fair value due to benchmark interest rates only. The basis adjustment related to the hedged items as of the termination date is being amortized over the remaining life of the hedged items.


6.	Stockholders’ Equity

The following table summarizes the Company’s common share repurchases, issuances and equity forward activity for the three and six months ended June 30, 2007 and 2006.


	Three Months					Six Months
	Ended					Ended
	June 30,					June 30,
(Shares in millions)	2007		2006			2007		2006

Common shares repurchased:
Equity forwards		—		2.1			—		4.5
Benefit plans⁽¹⁾		.8		.4			1.0		1.3

Total shares repurchased		.8		2.5			1.0		5.8

Average purchase price per share	$	41.18	$	53.93		$	42.05	$	54.62

Common shares issued		1.5		1.4			3.0		4.3

Equity forward contracts:
Outstanding at beginning of period		48.2		42.7			48.2		42.7
New contracts		—		5.3			—		7.7
Exercises		—		(2.1	)		—		(4.5	)

Outstanding at end of period		48.2		45.9			48.2		45.9

Authority remaining at end of period to repurchase or enter into equity forwards		15.7		10.9			15.7		10.9


	⁽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.


6.	Stockholders’ Equity (Continued)

As of June 30, 2007, the expiration dates and 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 June 29, 2007 was $57.58. 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 June 30, 2007, these initial trigger prices range from $23.93 per share to $30.11 per share.

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 June 30, 2007, December 31, 2006 and June 30, 2006.


	June 30,			December 31,			June 30,
	2007			2006			2006

Net unrealized gains (losses) on investments⁽¹⁾	$	250,263		$	340,363		$	375,503
Net unrealized gains (losses) on derivatives⁽²⁾		(671	)		(7,570	)		(3,459	)
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	$	265,388		$	349,111		$	370,204


	⁽¹⁾	Net of tax expense of $130,348, $179,244 and $199,569 as of June 30, 2007, December 31, 2006 and June 30, 2006, respectively.

	⁽²⁾	Net of tax benefit of $382, $4,347 and $1,977 as of June 30, 2007, December 31, 2006 and June 30, 2006, respectively.

	⁽³⁾	Net of tax expense of $9,309 and $8,787 as of June 30, 2007 and December 31, 2006, respectively.

	⁽⁴⁾	Net of tax benefit of $991 as of June 30, 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 follows for the three and six months ended June 30, 2007 and 2006.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006

Numerator:
Net income attributable to common stock	$	957,315		$	714,991		$	1,064,375		$	858,291
Adjusted for debt expense of convertible debentures (“Co-Cos”), net of taxes⁽¹⁾		17,679			16,460			35,189			31,277
Adjusted for non-taxable unrealized gains on equity forwards⁽²⁾		(507,072	)		(39,717	)		(272,191	)		—

Net income attributable to common stock, adjusted	$	467,922		$	691,734		$	827,373		$	889,568

Denominator (shares in thousands):
Weighted average shares used to compute basic EPS		411,870			410,957			411,457			411,811
Effect of dilutive securities:
Dilutive effect of Co-Cos		30,312			30,312			30,312			30,312
Dilutive effect of stock options, nonvested deferred compensation, nonvested restricted stock, restricted stock units, Employee Stock Purchase Plan (“ESPP”) and equity forwards⁽³⁾⁽⁴⁾		10,224			13,045			12,370			11,680

Dilutive potential common shares⁽⁵⁾		40,536			43,357			42,682			41,992

Weighted average shares used to compute diluted EPS		452,406			454,314			454,139			453,803

Net earnings per share:
Basic EPS	$	2.32		$	1.74		$	2.59		$	2.08
Dilutive effect of Co-Cos⁽¹⁾		(.03	)		(.08	)		(.05	)		(.07	)
Dilutive effect of equity forwards⁽²⁾⁽⁴⁾		(1.21	)		(.09	)		(.66	)		—
Dilutive effect of stock options, nonvested deferred compensation, nonvested restricted stock, restricted stock units, and ESPP⁽³⁾		(.05	)		(.05	)		(.06	)		(.05	)

Diluted EPS	$	1.03		$	1.52		$	1.82		$	1.96


⁽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. On June 25, 2007, holders of these securities were notified that the Co-Cos would be called at par on July 25, 2007, as allowed by the terms of the indenture governing the Co-Cos.

⁽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 June 30, 2007 and 2006, stock options and equity forwards of approximately 21 million shares and 8 million shares, respectively, and for the six months ended June 30, 2007 and 2006, stock options and equity forwards of approximately 26 million shares and 12 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						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006

Service cost — benefits earned during the period	$	1,775		$	2,073		$	3,550		$	4,146
Interest cost on projected benefit obligations		3,084			2,862			6,168			5,724
Expected return on plan assets		(4,494	)		(4,069	)		(8,988	)		(8,138	)
Net amortization and deferral		(179	)		122			(359	)		244

Total net periodic pension cost	$	186		$	988		$	371		$	1,976

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 June 30, 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 No. 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 and second quarters of 2007, the Company adjusted its federal unrecognized tax benefits to reflect the expected outcome of several issues that were addressed with the IRS as a part of the 2003-2004 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 quarters. In total, as of June 30, 2007, the Company has gross unrecognized tax benefits of $182 million, unrecognized tax benefits that, if recognized, would impact the effective tax rate of $42 million, as well as total interest and penalties recognized in the statements of operations and financial position of $17 million.


9.	Income Taxes (Continued)

Reasonably Possible Significant Increases/Decreases within Twelve Months

U.S. Federal Tax Uncertainties

The IRS issued a Revenue Agent’s Report (“RAR”) during the second quarter of 2007 concluding the primary exam of the Company’s 2003 and 2004 U.S. federal tax returns. However, the exam of these years remains open pending the conclusion of the separate IRS audit of an entity in which the Company is an investor (any results of which are not expected to have a material impact on the Company’s unrecognized tax benefit amounts). In addition, the Company is currently filing an administrative-level appeal related to one unagreed item originating from the Company’s 2004 U.S. federal tax return. An estimate of the range of the possible change to the balance of the Company’s unrecognized tax benefits that may result from resolution of the remaining unagreed item cannot at this time be made, pending further development of the appeals process.

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 be made.

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

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

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


10.	Contingencies

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 filed a motion to dismiss on June 21, 2007, with a hearing on the motion expected in late August.

On January 25, 2007, the Attorney General of Illinois filed a lawsuit against one of the Company’s subsidiaries, Arrow Financial Services, LLC (“AFS”), in the Circuit Court of Cook County, Illinois alleging that AFS violated the Illinois Consumer Fraud and Deceptive Practices Act and the federal Fair Debt Collections Practices Act. The lawsuit seeks to enjoin AFS from violating the Illinois Consumer Fraud and Deceptive Practices Act and from engaging in debt management and collection services in or from the State of Illinois. The lawsuit also seeks to rescind certain agreements to pay back debt between AFS and Illinois consumers, to pay restitution to all consumers who have been harmed by AFS’s alleged unlawful practices, to impose a statutory civil penalty of $50,000 and to impose a civil penalty of $50,000 per violation ($60,000 per violation if the consumer is 65 years of age or older). The lawsuit alleges that as of January 25, 2007, 660 complaints against Arrow Financial have been filed with the Office of the Illinois Attorney General since 1999 and over 800 complaints have been filed with the Better Business Bureau. As of December 29, 2006, the Company owns 88 percent of the membership interests in AFS Holdings, LLC, the parent company of AFS. Management cannot predict the outcome of this lawsuit or its effect on the Company’s financial position or results of operations.

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.


11.	Segment Reporting (Continued)

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 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 June 30, 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 six months ending June 30, 2007 and 2006, it accounted for 33 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 $153.2 billion at June 30, 2007, of which $128.1 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 six months ended June 30, 2007, the Company originated $617 million in mortgage and consumer loans of which $441 million pertained to mortgages in the held for sale portfolio. The Company’s mortgage and consumer loan portfolio totaled $600 million at June 30, 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


11.	Segment Reporting (Continued)

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 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 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 and Student Loan Servicing operating segments, and its recently acquired Upromise operating segment. 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 Student 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.

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.


11.	Segment Reporting (Continued)

“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.

Segment Results and Reconciliations to GAAP


	Three Months Ended June 30, 2007
						Corporate			Total “Core					Total
(Dollars in millions)	Lending		DMO			and Other			Earnings”		Adjustments⁽³⁾			GAAP

Interest income:
FFELP Stafford and Other Student Loans	$	719	$	—		$	—		$	719	$	(208	)	$	511
FFELP Consolidation Loans		1,391		—			—			1,391		(304	)		1,087
Private Education Loans		692		—			—			692		(363	)		329
Other loans		27		—			—			27		—			27
Cash and investments		182		—			7			189		(47	)		142

Total interest income		3,011		—			7			3,018		(922	)		2,096
Total interest expense		2,371		7			5			2,383		(686	)		1,697

Net interest income (loss)		640		(7	)		2			635		(236	)		399
Less: provisions for loan losses		247		—			—			247		(99	)		148

Net interest income (loss) after provisions for loan losses		393		(7	)		2			388		(137	)		251
Fee income		—		80			30			110		—			110
Collections revenue		—		77			—			77		—			77
Other income		59		—			49			108		925			1,033

Total other income		59		157			79			295		925			1,220
Operating expenses⁽¹⁾		182		96			104			382		17			399

Income (loss) before income taxes and minority interest in net earnings of subsidiaries		270		54			(23	)		301		771			1,072
Income tax expense (benefit)⁽²⁾		100		20			(9	)		111		(6	)		105
Minority interest in net earnings of subsidiaries		—		1			—			1		—			1

Net income (loss)	$	170	$	33		$	(14	)	$	189	$	777		$	966


⁽¹⁾		Operating expenses for the Lending, DMO, and Corporate and Other business segments include $13 million, $4 million, and $6 million, respectively, of stock option compensation expense.

⁽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 June 30, 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	$	(217	)	$	20	$	(39	)	$	—		$	(236	)
Less: provisions for loan losses		(99	)		—		—			—			(99	)

Net interest income after provisions for loan losses		(118	)		20		(39	)		—			(137	)
Fee income		—			—		—			—			—
Collections revenue		—			—		—			—			—
Other income		103			822		—			—			925

Total other income		103			822		—			—			925
Operating expenses		—			—		—			17			17

Total pre-tax “Core Earnings” adjustments to GAAP	$	(15	)	$	842	$	(39	)	$	(17	)		771

Income tax benefit													(6	)
Minority interest in net earnings of subsidiaries													—

Total “Core Earnings” adjustments to GAAP												$	777


11.	Segment Reporting (Continued)


	Three Months Ended June 30, 2006
						Corporate		Total “Core					Total
(Dollars in millions)	Lending		DMO			and Other		Earnings”		Adjustments⁽³⁾			GAAP

Interest income:
FFELP Stafford and Other Student Loans	$	719	$	—		$	—	$	719	$	(382	)	$	337
FFELP Consolidation Loans		1,114		—			—		1,114		(273	)		841
Private Education Loans		485		—			—		485		(251	)		234
Other loans		24		—			—		24		—			24
Cash and investments		170		—			1		171		(46	)		125

Total interest income		2,512		—			1		2,513		(952	)		1,561
Total interest expense		1,904		5			1		1,910		(706	)		1,204

Net interest income		608		(5	)		—		603		(246	)		357
Less: provisions for loan losses		60		—			—		60		8			68

Net interest income (loss) after provisions for loan losses		548		(5	)		—		543		(254	)		289
Fee income		—		90			33		123		—			123
Collections revenue		—		67			—		67		—			67
Other income		51		—			24		75		869			944

Total other income		51		157			57		265		869			1,134
Operating expenses⁽¹⁾		163		85			50		298		18			316

Income before income taxes and minority interest in net earnings of subsidiaries		436		67			7		510		597			1,107
Income tax expense⁽²⁾		161		26			2		189		193			382
Minority interest in net earnings of subsidiaries		—		1			—		1		—			1

Net income	$	275	$	40		$	5	$	320	$	404		$	724


⁽¹⁾		Operating expenses for the Lending, DMO, and Corporate and Other business segments include $8 million, $2 million, and $4 million, respectively, of stock option compensation expense.

⁽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 June 30, 2006

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