Edgar Filing: SLM CORP

e10vq

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

Form 10-Q


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

Commission File Number: 001-13251

SLM Corporation

(Exact name of registrant as specified in its charter)


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

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

(703) 810-3000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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


Class		Outstanding at September 30, 2009

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

SLM CORPORATION

FORM 10-Q

INDEX

September 30, 2009


Part I. Financial Information
	Item 1.	Financial Statements	2
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	57
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	129
	Item 4.	Controls and Procedures	133

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


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

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

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


	September 30,			December 31,
	2009			2008

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

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

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

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

Total liabilities		181,454,899			163,762,097

Commitments and contingencies
Equity
Preferred stock, par value $.20 per share, 20,000 shares authorized:
Series A: 3,300 and 3,300 shares, respectively, issued at stated value of $50 per share		165,000			165,000
Series B: 4,000 and 4,000 shares, respectively, issued at stated value of $100 per share		400,000			400,000
Series C: 7.25% mandatory convertible preferred stock; 1,012 and 1,150 shares, respectively, issued at liquidation preference of $1,000 per share		1,012,370			1,149,770
Common stock, par value $.20 per share, 1,125,000 shares authorized: 541,849 and 534,411 shares issued, respectively		108,362			106,883
Additional paid-in capital		4,862,071			4,684,112
Accumulated other comprehensive loss (net of tax benefit of $25,176 and $43,202, respectively)		(44,143	)		(76,476	)
Retained earnings		346,347			426,175

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

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

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

Total liabilities and equity	$	186,443,924		$	168,768,437

See accompanying notes to consolidated financial statements.

SLM CORPORATION

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

See accompanying notes to consolidated financial statements.

SLM CORPORATION

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


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

Balance at June 30, 2008		8,450,000			534,010,178		(66,444,785	)		467,565,393		$	1,715,000		$	106,802		$	4,637,731		$	61,994		$	855,527		$	(1,842,050	)	$	5,535,004		$	9,480		$	5,544,484
Comprehensive income:
Net income (loss)																									(158,541	)					(158,541	)		544			(157,997	)
Noncontrolling interest — other																															—			(1,483	)		(1,483	)
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments, net of tax																						(4,686	)								(4,686	)					(4,686	)
Change in unrealized gains (losses) on derivatives, net of tax																						(10,338	)								(10,338	)					(10,338	)
Defined benefit pension plans adjustment																						(283	)								(283	)					(283	)

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

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

Balance at June 30, 2009		8,449,770			534,841,879		(67,128,199	)		467,713,680		$	1,714,770		$	106,969		$	4,709,053		$	(48,683	)	$	229,865		$	(1,860,440	)	$	4,851,534		$	5		$	4,851,539
Comprehensive income:
Net income (loss)																									159,110						159,110			198			159,308
Noncontrolling interest — other																															—			(196	)		(196	)
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments, net of tax																						1,420									1,420						1,420
Change in unrealized gains (losses) on derivatives, net of tax																						3,346									3,346						3,346
Defined benefit pension plans adjustment																						(226	)								(226	)					(226	)

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

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

See accompanying notes to consolidated financial statements.

SLM CORPORATION

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


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

Balance at December 31, 2007		8,300,000			532,493,081		(65,951,394	)		466,541,687		$	1,565,000		$	106,499	$	4,590,174		$	236,364		$	557,204		$	(1,831,706	)	$	5,223,535		$	11,360		$	5,234,895
Comprehensive income:
Net income (loss)																								3,391						3,391			3,405			6,796
Acquisition of noncontrolling interest in Purchased Paper business																														—			(4,355	)		(4,355	)
Noncontrolling interest — other																														—			(1,869	)		(1,869	)
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments, net of tax																					(26,199	)								(26,199	)					(26,199	)
Change in unrealized gains (losses) on derivatives, net of tax																					31,932									31,932						31,932
Defined benefit pension plans adjustment																					(755	)								(755	)					(755	)

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

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

Balance at December 31, 2008		8,449,770			534,411,271		(66,958,400	)		467,452,871		$	1,714,770		$	106,883	$	4,684,112		$	(76,476	)	$	426,175		$	(1,856,394	)	$	4,999,070		$	7,270		$	5,006,340
Comprehensive income:
Net income (loss)																								15,004						15,004			690			15,694
Sale of international Purchased Paper — Non-Mortgage business																														—			(7,257	)		(7,257	)
Noncontrolling interest — other																														—			(696	)		(696	)
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments, net of tax																					3,689									3,689						3,689
Change in unrealized gains (losses) on derivatives, net of tax																					29,361									29,361						29,361
Defined benefit pension plans adjustment																					(717	)								(717	)					(717	)

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

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

See accompanying notes to consolidated financial statements.

SLM CORPORATION

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


	Nine Months Ended
	September 30,
	2009			2008

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

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

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

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

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

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

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

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

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

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

Income taxes	$	292,115		$	697,146

See accompanying notes to consolidated financial statements.

SLM CORPORATION

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


1.	Significant Accounting Policies

Basis of Presentation

The accompanying unaudited, consolidated financial statements of SLM Corporation (the “Company” or “Sallie Mae”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of the results for the interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three months ended September 30, 2009 are not necessarily indicative of the results for the year ending December 31, 2009. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s 2008 Annual Report on Form 10-K. Management has evaluated subsequent events, and the impact on the reported results and disclosures, through November 4, 2009, which is the date these financial statements were issued.

Reclassifications

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

Recently Issued Accounting Pronouncements

FASB Accounting Standards Codification

The Company adopted, as of July 1, 2009, the Financial Accounting Standards Board’s (“FASB’s”) Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. The ASC does not change authoritative guidance. Accordingly, implementing the ASC did not change any of the Company’s accounting, and therefore, did not have an impact on the consolidated results of the Company. References to authoritative GAAP literature have been updated accordingly.

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

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

The topic update to ASC 860, among other things, (1) eliminates the concept of a Qualifying Special Purpose Entity (“QSPE”), (2) changes the requirements for derecognizing financial assets, (3) changes the amount of the recognized gain/loss on a transfer accounted for as a sale when beneficial interests are received by the transferor, and (4) requires additional disclosure. The topic update to ASC 860 is effective for fiscal years beginning after November 15, 2009.

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

SLM CORPORATION

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


1.	Significant Accounting Policies (Continued)

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

The Company is currently evaluating the impact of these topic updates to its consolidated financial statements. Based on the Company’s preliminary review, management expects these changes will lead to the consolidation of QSPEs that are currently not consolidated by the Company. Assuming no changes to the Company’s current business model, the Company will consolidate its securitization trusts that are currently off-balance sheet on January 1, 2010 at their historical cost basis. The historical cost basis is the basis that would exist if these securitization trusts had remained on balance sheet since they settled. These new accounting rules would also be applied to new transactions entered into from January 1, 2010 forward. If these topic updates had been adopted as of September 30, 2009, the Company would have removed the $1.8 billion of Residual Interests associated with these trusts from the consolidated balance sheet and the Company would have consolidated $36.1 billion of assets and $35.4 billion of liabilities, which would have resulted in an approximate $0.7 billion after-tax reduction of stockholders’ equity as of September 30, 2009. Management allocates capital on a Managed Basis. This change will not impact management’s view of capital adequacy.

Subsequent Events

In May 2009, the FASB issued a topic update on ASC 855, “Subsequent Events.” This topic update is intended to establish general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this topic update sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The topic update to ASC 855 is effective for fiscal years and interim periods ending after June 15, 2009. The Company adopted this topic update effective June 15, 2009 and has evaluated any events subsequent to September 30, 2009, and their impact on the reported results and disclosures, through the date of this filing.

Fair Value Measurements

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


1.	Significant Accounting Policies (Continued)

instruments that were previously only required annually. Finally, the topic update to ASC 820, “Fair Value Measurements and Disclosures,” provides guidance for determining when a significant decrease in market activity has occurred and when a transaction is not orderly. It further reiterates that prices from inactive markets or disorderly transactions should carry less weight, if any, to the determination of fair value. These topic updates were effective for the Company beginning April 1, 2009. The adoption of these topic updates was not material to the Company.

On February 12, 2008, the FASB issued another topic update on ASC 820, which defers the effective date of the topic for nonfinancial assets and liabilities, except for such items that are recognized or disclosed at fair value in the financial statements on a recurring basis. This topic update delayed the implementation of these areas of ASC 820 for the Company’s accounting of goodwill, acquired intangibles, and other nonfinancial assets and liabilities that are measured at the lower of cost or market until January 1, 2009. Adoption of this topic update was not material to the Company.

Business Combinations

In December 2007, the FASB issued a topic update to ASC 805, “Business Combinations.” The update requires the acquiring entity in a business combination to recognize the entire acquisition-date fair value of assets acquired and liabilities assumed in both full and partial acquisitions; changes the recognition of assets acquired and liabilities assumed related to contingencies; changes the recognition and measurement of contingent consideration; requires expensing of most transaction and restructuring costs; and requires additional disclosures to enable the users of the financial statements to evaluate and understand the nature and financial effect of the business combination. The ASC 805 topic update applies to all transactions or other events in which the Company obtains control of one or more businesses. The ASC topic update applies prospectively to business combinations for which the acquisition date is on or after the beginning of the reporting period beginning on or after December 15, 2008, which for the Company was January 1, 2009. The adoption of this topic update on January 1, 2009 did not have a material effect on the Company’s results of operations or financial position.

In February 2009, the FASB issued another topic update to ASC 805. This additional update amends the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination under ASC 805. The ASC topic update had the same effective date as the topic update to ASC 805 referenced above. The adoption of this topic update did not have a material effect on the Company’s results of operations or financial position.

Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued a topic update to ASC 810, “Consolidation.” This update requires reporting entities to present noncontrolling (minority) interests as equity (as opposed to presentation as a liability or mezzanine equity) and provides guidance on the accounting for transactions between an entity and noncontrolling interests. On January 1, 2009, the Company adopted this ASC topic update, the provisions of which, among other things, require that minority interests be renamed “noncontrolling interests” and that a company present a consolidated net income (loss) measure that includes the amount attributable to such “noncontrolling interests” for all periods presented. The topic update to ASC 810 applies prospectively for reporting periods beginning on or after December 15, 2008, except for the presentation and disclosure requirements which are applied retrospectively for all periods presented. The Company has reclassified financial statement line items within its consolidated balance sheets, statements of income, statements of


1.	Significant Accounting Policies (Continued)

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

Disclosures about Derivative Investments and Hedging Activities

In March 2008, the FASB updated ASC 815, “Derivatives and Hedging.” This topic update requires enhanced disclosures about an entity’s derivative and hedging activities, including (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for under ASC 815 and its related interpretations, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. To meet those objectives, the topic update requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This ASC topic update is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted this topic update on January 1, 2009.


2.	Allowance for Loan Losses

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

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


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

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

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


2.	Allowance for Loan Losses (Continued)

Allowance for Private Education Loan Losses

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


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

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

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

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


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

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


2.	Allowance for Loan Losses (Continued)

Private Education Loan Delinquencies

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


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

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

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

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

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

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

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

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

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


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

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

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


2.	Allowance for Loan Losses (Continued)

Allowance for FFELP Loan Losses

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


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

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

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

Charge-offs as a percentage of average loans in repayment (annualized)		.1	%		.1	%		.1	%		.1	%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)		.1	%		.1	%		.1	%		.1	%
Allowance as a percentage of the ending total loan balance		.1	%		.1	%		.1	%		.1	%
Allowance as a percentage of ending loans in repayment		.2	%		.2	%		.2	%		.2	%
Allowance coverage of charge-offs (annualized)		2.3			1.9			1.9			2.2
Ending total loans	$	134,087,420		$	119,165,201		$	134,087,420		$	119,165,201
Average loans in repayment	$	69,679,688		$	66,858,709		$	69,195,627		$	65,691,920
Ending loans in repayment	$	69,832,792		$	67,074,302		$	69,832,792		$	67,074,302

The Company maintains an allowance for Risk Sharing loan losses on its FFELP loan portfolio. The level of Risk Sharing has varied over the past few years with legislative changes. As of September 30, 2009, 55 percent of the on-balance sheet FFELP loan portfolio was subject to three-percent Risk Sharing, 44 percent was subject to two-percent Risk Sharing and the remaining 1 percent was not subject to any Risk Sharing.


2.	Allowance for Loan Losses (Continued)

FFELP Loan Delinquencies

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


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

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

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

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

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

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

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

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

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


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

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

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


3.	Investments

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


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

Investments
Available-for-sale
U.S. Treasury securities and other U.S. government agency obligations	$	7,029	$	8	$	—		$	7,037
Other securities:
Asset-backed securities		113,096		689		(56	)		113,729
Commercial paper and asset-backed commercial paper		849,985		—		—			849,985
Municipal bonds		10,298		2,255		—			12,553
Other		1,547		—		(182	)		1,365

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

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

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

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

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


3.	Investments (Continued)


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

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

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

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

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

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

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

In addition to the restricted investments detailed above, at September 30, 2009 and December 31, 2008, the Company had restricted cash of $5.7 billion and $3.5 billion, respectively.

As of September 30, 2009 and December 31, 2008, $2 million and $(2) million, respectively, of the net unrealized gain (loss) (after tax) related to available-for-sale investments was included in accumulated other comprehensive income. As of September 30, 2009 and December 31, 2008, $54 million ($28 million of this is in restricted cash and investments on the balance sheet) and $26 million (none of which is in restricted cash and investments on the balance sheet), respectively, of available-for-sale investment securities were pledged as collateral.

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


3.	Investments (Continued)

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


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

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

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


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

At September 30, 2009 and December 31, 2008, the Company also had other investments of $850 million and $180 million, respectively. At September 30, 2009, other investments included a $737 million receivable for cash collateral posted to derivative counterparties. Other investments also included leveraged leases which at September 30, 2009 and December 31, 2008, totaled $66 million and $76 million, respectively, that are general obligations of American Airlines and Federal Express Corporation. At September 30, 2009 and December 31, 2008, other investments also included the Company’s remaining investment in The Reserve Primary Fund totaling $42 million and $97 million, respectively.


4.	Goodwill and Acquired Intangible Assets

Goodwill

All acquisitions must be assigned to a reporting unit or units. A reporting unit is the same as or one level below an operating segment. The following table summarizes the Company’s allocation of goodwill to its reporting units.


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

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

Total	$	991	$	991


4.	Goodwill and Acquired Intangible Assets (Continued)

Impairment Testing

The Company performs goodwill impairment testing annually in the fourth quarter as of a September 30 valuation date or more frequently if an event occurs or circumstances change such that there is a potential that the fair value of a reporting unit or reporting units may be below their respective carrying values.

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

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

During the third quarter, no new unfavorable events or changes in circumstances occurred to warrant an impairment assessment as of September 30, 2009, as SAFRA was consistent with the Administration’s 2010 budget request which was submitted to Congress in the first quarter of 2009. Nevertheless, in light of ongoing uncertainties associated with the Administration’s proposed budget and the economic conditions described above, the Company continues to monitor the fair value of goodwill for each of its reporting units on a quarterly basis. Based on the Company’s assessment that there have been no change in circumstances associated with any of its reporting units during the third quarter and based on its aforementioned monitoring process, the Company concluded that goodwill was not impaired as of September 30, 2009.

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


4.	Goodwill and Acquired Intangible Assets (Continued)

Acquired Intangible Assets

Acquired intangible assets include the following:


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

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

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

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


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

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

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

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

The Company recorded amortization of acquired intangible assets totaling $10 million and $14 million for the three months ended September 30, 2009 and 2008, respectively, and $29 million and $44 million for the nine months ended September 30, 2009 and 2008, respectively. In the third quarter of 2008, the Company decided to wind down its purchased paper businesses. As a result, in the third quarter of 2008, the Company recorded an aggregate amount of $36 million of impairment of acquired intangible assets, of which $28 million related to the impairment of two trade names and $8 million related to certain banking customer relationships. The Company will continue to amortize its intangible assets with definite useful lives over their remaining estimated useful lives.


5.	Borrowings

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


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

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

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

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

As of September 30, 2009, the Company had $3.5 billion in unsecured revolving credit facilities which provide liquidity support for general corporate purposes. The Company has never drawn on these facilities. These facilities include a $1.9 billion revolving credit facility maturing in October 2010 and a $1.6 billion revolving credit facility maturing in October 2011. These figures do not include a $215 million commitment from Aurora Bank, FSB, formerly known as Lehman Brothers Bank, a subsidiary of Lehman Brothers Holdings Inc, which declared bankruptcy on September 15, 2008. The Company is operating under the assumption that the lending commitment of Aurora Bank, FSB, will not be honored if drawn upon. While the Company continues to explore various options, it does not anticipate replacing its commitment from Aurora Bank, FSB.

On April 24, 2009, in conjunction with the extension of the 2008 ABCP Facilities, a $1.4 billion revolving credit facility maturing in October 2009 was retired and a $1.9 billion revolving credit facility maturing in October 2011 was reduced to $1.6 billion. In connection with the early termination of the unsecured revolving credit facilities, interest on these facilities, if drawn, increases to LIBOR plus 450 basis points.

The principal financial covenants in the unsecured revolving credit facilities require the Company to maintain consolidated tangible net worth of at least $1.38 billion at all times. Consolidated tangible net worth as calculated for purposes of this covenant was $3.1 billion as of September 30, 2009. The covenants also require the Company to meet either a minimum interest coverage ratio or a minimum net adjusted revenue test based on the four preceding quarters’ adjusted “Core Earnings” financial performance. The Company was compliant with both the minimum interest coverage ratio and the minimum net adjusted revenue tests as of the quarter ended September 30, 2009. Failure to meet these covenants would result in the facilities being withdrawn. In the past, the Company has not relied upon its unsecured revolving credit facilities as a primary source of liquidity. Although the Company has never borrowed under these facilities, they are available to be drawn upon for general corporate purposes.


5.	Borrowings (Continued)

Secured Borrowings

Variable Interest Entities (“VIEs”) are required to be consolidated by their primary beneficiaries. A VIE exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics are the direct or indirect ability to make decisions about an entity’s activities that have a significant impact on the success of the entity, the obligation to absorb the expected losses of an entity, and the rights to receive the expected residual returns of the entity.

The Company currently consolidates a number of financing entities that are VIEs as a result of being the entities’ primary beneficiary. As a result, these financing VIEs are accounted for as secured borrowings. The process of identifying the primary beneficiary involves identifying all other parties that hold variable interests in the entity and determining which of the parties, including the Company, has the responsibility to absorb the majority of the entity’s expected losses or the rights to its expected residual returns. The Company is the primary beneficiary of and currently consolidates the following financing VIEs as of September 30, 2009 and December 31, 2008:


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

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

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

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


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


5.	Borrowings (Continued)


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

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

		32,164		82,573		114,737		123,432		3,418		1,940		128,790
ASC 815 fair value adjustment		—		872		872		—		—		—		—

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

Asset-Backed Financing Facilities

During the first quarter of 2008, the Company entered into three new asset-backed financing facilities (the “2008 Asset-Backed Financing Facilities”): (i) a $26.0 billion FFELP student loan ABCP conduit facility (the “2008 FFELP ABCP Facility”); (ii) a $5.9 billion Private Education Loan ABCP conduit facility (the “2008 Private Education Loan ABCP Facility”) (collectively, the “2008 ABCP Facilities”); and (iii) a $2.0 billion secured FFELP loan facility (the “2008 Asset-Backed Loan Facility”). The initial term of the 2008 Asset-Backed Financing Facilities was 364 days. The underlying cost of borrowing under the 2008 ABCP Facilities was approximately LIBOR plus 0.68 percent for the FFELP loan facilities and LIBOR plus 1.55 percent for the Private Education Loan facility, excluding upfront and unused commitment fees. All-in pricing on the 2008 ABCP Facilities varies based on usage. For the full year 2008, the combined, all-in cost of borrowings related to the 2008 Asset-Backed Financing Facilities, including amortized upfront fees and unused commitment fees, was three-month LIBOR plus 2.47 percent. The primary use of the 2008 Asset-Backed Financing Facilities was to refinance comparable ABCP facilities incurred in connection with the Proposed Merger, with the expectation that outstanding balances under the 2008 Asset-Backed Financing Facilities would be reduced through securitization of the underlying student loan collateral in the term ABS market.

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

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


5.	Borrowings (Continued)

total of $86 million in fees were paid related to these extensions. The 2008 Private Education Loan ABCP Facility was paid off and terminated on April 24, 2009. The stated borrowing rate of the 2008 FFELP ABCP Facility is the applicable funding rate plus 130 basis points excluding upfront fees. The applicable funding rate generally will be either a LIBOR or commercial paper rate. The terms of the 2008 FFELP ABCP Facility call for an increase in the applicable funding spread to 300 basis points if the outstanding borrowing amount was not reduced to $15.2 billion and $10.9 billion as of June 30, 2009 and September 30, 2009, respectively. The outstanding borrowings were reduced to $12.5 billion and $9.4 billion on June 30, 2009 and September 30, 2009, respectively. If the Company does not negotiate an extension or pay off all outstanding amounts of the 2008 FFELP ABCP Facility at maturity, the facility will extend by 90 days with the interest rate generally increasing from LIBOR plus 250 basis points to 550 basis points over the 90 day period. The other terms of the facilities remained materially unchanged.

The maximum amount the Company may borrow under the 2008 FFELP ABCP Facility is limited based on certain factors, including market conditions and the fair value of student loans in the facility. As of September 30, 2009, the maximum borrowing amount was approximately $10.5 billion. Funding under the 2008 FFELP ABCP Facility is subject to usual and customary conditions. The 2008 FFELP ABCP Facility is subject to termination under certain circumstances, including the Company’s failure to comply with the principal financial covenants in its unsecured revolving credit facilities.

Borrowings under the 2008 FFELP ABCP Facility are nonrecourse to the Company. As of September 30, 2009, the Company had $9.4 billion outstanding in connection with the 2008 FFELP ABCP Facility. The book basis of the assets securing this facility as of September 30, 2009 was $10.9 billion.

The Department of Education (“ED”) Funding Programs

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


5.	Borrowings (Continued)

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

Also pursuant to ECASLA, on January 15, 2009, ED published summary terms under which it will purchase eligible FFELP Stafford and PLUS loans from a conduit vehicle established to provide funding for eligible student lenders (the “ED Conduit Program”). Loans eligible for the ED Conduit Program must be first disbursed on or after October 1, 2003, but not later than July 1, 2009, and fully disbursed before September 30, 2009, and meet certain other requirements including with respect to borrower benefits. The ED Conduit Program was launched on May 11, 2009 and will accept eligible loans through July 1, 2010. The ED Conduit Program has a term of five years and will expire on January 19, 2014. Funding for the ED Conduit Program is provided by the capital markets at a cost based on market rates, with the Company being advanced 97 percent of the student loan face amount. The Student Loan Short-Term Notes (“SLST Notes”), issued by the ED Conduit, are supported by a combination of i) Funding Notes backed by FFELP student loans, ii) the Liquidity Agreement with the Federal Financing Bank (“FFB”), and iii) the Put Agreement provided by ED. If the conduit does not have sufficient funds to pay all SLST Notes, then those SLST Notes will be repaid with funds from the FFB. The FFB will hold the notes for a short period of time and, if at the end of that time, the SLST Notes still cannot be paid off, the underlying FFELP loans that serve as collateral to the ED Conduit will be sold to ED through the Put Agreement at a price of 97 percent of the face amount of the loans. As of September 30, 2009, approximately $14.1 billion face amount of the Company’s Stafford and PLUS loans were funded through the ED Conduit Program with a weighted average issuance cost of approximately 0.87 percent. As of September 30, 2009, there are approximately $1.1 billion face amount of additional FFELP Stafford and PLUS loans (excluding loans currently in the Participation Program) that can be funded through the ED Conduit Program.

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

On February 6, 2009, the Federal Reserve Bank of New York published proposed terms for a program designed to facilitate renewed issuance of consumer and small business ABS at lower interest rate spreads. TALF was initiated on March 17, 2009 and currently provides investors who purchase eligible ABS with funding of up to five years. Eligible ABS include ‘AAA’ rated student loan ABS backed by FFELP and private student loans first disbursed since May 1, 2007. As of September 30, 2009, the Company had approximately $10.6 billion book basis of student loans (including $7.3 billion book basis of Private Education Loans and $3.3 billion book basis of Consolidation Loans) eligible to serve as collateral for ABS funded under TALF; this amount does not include loans eligible for ECASLA financing programs. For student loan collateral, TALF is scheduled to expire on March 31, 2010.

On May 5, 2009, the Company priced a $2.6 billion Private Education Loan securitization which closed on May 12, 2009. The issue bears a coupon of 1-month LIBOR plus 6.0 percent and is callable at the issuer’s option at 93 percent of the outstanding balance of the ABS between November 15, 2011 and April 16, 2012. If the issue is called on November 15, 2011, which the Company believes is probable; the effective cost of the financing will be approximately 1-month LIBOR plus 3.7 percent. This transaction was TALF-eligible.

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


5.	Borrowings (Continued)

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

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

These securitizations are accounted for as secured borrowings. The Company has concluded that it is probable it will call these bonds at the call date at the respective discount. Probability is based on the Company’s assessment of whether these bonds can be refinanced at the call date at or lower than a breakeven cost of funds based on the call discount. As a result, the Company is accreting this call discount as a reduction to interest expense through the call date. If it becomes less than probable the Company will call these bonds at a future date it will result in the Company reversing this prior accretion as a cumulative catch up. The Company has accreted approximately $33 million as a reduction of interest expense through September 30, 2009.

Consolidation of Off-Balance Sheet Securitizations

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


6.	Student Loan Securitization

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


6.	Student Loan Securitization (Continued)

Securitization Activity

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


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

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

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

Securitizations — financings:
FFELP Stafford/PLUS Loans⁽¹⁾		—		—							3		6,721
FFELP Consolidation Loans⁽¹⁾		—		—							—		—
Private Education Loans⁽¹⁾		2		3,766							—		—

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

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


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

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

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

Securitizations — financings:
FFELP Stafford/PLUS Loans⁽¹⁾		—		—							9		18,546
FFELP Consolidation Loans⁽¹⁾		2		4,524							—		—
Private Education Loans⁽¹⁾		4		10,184							—		—

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

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


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


6.	Student Loan Securitization (Continued)

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


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

Net proceeds from new securitizations completed during the period	$	—		$	—		$	—		$	—
Cash distributions from trusts related to Residual Interests		100			237			368			753
Servicing fees received⁽¹⁾		55			61			171			187
Purchases of previously transferred financial assets for representation and warranty violations		(1	)		(2	)		(6	)		(15	)
Reimbursements of borrower benefits⁽²⁾		(9	)		(7	)		(26	)		(21	)
Purchases of delinquent Private Education Loans from securitization trusts using delinquent loan call option		—			(51	)		—			(152	)
Purchases of loans using clean-up call option		—			584			—			697


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

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


6.	Student Loan Securitization (Continued)

Retained Interest in Securitized Receivables

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


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

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


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

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


	⁽¹⁾	Includes $641 million and $762 million related to the fair value of the Embedded Floor Income as of September 30, 2009 and December 31, 2008, respectively. Changes in the fair value of the Embedded Floor Income are primarily due to changes in the interest rates and the paydown of the underlying loans.

	⁽²⁾	The Company uses CPR curves for Residual Interest valuations that are based on seasoning (the number of months since entering repayment). Under this methodology, a different CPR is applied to each year of a loan’s seasoning. Repayment status CPR used is based on the number of months since first entering repayment (seasoning). Life of loan CPR is related to repayment status only and does not include the impact of the loan while in interim status. The CPR assumption used for all periods includes the impact of projected defaults.

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

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


6.	Student Loan Securitization (Continued)

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

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


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

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

The following table reflects the sensitivity of the current fair value of the Residual Interests to adverse changes in the key economic assumptions used in the valuation of the Residual Interest at September 30, 2009, discussed in detail in the preceding table. The effect of a variation in a particular assumption on the fair value of the Residual Interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities. These sensitivities are hypothetical, as the actual results could be materially different than these estimates.


6.	Student Loan Securitization (Continued)


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

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


	3 month LIBOR forward curve at September 30, 2009 plus contracted spreads
Difference between Asset and Funding underlying indices⁽⁴⁾
Impact on fair value of 0.25% absolute increase in funding index compared to asset index	$	(43	)	$	(177	)	$	(2	)
Impact on fair value of 0.50% absolute increase in funding index compared to asset index	$	(86	)	$	(354	)	$	(4	)


⁽¹⁾		Certain consolidation trusts have $3.3 billion of non-U.S. dollar (Euro denominated) bonds outstanding. To convert these non-U.S. dollar denominated bonds into U.S. dollar liabilities, the trusts have entered into foreign-currency swaps with certain counterparties. Additionally, certain Private Education Loan trusts contain interest rate swaps that hedge the basis and reset risk between the Prime indexed assets and LIBOR index notes. As of September 30, 2009, these swaps are in a $959 million gain position (in the aggregate) and the trusts had $633 million of exposure to counterparties (gain position less collateral posted) primarily as a result of the decline in the exchange rates between the U.S. dollar and the Euro. This unrealized market value gain is not part of the fair value of the Residual Interest in the table above. Not all derivatives within the trusts require the swap counterparties to post collateral to the respective trust for changes in market value, unless the trust’s swap counterparty’s credit rating has been withdrawn or has been downgraded below a certain level. If the swap counterparty does not post the required collateral or is downgraded further, the counterparty must find a suitable replacement counterparty or provide the trust with a letter of credit or a guaranty from an entity that has the required credit ratings. Ultimately, the Company’s exposure related to a swap counterparty failing to make its payments is limited to the fair value of the related trust’s Residual Interest which was $1.3 billion as of September 30, 2009.

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

⁽³⁾		Expected credit losses are used to project future cash flows related to the Private Education Loan securitization’s Residual Interest. However, until the fourth quarter of 2008 when it ceased this activity for all trusts settling prior to September 30, 2005, the Company purchased loans at par when the loans reached 180 days delinquent prior to default under a contingent call option, resulting in no credit losses at the trust nor related to the Company’s Residual Interest. When the Company exercised its contingent call option and purchased the loans from the trust at par, the Company recorded a loss related to these loans that are now on the Company’s balance sheet. The Company recorded losses of $44 million and $124 million, respectively, for the three and nine months ended September 30, 2008, and did not record any losses for the three and nine months ended September 30, 2009, related to this activity. For all trusts settling after October 1, 2005, the Company does not hold this contingent call option.

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

⁽⁵⁾		In addition to the assumptions in the table above, the Company also projects the reduction in distributions that will result from the various benefit programs that exist related to consecutive on-time payments by borrowers. Related to the entire $1.8 billion Residual Interest, there are $223 million (present value) of benefits projected which reduce the fair value.


6.	Student Loan Securitization (Continued)

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


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

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

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

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


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

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

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

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


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

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


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


7.	Derivative Financial Instruments

Derivative instruments that are used as part of the Company’s interest rate and foreign currency risk management strategy include interest rate swaps, basis swaps, cross-currency interest rate swaps, interest rate futures contracts, and interest rate floor and cap contracts with indices that relate to the pricing of specific balance sheet assets and liabilities including the Residual Interests from off-balance sheet securitizations. (For a full discussion of the Company’s risk management strategy and use of derivatives, please see the Company’s


7.	Derivative Financial Instruments (Continued)

2008 Form 10-K, Note 9, “Derivative Financial Instruments,” to the consolidated financial statements.) The accounting of the Company’s derivatives requires that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The Company’s derivative instruments are classified and accounted for by the Company as fair value hedges, cash flow hedges or trading activities.

Fair Value Hedges

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

Cash Flow Hedges

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

Trading Activities

When instruments do not qualify as hedges, they are accounted for as trading where all changes in fair value of the derivatives are recorded through earnings. In general, derivative instruments included in trading activities include Floor Income Contracts, basis swaps and various other derivatives that do not qualify for hedge accounting under ASC 815.


7.	Derivative Financial Instruments (Continued)

Summary of Derivative Financial Statement Impact

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

Impact of Derivatives on Consolidated Balance Sheet


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

Fair Values⁽¹⁾
Derivative Assets
Interest rate swaps	Interest rate	$	—		$	—		$	930		$	1,529		$	114		$	323		$	1,044		$	1,852
Cross currency interest rate swaps	Foreign currency and interest rate		—			—			3,377			2,743			55			13			3,432			2,756

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

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

Net total derivatives		$	(90	)	$	(146	)	$	4,032		$	3,632		$	(1,855	)	$	(1,465	)	$	2,087		$	2,021


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

⁽²⁾		“Other” includes the fair value of the embedded derivatives in asset-backed financings. The embedded derivatives are required to be accounted for as derivatives.

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


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

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

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


7.	Derivative Financial Instruments (Continued)


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

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

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


⁽¹⁾		“Other” includes embedded derivatives bifurcated from newly issued on-balance sheet securitization debt, as well as embedded derivatives in the total return swap discussed in footnote 2 to the table above.

Impact of Derivatives on Consolidated Statements of Income


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

Fair Value Hedges
Interest rate swaps	$	121		$	136		$	111		$	53		$	(132	)	$	(138	)	$	100		$	51
Cross currency interest rate swaps		813			(2,715	)		124			(3	)		(807	)		2,759			130			41

Total fair value derivatives		934			(2,579	)		235			50			(939	)		2,621			230			92
Cash Flow Hedges
Interest rate swaps		—			—			(38	)		(10	)		—			—			(38	)		(10	)

Total cash flow derivatives		—			—			(38	)		(10	)		—			—			(38	)		(10	)
Trading
Interest rate swaps		91			(211	)		70			24			—			—			161			(187	)
Floor/Cap contracts		(80	)		(33	)		(189	)		(75	)		—			—			(269	)		(108	)
Futures		—			—			—			—			—			—			—			—
Cross currency interest rate swaps		18			12			2			(1	)		—			—			20			11
Other		(18	)		—			(1	)		—			—			—			(19	)		—

Total trading derivatives		11			(232	)		(118	)		(52	)		—			—			(107	)		(284	)

Total		945			(2,811	)		79			(12	)		(939	)		2,621			85			(202	)
Less: realized gains (losses) recorded in interest expense		—			—			197			40			—			—			197			40

Gains (losses) on derivative and hedging activities, net	$	945		$	(2,811	)	$	(118	)	$	(52	)	$	(939	)	$	2,621		$	(112	)	$	(242	)


⁽¹⁾		Recorded in “Gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

⁽²⁾		Represents ineffectiveness related to cash flow hedges.

⁽³⁾		For fair value and cash flow hedges, recorded in interest expense. For trading derivatives, recorded in “Gains (losses) on derivative and hedging activities, net.”


7.	Derivative Financial Instruments (Continued)


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

Fair Value Hedges
Interest rate swaps	$	(549	)	$	176		$	287		$	102		$	583		$	(182	)	$	321		$	96
Cross currency interest rate swaps		1,054			(1,218	)		320			73			(1,308	)		1,365			66			220

Total fair value derivatives		505			(1,042	)		607			175			(725	)		1,183			387			316
Cash Flow Hedges
Interest rate swaps		—			—			(77	)		(30	)		—			—			(77	)		(30	)

Total cash flow derivatives		—			—			(77	)		(30	)		—			—			(77	)		(30	)
Trading
Interest rate swaps		(511	)		(513	)		418			362			—			—			(93	)		(151	)
Floor/Cap contracts		323			240			(500	)		(390	)		—			—			(177	)		(150	)
Futures		1			(2	)		(1	)		3			—			—			—			1
Cross currency interest rate swaps		(15	)		8			3			(2	)		—			—			(12	)		6
Other		(69	)		—			2			—			—			—			(67	)		—

Total trading derivatives		(271	)		(267	)		(78	)		(27	)		—			—			(349	)		(294	)

Total		234			(1,309	)		452			118			(725	)		1,183			(39	)		(8	)
Less: realized gains (losses) recorded in interest expense		—			—			530			145			—			—			530			145

Gains (losses) on derivative and hedging activities, net	$	234		$	(1,309	)	$	(78	)	$	(27	)	$	(725	)	$	1,183		$	(569	)	$	(153	)


⁽¹⁾		Recorded in “Gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

⁽²⁾		Represents ineffectiveness related to cash flow hedges.

⁽³⁾		For fair value and cash flow hedges, recorded in interest expense. For trading derivatives, recorded in “Gains (losses) on derivative and hedging activities, net.”

Impact of Derivatives on Consolidated Statements of Changes in Stockholders’ Equity (net of tax)


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

Total gains (losses) on cash flow hedges	$	(21	)	$	(17	)	$	(20	)	$	13
Realized (gains) losses reclassified to interest expense^(1)(2)(3)		24			7			49			19
Hedge ineffectiveness reclassified to earnings⁽¹⁾⁽⁴⁾		—			—			—			—

Total change in stockholders’ equity for unrealized gains (losses) on derivatives	$	3		$	(10	)	$	29		$	32


⁽¹⁾		Amounts included in “Realized gain (loss) on derivatives” in the “Impact of Derivatives on Consolidated Statements of Income” table above.

⁽²⁾		Includes net settlement income/expense.

⁽³⁾		The Company expects to reclassify $10.9 million of after-tax net losses from accumulated other comprehensive income to earnings during the next 12 months related to net settlement accruals on interest rate swaps.

⁽⁴⁾		Recorded in “Gains (losses) derivatives and hedging activities, net” in the consolidated statements of income.


7.	Derivative Financial Instruments (Continued)

Collateral

Collateral held and pledged at September 30, 2009 and December 31, 2008 related to derivative exposures between the Company and its derivative counterparties are detailed in the following table:


(Dollars in millions)	September 30, 2009		December 31, 2008

Collateral held:
Cash (obligation to return cash collateral is recorded in short-term borrowings)⁽¹⁾	$	1,511	$	1,624
Securities at fair value — corporate derivatives (not recorded in financial statements)⁽²⁾		265		689
Securities at fair value — on-balance sheet securitization derivatives (not recorded in financial statements)⁽³⁾		792		688

Total collateral held	$	2,568	$	3,001

Derivative asset at fair value including accrued interest	$	3,704	$	3,741

Collateral pledged to others:
Cash (right to receive return of cash collateral is recorded in investments)	$	737	$	—
Securities at fair value (recorded in investments)⁽⁴⁾		26		26
Securities at fair value (recorded in restricted investments)⁽⁵⁾		28		—
Securities at fair value re-pledged (not recorded in financial statements)⁽⁵⁾⁽⁶⁾		—		191

Total collateral pledged	$	791	$	217

Derivative liability at fair value including accrued interest and premium receivable	$	856	$	677


⁽¹⁾		At September 30, 2009 and December 31, 2008, $903 million and $0 million, respectively, was held in restricted cash accounts.

⁽²⁾		Effective with the downgrade in the Company’s unsecured credit ratings on May 13, 2009, the Company does not have the ability to sell or re-pledge securities it holds as collateral.

⁽³⁾		The trusts do not have the ability to sell or re-pledge securities they hold as collateral.

⁽⁴⁾		Counterparty does not have the right to sell or re-pledge securities.

⁽⁵⁾		Counterparty has the right to sell or re-pledge securities.

⁽⁶⁾		Represents securities the Company holds as collateral that have been pledged to other counterparties.

Additionally, as of September 30, 2009 and December 31, 2008, $424 million and $340 million, respectively, in collateral related to off-balance sheet trust derivatives were held by these off-balance sheet trusts. Collateral posted by third parties to the off-balance sheet trusts cannot be sold or re-pledged by the trusts.


8.	Other Assets

The following table provides detail on the Company’s other assets at September 30, 2009 and December 31, 2008.


	September 30, 2009					December 31, 2008
	Ending		% of			Ending		% of
	Balance		Balance			Balance		Balance

Accrued interest receivable	$	3,234,017		29	%	$	3,466,404		31	%
Derivatives at fair value		3,279,255		29			3,013,644		27
Income tax asset		1,929,868		17			1,661,039		15
APG purchased paper receivables and real estate owned		749,858		7			1,222,345		11
Benefit and insurance-related investments		479,517		4			472,899		4
Fixed assets, net		312,401		3			313,059		3
Accounts receivable — general		852,530		8			712,854		6
Other		461,560		3			278,533		3

Total	$	11,299,006		100	%	$	11,140,777		100	%

The “Derivatives at fair value” line in the above table includes the fair value of the Company’s derivatives in a gain position by counterparty exclusive of accrued interest and collateral. At September 30, 2009 and December 31, 2008, these balances included cross-currency interest rate swaps and interest rate swaps designated as fair value hedges that were offset by an increase in interest-bearing liabilities related to the hedged debt. As of September 30, 2009 and December 31, 2008, the cumulative mark-to-market adjustment to the hedged debt was $(4.0) billion and $(3.4) billion, respectively.


9.	Stockholders’ Equity

The following table summarizes the Company’s common share repurchases and issuances for the three and nine months ended September 30, 2009 and 2008.


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

Common shares repurchased:
Benefit plans⁽¹⁾		.1		.5		.2		1.0

Total shares repurchased		.1		.5		.2		1.0

Average purchase price per share	$	17.81	$	28.20	$	22.91	$	24.60

Common shares issued		7.0		.4		7.4		1.9

Authority remaining at end of period for repurchases		38.8		38.8		38.8		38.8


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

The closing price of the Company’s common stock on September 30, 2009 was $8.72.


9.	Stockholders’ Equity (Continued)

During the third quarter of 2009, the Company converted approximately $137 million of its Series C Preferred Stock to common stock. As part of this conversion, the Company delivered to the holders of the preferred stock: (1) approximately 7 million shares (the number of common shares they would most likely receive if the preferred stock they held mandatorily converted to common shares in the fourth quarter of 2010) plus (2) a discounted amount of the preferred stock dividends the holders of the preferred stock would have received if they held the preferred stock through the mandatory conversion date. The accounting treatment for this conversion resulted in a loss recorded in preferred stock dividends for the period of approximately $20 million.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) includes the after-tax change in unrealized gains and losses on available-for-sale investments, unrealized gains and losses on derivatives, and the defined benefit pension plans adjustment. The following table presents the cumulative balances of the components of other comprehensive income (loss) as of September 30, 2009, December 31, 2008 and September 30, 2008.


	September 30,			December 31,			September 30,
	2009			2008			2008

Net unrealized gains (losses) on investments⁽¹⁾	$	2,446		$	(1,243	)	$	17,918
Net unrealized gains (losses) on derivatives⁽²⁾		(64,625	)		(93,986	)		9,358
Defined benefit pension plans:
Net prior service cost		—			—			—
Net gain		18,036			18,753			19,411

Total defined benefit pension plans⁽³⁾		18,036			18,753			19,411

Total accumulated other comprehensive income (loss)	$	(44,143	)	$	(76,476	)	$	46,687


	⁽¹⁾	Net of tax expense of $1,358 as of September 30, 2009, tax benefit of $750 as of December 31, 2008, and tax expense of $10,100 as of September 30, 2008.

	⁽²⁾	Net of tax benefit of $37,195, and $53,419 as of September 30, 2009 and December 31, 2008, respectively, and tax expense of $5,319 as of September 30, 2008.

	⁽³⁾	Net of tax expense of $10,661, $10,967 and $11,347 as of September 30, 2009, December 31, 2008 and September 30, 2008, respectively.


10.	Earnings (Loss) per Common Share

Basic earnings (loss) 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 nine months ended September 30, 2009 and 2008.


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

Numerator:
Net income (loss) attributable to common stock	$	116,483	$	(186,015	)	$	(79,818	)	$	(80,499	)
Adjusted for dividends of convertible preferred stock series C⁽¹⁾		—		—			—			—

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

Denominator (shares in thousands):
Weighted average shares used to compute basic EPS		470,280		466,646			467,960			466,625
Effect of dilutive securities:
Dilutive effect of convertible preferred stock series C⁽¹⁾		—		—			—			—
Dilutive effect of stock options, nonvested deferred compensation, nonvested restricted stock, restricted stock units and Employee Stock Purchase Plan (“ESPP”)⁽²⁾		778		—			—			—

Dilutive potential common shares⁽³⁾		778		—			—			—

Weighted average shares used to compute diluted EPS		471,058		466,646			467,960			466,625

Net earnings (loss) per share:
Basic earnings (loss) per common share	$	.25	$	(.40	)	$	(.17	)	$	(.17	)
Dilutive effect of convertible preferred stock series C⁽¹⁾		—		—			—			—
Dilutive effect of stock options, nonvested deferred compensation, nonvested restricted stock, restricted stock units, and ESPP⁽²⁾		—		—			—			—

Diluted earnings (loss) per common share	$	.25	$	(.40	)	$	(.17	)	$	(.17	)


⁽¹⁾		The Company’s 7.25 percent mandatory convertible preferred stock Series C was issued on December 31, 2007. The mandatory convertible preferred stock will automatically convert on December 15, 2010, into between approximately 42 million shares and 52 million shares of common stock, depending upon the Company’s stock price at that time. Depending upon the amount of the mandatory convertible preferred stock outstanding as of that date, the actual number of shares of common stock issued may be less. These instruments were anti-dilutive for the three months ended September 30, 2009. These instruments were anti-dilutive for the three and nine months ended September 30, 2008, and the nine months ended September 30, 2009, due to the net losses attributable to common stock for those periods.

⁽²⁾		Includes the potential dilutive effect of additional common shares that are issuable upon exercise of outstanding stock options, non-vested deferred compensation and restricted stock, restricted stock units, and the outstanding commitment to issue shares under the ESPP, determined by the treasury stock method.

⁽³⁾		For the three and nine months ended September 30, 2009, stock options covering approximately 43 million shares for each period, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive. For the three and nine months ended September 30, 2008, stock options covering approximately 41 million and 38 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.


11.	Other Income

The following table summarizes the components of “Other income” in the consolidated statements of income for the three and nine months ended September 30, 2009 and 2008.


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

Gains on debt repurchases	$	74,367		$	15,911		$	463,416	$	37,195
Late fees and forbearance fees		38,588			35,528			107,351		106,713
Asset servicing and other transaction fees		27,872			28,026			79,318		79,961
Loan servicing fees		16,677			6,414			35,410		18,682
Foreign currency translation gains (losses), net		(23,164	)		(12,989	)		10,828		(8,863	)
Other		15,666			20,206			44,906		61,669

Total	$	150,006		$	93,096		$	741,229	$	295,357

The change in other income over all periods presented is primarily the result of the gains on debt repurchases. The Company began repurchasing its outstanding debt in the second quarter of 2008. The Company repurchased $1.4 billion and $580 million face amount of its senior unsecured notes for the three months ended September 30, 2009 and 2008, respectively, and repurchased $2.7 billion and $1.8 billion face amount of its senior unsecured notes for the nine months ended September 30, 2009 and 2008, respectively. The increase in the gain on debt repurchases between 2009 and 2008 was the result of differences in the characteristics of debt repurchased and larger unsecured credit spreads in 2009. Since the second quarter of 2008, the Company repurchased $4.6 billion face amount of its senior unsecured notes in the aggregate, with maturity dates ranging from 2008 to 2014.


12.	Restructuring Activities

In response to the College Cost Reduction and Access Act of 2007 (“CCRAA”) and challenges in the capital markets, the Company initiated a restructuring plan in the fourth quarter of 2007. The plan focused on conforming the Company’s lending activities to the economic environment, exiting certain customer relationships and product lines, winding down the Company’s debt purchased paper businesses, and significantly reducing its operating expenses. The restructuring plan is essentially completed and the Company’s objectives have been met. During 2008, the Company reduced the run-rate of its operating expenses by 20 percent versus the end of 2007, after adjusting for restructuring costs, growth and other investments. As part of the Company’s cost reduction efforts, restructuring expenses of $4 million were recognized in both the current quarter and prior quarter. Restructuring expenses from the fourth quarter of 2007 through the third quarter of 2009 totaled $119 million. The majority of these restructuring expenses were severance costs related to the completed and planned elimination of approximately 2,800 positions, or approximately 25 percent of the workforce. The Company estimates approximately $7 million of additional restructuring expenses associated with its current cost reduction efforts will be incurred. These estimated additional restructuring costs relate primarily to position eliminations and resulting employee terminations, as well as lease termination costs in the Company’s Asset Performance Group (“APG”) business segment.

On September 17, 2009 the House passed the SAFRA which would eliminate FFELP and require that, after July 1, 2010, all new federal loans be made through the Direct Lending program. The Senate has yet to take up the legislation. If this legislation is signed into law, the Company will undertake another significant


12.	Restructuring Activities (Continued)

restructuring to conform its infrastructure to the elimination of the FFELP and achieve additional expense reduction.

The following table summarizes the restructuring expenses incurred during the quarters ended September 30, 2009 and 2008 and cumulative restructuring expenses incurred through September 30, 2009.


											Cumulative
											Expense as of
	Three Months Ended September 30,						Nine Months Ended September 30,				September 30,
	2009			2008			2009		2008		2009

Severance costs	$	3,472		$	9,917		$	10,429	$	59,000	$	95,792
Lease and other contract termination costs		(12	)		(86	)		730		8,983		10,247
Exit and other costs		132			677			1,636		9,943		13,036

Total⁽¹⁾	$	3,592		$	10,508		$	12,795	$	77,926	$	119,075


⁽¹⁾		Aggregate restructuring expenses incurred across the Company’s reportable segments during the three months ended September 30, 2009 and 2008 totaled $2 million and $(.2) million, respectively, in the Company’s Lending reportable segment, $1 million and $4 million, respectively, in the Company’s APG reportable segment, and $1 million and $7 million, respectively, in the Company’s Corporate and Other reportable segment.

As of September 30, 2009 and 2008, severance costs were incurred in conjunction with aggregate completed and planned position eliminations of approximately 2,800 and 2,500 positions, respectively, across all of the Company’s reportable segments, with position eliminations ranging from senior executives to clerical personnel. Lease and other contract termination costs and exit and other costs incurred during the three months ended September 30, 2009 and 2008, respectively, related primarily to terminated or abandoned facility leases and consulting costs incurred in conjunction with various cost reduction and exit strategies.

The following table summarizes the restructuring liability balance, which is included in other liabilities in the accompanying consolidated balance sheet.


				Lease and
				Other
				Contract
	Severance			Termination			Exit and
	Costs			Costs			Other Costs			Total

Balance at December 31, 2007	$	18,329		$	—		$	—		$	18,329
Net accruals		62,858			9,517			11,400			83,775
Cash paid		(66,063	)		(6,719	)		(11,340	)		(84,122	)

Balance at December 31, 2008		15,124			2,798			60			17,982
Net accruals		10,429			730			1,636			12,795
Cash paid		(19,870	)		(1,388	)		(1,696	)		(22,954	)

Balance at September 30, 2009	$	5,683		$	2,140		$	—		$	7,823


13.	Fair Value Measurements

The Company uses estimates of fair value in applying various accounting standards for its financial statements. Under GAAP, fair value measurements are used in one of four ways:


	•	In the consolidated balance sheet with changes in fair value recorded in the consolidated statement of income;


13.	Fair Value Measurements (Continued)


	•	In the consolidated balance sheet with changes in fair value recorded in the accumulated other comprehensive income section of the consolidated statement of changes in stockholders’ equity;

	•	In the consolidated balance sheet for instruments carried at lower of cost or fair value with impairment charges recorded in the consolidated statement of income; and

	•	In the notes to the financial statements.

Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, the Company’s policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads (including for the Company’s liabilities), relying first on observable data from active markets. Additional adjustments may be made for factors including liquidity, credit, bid/offer spreads, etc., depending on current market conditions. Transaction costs are not included in the determination of fair value. When possible, the Company seeks to validate the model’s output to market transactions. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable.

The Company categorizes its fair value estimates based on a hierarchical framework associated with three levels of price transparency utilized in measuring financial instruments at fair value. Classification is based on the lowest level of input that is significant to the fair value of the instrument. The three levels are as follows:


	•	Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. The types of financial instruments included in level 1 are highly liquid instruments with quoted prices;

	•	Level 2 — Inputs from active markets, other than quoted prices for identical instruments, are used to model fair value. Significant inputs are directly observable from active markets for substantially the full term of the asset or liability being valued; and

	•	Level 3 — Pricing inputs significant to the valuation are unobservable. Inputs are developed based on the best information available; however, significant judgment is required by management in developing the inputs.

Student Loans

The Company’s FFELP loans and Private Education Loans are accounted for at cost or at the lower of cost or market if the loan is held-for-sale (see the Company’s 2008 Annual Report on Form 10-K, Note 2, “Significant Accounting Policies — Loans,” to the consolidated financial statements for a discussion of the accounting treatment); however, the fair value is disclosed in compliance with GAAP. FFELP loans classified as held-for-sale are those which the Company has the ability and intent to sell under various ED loan purchase programs. In these instances, the FFELP loans are valued using the committed sales price under the programs. For all other FFELP loans and Private Education Loans, fair value was determined by modeling loan level cash flows using stated terms of the assets and internally-developed assumptions to determine aggregate portfolio yield, net present value and average life. The significant assumptions used to project cash flows are prepayment speeds, default rates, cost of funds, required return on equity, and expected Repayment Borrower Benefits to be earned. In addition, the Floor Income component of the Company’s FFELP loan portfolio is


13.	Fair Value Measurements (Continued)

valued through discounted cash flow and option models using both observable market inputs and internally developed inputs. A number of significant inputs into the models are not observable.

Other Loans

Facilities financings, and mortgage and consumer loans held for investment are accounted for at cost with fair values being disclosed. Mortgage loans held for sale are accounted for at lower of cost or market. Fair value was determined with discounted cash flow models using the stated terms of the loans and observable market yield curves. In addition, adjustments and assumptions were made for credit spreads, liquidity, prepayment speeds and defaults. A number of significant inputs into the models are not observable.

Cash and Investments (Including “Restricted”)

Cash and cash equivalents are carried at cost. Carrying value approximated fair value for disclosure purposes. Investments are classified as trading or available-for-sale are carried at fair value in the financial statements. Investments in U.S. Treasury securities and securities issued by U.S. government agencies that are traded in active markets were valued using observable market prices. Other investments for which observable prices from active markets are not available were valued through standard bond pricing models using observable market yield curves adjusted for credit and liquidity spreads. The fair value of investments in Commercial Paper, Asset Backed Commercial Paper, or Demand Deposits that have a remaining term of less than 90 days when purchased are estimated at cost and when needed, adjustments for liquidity and credit spreads are made depending on market conditions and counterparty credit risks. These investments consist of mostly overnight/weekly maturity instruments with highly-rated counterparties.

Borrowings

Borrowings are accounted for at cost in the financial statements except when denominated in a foreign currency or when designated as the hedged item in a fair value hedge relationship. When the hedged risk is the benchmark interest rate and not full fair value, the cost basis is adjusted for changes in value due to benchmark interest rates only. Additionally, foreign currency denominated borrowings are re-measured at current spot rates in the financial statements. The full fair value of all borrowings is disclosed. Fair value was determined through standard bond pricing models and option models (when applicable) using the stated terms of the borrowings, and observable yield curves, foreign currency exchange rates and volatilities from active markets; or from quotes from broker-dealers. Credit adjustments for unsecured corporate debt are made based on indicative quotes from observable trades and spreads on credit default swaps specific to the Company. Credit adjustments for secured borrowings are based on indicative quotes from broker-dealers. These adjustments for both secured and unsecured borrowings are material to the overall valuation of these items and, currently, are based on inputs from inactive markets.

Derivative Financial Instruments

All derivatives are accounted for at fair value in the financial statements. The fair values of a majority of derivative financial instruments, including swaps and floors, were determined by standard derivative pricing and option models using the stated terms of the contracts and observable yield curves, forward foreign currency exchange rates and volatilities from active markets. In some cases, management utilized internally developed amortization streams to model the fair value for swaps whose notional amounts contractually amortizes with securitized asset balances. Complex structured derivatives or derivatives that trade in less liquid


13.	Fair Value Measurements (Continued)

markets require significant adjustments and judgment in determining fair value that cannot be corroborated with market transactions. When determining the fair value of derivatives, the Company takes into account counterparty credit risk for positions where it is exposed to the counterparty on a net basis by assessing exposure net of collateral held. The net exposures for each counterparty are adjusted based on market information available for the specific counterparty including spreads from credit default swaps. Additionally, when the counterparty has exposure to the Company related to SLM Corporation derivatives, the Company fully collateralizes the exposure minimizing the adjustment necessary to the derivative valuations for the Company’s credit risk. While trusts that contain derivatives are not required to post collateral to counterparties, the credit quality and securitized nature of the trusts minimizes any adjustments for the counterparty’s exposure to the trusts. It is the Company’s policy to compare its derivative fair values to those received by its counterparties in order to validate the model’s outputs. The carrying value of borrowings designated as the hedged item in an ASC 815 fair value hedge are adjusted for changes in fair value due to benchmark interest rates and foreign-currency exchange rates. These valuations are determined through standard bond pricing models and option models (when applicable) using the stated terms of the borrowings, and observable yield curves, foreign currency exchange rates, and volatilities.

During 2008 and 2009, the bid/ask spread widened significantly for derivatives indexed to certain interest rate indices as a result of market inactivity. As such, significant adjustments for the bid/ask spread and unobservable inputs were used in the fair value calculation resulting in these instruments being classified as level 3 in the fair value hierarchy. Additionally, significant unobservable inputs were used to model the amortizing notional of some swaps tied to securitized asset balances and as such, these derivatives have been classified as level 3 in the fair value hierarchy.

Residual Interests

The Residual Interests are carried at fair value in the financial statements. No active market exists for student loan Residual Interests; as such, the fair value is calculated using discounted cash flow models and option models. Observable inputs from active markets are used where available, including yield curves and volatilities. Significant unobservable inputs such as prepayment speeds, default rates, certain bonds’ costs of funds and discount rates, are used in determining the fair value and require significant judgment. These unobservable inputs are internally determined based upon analysis of historical data and expected industry trends. On a quarterly basis the Company back tests its prepayment speed, default rates and costs of funds assumptions by comparing those assumptions to actuals experienced. Additionally, the Company uses non-binding broker quotes and industry analyst reports which show changes in the indicative prices of the asset-backed securities tranches immediately senior to the Residual Interest as an indication of potential changes in the discount rate used to value the Residual Interests. Market transactions are not available to validate the models’ results. An analysis of the impact of changes to significant inputs is addressed further in Note 6, “Student Loan Securitization.”


13.	Fair Value Measurements (Continued)

The following tables summarize the valuation of the Company’s financial instruments that are marked-to-market on a recurring basis in the consolidated financial statements as of September 30, 2009 and December 31, 2008.


	Fair Value Measurements on a Recurring
	Basis as of September 30, 2009
												Cash
(Dollars in millions)	Level 1			Level 2			Level 3		Total			Collateral			Net

Assets
Available for sale investments	$	—		$	1,051		$	—	$	1,051		$	—		$	1,051
Retained Interest in off-balance sheet securitized loans		—			—			1,838		1,838			—			1,838
Derivative instruments⁽¹⁾⁽²⁾		—			2,001			1,278		3,279			(1,511	)		1,768

Total Assets	$	—		$	3,052		$	3,116	$	6,168		$	(1,511	)	$	4,657

Liabilities⁽³⁾
Derivative instruments⁽¹⁾⁽²⁾	$	(2	)	$	(1,190	)	$	—	$	(1,192	)	$	737		$	(455	)

Total Liabilities	$	(2	)	$	(1,190	)	$	—	$	(1,192	)	$	737		$	(455	)


	Fair Value Measurements on a Recurring
	Basis as of December 31, 2008
													Cash
(Dollars in millions)	Level 1			Level 2			Level 3			Total			Collateral			Net

Assets
Available for sale investments	$	—		$	899		$	—		$	899		$	—		$	899
Retained Interest in off-balance sheet securitized loans		—			—			2,200			2,200			—			2,200
Derivative instruments⁽¹⁾⁽²⁾		—			3,014			—			3,014			(1,624	)		1,390

Total Assets	$	—		$	3,913		$	2,200		$	6,113		$	(1,624	)	$	4,489

Liabilities⁽³⁾
Derivative instruments⁽¹⁾⁽²⁾	$	(3	)	$	(648	)	$	(341	)	$	(992	)	$	—		$	(992	)

Total Liabilities	$	(3	)	$	(648	)	$	(341	)	$	(992	)	$	—		$	(992	)


	⁽¹⁾	Fair value of derivative instruments is comprised of market value less accrued interest and excludes collateral.

	⁽²⁾	Level 1 derivatives include euro-dollar futures contracts. Level 2 derivatives include derivatives indexed to interest rate indices and currencies that are considered liquid. Level 3 derivatives include derivatives indexed to illiquid interest rate indices and derivatives for which significant adjustments were made to observable inputs.

	⁽³⁾	Borrowings which are the hedged items in a fair value hedge relationship and which are adjusted for changes in value due to benchmark interest rates only are not carried at full fair value and are not reflected in this table.


13.	Fair Value Measurements (Continued)

The following table summarizes the change in balance sheet carrying value associated with Level 3 financial instruments carried at fair value on a recurring basis during the three and nine months ended September 30, 2009 and 2008.


	Three Months Ended September 30,
	2009								2008
	Residual			Derivative					Residual			Derivative
(Dollars in millions)	Interests			Instruments			Total		Interests			Instruments			Total

Balance, beginning of period	$	1,821		$	790		$	2,611	$	2,545		$	(121	)	$	2,424
Total gains/(losses) (realized and unrealized):
Included in earnings⁽¹⁾		117			357			474		21			(303	)		(282	)
Included in other comprehensive income		—			—			—		—			—			—
Purchases, issuances and settlements		(100	)		131			31		(243	)		18			(225	)
Transfers in and/or out of Level 3		—			—			—		—			9			9

Balance, end of period	$	1,838		$	1,278		$	3,116	$	2,323		$	(397	)	$	1,926

Change in unrealized gains/(losses) relating to instruments still held at the reporting date	$	13	⁽²⁾	$	474	⁽³⁾	$	487	$	(81	)⁽²⁾	$	(282	)⁽³⁾	$	(363	)


	Nine Months Ended September 30,
	2009									2008
	Residual			Derivative						Residual			Derivative
(Dollars in millions)	Interests			Instruments			Total			Interests			Instruments			Total

Balance, beginning of period	$	2,200		$	(341	)	$	1,859		$	3,044		$	(71	)	$	2,973
Total gains/(losses) (realized and unrealized):
Included in earnings⁽¹⁾		18			233			251			38			(365	)		(327	)
Included in other comprehensive income		—			—			—			—			—			—
Purchases, issuances and settlements		(380	)		318			(62	)		(759	)		30			(729	)
Transfers in and/or out of Level 3		—			1,068			1,068			—			9			9

Balance, end of period	$	1,838		$	1,278		$	3,116		$	2,323		$	(397	)	$	1,926

Change in unrealized gains/(losses) relating to instruments still held at the reporting date	$	(338	)⁽²⁾	$	552	⁽³⁾	$	214		$	(361	)⁽²⁾	$	(324	)⁽³⁾	$	(685	)


	⁽¹⁾	“Included in earnings” is comprised of the following amounts recorded in the specified line item in the consolidated statements of income:


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

Servicing and securitization revenue	$	117		$	21		$	18		$	38
Gains (losses) on derivative and hedging activities, net		414			(303	)		386			(365	)
Interest expense		(57	)		—			(153	)		—

Total	$	474		$	(282	)	$	251		$	(327	)


	⁽²⁾	Recorded in “servicing and securitization revenue (loss)” in the consolidated statements of income.

	⁽³⁾	Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.


13.	Fair Value Measurements (Continued)

In addition, at September 30, 2009, the Company had real estate owned assets, related to its Purchased Paper — Mortgage/Properties business, held on its balance sheet at fair value totaling $96 million. These assets are carried at the lower of cost or fair value and as such are marked-to-market on a non-recurring basis. Fair value is determined using significant unobservable inputs primarily based on broker price opinions and are considered Level 3 valuations.

The following table summarizes the fair values of the Company’s financial assets and liabilities, including derivative financial instruments, as of September 30, 2009 and December 31, 2008.


	September 30, 2009									December 31, 2008
	Fair			Carrying						Fair			Carrying
(Dollars in millions)	Value			Value			Difference			Value			Value			Difference

Earning assets
FFELP loans	$	133,756		$	136,351		$	(2,595	)	$	107,319		$	124,220		$	(16,901	)
Private Education Loans		19,872			22,494			(2,622	)		14,141			20,582			(6,441	)
Other loans		308			454			(146	)		619			729			(110	)
Cash and investments		12,782			12,782			—			8,646			8,646			—

Total earning assets		166,718			172,081			(5,363	)		130,725			154,177			(23,452	)

Interest-bearing liabilities
Short-term borrowings		53,211			53,407			196			41,608			41,933			325
Long-term borrowings		111,395			124,648			13,253			93,462			118,225			24,763

Total interest-bearing liabilities		164,606			178,055			13,449			135,070			160,158			25,088

Derivative financial instruments
Floor Income/Cap contracts		(1,390	)		(1,390	)		—			(1,466	)		(1,466	)		—
Interest rate swaps		349			349			—			1,374			1,374			—
Cross currency interest rate swaps		3,156			3,156			—			2,116			2,116			—
Futures contracts		(2	)		(2	)		—			(3	)		(3	)		—
Other		(26	)		(26	)		—			—			—			—
Other
Residual interest in securitized assets								—			2,200			2,200			—

Excess of net asset fair value over carrying value							$	8,086								$	1,636


14.	Commitments and Contingencies

On August 3, 2009, the Company received the final audit report of ED’s Office of the Inspector General (“OIG”) related to the Company’s billing practices for special allowance payments. Among other things, the OIG recommended that ED instruct the Company to return approximately $22 million in alleged special allowance overpayments. The Company continues to believe that its practices were consistent with longstanding ED guidance and all applicable rules and regulations and intends to continue disputing these findings. The OIG has audited other industry participants with regard to special allowance payments for loans funded by tax exempt obligations and in certain cases the Secretary of ED has disagreed with the OIG’s recommendations.

In the ordinary course of business, the Company and its subsidiaries are defendants in or parties to pending and threatened legal actions and proceedings including actions brought on behalf of various classes of claimants. These actions and proceedings may be based on alleged violations of consumer protection, securities, employment or other laws. In certain of these actions and proceedings, claims for substantial monetary damage are asserted against the Company and its subsidiaries.

In the ordinary course of business, the Company and its subsidiaries also are subject to regulatory examinations, information gathering requests, inquiries and investigations. In connection with formal and informal inquiries in these cases, the Company and its subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of the Company’s regulated activities.

In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, the Company cannot predict what the eventual outcome of the pending matters will be, what the timing or the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.

The Company is required to establish reserves for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, the Company does not establish reserves.

Based on current knowledge, no reserves have been established for any pending litigation or regulatory matters. Based on current knowledge, management does not believe that loss contingencies, if any, arising from pending litigation or regulatory matters will have a material adverse effect on the consolidated financial position or liquidity of the Company.


15.	Income Taxes

For the nine months ended September 30, 2009 and 2008, the Company reported an income tax benefit of $4 million and $13 million, respectively, representing effective tax rates of (33) percent and 206 percent, respectively. The movement in the effective tax rate was primarily driven by the reduction of tax and interest on U.S. federal and state uncertain tax positions in both periods, as well as the permanent tax impact of deducting Proposed Merger-related transaction costs in the nine months ended September 30, 2008.

Accounting for Uncertainty in Income Taxes

The unrecognized tax benefits changed from $86 million at December 31, 2008 to $83 million at September 30, 2009, and accrued interest and penalties changed from $10 million at December 31, 2008 to $7 million at September 30, 2009. Included in the $83 million are $18 million of unrecognized tax benefits that if recognized, would favorably impact the effective tax rate.


15.	Income Taxes (Continued)

These changes result primarily from adding a new issue that was identified during the first quarter of 2009 while completing the 2008 U.S. federal income tax return, as well as adjusting the 2003-2007 unrecognized tax benefits to incorporate the net impact of IRS and state tax authority examinations of several of the Company’s income tax returns. New information was received from the IRS during the first quarter as part of the IRS examination of Company’s 2005 and 2006 U.S. federal income tax returns and the examination was ultimately concluded during the second quarter. During the third quarter of 2009, the IRS concluded the examination of the 2003 and 2004 U.S. federal income tax returns of an entity in which the company is an investor, and the Virginia tax authority concluded the examination of the Company’s 2005 through 2007 income tax returns. Several other less significant amounts of uncertain tax benefits were also added during the quarter.


16.	Segment Reporting

The Company has two primary operating segments — the Lending operating segment and the APG, formerly known as DMO, operating segment. The Lending and APG operating segments meet the quantitative thresholds for reportable segments. Accordingly, the results of operations of the Company’s Lending and APG segments are presented below. The Company has smaller operating segments including the Guarantor Servicing, Loan Servicing, and Upromise operating segments, as well as certain other products and services provided to colleges and universities which do not meet the required quantitative thresholds. 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 reportable segment.

The management reporting process measures the performance of the Company’s operating segments based on the management structure of the Company, as well as the methodology used by management to evaluate performance and allocate resources. Management, including the Company’s chief operating decision makers, 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 September 30, 2009 and 2008. United Student Aid Funds, Inc. (“USA Funds”) is the Company’s largest customer in both the APG and Corporate and Other segments. During the nine months ended


16.	Segment Reporting (Continued)

September 30, 2009 and 2008, USA Funds accounted for 17 percent and 45 percent, respectively, of the aggregate revenues generated by the Company’s APG 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 operating segment, the Company originates and acquires both FFELP loans and Private Education Loans. As of September 30, 2009, the Company managed $192.2 billion of student loans, of which $157.3 billion or 82 percent are federally insured, and has 10 million student and parent customers. In the nine months ended September 30, 2009, the Company originated $4 million in mortgage loans which were sold. The Company’s mortgage and other consumer loan portfolio totaled $393 million at September 30, 2009.

Private Education Loans 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 in alternative learning programs such as career training, distance learning and lifelong learning programs. Most higher education Private Education Loans are made in conjunction with a FFELP 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 historical risk-performance underwriting strategies, the addition of qualified cosigners and a combination of higher interest rates and loan origination fees that compensate the Company for the higher risk.

APG

The Company’s APG 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, and sub-performing and non-performing mortgage loans. The Company’s APG 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 13 FFELP Guarantors and for campus-based programs.

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

The Company concluded in 2008 that its APG purchased paper business no longer produced a strategic fit, and the Company decided to wind down this business. Due to the continued weakening of the U.S. economy, during the third quarter of 2009, the Company recorded $12 million of impairment related to declines in the fair value of mortgage loans and real estate held by the Company’s mortgage purchased paper subsidiary and $9 million of impairment related to the Company’s non-mortgage purchase paper subsidiary. These impairments are recorded within collections revenue (loss) as they are not considered restructuring expenses.


16.	Segment Reporting (Continued)

Corporate and Other

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

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

Upromise markets and administers a consumer savings network and also provides program management, transfer and servicing agent services, and administration services for 529 college-savings plans. The Company’s other products and services include comprehensive financing and loan delivery solutions that it provides to college financial aid offices and students to streamline the financial aid process. Corporate overhead includes all of the typical headquarter functions such as executive management, accounting and finance, human resources and marketing.

Measure of Profitability

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

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


16.	Segment Reporting (Continued)

Segment Results and Reconciliations to GAAP


	Three Months Ended September 30, 2009
						Corporate		Total “Core					Total
(Dollars in millions)	Lending		APG			and Other		Earnings”		Adjustments⁽²⁾			GAAP

Interest income:
FFELP Stafford and Other Student Loans	$	340	$	—		$	—	$	340	$	(37	)	$	303
FFELP Consolidation Loans		430		—			—		430		52			482
Private Education Loans		561		—			—		561		(165	)		396
Other loans		11		—			—		11		—			11
Cash and investments		3		—			5		8		(1	)		7

Total interest income		1,345		—			5		1,350		(151	)		1,199
Total interest expense		652		5			3		660		14			674

Net interest income (loss)		693		(5	)		2		690		(165	)		525
Less: provisions for loan losses		448		—			—		448		(127	)		321

Net interest income (loss) after provisions for loan losses		245		(5	)		2		242		(38	)		204
Contingency fee revenue		—		82			—		82		—			82
Collections revenue		—		16			—		16		—			16
Guarantor servicing fees		—		—			48		48		—			48
Other income		129		—			56		185		21			206

Total other income		129		98			104		331		21			352
Restructuring expenses		2		1			1		4		—			4
Operating expenses		154		80			75		309		9			318

Total expenses		156		81			76		313		9			322

Income before income tax expense (benefit)		218		12			30		260		(26	)		234
Income tax expense⁽¹⁾		80		5			11		96		(21	)		75
Less: net income attributable to noncontrolling interest		—		—			—		—		—			—

Net income attributable to SLM Corporation	$	138	$	7		$	19	$	164	$	(5	)	$	159

Economic Floor Income (net of tax) not included in “Core Earnings”	$	23	$	—		$	—	$	23


⁽¹⁾		Income taxes are based on a percentage of net income before tax for each individual reportable segment.

⁽²⁾		“Core Earnings” adjustments to GAAP:


	Three Months Ended September 30, 2009
	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 (loss)	$	(232	)	$	75		$	(8	)	$	—		$	(165	)
Less: provisions for loan losses		(127	)		—			—			—			(127	)

Net interest income (loss) after provisions for loan losses		(105	)		75			(8	)		—			(38	)
Contingency fee revenue		—			—			—			—			—
Collections revenue		—			—			—			—			—
Guarantor servicing fees		—			—			—			—			—
Other income (loss)		133			(112	)		—			—			21

Total other income (loss)		133			(112	)		—			—			21
Restructuring expenses		—			—			—			—			—
Operating expenses		—			—			—			10			10

Total expenses		—			—			—			10			10

Total pre-tax “Core Earnings” adjustments to GAAP	$	28		$	(37	)	$	(8	)	$	(10	)		(27	)

Income tax benefit														(22	)
Less: net income attributable to noncontrolling interest														—

Total “Core Earnings” adjustments to GAAP													$	(5	)


16.	Segment Reporting (Continued)


	Three Months Ended September 30, 2008
						Corporate		Total “Core						Total
(Dollars in millions)	Lending		APG			and Other		Earnings”			Adjustments⁽²⁾			GAAP

Interest income:
FFELP Stafford and Other Student Loans	$	612	$	—		$	—	$	612		$	(96	)	$	516
FFELP Consolidation Loans		995		—			—		995			(164	)		831
Private Education Loans		678		—			—		678			(233	)		445
Other loans		20		—			—		20			—			20
Cash and investments		62		—			7		69			(12	)		57

Total interest income		2,367		—			7		2,374			(505	)		1,869
Total interest expense		1,651		6			5		1,662			(268	)		1,394

Net interest income (loss)		716		(6	)		2		712			(237	)		475
Less: provisions for loan losses		263		—			—		263			(76	)		187

Net interest income (loss) after provisions for loan losses		453		(6	)		2		449			(161	)		288
Contingency fee revenue		—		89			—		89			—			89
Collections revenue		—		(169	)		—		(169	)		(2	)		(171	)
Guarantor servicing fees		—		—			37		37			—			37
Other income		55		—			51		106			(233	)		(127	)

Total other income		55		(80	)		88		63			(235	)		(172	)
Restructuring expenses		—		4			7		11			—			11
Operating expenses		142		106			68		316			51			367

Total expenses		142		110			75		327			51			378

Income (loss) before income tax expense (benefit)		366		(196	)		15		185			(447	)		(262	)
Income tax expense (benefit)⁽¹⁾		134		(73	)		6		67			(171	)		(104	)
Less: net income attributable to noncontrolling interest		—		1			—		1			—			1

Net income (loss) attributable to SLM Corporation	$	232	$	(124	)	$	9	$	117		$	(276	)	$	(159	)

Economic Floor Income (net of tax) not included in “Core Earnings”	$	1	$	—		$	—	$	1


⁽¹⁾		Income taxes are based on a percentage of net income before tax for each individual reportable segment.

⁽²⁾		“Core Earnings” adjustments to GAAP:


	Three Months Ended September 30, 2008
	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 (loss)	$	(230	)	$	36		$	(43	)	$	—		$	(237	)
Less: provisions for loan losses		(76	)		—			—			—			(76	)

Net interest income (loss) after provisions for loan losses		(154	)		36			(43	)		—			(161	)
Contingency fee revenue		—			—			—			—			—
Collections revenue (loss)		(2	)		—			—			—			(2	)
Guarantor servicing fees		—			—			—			—			—
Other income (loss)		9			(242	)		—			—			(233	)

Total other income (loss)		7			(242	)		—			—			(235	)
Restructuring expenses		—			—			—			—			—
Operating expenses		1			—			—			50			51

Total expenses		1			—			—			50			51

Total pre-tax “Core Earnings” adjustments to GAAP	$	(148	)	$	(206	)	$	(43	)	$	(50	)		(447	)

Income tax expense														(171	)
Less: net income attributable to noncontrolling interest														—

Total “Core Earnings” adjustments to GAAP													$	(276	)


16.	Segment Reporting (Continued)


	Nine Months Ended September 30, 2009
						Corporate		Total “Core					Total
(Dollars in millions)	Lending		APG			and Other		Earnings”		Adjustments⁽²⁾			GAAP

Interest income:
FFELP Stafford and Other Student Loans	$	1,012	$	—		$	—	$	1,012	$	(42	)	$	970
FFELP Consolidation Loans		1,263		—			—		1,263		169			1,432
Private Education Loans		1,683		—			—		1,683		(507	)		1,176
Other loans		46		—			—		46		—			46
Cash and investments		8		—			14		22		(2	)		20

Total interest income		4,012		—			14		4,026		(382	)		3,644
Total interest expense		2,424		15			11		2,450		70			2,520

Net interest income (loss)		1,588		(15	)		3		1,576		(452	)		1,124
Less: provisions for loan losses		1,199		—			—		1,199		(349	)		850

Net interest income (loss) after provisions for loan losses		389		(15	)		3		377		(103	)		274
Contingency fee revenue		—		230			—		230		—			230
Collections revenue		—		16			—		16		—			16
Guarantor servicing fees		—		—			107		107		—			107
Other income (loss)		591		—			152		743		(410	)		333

Total other income (loss)		591		246			259		1,096		(410	)		686
Restructuring expenses		7		3			3		13		—			13
Operating expenses		435		260			211		906		29			935

Total expenses		442		263			214		919		29			948

Income (loss) before income tax expense (benefit)		538		(32	)		48		554		(542	)		12
Income tax expense (benefit)⁽¹⁾		199		(12	)		18		205		(209	)		(4	)
Less: net income attributable to noncontrolling interest		—		1			—		1		—			1

Net income (loss) attributable to SLM Corporation	$	339	$	(21	)	$	30	$	348	$	(333	)	$	15

Economic Floor Income (net of tax) not included in “Core Earnings”	$	191	$	—		$	—	$	191


⁽¹⁾		Income taxes are based on a percentage of net income before tax for each individual reportable segment.

⁽²⁾		“Core Earnings” adjustments to GAAP:


	Nine Months Ended September 30, 2009
	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 (loss)	$	(705	)	$	92		$	161	$	—		$	(452	)
Less: provisions for loan losses		(349	)		—			—		—			(349	)

Net interest income (loss) after provisions for loan losses		(356	)		92			161		—			(103	)
Contingency fee revenue		—			—			—		—			—
Collections revenue		—			—			—		—			—
Guarantor servicing fees		—			—			—		—			—
Other income (loss)		159			(569	)		—		—			(410	)

Total other income (loss)		159			(569	)		—		—			(410	)
Restructuring expenses		—			—			—		—			—
Operating expenses		—			—			—		29			29

Total expenses		—			—			—		29			29

Total pre-tax “Core Earnings” adjustments to GAAP	$	(197	)	$	(477	)	$	161	$	(29	)		(542	)

Income tax benefit													(209	)
Less: net income attributable to noncontrolling interest													—

Total “Core Earnings” adjustments to GAAP												$	(333	)


16.	Segment Reporting (Continued)


	Nine Months Ended September 30, 2008
						Corporate		Total “Core						Total
(Dollars in millions)	Lending		APG			and Other		Earnings”			Adjustments⁽²⁾			GAAP

Interest income:
FFELP Stafford and Other Student Loans	$	1,630	$	—		$	—	$	1,630		$	(152	)	$	1,478
FFELP Consolidation Loans		2,891		—			—		2,891			(454	)		2,437
Private Education Loans		2,093		—			—		2,093			(795	)		1,298
Other loans		65		—			—		65			—			65
Cash and investments		284		—			18		302			(51	)		251

Total interest income		6,963		—			18		6,981			(1,452	)		5,529
Total interest expense		5,080		20			15		5,115			(739	)		4,376

Net interest income (loss)		1,883		(20	)		3		1,866			(713	)		1,153
Less: provisions for loan losses		636		—			—		636			(169	)		467

Net interest income (loss) after provisions for loan losses		1,247		(20	)		3		1,230			(544	)		686
Contingency fee revenue		—		259			—		259			—			259
Collections revenue		—		(85	)		—		(85	)		(2	)		(87	)
Guarantor servicing fees		—		—			95		95			—			95
Other income		161		—			147		308			(113	)		195

Total other income		161		174			242		577			(115	)		462
Restructuring expenses		46		10			22		78			—			78
Operating expenses		460		322			213		995			82			1,077

Total expenses		506		332			235		1,073			82			1,155

Income (loss) before income tax expense (benefit)		902		(178	)		10		734			(741	)		(7	)
Income tax expense (benefit)⁽¹⁾		332		(65	)		3		270			(283	)		(13	)
Less: net income attributable to noncontrolling interest		—		3			—		3			—			3

Net income (loss) attributable to SLM Corporation	$	570	$	(116	)	$	7	$	461		$	(458	)	$	3

Economic Floor Income (net of tax) not included in “Core Earnings”	$	50	$	—		$	—	$	50


⁽¹⁾		Income taxes are based on a percentage of net income before tax for each individual reportable segment.

⁽²⁾		“Core Earnings” adjustments to GAAP:


	Nine Months Ended September 30, 2008
	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 (loss)	$	(680	)	$	34		$	(67	)	$	—		$	(713	)
Less: provisions for loan losses		(169	)		—			—			—			(169	)

Net interest income (loss) after provisions for loan losses		(511	)		34			(67	)		—			(544	)
Contingency fee revenue		—			—			—			—			—
Collections revenue		(2	)		—			—			—			(2	)
Guarantor servicing fees		—			—			—			—			—
Other income		40			(153	)		—			—			(113	)

Total other income		38			(153	)		—			—			(115	)
Restructuring expenses		—			—			—			—			—
Operating expenses		1			—			—			81			82

Total expenses		1			—			—			81			82

Total pre-tax “Core Earnings” adjustments to GAAP	$	(474	)	$	(119	)	$	(67	)	$	(81	)		(741	)

Income tax benefit														(283	)
Less: net income attributable to noncontrolling interest														—

Total “Core Earnings” adjustments to GAAP													$	(458	)


16.	Segment Reporting (Continued)

Summary of “Core Earnings” Adjustments to GAAP

The adjustments required to reconcile from the Company’s “Core Earnings” results to its GAAP results of operations relate to differing treatments for securitization transactions, derivatives, Floor Income, and certain other items that management does not consider in evaluating the Company’s operating results. The following table reflects aggregate adjustments associated with these areas for the three and nine months ended September 30, 2009 and 2008.


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

“Core Earnings” adjustments to GAAP:
Net impact of securitization accounting⁽¹⁾	$	28		$	(148	)	$	(197	)	$	(474	)
Net impact of derivative accounting⁽²⁾		(37	)		(206	)		(477	)		(119	)
Net impact of Floor Income⁽³⁾		(8	)		(43	)		161			(67	)
Net impact of acquired intangibles⁽⁴⁾		(10	)		(50	)		(29	)		(81	)
Net tax effect⁽⁵⁾		22			171			209			283

Total “Core Earnings” adjustments to GAAP	$	(5	)	$	(276	)	$	(333	)	$	(458	)


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

⁽²⁾		Derivative accounting: “Core Earnings” net income excludes periodic unrealized gains and losses arising primarily in the Company’s Lending operating segment, and to a lesser degree in the Company’s Corporate and Other reportable segment, that are caused primarily by the one-sided mark-to-market derivative valuations prescribed by ASC 815 on derivatives that do not qualify for “hedge treatment” under GAAP. Under the Company’s “Core Earnings” presentation, the Company recognizes the economic effect of these hedges, which generally results in any cash paid or received being recognized ratably as an expense or revenue over the hedged item’s life.

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

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

⁽⁵⁾		Net Tax Effect: Such tax effect is based upon the Company’s “Core Earnings” effective tax rate for the year.


17.	Subsequent Event

On October 22, 2009, GRP Loan, LLC and GRP Strategies, LLC, wholly-owned subsidiaries of the Company, entered into a definitive sale agreement to sell $367 million in assets, which is substantially all of the mortgage loan and real estate assets of the Purchased Paper — Mortgage/Properties business, for $279 million. The transaction closed on October 26, 2009. In connection with this transaction, the Company will recognize an after tax loss of approximately $85 million to $95 million in the fourth quarter of 2009.


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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three and nine months ended September 30, 2009 and 2008
(Dollars in millions, except per share amounts, unless otherwise noted)

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

This quarterly report contains forward-looking statements and information based on management’s current expectations as of the date of this document. Statements that are not historical facts, including statements about our beliefs or expectations and statements that assume or are dependent upon future events, are forward-looking statements. Forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the occurrence of any event, change or other circumstances that could affect our ability to cost-effectively refinance asset-backed financing facilities due April 2010, (collectively, the “2008 Asset-Backed Financing Facilities”), including any potential foreclosure on the student loans under those facilities following their termination; increased financing costs; limited liquidity; any adverse outcomes in any significant litigation to which we are a party; our derivative counterparties terminating their positions with the Company if permitted by their contracts and the Company substantially incurring additional costs to replace any terminated positions; changes in the terms of student loans and the educational credit marketplace (including changes resulting from new laws, such as any laws enacted to implement the Administration’s 2010 budget proposals as they relate to the Federal Family Education Loan Program (“FFELP”) and from the implementation of applicable laws and regulations) which, among other things, may change the volume, average term and yields on student loans under the FFELP, may result in loans being originated or refinanced under non-FFELP programs, or may affect the terms upon which banks and others agree to sell FFELP loans to the Company. The Company could be affected by: various liquidity programs being implemented by the federal government; changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; changes in the composition of our Managed FFELP and Private Education Loan portfolios; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments, and in the securitization markets for education loans, which may increase the costs or limit the availability of financings necessary to initiate, purchase or carry education loans; changes in projections of losses from loan defaults; changes in general economic conditions; changes in prepayment rates and credit spreads; and changes in the demand for debt management services and new laws or changes in existing laws that govern debt management services. The preparation of our consolidated financial statements also requires management to make certain estimates and assumptions including estimates and assumptions about future events. These estimates or assumptions may prove to be incorrect. All forward-looking statements contained in this quarterly report are qualified by these cautionary statements and are made only as of the date of this document. The Company does not undertake any obligation to update or revise these forward-looking statements to conform the statement to actual results or changes in the Company’s expectations.

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

RECENT DEVELOPMENTS

Department of Education Federal Student Aid Title IV Student Loan Management/Servicing Contract (the “ED Servicing Contract”)

In the second quarter of 2009, the Department of Education (“ED”) named Sallie Mae as one of four private sector servicers awarded a servicing contract (the “ED Servicing Contract”) to service loans we sell to ED plus a portion of the loans others sell to ED, existing Direct Student Loan Program loans, and loans originated in the future. The contract specifically covers the servicing of all federally-owned student loans, including the servicing of FFELP loans purchased by ED as part of the Purchase Program pursuant to The

Ensuring Continued Access to Student Loans Act of 2008 (“ECASLA”). See “LIQUIDITY AND CAPITAL RESOURCES — ED Funding Programs” for a further discussion. Beginning in 2010, the contract will also cover the servicing of new Direct Loans. The contract will span five years with one, five-year renewal at the option of ED.

Through October 15, 2009, the Company has sold to ED approximately $18.5 billion face amount of loans as part of the Purchase Program (approximately $840 million face amount of this amount was sold in the third quarter of 2009). Outstanding debt of $18.5 billion has been paid down related to the Participation Program in connection with these loan sales. The Company is servicing approximately $19 billion of loans under the ED Servicing Contract as of October 15, 2009.

Legislative and Regulatory Developments

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A discussion of the Company’s critical accounting policies, which include allowance for loan losses, premium and discount amortization related to our loan portfolio, fair value measurement, securitization and Retained Interest accounting, and derivative accounting can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Fair Value Measurements

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

On April 9, 2009, the FASB issued three ASC topic updates regarding fair value measurements and recognition of impairment. Under ASC 320, “Investments — Debt and Equity Securities,” impairment must be recorded within the consolidated statements of income for debt securities if there exists a fair value loss and the entity intends to sell the security or it is more likely than not the entity will be required to sell the security before recovery of the loss. Additionally, expected credit losses must be recorded through income regardless of the impairment determination above. Remaining fair value losses are recorded to other comprehensive income. ASC 825, “Financial Instruments,” requires interim disclosures of the fair value of financial instruments that were previously only required annually. Finally, the update to ASC 820, “Fair Value Measurements and Disclosures,” provides guidance for determining when a significant decrease in market activity has occurred and when a transaction is not orderly. It further reiterates that prices from inactive markets or disorderly transactions should carry less weight, if any, to the determination of fair value. These topic updates were effective for the Company beginning April 1, 2009. The adoption of these updates was not material to the Company.

Significant assumptions used in fair value measurements including those related to credit and liquidity risk are as follows:


	1.	Investments — Our investments primarily consist of overnight/weekly maturity instruments with high credit quality counterparties. However, we have considered credit and liquidity risk involving specific instruments. These assumptions have further been validated by the successful maturity of these investments in the period immediately following the end of the reporting period. In the fourth quarter 2008, we recorded an impairment of $8 million related to our investment in the Reserve Primary Fund based on an internal assessment of the collectability of our remaining investment. See “LIQUIDITY AND CAPITAL RESOURCES — Counterparty Exposure” for a further discussion.

	2.	Derivatives — When determining the fair value of derivatives, we take into account counterparty credit risk for positions where we are exposed to the counterparty on a net basis by assessing exposure net of collateral held. The net exposures for each counterparty are adjusted based on market information available for the specific counterparty including spreads from credit default swaps. Additionally, when the counterparty has exposure to the Company related to SLM Corporation derivatives, we fully collateralize the exposure minimizing the adjustment necessary to the derivative valuations for our credit risk. Trusts that contain derivatives are not required to post collateral to counterparties as the credit quality and securitized nature of the trusts minimizes any adjustments for the counterparty’s exposure to the trusts. Adjustments related to credit risk reduced the overall value of our derivatives by $81 million as of September 30, 2009. We also take into account changes in liquidity when determining the fair value of derivative positions. We adjusted the fair value of certain less liquid positions downward by approximately $202 million to take into account a significant reduction in liquidity as of September 30, 2009, related primarily to basis swaps indexed to interest rate indices with inactive markets. A major indicator of market inactivity is the widening of the bid/ask spread in these markets. In general, the widening of counterparty credit spreads and reduced liquidity for derivative instruments as indicated by wider bid/ask spreads will reduce the fair value of derivatives. In addition, certain cross-currency interest rate swaps hedging foreign currency denominated reset rate notes in the Company’s on-balance sheet trusts contain extension features that coincide with the remarketing dates of the notes. The valuation of the extension feature requires significant judgment based on internally developed inputs. These swaps were transferred into Level 3 during the first quarter of 2009 due to a change in the assumption regarding successful remarketing. These swaps were carried at $1.7 billion as of September 30, 2009.

	3.	Residual Interests — We have never sold our Residual Interests. We do not consider our Residual Interests to be liquid, which we take into account when valuing our Residual Interests. We use non-binding broker quotes and industry analyst reports which show changes in the indicative prices of the asset-backed securities tranches immediately senior to the Residual Interest as an indication of potential changes in the discount rate used to value the Residual Interest. We also use the most current prepayment and default rate assumptions to project the cash flows used to value Residual Interests. These assumptions are internally developed and primarily based on analyzing the actual results of loan performance from past periods. See Note 6, “Student Loan Securitization,” to the consolidated financial statements for a discussion of all assumption changes made during the quarter to properly determine the fair value of the Residual Interests, as well as a shock analysis to fair value related to all significant assumptions.

	4.	Student Loans — Our FFELP loans and Private Education Loans are accounted for at cost or at the lower of cost or fair value if the loan is held-for-sale. The fair value is disclosed in compliance with ASC No. 825, “Financial Instruments.” For both FFELP loans and Private Education Loans accounted for at cost, fair value is determined by modeling loan level cash flows using stated terms of the assets and internally-developed assumptions to determine aggregate portfolio yield, net present value and average life. The significant assumptions used to project cash flows are prepayment speeds, default rates, cost of funds, and required return on equity. In addition, the Floor Income component of our FFELP loan portfolio is valued through discounted cash flow and option models using both observable market inputs and internally developed inputs. Significant inputs into the models are not generally


		market observable. They are either derived internally through a combination of historical experience and management’s qualitative expectation of future performance (in the case of prepayment speeds, default rates, and capital assumptions), or are obtained through external broker quotes (as in the case of cost of funds). When possible, market transactions are used to validate the model. In most cases these are either infrequent or not observable. For FFELP loans classified as held-for-sale and accounted for at the lower of cost or market, the fair value is based on the committed sales price of the various loan purchase programs established by ED.

For further information regarding the impact of Level 3 fair values to the results of operations, see Note 13, “Fair Value Measurements,” to the consolidated financial statements.

SELECTED FINANCIAL DATA

Condensed Statements of Income


	Three Months												Nine Months
	Ended						Increase						Ended						Increase
	September 30,						(Decrease)						September 30,						(Decrease)
	2009			2008			$			%			2009			2008			$			%

Net interest income	$	525		$	475		$	50			11	%	$	1,124		$	1,153		$	(29	)		(3	)%
Less: provisions for loan losses		321			187			134			72			850			467			383			82

Net interest income (loss) after provisions for loan losses		204			288			(84	)		(29	)		274			686			(412	)		(60	)
Servicing and securitization revenue (loss)		155			65			90			138			147			174			(27	)		(16	)
Gains (losses) on loans and securities, net		12			(44	)		56			(127	)		13			(122	)		135			(111	)
Gains (losses) on derivative and hedging activities, net		(112	)		(242	)		130			(54	)		(569	)		(153	)		(416	)		272
Contingency fee revenue		82			89			(7	)		(8	)		230			259			(29	)		(11	)
Collections revenue (loss)		16			(171	)		187			(109	)		16			(87	)		103			(118	)
Guarantor servicing fees		48			37			11			30			107			95			12			13
Other income		151			94			57			61			742			296			446			151
Restructuring expenses		4			11			(7	)		(64	)		13			78			(65	)		(83	)
Operating expenses		318			367			(49	)		(13	)		935			1,077			(142	)		(13	)

Net income (loss) before income tax benefit		234			(262	)		496			(189	)		12			(7	)		19			(271	)
Income tax expense (benefit)		75			(104	)		179			(172	)		(4	)		(13	)		9			(69	)

Net income (loss)		159			(158	)		317			(201	)		16			6			10			167
Less: net income attributable to noncontrolling interest		—			1			(1	)		(100	)		1			3			(2	)		(67	)

Net income (loss) attributable to SLM Corporation		159			(159	)		318			(200	)		15			3			12			400
Preferred stock dividends		43			27			16			59			95			84			11			13

Net income (loss) attributable to SLM Corporation common stock	$	116		$	(186	)	$	302			(162	)%	$	(80	)	$	(81	)	$	1			(1	)%

Basic earnings (loss) per common share attributable to SLM Corporation common shareholders	$	.25		$	(.40	)	$	.65			163	%	$	(.17	)	$	(.17	)	$	—			—	%

Diluted earnings (loss) per common share attributable to SLM Corporation common shareholders	$	.25		$	(.40	)	$	.65			163	%	$	(.17	)	$	(.17	)	$	—			—	%

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

Condensed Balance Sheets


					Increase
	September 30,		December 31,		(Decrease)
	2009		2008		$			%

Assets
FFELP Stafford and Other Student Loans, net	$	43,258	$	44,025	$	(767	)		(2	)%
FFELP Stafford Loans Held-for-Sale		23,846		8,451		15,395			182
FFELP Consolidation Loans, net		69,246		71,744		(2,498	)		(3	)
Private Education Loans, net		22,495		20,582		1,913			9
Other loans, net		455		729		(274	)		(38	)
Cash and investments		7,022		5,112		1,910			37
Restricted cash and investments		5,761		3,535		2,226			63
Retained Interest in off-balance sheet securitized loans		1,838		2,200		(362	)		(16	)
Goodwill and acquired intangible assets, net		1,224		1,249		(25	)		(2	)
Other assets		11,299		11,141		158			1

Total assets	$	186,444	$	168,768	$	17,676			10	%

Liabilities and Equity
Short-term borrowings	$	53,407	$	41,933	$	11,474			27	%
Long-term borrowings		124,648		118,225		6,423			5
Other liabilities		3,400		3,604		(204	)		(6	)

Total liabilities		181,455		163,762		17,693			11

SLM Corporation stockholders’ equity before treasury stock		6,850		6,855		(5	)		—
Common stock held in treasury		1,861		1,856		5			—

SLM Corporation stockholders’ equity		4,989		4,999		(10	)
Noncontrolling interest		—		7		(7	)		—

Total equity		4,989		5,006		(17	)		—

Total liabilities and equity	$	186,444	$	168,768	$	17,676			10	%

RESULTS OF OPERATIONS

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

For the three months ended September 30, 2009, net income attributable to SLM Corporation was $159 million or $.25 diluted earnings per common share attributable to SLM Corporation common shareholders, compared to net loss of $159 million, or $.40 diluted loss per common share attributable to SLM Corporation common shareholders, for the three months ended September 30, 2008. The effective tax rate for those periods was 32 percent and 40 percent, respectively. The movement in the effective tax rate was primarily driven by the reduction of tax and interest on U.S. federal and state uncertain tax positions. For the three months ended September 30, 2009, the Company’s pre-tax income was $234 million compared to pre-tax loss of $262 million in the year-ago quarter. The increase in pre-tax income of $496 million was primarily due to a decrease in net losses on derivative and hedging activities of $130 million in the third quarter of 2009 from $242 million net losses in the third quarter of 2008 to $112 million net losses in the third quarter of 2009, along with an increase in collections revenue of $187 million, and an increase in gains on debt repurchases of $58 million.

Net interest income after provisions for loan losses decreased by $84 million in the third quarter from the year-ago quarter. This decrease was due to a $134 million increase in provisions for loan losses offset by a $50 million increase in net interest income. The increase in net interest income was primarily due to a decrease in the 2008 Asset Backed Financing Facilities fees and an $18.9 billion increase in the average balance of on-balance sheet student loans (see “LENDING BUSINESS SEGMENT — Net Interest Income — Net Interest Margin — On-Balance Sheet”). The increase in provisions for loan losses relates primarily to the increase in charge-off expectations on Private Education Loans from the year-ago period, primarily as a result of the continued weakening of the U.S. economy (see “LENDING BUSINESS SEGMENT — Private Education Loan Losses — Private Education Loan Delinquencies and Forbearance” and “— Allowance for Private Education Loan Losses”).

There were no gains on student loan securitizations in either the third quarter of 2009 or the year-ago quarter as the Company did not complete any off-balance sheet securitizations in those periods. Servicing and securitization revenue increased by $90 million from revenue of $65 million in the third quarter of 2008 to $155 million in the third quarter of 2009. This increase was primarily due to a current-quarter’s unrealized mark-to-market gain of $13 million on the Company’s Residual Interests compared to a year-ago quarter’s unrealized mark-to-market loss of $81 million. See “LIQUIDITY AND CAPITAL RESOURCES — Retained Interest in Securitized Receivables” for further discussion of the factors impacting the fair values.

The $12 million of gains on sales of loans and securities, net, in the third quarter 2009 related to the gain on sale of approximately $840 million face amount of FFELP loans to the ED as part of the Purchase Program. Approximately $17.6 billion face amount of additional FFELP loans were sold to the ED on October 15, 2009. There were net losses of $44 million on sales of loans and securities in the year-ago quarter. Prior to the fourth quarter of 2008, these losses were primarily the result of the Company’s repurchase of delinquent Private Education Loans from the Company’s off-balance sheet securitization trusts. When Private Education Loans in the Company’s off-balance sheet securitization trusts that settled before September 30, 2005, became 180 days delinquent, the Company previously exercised its contingent call option to repurchase these loans at par value out of the trusts and recorded a loss for the difference in the par value paid and the fair market value of the loans at the time of purchase. The Company does not hold the contingent call option for any trusts that settled after September 30, 2005. In October 2008, the Company decided to no longer exercise its contingent call option.

In the third quarter of 2009, contingency fee, collections and guarantor servicing fee revenue totaled $146 million, a $190 million increase from a loss of $44 million in the year-ago quarter. This increase was primarily due to a reduction in impairment recognized on our purchased paper portfolios, which was partially offset by a decline in revenue due to significantly smaller portfolios in our purchased paper businesses year-over-year, as a result of winding down these businesses. In the third quarter of 2009, total impairment of $21 million was comprised of $12 million of impairment related to declines in the fair value of mortgage loans and real estate held by the Company’s mortgage purchased paper subsidiary and $9 million of

impairment related to the Company’s non-mortgage purchased paper subsidiary, compared to $242 million of total impairment recorded in the third quarter of 2008, of which $147 million of impairment related to declines in the fair value of mortgage loans and real estate held by the Company’s mortgage purchased paper subsidiary and $95 million, including a loss on the sale of the Company’s international purchased paper business, related to the Company’s non-mortgage purchased paper subsidiary (see “ASSET PERFORMANCE GROUP BUSINESS SEGMENT”).

In response to the College Cost Reduction and Access Act of 2007 (“CCRAA”) and challenges in the capital markets, the Company initiated a restructuring plan in the fourth quarter of 2007. The plan focused on conforming our lending activities to the economic environment, exiting certain customer relationships and product lines, winding down our debt purchased paper businesses, and significantly reducing our operating expenses. The restructuring plan is essentially completed and our objectives have been met. During 2008, we reduced the run-rate of our operating expenses by 20 percent versus the end of 2007, after adjusting for restructuring costs, growth and other investments. As part of the Company’s cost reduction efforts, restructuring expenses of $4 million and $11 million were recognized in the third quarters of 2009 and 2008, respectively. Restructuring expenses from the fourth quarter of 2007 through the third quarter of 2009 totaled $119 million. The majority of these restructuring expenses were severance costs related to the completed and planned elimination of approximately 2,800 positions, or approximately 25 percent of the workforce. We estimate approximately $7 million of additional restructuring expenses associated with our current cost reduction efforts will be incurred. On September 17, 2009 the House passed the SAFRA which would eliminate FFELP and require that, after July 1, 2010, all new federal loans be made through the Direct Lending program. The Senate has yet to take up the legislation. If this legislation is signed into law, the Company will undertake another significant restructuring to conform its infrastructure to the elimination of the FFELP and achieve additional expense reduction. See “RECENT DEVELOPMENTS — Legislative and Regulatory Developments” for a further discussion of SAFRA.

Operating expenses were $318 million in the third quarter of 2009 compared to $367 million in the third quarter of 2008. As previously discussed, in 2008 the Company decided to wind down its purchased paper businesses. This decision resulted in a $36 million impairment of intangible assets in the third quarter of 2008. The remaining $13 million decrease in operating expenses was primarily due to the Company’s cost reduction efforts discussed above. The amortization and impairment of acquired intangibles totaled $10 million and $50 million for the third quarters of 2009 and 2008, respectively.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

For the nine months ended September 30, 2009, net income attributable to SLM Corporation was $15 million or $.17 diluted loss per common share attributable to SLM Corporation common shareholders, compared to net income of $3 million, or $.17 diluted loss per common share attributable to SLM Corporation common shareholders, for the nine months ended September 30, 2008. The effective tax rate for those periods was (33) percent and 206 percent, respectively. The movement in the effective tax rate was primarily driven by the reduction of tax and interest on U.S. federal and state uncertain tax positions in both periods, as well as the permanent tax impact of deducting Proposed Merger-related transaction costs in the nine months ended September 30, 2008. For the nine months ended September 30, 2009, the Company’s pre-tax income was $12 million compared to pre-tax loss of $7 million in the year-ago period. The increase in pre-tax income of $19 million was primarily due an increase in gains on debt repurchases of $426 million, offset by an increase of $417 million in net losses on derivative and hedging activities.

There were no gains on student loan securitizations in either the nine months ended September 30, 2009 or the year-ago period as the Company did not complete any off-balance sheet securitizations in those periods. Servicing and securitization revenue decreased by $27 million from $174 million in the nine months ended September 30, 2008 to $147 million in the nine months ended September 30, 2009. This decrease was primarily due to a decrease in net Embedded Floor Income. See “LIQUIDITY AND CAPITAL RESOURCES — Retained Interest in Securitized Receivables” for further discussion of the factors impacting the fair values.

Net interest income after provisions for loan losses decreased by $412 million in the nine months ended September 30, 2009 from the year-ago period. This decrease was due to a $383 million increase in provisions for loan losses and to a $29 million decrease in net interest income. The decrease in net interest income was primarily due to a decrease in the student loan spread and other asset spread partially offset by a $19.7 billion increase in the average balance of on-balance sheet student loans (see “LENDING BUSINESS SEGMENT — Net Interest Income — Net Interest Margin — On-Balance Sheet”). The increase in provisions for loan losses related primarily to increases in charge-off expectations on Private Education Loans primarily as a result of the continued weakening of the U.S. economy (see “LENDING BUSINESS SEGMENT — Private Education Loan Losses — Private Education Loan Delinquencies and Forbearance” and “— Allowance for Private Education Loan Losses”)

There were $12 million in net gains on sales of loans and securities in the nine months ended September 30, 2009 related to the ED Purchase Program as previously discussed, compared to net losses of $122 million incurred in the nine months ended September 30, 2008. Prior to the fourth quarter of 2008, these losses were primarily the result of the Company’s repurchase of delinquent Private Education Loans from the Company’s off-balance sheet securitization trusts. As previously discussed, the Company no longer repurchases these loans.

For the nine months ended September 30, 2009, contingency fee, collections and guarantor servicing fee revenue totaled $353 million, an $86 million increase from $267 million in the year-ago period. This increase was primarily due to a reduction in impairment recognized on our purchased paper portfolios, which was partially offset by a decline in revenue due to significantly smaller portfolios in our purchased paper businesses, as a result of winding down these businesses. In the nine months ended September 30, 2009, total impairment of $118 million was comprised of $93 million of impairment related to declines in the fair value of mortgage loans and real estate held by the Company’s mortgage purchased paper subsidiary and $25 million of impairment related to the Company’s non-mortgage purchased paper subsidiary, compared to $323 million of total impairment recorded in the nine months ended September 30, 2008, of which $212 million of impairment related to declines in the fair value of mortgage loans and real estate held by the Company’s mortgage purchased paper subsidiary and $111 million, including a loss on the sale of the Company’s international purchased paper business, related to the Company’s non-mortgage purchased paper subsidiary (see “ASSET PERFORMANCE GROUP BUSINESS SEGMENT”).

Restructuring expenses of $13 million and $78 million were recognized in the nine months ended September 30, 2009 and 2008, respectively, as previously discussed.

Operating expenses were $935 million for the nine months ended September 30, 2009 compared to $1.1 billion in the year-ago period. The decrease in operating expenses was primarily due to the Company’s cost reduction efforts discussed above. The amortization and impairment of acquired intangibles totaled $29 million and $81 million (including a $36 million impairment of intangible assets in the third quarter of 2008 as discussed above) for the nine months ended September 30, 2009 and 2008, respectively.

As previously discussed, preferred stock dividends for the nine months ended September 30, 2009 included a loss of $20 million due to the conversion of $137 million of Series C Preferred Stock to common stock in the third quarter of 2009.

Other Income

The following table summarizes the components of “Other income” in the consolidated statements of income for the three and nine months ended September 30, 2009 and 2008.


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

Gains on debt repurchases	$	74		$	16		$	463	$	37
Late fees and forbearance fees		39			36			107		107
Asset servicing and other transaction fees		28			28			79		80
Loan servicing fees		17			6			35		19
Foreign currency translation gains (losses)		(23	)		(13	)		11		(9	)
Other		16			21			47		61

Total	$	151		$	94		$	742	$	295

The change in other income over all periods presented is primarily the result of the gains on debt repurchases. The Company began repurchasing its outstanding debt in the second quarter of 2008. The Company repurchased $1.4 billion and $580 million face amount of its senior unsecured notes for the quarters ended September 30, 2009 and 2008, respectively, and repurchased $2.7 billion and $1.8 billion face amount of its senior unsecured notes for the nine months ended September 30, 2009 and 2008, respectively. The increase in the gain on debt repurchases between 2009 and 2008 was the result of differences in the characteristics of debt repurchased and larger unsecured credit spreads in 2009. Since the second quarter of 2008, the Company repurchased $4.6 billion face amount of its senior unsecured notes in the aggregate, with maturity dates ranging from 2008 to 2014.

BUSINESS SEGMENTS

The results of operations of the Company’s Lending and Asset Performance Group (“APG”) operating segments are presented below. These defined business segments operate in distinct business environments and are considered reportable segments under ASC 280, “Segment Reporting,” based on quantitative thresholds applied to the Company’s financial statements. In addition, we provide other complementary products and services, including guarantor and student loan servicing, through smaller operating segments that do not meet such thresholds and are aggregated in the Corporate and Other reportable segment for financial reporting purposes.

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. In accordance with the Rules and Regulations of the Securities and Exchange Commission (“SEC”), we prepare financial statements in accordance with GAAP. In addition to evaluating the Company’s GAAP-based financial information, management, including the Company’s chief operating decision makers, evaluates the performance of the Company’s operating segments based on their profitability on a basis that, as allowed under ASC 280, 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. Accordingly, information regarding the Company’s reportable segments is provided herein based on “Core Earnings,” which are discussed in detail below.

Our “Core Earnings” 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 and as a result, our management reporting 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.

“Core Earnings” are the primary financial performance measures used by management to develop the Company’s financial plans, track results, and establish corporate performance targets. While “Core Earnings” are not a substitute for reported results under GAAP, the Company relies on “Core Earnings” in operating its business because “Core Earnings” permit management to make meaningful period-to-period comparisons of the operational and performance indicators that are most closely assessed by management. Management believes this information provides additional insight into the financial performance of the core business activities of our operating segments. Accordingly, the tables presented below reflect “Core Earnings” which is reviewed and utilized by management to manage the business for each of the Company’s reportable segments. A further discussion regarding “Core Earnings” is included under “Limitations of ‘Core Earnings’ “ and “Pre-tax Differences between ‘Core Earnings’ and GAAP by Business Segment.”

The “LENDING BUSINESS SEGMENT” section includes all discussion of income and related expenses associated with the net interest margin, the student loan spread and its components, the provisions for loan losses, and other fees earned on our Managed portfolio of student loans. The “APG BUSINESS SEGMENT” section reflects the fees earned and expenses incurred in providing accounts receivable management and collection services. The “CORPORATE AND OTHER BUSINESS SEGMENT” section includes our remaining fee businesses and other corporate expenses that do not pertain directly to the primary operating segments identified above.


	Three Months Ended
	September 30, 2009
						Corporate
	Lending		APG			and Other

Interest income:
FFELP Stafford and Other Student Loans	$	340	$	—		$	—
FFELP Consolidation Loans		430		—			—
Private Education Loans		561		—			—
Other loans		11		—			—
Cash and investments		3		—			5

Total interest income		1,345		—			5
Total interest expense		652		5			3

Net interest income (loss)		693		(5	)		2
Less: provisions for loan losses		448		—			—

Net interest income (loss) after provisions for loan losses		245		(5	)		2
Contingency fee revenue		—		82			—
Collections revenue		—		16			—
Guarantor servicing fees		—		—			48
Other income		129		—			56

Total other income		129		98			104
Restructuring expenses		2		1			1
Operating expenses		154		80			75

Total expenses		156		81			76

Income before income tax expense		218		12			30
Income tax expense⁽¹⁾		80		5			11
Less: net income attributable to noncontrolling interest		—		—			—

“Core Earnings” net income attributable to SLM Corporation	$	138	$	7		$	19

Economic Floor Income (net of tax) not included in “Core Earnings”	$	23	$	—		$	—


⁽¹⁾		Income taxes are based on a percentage of net income before tax for each individual reportable segment.


	Three Months Ended
	September 30, 2008
						Corporate
	Lending		APG			and Other

Interest income:
FFELP Stafford and Other Student Loans	$	612	$	—		$	—
FFELP Consolidation Loans		995		—			—
Private Education Loans		678		—			—
Other loans		20		—			—
Cash and investments		62		—			7

Total interest income		2,367		—			7
Total interest expense		1,651		6			5

Net interest income (loss)		716		(6	)		2
Less: provisions for loan losses		263		—			—

Net interest income (loss) after provisions for loan losses		453		(6	)		2
Contingency fee revenue		—		89			—
Collections revenue		—		(169	)		—
Guarantor servicing fees		—		—			37
Other income		55		—			51

Total other income (loss)		55		(80	)		88
Restructuring expenses		—		4			7
Operating expenses		142		106			68

Total expenses		142		110			75

Income (loss) before income tax expense (benefit)		366		(196	)		15
Income tax expense (benefit)⁽¹⁾		134		(73	)		6
Less: net income attributable to noncontrolling interest		—		1			—

“Core Earnings” net income (loss) attributable to SLM Corporation	$	232	$	(124	)	$	9

Economic Floor Income (net of tax) not included in “Core Earnings”	$	1	$	—		$	—


⁽¹⁾		Income taxes are based on a percentage of net income before tax for each individual reportable segment.


	Nine Months Ended
	September 30, 2009
						Corporate
	Lending		APG			and Other

Interest income:
FFELP Stafford and Other Student Loans	$	1,012	$	—		$	—
FFELP Consolidation Loans		1,263		—			—
Private Education Loans		1,683		—			—
Other loans		46		—			—
Cash and investments		8		—			14

Total interest income		4,012		—			14
Total interest expense		2,424		15			11

Net interest income (loss)		1,588		(15	)		3
Less: provisions for loan losses		1,199		—			—

Net interest income (loss) after provisions for loan losses		389		(15	)		3
Contingency fee revenue		—		230			—
Collections revenue		—		16			—
Guarantor servicing fees		—		—			107
Other income		591		—			152

Total other income		591		246			259
Restructuring expenses		7		3			3
Operating expenses		435		260			211

Total expenses		442		263			214

Income (loss) before income tax expense (benefit)		538		(32	)		48
Income tax expense (benefit)⁽¹⁾		199		(12	)		18
Less: net income attributable to noncontrolling interest		—		1			—

“Core Earnings” net income (loss) attributable to SLM Corporation	$	339	$	(21	)	$	30

Economic Floor Income (net of tax) not included in “Core Earnings”	$	191	$	—		$	—


⁽¹⁾		Income taxes are based on a percentage of net income before tax for each individual reportable segment.


	Nine Months Ended
	September 30, 2008
						Corporate
	Lending		APG			and Other

Interest income:
FFELP Stafford and Other Student Loans	$	1,630	$	—		$	—
FFELP Consolidation Loans		2,891		—			—
Private Education Loans		2,093		—			—
Other loans		65		—			—
Cash and investments		284		—			18

Total interest income		6,963		—			18
Total interest expense		5,080		20			15

Net interest income (loss)		1,883		(20	)		3
Less: provisions for loan losses		636		—			—

Net interest income (loss) after provisions for loan losses		1,247		(20	)		3
Contingency fee revenue		—		259			—
Collections revenue		—		(85	)		—
Guarantor servicing fees		—		—			95
Other income		161		—			147

Total other income		161		174			242
Restructuring expenses		46		10			22
Operating expenses		460		322			213

Total expenses		506		332			235

Income (loss) before income tax expense (benefit)		902		(178	)		10
Income tax expense (benefit)⁽¹⁾		332		(65	)		3
Less: net income attributable to noncontrolling interest		—		3			—

“Core Earnings” net income (loss) attributable to SLM Corporation	$	570	$	(116	)	$	7

Economic Floor Income (net of tax) not included in “Core Earnings”	$	50	$	—		$	—


⁽¹⁾		Income taxes are based on a percentage of net income before tax for each individual reportable segment.

Limitations of “Core Earnings”

While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, management believes that “Core Earnings” are an important additional tool for providing a more complete understanding of the Company’s results of operations. Nevertheless, “Core Earnings” are subject to certain general and specific limitations that investors should carefully consider. For example, as stated above, unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting. Our “Core Earnings” are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Unlike GAAP, “Core Earnings” reflect only current period adjustments to GAAP. Accordingly, the Company’s “Core Earnings” presentation does not represent a comprehensive basis of accounting. Investors, therefore, may not compare our Company’s performance with that of other financial services companies based upon “Core Earnings.” “Core Earnings” results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely used by management, the Company’s board of directors, rating agencies and lenders to assess performance.

Other limitations arise from the specific adjustments that management makes to GAAP results to derive “Core Earnings” results. For example, in reversing the unrealized gains and losses that result from ASC 815, “Derivatives and Hedging,” on derivatives that do not qualify for “hedge treatment,” as well as on derivatives that do qualify but are in part ineffective because they are not perfect hedges, we focus on the long-term economic effectiveness of those instruments relative to the underlying hedged item and isolate the effects of interest rate volatility and changing credit spreads on the fair value of such instruments during the period. Under GAAP, the effects of these factors on the fair value of the derivative instruments (but not on the underlying hedged item) tend to show more volatility in the short term. While our presentation of our results on a “Core Earnings” basis provides important information regarding the performance of our Managed portfolio, a limitation of this presentation is that we are presenting the ongoing spread income on loans that have been sold to a trust managed by us. While we believe that our “Core Earnings” presentation presents the economic substance of our Managed loan portfolio, it understates earnings volatility from securitization gains. Our “Core Earnings” results exclude certain Floor Income, which is real cash income, from our reported results and therefore may understate earnings in certain periods. Management’s financial planning and valuation of operating results, however, does not take into account Floor Income because of its inherent uncertainty, except when it is Fixed Rate Floor Income that is economically hedged through Floor Income Contracts.

Pre-Tax Differences between “Core Earnings” and GAAP by Business Segment

Our “Core Earnings” 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 makers. Our “Core Earnings” are used in developing our financial plans and tracking results, and also in establishing corporate performance targets and incentive compensation. Management believes this information provides additional insight into the financial performance of the Company’s core business activities. “Core Earnings” net income reflects only current period adjustments to GAAP net income, as described in the more detailed discussion of the differences between “Core Earnings” and GAAP that follows, which includes further detail on each specific adjustment required to reconcile our “Core Earnings” segment presentation to our GAAP earnings.


	Three Months Ended September 30,
	2009									2008
							Corporate									Corporate
	Lending			APG			and Other			Lending			APG			and Other

“Core Earnings” adjustments to GAAP:
Net impact of securitization accounting	$	28		$	—		$	—		$	(148	)	$	—		$	—
Net impact of derivative accounting		(37	)		—			—			(206	)		—			—
Net impact of Floor Income		(8	)		—			—			(43	)		—			—
Net impact of acquired intangibles		(3	)		(2	)		(5	)		(41	)		(7	)		(2	)

Total “Core Earnings” adjustments to GAAP	$	(20	)	$	(2	)	$	(5	)	$	(438	)	$	(7	)	$	(2	)


	Nine Months Ended September 30,
	2009									2008
							Corporate									Corporate
	Lending			APG			and Other			Lending			APG			and Other

“Core Earnings” adjustments to GAAP:
Net impact of securitization accounting	$	(197	)	$	—		$	—		$	(474	)	$	—		$	—
Net impact of derivative accounting		(477	)		—			—			(119	)		—			—
Net impact of Floor Income		161			—			—			(67	)		—			—
Net impact of acquired intangibles		(8	)		(5	)		(16	)		(51	)		(17	)		(13	)

Total “Core Earnings” adjustments to GAAP	$	(521	)	$	(5	)	$	(16	)	$	(711	)	$	(17	)	$	(13	)

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

The following table summarizes the securitization adjustments in our Lending operating segment for the three and nine months ended September 30, 2009 and 2008.


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

“Core Earnings” securitization adjustments:
Net interest income on securitized loans, before provisions for loan losses and before intercompany transactions	$	(254	)	$	(245	)	$	(693	)	$	(694	)
Provisions for loan losses		127			76			349			169

Net interest income on securitized loans, after provisions for loan losses, before intercompany transactions		(127	)		(169	)		(344	)		(525	)
Intercompany transactions with off-balance sheet trusts		—			(44	)		—			(123	)

Net interest income on securitized loans, after provisions for loan losses		(127	)		(213	)		(344	)		(648	)
Servicing and securitization revenue		155			65			147			174

Total “Core Earnings” securitization adjustments⁽¹⁾	$	(28	)	$	(148	)	$	(197	)	$	(474	)


⁽¹⁾		Negative amounts are subtracted from “Core Earnings”net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” net income to arrive at GAAP net income.

“Intercompany transactions with off-balance sheet trusts” in the above table relate primarily to losses that result from the repurchase of delinquent loans from our off-balance sheet securitization trusts. When Private Education Loans in our securitization trusts settling before September 30, 2005 became 180 days delinquent, we previously exercised our contingent call option to repurchase these loans at par value out of the trust and recorded a loss for the difference in the par value paid and the fair market value of the loan at the time of purchase. We do not hold the contingent call option for any trusts settled after September 30, 2005. In October 2008, the Company decided to no longer exercise its contingent call option.

2) Derivative Accounting: “Core Earnings” exclude periodic unrealized gains and losses that are caused primarily by the one-sided mark-to-market derivative valuations prescribed by ASC 815 on derivatives that do not qualify for “hedge treatment” under GAAP. These unrealized gains and losses occur in our Lending operating segment. In our “Core Earnings” presentation, we recognize the economic effect of these hedges, which generally results in any cash paid or received being recognized ratably as an expense or revenue over the hedged item’s life.

ASC 815 requires that changes in the fair value of derivative instruments be recognized currently in earnings unless specific hedge accounting criteria, as specified by ASC 815, are met. We believe that our derivatives are effective economic hedges, and as such, are a critical element of our interest rate risk management strategy. However, some of our derivatives, primarily Floor Income Contracts and certain basis swaps, do not qualify for “hedge treatment” as defined by ASC 815, and the stand-alone derivative must be marked-to-market in the income statement with no consideration for the corresponding change in fair value of the hedged item. The gains and losses described in “Gains (losses) on derivative and hedging activities, net” are primarily caused by interest rate and foreign currency exchange rate volatility, and changing credit spreads during the period, as well as the volume and term of derivatives not receiving hedge treatment.

Our Floor Income Contracts are written options that must meet more stringent requirements than other hedging relationships to achieve hedge effectiveness under ASC 815. Specifically, our Floor Income Contracts do not qualify for hedge accounting treatment because the pay down of principal of the student loans underlying the Floor Income embedded in those student loans does not exactly match the change in the notional amount of our written Floor Income Contracts. Under ASC 815, the upfront payment is deemed a liability and changes in fair value are recorded through income throughout the life of the contract. The change in the value of Floor Income Contracts is primarily caused by changing interest rates that cause the amount of Floor Income earned on the underlying student loans and paid to the counterparties to vary. This is economically offset by the change in value of the student loan portfolio, including our Retained Interests, earning Floor Income but that offsetting change in value is not recognized under ASC 815. We believe the Floor Income Contracts are economic hedges because they effectively fix the amount of Floor Income earned over the contract period, thus eliminating the timing and uncertainty that changes in interest rates can have on Floor Income for that period. Prior to ASC 815, we accounted for Floor Income Contracts as hedges and amortized the upfront cash compensation ratably over the lives of the contracts.

Basis swaps are used to convert floating rate debt from one floating interest rate index to another to better match the interest rate characteristics of the assets financed by that debt. We primarily use basis swaps to change the index of our floating rate debt to better match the cash flows of our student loan assets that are primarily indexed to a commercial paper, Prime or Treasury bill index. In addition, we use basis swaps to convert debt indexed to the Consumer Price Index to three-month month LIBOR debt. ASC 815 requires that when using basis swaps, the change in the cash flows of the hedge effectively offset both the change in the cash flows of the asset and the change in the cash flows of the liability. Our basis swaps hedge variable interest rate risk; however, they generally do not meet this effectiveness test because the index of the swap does not exactly match the index of the hedged assets as required by ASC 815. Additionally, some of our FFELP loans can earn at either a variable or a fixed interest rate depending on market interest rates. We also have basis swaps that do not meet the ASC 815 effectiveness test that economically hedge off-balance sheet instruments. As a result, under GAAP these swaps are recorded at fair value with changes in fair value reflected currently in the income statement.

The table below quantifies the adjustments for derivative accounting under ASC 815 on net income for the quarters ended September 30, 2009 and 2008, and for the nine months ended September 30, 2009 and 2008, when compared with the accounting principles employed in all years prior to the ASC 815 implementation.


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

“Core Earnings” derivative adjustments:
Gains (losses) on derivative and hedging activities, net, included in other income⁽¹⁾	$	(112	)	$	(242	)	$	(569	)	$	(153	)
Less: Realized (gains) losses on derivative and hedging activities, net⁽¹⁾		118			41			120			39

Unrealized gains (losses) on derivative and hedging activities, net⁽¹⁾		6			(201	)		(449	)		(114	)
Other pre-ASC 815 accounting adjustments		(43	)		(5	)		(28	)		(5	)

Total net impact of ASC 815 derivative accounting⁽²⁾	$	(37	)	$	(206	)	$	(477	)	$	(119	)


⁽¹⁾		See “Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” below for a detailed breakdown of the components of both the realized and unrealized losses on derivative and hedging activities.

⁽²⁾		Negative amounts are subtracted from “Core Earnings”net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” net income to arrive at GAAP net income.

Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities

ASC 815 requires net settlement income/expense on derivatives and realized gains/losses related to derivative dispositions (collectively referred to as “realized gains (losses) on derivative and hedging activities”)

that do not qualify as hedges under ASC 815 to be recorded in a separate income statement line item below net interest income. The table below summarizes the realized losses on derivative and hedging activities, and the associated reclassification on a “Core Earnings” basis for the quarters ended September 30, 2009 and 2008 and for the nine months ended September 30, 2009 and 2008.


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

Reclassification of realized gains (losses) on derivative and hedging activities:
Net settlement expense on Floor Income Contracts reclassified to net interest income	$	(189	)	$	(75	)	$	(500	)	$	(390	)
Net settlement income (expense) on interest rate swaps reclassified to net interest income		72			22			396			339
Foreign exchange derivatives gains (losses) reclassified to other income					12			(14	)		8
Net realized gains (losses) on terminated derivative contracts reclassified to other income		(1	)		—			(2	)		4

Total reclassifications of realized (gains) losses on derivative and hedging activities		(118	)		(41	)		(120	)		(39	)
Add: Unrealized gains (losses) on derivative and hedging activities, net⁽¹⁾		6			(201	)		(449	)		(114	)

Gains (losses) on derivative and hedging activities, net	$	(112	)	$	(242	)	$	(569	)	$	(153	)


⁽¹⁾		“Unrealized gains (losses) on derivative and hedging activities, net” is comprised of the following unrealized mark-to-market gains (losses):


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

Floor Income Contracts	$	(80	)	$	(33	)	$	323		$	240
Basis swaps		97			(210	)		(435	)		(498	)
Foreign currency hedges		24			44			(256	)		147
Other		(35	)		(2	)		(81	)		(3	)

Total unrealized gains (losses) on derivative and hedging activities, net	$	6		$	(201	)	$	(449	)	$	(114	)

Unrealized gains and losses on Floor Income Contracts are primarily caused by changes in interest rates and the forward interest rate curve. In general, an increase in interest rates, or a steepening of the forward interest rate curve, results in an unrealized gain and vice versa. Unrealized gains and losses on basis swaps result from changes in the spread between indices and on changes in the forward interest rate curves that impact basis swaps hedging repricing risk between quarterly reset debt and daily reset assets. Unrealized gains (losses) on foreign currency hedges are primarily the result of ineffectiveness on cross-currency interest rate swaps hedging foreign currency denominated debt related to differences between forward and spot foreign currency exchange rates.

3) Floor Income: The timing and amount (if any) of Floor Income earned in our Lending operating segment is uncertain and in excess of expected spreads. Therefore, we only include such income in “Core Earnings” when it is Fixed Rate Floor Income that is economically hedged. We employ derivatives, primarily Floor Income Contracts, to economically hedge Floor Income. As discussed above in “Derivative Accounting,” these derivatives do not qualify as effective accounting hedges, and therefore, under GAAP, they are marked-to-market through the “gains (losses) on derivative and hedging activities, net” line in the consolidated statement of income with no offsetting gain or loss recorded for the economically hedged items. For “Core Earnings,” we reverse the fair value adjustments on the Floor Income Contracts economically hedging Floor

Income and include in income the amortization of net premiums received on contracts economically hedging Fixed Rate Floor Income.

The following table summarizes the Floor Income adjustments in our Lending operating segment for the three and nine months ended September 30, 2009 and 2008.


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

“Core Earnings” Floor Income adjustments:
Floor Income earned on Managed loans, net of payments on Floor Income Contracts	$	36		$	1		$	263		$	60
Amortization of net premiums on Floor Income Contracts and futures in net interest income		(44	)		(44	)		(102	)		(127	)

Total “Core Earnings” Floor Income adjustments⁽¹⁾⁽²⁾	$	(8	)	$	(43	)	$	161		$	(67	)


⁽¹⁾		Negative amounts are subtracted from “Core Earnings”net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” net income to arrive at GAAP net income.

⁽²⁾		The following table summarizes the amount of Economic Floor Income earned during the three and nine months ended September 30, 2009 and 2008 that is not included in “Core Earnings” net income:


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

Floor Income earned on Managed loans, net of payments on Floor Income Contracts, not included in “Core Earnings”	$	36		$	1		$	263		$	60
Amortization of net premiums on Variable Rate Floor Income Contracts not included in “Core Earnings”		—			—			40			20
Amortization of net premiums on Fixed Rate Floor Income Contracts included in “Core Earnings”		44			44			102			127

Total Economic Floor Income earned		80			45			405			207
Less: Amortization of net premiums on Fixed Rate Floor Income Contracts included in “Core Earnings”		(44	)		(44	)		(102	)		(127	)

Total Economic Floor Income earned, not included in “Core Earnings”	$	36		$	1		$	303		$	80

4) Acquired Intangibles: Our “Core Earnings” exclude goodwill and intangible impairment and the amortization of acquired intangibles. For the quarters ended September 30, 2009 and 2008, goodwill and intangible impairment and the amortization of acquired intangibles totaled $10 million and $50 million, respectively, and for the nine months ended September 30, 2009 and 2008, totaled $29 million and $81 million, respectively. In the third quarter of 2008, the Company decided to wind down its purchased paper businesses. This decision resulted in $36 million of impairment of intangible assets in the quarter ended September 30, 2008.

LENDING BUSINESS SEGMENT

In our Lending business segment, we originate and acquire federally guaranteed student loans and Private Education Loans that are not federally guaranteed. Typically a Private Education Loan is made in conjunction with a FFELP Stafford loan and as a result is marketed through the same marketing channels as FFELP loans. While FFELP loans and Private Education Loans have different overall risk profiles due to the federal guarantee of the FFELP loans, they currently share many of the same characteristics such as similar repayment terms, the same marketing channel and sales force, and are originated and serviced on the same servicing platform. Finally, where possible, the borrower receives a single bill for both FFELP and Private Education Loans.

On a Managed Basis, the Company had $108.9 billion, $113.9 billion, and $127.2 billion as of September 30, 2009, June 30, 2009, and December 31, 2008, respectively, of FFELP loans indexed to three-

month financial commercial paper rate (“CP”) funded with debt indexed to LIBOR. Due to the unintended consequences of government actions in other areas of the capital markets and limited issuances of qualifying financial commercial paper, the historical relationship between CP and LIBOR has been broken recently. For the fourth quarter of 2008, ED announced that for purposes of calculating the FFELP loan index from October 27, 2008 to the end of the fourth quarter, the Federal Reserve’s Commercial Paper Funding Facility rates (“CPFF”) would be used for those days in which no CP was available. This resulted in a CP/LIBOR spread of 21 basis points in the fourth quarter of 2008. The CP/LIBOR spread would have been 62 basis points in the fourth quarter of 2008 if ED had not addressed this issue by using the CPFF. ED has decided that no such correction was required during 2009. This resulted in a CP/LIBOR spread of 52 basis points, 45 basis points, and 13 basis points, in the first, second and third quarters of 2009, respectively, compared to the CP/LIBOR spread of 21 basis points in the fourth quarter of 2008 and the historic average spread through the third quarter of 2008 of approximately 10 basis points.

“Core Earnings” net interest income would have been $139 million, $105 million, and $5 million higher in the first, second and third quarters of 2009, respectively, at a historical CP/LIBOR spread of 10 basis points. Because of the low interest rate environment, the Company earned additional Economic Floor Income not included in “Core Earnings” of $126 million, $141 million, and $36 million in the first, second, and third quarters of 2009, respectively. Although we exclude these amounts from our “Core Earnings” presentation, the levels earned in 2009 quarters can be viewed as offsets to the CP/LIBOR basis exposure in low interest rate environments where we earn Floor Income.

Additionally, the index paid on borrowings under ED’s Participation Program is based on the prior quarter’s CP rates, whereas the index earned on the underlying loans is based on the current quarter’s CP rates. The declines in CP rates during the first, second, and third quarters of 2009 resulted in $40 million, $13 million, and $6 million of higher interest expense in the first, second, and third quarters of 2009, respectively.

The following table summarizes the “Core Earnings” results of operations for our Lending business segment.


	Three Months				Increase			Nine Months				Increase
	Ended				(Decrease)			Ended				(Decrease)
	September 30,				2009 vs.			September 30,				2009 vs.
	2009		2008		2008			2009		2008		2008

“Core Earnings” interest income:
FFELP Stafford and Other Student Loans	$	340	$	612		(44	)%	$	1,012	$	1,630		(38	)%
FFELP Consolidation Loans		430		995		(57	)		1,263		2,891		(56	)
Private Education Loans		561		678		(17	)		1,683		2,093		(20	)
Other loans		11		20		(45	)		46		65		(29	)
Cash and investments		3		62		(95	)		8		284		(97	)

Total “Core Earnings” interest income		1,345		2,367		(43	)		4,012		6,963		(42	)
Total “Core Earnings” interest expense		652		1,651		(61	)		2,424		5,080		(52	)

Net “Core Earnings” interest income		693		716		(3	)		1,588		1,883		(16	)
Less: provisions for loan losses		448		263		70			1,199		636		89

Net “Core Earnings” interest income after provisions for loan losses		245		453		(46	)		389		1,247		(69	)
Other income		129		55		135			591		161		267
Restructuring expenses		2		—		100			7		46		(85	)
Operating expenses		154		142		8			435		460		(5	)

Total expenses		156		142		10			442		506		(13	)

Income before income taxes and minority interest in net earnings of subsidiaries		218		366		(40	)		538		902		(40	)
Income tax expense		80		134		(40	)		199		332		(40	)

“Core Earnings” net income	$	138	$	232		(41	)%	$	339	$	570		(41	)%

Economic Floor Income (net of tax) not included in “Core Earnings”	$	23	$	1		2,200	%	$	191	$	50		282	%

Net Interest Income

Changes to net interest income are primarily due to fluctuations in the student loan and other asset spread discussed below, the growth of our student loan portfolio, and changes in the level of cash and investments we hold on our balance sheet for liquidity purposes.

Average Balance Sheets — On-Balance Sheet

The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities for the three and nine months ended September 30, 2009 and 2008. This table reflects the net interest margin for the entire Company for our on-balance sheet assets. It is included in the Lending business segment discussion because this segment includes substantially all interest-earning assets and interest-bearing liabilities.


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

Average Assets
FFELP Stafford and Other Student Loans	$	64,673		1.86	%	$	45,804		4.48	%	$	60,190		2.15	%	$	41,954		4.71	%
FFELP Consolidation Loans		69,643		2.74			72,926		4.53			70,464		2.72			73,410		4.43
Private Education Loans		23,214		6.77			19,876		8.92			22,968		6.85			18,551		9.35
Other loans		469		9.33			859		9.21			602		10.20			1,023		8.43
Cash and investments		13,694		.20			7,964		2.85			10,518		.25			9,762		3.44

Total interest-earning assets		171,693		2.77	%		147,429		5.04	%		164,742		2.96	%		144,700		5.10	%

Non-interest-earning assets		8,686					10,035					9,015					9,991

Total assets	$	180,379				$	157,464				$	173,757				$	154,691

Average Liabilities and Equity
Short-term borrowings	$	50,700		1.31	%	$	34,050		4.93	%	$	46,389		2.05	%	$	35,169		4.85	%
Long-term borrowings		121,060		1.66			114,046		3.39			118,479		2.04			110,368		3.75

Total interest-bearing liabilities		171,760		1.56	%		148,096		3.75	%		164,868		2.04	%		145,537		4.02	%

Non-interest-bearing liabilities		3,679					3,812					3,822					3,718
Equity		4,940					5,556					5,067					5,436

Total liabilities and equity	$	180,379				$	157,464				$	173,757				$	154,691

Net interest margin				1.21	%				1.28	%				.91	%				1.06	%

Rate/Volume Analysis — On-Balance Sheet

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


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

Three Months Ended September 30, 2009 vs. 2008
Interest income	$	(670	)	$	(958	)	$	288
Interest expense		(720	)		(991	)		271

Net interest income	$	50		$	33		$	17

Nine Months Ended September 30, 2009 vs. 2008
Interest income	$	(1,885	)	$	(2,726	)	$	841
Interest expense		(1,856	)		(2,486	)		630

Net interest income	$	(29	)	$	(240	)	$	211

Net Interest Margin — On-Balance Sheet

The following table reflects the net interest margin of our on-balance sheet interest-earning assets, before provisions for loan losses. (Certain percentages do not add or subtract down as they are based on average balances.)


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

Student loan spread⁽¹⁾⁽²⁾		1.58	%		1.71	%		1.29	%		1.41	%
Other asset spread⁽¹⁾⁽³⁾		(2.07	)		.06			(2.10	)		.12

Net interest margin, before the impact of 2008 Asset-Backed Financing Facilities fees⁽¹⁾		1.28			1.61			1.06			1.32
Less: 2008 Asset-Backed Financing Facilities fees		(.07	)		(.33	)		(.15	)		(.25	)

Net interest margin		1.21	%		1.28	%		.91	%		1.06	%


	⁽¹⁾	Before commitment and liquidity fees associated with the 2008 Asset-Backed Financing Facilities, which are referred to as the “2008 Asset-Backed Financing Facilities fees” (see “LIQUIDITY AND CAPITAL RESOURCES — Additional Funding for General Corporate Purposes — Asset-Backed Financing Facilities” for a further discussion).

	⁽²⁾	Composition of student loan spread:


Student loan yield, before Floor Income	3.12	%	5.57	%	3.29	%	5.74	%
Gross Floor Income	.43		.16		.49		.31
Consolidation Loan Rebate Fees	(.45	)	(.54	)	(.48	)	(.57	)
Repayment Borrower Benefits	(.10	)	(.12	)	(.09	)	(.12	)
Premium and discount amortization	(.03	)	.07		(.10	)	(.16	)

Student loan net yield	2.97		5.14		3.11		5.20
Student loan cost of funds	(1.39	)	(3.43	)	(1.82	)	(3.79	)

Student loan spread, before 2008 Asset-Backed Financing Facilities fees	1.58	%	1.71	%	1.29	%	1.41	%


	⁽³⁾	Comprised of investments, cash and other loans.

Student Loan Spread — On-Balance Sheet

The student loan spread is impacted by changes in its various components, as reflected in footnote (2) to the “Net Interest Margin — On-Balance Sheet” table above. Gross Floor Income is impacted by interest rates and the percentage of the FFELP portfolio eligible to earn Floor Income. Floor Income Contracts used to economically hedge Gross Floor Income do not qualify as ASC 815 hedges and as a result the net settlements on such contracts are not recorded in net interest margin but rather in “gains (losses) on derivative and hedging activities, net” line in the consolidated statements of income. The spread impact from Consolidation Loan Rebate Fees fluctuates as a function of the percentage of FFELP Consolidation Loans on our balance sheet. Repayment Borrower Benefits are generally impacted by the terms of the Repayment Borrower Benefits being offered, as well as the payment behavior of the underlying loans. Premium and discount amortization is generally impacted by the prices previously paid for loans and amounts capitalized related to such purchases or originations. Premium and discount amortization is also impacted by prepayment behavior of the underlying loans.

The student loan spread, before 2008 Asset-Backed Financing Facilities fees, for the third quarter of 2009 decreased 13 basis points from the year-ago quarter. This decrease was primarily due an increase in the credit spreads on the Company’s ABS and unsecured debt issued in the last two years due to the current credit environment, a 5 basis point widening of the CP/LIBOR spread, a higher cost of funds due to the impact of ASC 815 (discussed below) and an increase in premium amortization of 10 basis points between the current and year-ago quarters. The increase in premium expense was primarily due to both quarters having changes to prepayment assumptions used to amortize premiums on FFELP Stafford and Consolidation Loans. The

decreases made to these prepayment speed assumptions were larger in the third quarter of 2008 than the third quarter of 2009 (see “‘Core Earnings’ Net Interest Margin — ‘Core Earnings’ Basis Student Loan Spread” for further discussion). Partially offsetting these decreases to the student loan spread was an increase in Gross Floor Income.

The cost of funds for on-balance sheet student loans excludes the impact of basis swaps that are intended to economically hedge the re-pricing and basis mismatch between our funding and student loan asset indices, but do not receive hedge accounting treatment under ASC 815. We use basis swaps to manage the basis risk associated with our interest rate sensitive assets and liabilities. These swaps generally do not qualify as accounting hedges, and as a result, are required to be accounted for in the “gains (losses) on derivatives and hedging activities, net” line on the income statement, as opposed to being accounted for in interest expense. As a result, these basis swaps are not considered in the calculation of the cost of funds in the table above and therefore, in times of volatile movements of interest rates like those experienced in 2008 and 2009, the student loan spread can be volatile. See the “‘Core Earnings’ Net Interest Margin” table below, which reflects these basis swaps in interest expense and demonstrates the economic hedge effectiveness of these basis swaps.

Other Asset Spread — On-Balance Sheet

The other asset spread is generated from cash and investments (both restricted and unrestricted) primarily in our liquidity portfolio and other loans. The Company invests its liquidity portfolio primarily in short-term securities with maturities of one week or less in order to manage counterparty credit risk and maintain available cash balances. The other asset spread for the third quarter of 2009 decreased 213 basis points from the year-ago quarter. Changes in the other asset spread primarily relate to differences in the index basis and reset frequency between the asset indices and funding indices. A portion of this risk is hedged with derivatives that do not receive hedge accounting treatment under ASC 815 and will impact the other asset spread in a similar fashion as the impact to the on-balance sheet student loan spread as discussed above. In volatile interest rate environments, these spreads may move significantly from period to period and differ from the “Core Earnings” basis other asset spread discussed below.

Net Interest Margin — On-Balance Sheet

The net interest margin, before 2008 Asset-Backed Financing Facilities fees, for the third quarter of 2009 decreased 33 basis points from the year-ago quarter. These changes primarily relate to the previously discussed changes in the on-balance sheet student loan and other asset spreads. The student loan portfolio as a percentage of the overall interest-earning asset portfolio did not change substantially between the periods.

See “LIQUIDITY AND CAPITAL RESOURCES — Additional Funding Sources for General Corporate Purposes — Asset-Backed Financing Facilities” for a discussion of the 2008 Asset-Backed Financing Facilities fees and related extensions.

“Core Earnings” Net Interest Margin

The following table analyzes the earnings from our portfolio of Managed interest-earning assets on a “Core Earnings” basis (see “BUSINESS SEGMENTS — Pre-tax Differences between ‘Core Earnings’ and GAAP by Business Segment”). The “‘Core Earnings’ Net Interest Margin” presentation and certain components used in the calculation differ from the “Net Interest Margin — On-Balance Sheet” presentation. The “Core Earnings” presentation, when compared to our on-balance sheet presentation, is different in that it:


	•	Includes the net interest margin related to our off-balance sheet student loan securitization trusts. This includes any related fees or costs such as the Consolidation Loan Rebate Fees, premium/discount amortization and Repayment Borrower Benefits yield adjustments;

	•	Includes the reclassification of certain derivative net settlement amounts. The net settlements on certain derivatives that do not qualify as ASC 815 hedges are recorded as part of the “gain (loss) on derivative and hedging activities, net” line in the consolidated statements of income and are therefore not recognized in the on-balance sheet student loan spread. Under this presentation, these gains and losses


		are reclassified to the income statement line item of the economically hedged item. For our “Core Earnings” net interest margin, this would primarily include: (a) reclassifying the net settlement amounts related to our written Floor Income Contracts to student loan interest income and (b) reclassifying the net settlement amounts related to certain of our basis swaps to debt interest expense;


	•	Excludes unhedged Floor Income and hedged Variable Rate Floor Income earned on the Managed student loan portfolio; and

	•	Includes the amortization of upfront payments on Fixed Rate Floor Income Contracts in student loan income that we believe are economically hedging the Floor Income.

The following table reflects the “Core Earnings” net interest margin, before provisions for loan losses. (Certain percentages do not add or subtract down as they are based on average balances.)


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

“Core Earnings” basis student loan spread⁽¹⁾:
FFELP loan spread			.90	%		1.13	%		.56	%		.87	%
Private Education Loan spread⁽²⁾			4.45			5.20			4.54			5.22

Total “Core Earnings” basis student loan spread⁽³⁾			1.56			1.90			1.32			1.68
“Core Earnings” basis other asset spread⁽¹⁾⁽⁴⁾			(.93	)		(.12	)		(.98	)		(.19	)

“Core Earnings” net interest margin, before 2008 Asset-Backed Financing Facilities fees⁽¹⁾			1.38			1.78			1.18			1.54
Less: 2008 Asset-Backed Financing Facilities fees			(.06	)		(.26	)		(.13	)		(.20	)

“Core Earnings” net interest margin			1.32	%		1.52	%		1.05	%		1.35	%




⁽¹⁾	Before commitment and liquidity fees associated with the 2008 Asset-Backed Financing Facilities, which are referred to as the “2008 Asset-Backed Financing Facilities fees” (see “LIQUIDITY AND CAPITAL RESOURCES — Additional Funding for General Corporate Purposes — Asset-Backed Financing Facilities” for a further discussion).
⁽²⁾	“Core Earnings” basis Private Education Loan Spread, before 2008 Asset-Backed Financing Facilities fees and after provision for loan losses		(.10	)%		2.76	%		.55	%		3.02	%
⁽³⁾	Composition of “Core Earnings” basis student loan spread:
	“Core Earnings” basis student loan yield		3.29	%		5.72	%		3.45	%		5.94	%
	Consolidation Loan Rebate Fees		(.45	)		(.52	)		(.47	)		(.54	)
	Repayment Borrower Benefits		(.10	)		(.11	)		(.09	)		(.11	)
	Premium and discount amortization		.01			.09			(.08	)		(.15	)

	“Core Earnings” basis student loan net yield		2.75			5.18			2.81			5.14
	“Core Earnings” basis student loan cost of funds		(1.19	)		(3.28	)		(1.49	)		(3.46	)

	“Core Earnings” basis student loan spread, before 2008 Asset-Backed Financing Facilities fees		1.56	%		1.90	%		1.32	%		1.68	%

⁽⁴⁾	Comprised of investments, cash and other loans
⁽⁵⁾	The average balances of our Managed interest-earning assets for the respective periods are:
	FFELP loans	$	155,434		$	142,372		$	152,468		$	140,060
	Private Education Loans		36,025			33,098			35,951			31,919

	Total student loans		191,459			175,470			188,419			171,979
	Other interest-earning assets		15,378			10,829			12,466			13,075

	Total Managed interest-earning assets	$	206,837		$	186,299		$	200,885		$	185,054

“Core Earnings” Basis Student Loan Spread

The “Core Earnings” basis student loan spread, before the 2008 Asset-Backed Financing Facilities fees, for the third quarter of 2009 decreased 34 basis points from the year-ago quarter. The “Core Earnings” basis student loan spread was negatively impacted by an increase in the credit spreads on the Company’s ABS and unsecured debt issued in the last two years due to the current credit environment, a 5 basis point widening of the CP/LIBOR spread, and an increase in premium amortization of 8 basis points between the current and year-ago quarters. The increase in premium expense was primarily due to both quarters having changes to prepayment assumptions used to amortize premiums on FFELP Stafford and Consolidation Loans. The decreases made to these prepayment speed assumptions were larger in the third quarter of 2008 than the third quarter of 2009. The Company decreased prepayment speed assumptions in both quarters as a result of a significant decrease in prepayment activity experienced since 2008. This decrease in prepayment activity, which the Company expects will continue into the foreseeable future, was primarily due to a reduction in third-party consolidation activity as a result of the CCRAA and the current U.S. economic and credit environment. Decreasing the prepayment speeds has the effect of lengthening the assumed lives of these loans and resulted in a one-time, cumulative catch-up adjustment to reverse prior premium expense. Partially offsetting these decreases to the “Core Earnings” basis student loan spread was lower cost of funds related to the ED Conduit Program which began in May 2009.

The “Core Earnings” basis FFELP loan spread for the third quarter of 2009 decreased from the year-ago quarter due to the same reasons discussed above related to the entire “Core Earnings” basis student loan spread, as well as the mix of the FFELP portfolio shifting towards loans originated subsequent to October 1, 2007, which have lower yields as a result of the CCRAA. The “Core Earnings” basis Private Education Loan spread before provision for loan losses for the third quarter of 2009 was negatively impacted by the increase in the cost of funds discussed previously. The changes in the “Core Earnings” basis Private Education Loan spread after provision for loan losses for all periods presented was primarily due to the timing and amount of provision associated with our allowance for Private Education Loan Losses as discussed below (see “Private Education Loan Losses — Allowance for Private Education Loan Losses”).

“Core Earnings” Basis Other Asset Spread

The “Core Earnings” basis other asset spread is generated from cash and investments (both restricted and unrestricted) primarily in our liquidity portfolio, and other loans. The Company invests its liquidity portfolio primarily in short-term securities with maturities of one week or less in order to manage counterparty credit risk and maintain available cash balances. The “Core Earnings” basis other asset spread for the third quarter of 2009 decreased 81 basis points from the year-ago quarter. Changes in this spread primarily relate to differences between the index basis and reset frequency of the asset indices and funding indices. In volatile interest rate environments, the asset and debt reset frequencies will lag each other. Changes in this spread are also a result of the increase in our cost of funds as previously discussed.

“Core Earnings” Net Interest Margin

The “Core Earnings” net interest margin, before the 2008 Asset-Backed Financing Facilities fees, for the third quarter of 2009 decreased 40 basis points from the year-ago quarter. These changes primarily relate to the previously discussed changes in the “Core Earnings” basis student loan and other asset spreads. The Managed student loan portfolio as a percentage of the overall interest-earning asset portfolio did not change substantially between the periods.

See “LIQUIDITY AND CAPITAL RESOURCES — Additional Funding Sources for General Corporate Purposes — Asset-Backed Financing Facilities” for a discussion of the 2008 Asset-Backed Financing Facilities fees and related extensions.

Summary of our Managed Student Loan Portfolio

The following tables summarize the components of our Managed student loan portfolio and show the changing composition of our portfolio.

Ending Managed Student Loan Balances, net


	September 30, 2009
	FFELP			FFELP						Private
	Stafford and			Consolidation			Total			Education
	Other⁽¹⁾			Loans			FFELP			Loans			Total

On-balance sheet:
In-school	$	23,741		$	—		$	23,741		$	6,568		$	30,309
Grace and repayment		42,272			68,075			110,347			17,436			127,783

Total on-balance sheet, gross		66,013			68,075			134,088			24,004			158,092
On-balance sheet unamortized premium (discount)		1,193			1,225			2,418			(543	)		1,875
On-balance sheet receivable for partially charged-off loans		—			—			—			435			435
On-balance sheet allowance for losses		(101	)		(54	)		(155	)		(1,402	)		(1,557	)

Total on-balance sheet, net		67,105			69,246			136,351			22,494			158,845

Off-balance sheet:
In-school		272			—			272			871			1,143
Grace and repayment		5,538			14,551			20,089			12,208			32,297

Total off-balance sheet, gross		5,810			14,551			20,361			13,079			33,440
Off-balance sheet unamortized premium (discount)		141			447			588			(346	)		242
Off-balance sheet receivable for partially charged-off loans		—			—			—			200			200
Off-balance sheet allowance for losses		(16	)		(9	)		(25	)		(521	)		(546	)

Total off-balance sheet, net		5,935			14,989			20,924			12,412			33,336

Total Managed	$	73,040		$	84,235		$	157,275		$	34,906		$	192,181

% of on-balance sheet FFELP		49	%		51	%		100	%
% of Managed FFELP		46	%		54	%		100	%
% of total		38	%		44	%		82	%		18	%		100	%


⁽¹⁾		FFELP category is primarily Stafford loans, but also includes federally insured PLUS and HEAL loans.


	December 31, 2008
	FFELP			FFELP						Private
	Stafford and			Consolidation			Total			Education
	Other⁽¹⁾			Loans			FFELP			Loans			Total

On-balance sheet:
In-school	$	18,961		$	—		$	18,961		$	7,972		$	26,933
Grace and repayment		32,455			70,511			102,966			14,231			117,197

Total on-balance sheet, gross		51,416			70,511			121,927			22,203			144,130
On-balance sheet unamortized premium (discount)		1,151			1,280			2,431			(535	)		1,896
On-balance sheet receivable for partially charged-off loans		—			—			—			222			222
On-balance sheet allowance for losses		(91	)		(47	)		(138	)		(1,308	)		(1,446	)

Total on-balance sheet, net		52,476			71,744			124,220			20,582			144,802

Off-balance sheet:
In-school		473			—			473			1,629			2,102
Grace and repayment		6,583			15,078			21,661			12,062			33,723

Total off-balance sheet, gross		7,056			15,078			22,134			13,691			35,825
Off-balance sheet unamortized premium (discount)		105			462			567			(361	)		206
Off-balance sheet receivable for partially charged-off loans		—			—			—			92			92
Off-balance sheet allowance for losses		(18	)		(9	)		(27	)		(505	)		(532	)

Total off-balance sheet, net		7,143			15,531			22,674			12,917			35,591

Total Managed	$	59,619		$	87,275		$	146,894		$	33,499		$	180,393

% of on-balance sheet FFELP		42	%		58	%		100	%
% of Managed FFELP		41	%		59	%		100	%
% of total		33	%		48	%		81	%		19	%		100	%


⁽¹⁾		FFELP category is primarily Stafford loans, but also includes federally insured PLUS and HEAL loans.

Student Loan Average Balances (net of unamortized premium/discount)

The following tables summarize the components of our Managed student loan portfolio and show the changing composition of our portfolio.


	Three Months Ended September 30, 2009
	FFELP			FFELP						Private
	Stafford and			Consolidation			Total			Education
	Other⁽¹⁾			Loans			FFELP			Loans			Total

On-balance sheet	$	64,673		$	69,643		$	134,316		$	23,214		$	157,530
Off-balance sheet		6,052			15,066			21,118			12,811			33,929

Total Managed	$	70,725		$	84,709		$	155,434		$	36,025		$	191,459

% of on-balance sheet FFELP		48	%		52	%		100	%
% of Managed FFELP		46	%		54	%		100	%
% of total		37	%		44	%		81	%		19	%		100	%


⁽¹⁾		FFELP category is primarily Stafford loans, but also includes federally insured PLUS and HEAL loans.


	Three Months Ended September 30, 2008
	FFELP			FFELP						Private
	Stafford and			Consolidation			Total			Education
	Other⁽¹⁾			Loans			FFELP			Loans			Total

On-balance sheet	$	45,804		$	72,926		$	118,730		$	19,876		$	138,606
Off-balance sheet		7,848			15,794			23,642			13,222			36,864

Total Managed	$	53,652		$	88,720		$	142,372		$	33,098		$	175,470

% of on-balance sheet FFELP		39	%		61	%		100	%
% of Managed FFELP		38	%		62	%		100	%
% of total		31	%		50	%		81	%		19	%		100	%


	Nine Months Ended September 30, 2009
	FFELP			FFELP						Private
	Stafford and			Consolidation			Total			Education
	Other⁽¹⁾			Loans			FFELP			Loans			Total

On-balance sheet	$	60,190		$	70,464		$	130,654		$	22,968		$	153,622
Off-balance sheet		6,567			15,247			21,814			12,983			34,797

Total Managed	$	66,757		$	85,711		$	152,468		$	35,951		$	188,419

% of on-balance sheet FFELP		46	%		54	%		100	%
% of Managed FFELP		44	%		56	%		100	%
% of total		35	%		46	%		81	%		19	%		100	%


	Nine Months Ended September 30, 2008
	FFELP			FFELP						Private
	Stafford and			Consolidation			Total			Education
	Other⁽¹⁾			Loans			FFELP			Loans			Total

On-balance sheet	$	41,954		$	73,410		$	115,364		$	18,551		$	133,915
Off-balance sheet		8,612			16,084			24,696			13,368			38,064

Total Managed	$	50,566		$	89,494		$	140,060		$	31,919		$	171,979

% of on-balance sheet FFELP		36	%		64	%		100	%
% of Managed FFELP		36	%		64	%		100	%
% of total		29	%		52	%		81	%		19	%		100	%


⁽¹⁾		FFELP category is primarily Stafford loans, but also includes federally insured PLUS and HEAL loans.

Floor Income — Managed Basis

The following table analyzes the ability of the FFELP loans in our Managed portfolio to earn Floor Income after September 30, 2009 and 2008, based on interest rates as of those dates.


	September 30, 2009									September 30, 2008
	Fixed			Variable						Fixed			Variable
	Borrower			Borrower						Borrower			Borrower
(Dollars in billions)	Rate			Rate			Total			Rate			Rate			Total

Student loans eligible to earn Floor Income:
On-balance sheet student loans	$	118.1		$	15.2		$	133.3		$	102.1		$	16.1		$	118.2
Off-balance sheet student loans		14.5			5.8			20.3			15.2			7.6			22.8

Managed student loans eligible to earn Floor Income		132.6			21.0			153.6			117.3			23.7			141.0
Less: post-March 31, 2006 disbursed loans required to rebate Floor Income		(79.1	)		(1.3	)		(80.4	)		(60.9	)		(1.4	)		(62.3	)
Less: economically hedged Floor Income Contracts		(39.9	)		—			(39.9	)		(25.7	)		—			(25.7	)

Net Managed student loans eligible to earn Floor Income	$	13.6		$	19.7		$	33.3		$	30.7		$	22.3		$	53.0

Net Managed student loans earning Floor Income	$	13.6		$	3.3		$	16.9		$	0.2		$	3.4		$	3.6

We have sold Floor Income Contracts to hedge the potential Floor Income from specifically identified pools of FFELP Consolidation Loans that are eligible to earn Floor Income.

The following table presents a projection of the average Managed balance of FFELP Consolidation Loans for which Fixed Rate Floor Income has already been economically hedged through Floor Income Contracts for the period from April 1, 2009 to September 30, 2013. These loans are both on-balance sheet and off-balance sheet, and the related hedges do not qualify under ASC 815 accounting as effective hedges.


	October 1, 2009 to
(Dollars in billions)	December 31, 2009		2010		2011		2012		2013

Average balance of FFELP Consolidation Loans whose Floor Income is economically hedged (Managed Basis)	$	40	$	37	$	25	$	16	$	5

Private Education Loan Losses

On-Balance Sheet versus Managed Basis Presentation

All Private Education Loans are initially acquired on-balance sheet. The securitization of Private Education Loans prior to 2009 has been accounted for off-balance sheet. For our Managed Basis presentation in the table below, when loans are securitized, we reduce the on-balance sheet allowance for loan losses for amounts previously provided and then increase the allowance for loan losses for these loans off-balance sheet, with the total of both on-balance sheet and off-balance sheet being the Managed Basis allowance for loan losses.

When Private Education Loans in our securitized trusts settling before September 30, 2005, became 180 days delinquent, we previously exercised our contingent call option to repurchase these loans at par value out of the trust and recorded a loss for the difference in the par value paid and the fair market value of the loan at the time of purchase. Revenue is recognized over the anticipated remaining life of the loan based upon the amount and timing of anticipated cash flows. Beginning in October 2008, the Company decided to no longer exercise its contingent call option. On a Managed Basis, the losses recorded under GAAP for loans repurchased at day 180 were reversed and the full amount is charged-off at day 212 of delinquency. We do not hold the contingent call option for any trusts settled after September 30, 2005.

When measured as a percentage of ending loans in repayment, the off-balance sheet allowance for loan losses percentage is lower than the on-balance sheet percentage because of the different mix and aging of loans on-balance sheet and off-balance sheet.

Private Education Loan Delinquencies and Forbearance

The tables below present our Private Education Loan delinquency trends as of September 30, 2009 and 2008. Delinquencies have the potential to adversely impact earnings as they are an initial indication of the borrower’s potential to possibly default and as a result command a higher loan loss reserve than loans in current status. Delinquent loans also require increased servicing and collection efforts, resulting in higher operating costs.


	On-Balance Sheet Private Education
	Loan Delinquencies
	September 30,						September 30,
	2009						2008
	Balance			%			Balance			%

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

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

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

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

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

Percentage of Private Education Loans in repayment					51.1	%					42.2	%

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

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


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

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

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


	Off-Balance Sheet Private Education
	Loan Delinquencies
	September 30,						September 30,
	2009						2008
	Balance			%			Balance			%

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

Total Private Education Loans in repayment		9,458			100	%		8,230			100	%

Total Private Education Loans, gross		13,080						13,648
Private Education Loan unamortized discount		(347	)					(349	)

Total Private Education Loans		12,733						13,299
Private Education Loan receivable for partially charged-off loans		200						73
Private Education Loan allowance for losses		(522	)					(409	)

Private Education Loans, net	$	12,411					$	12,963

Percentage of Private Education Loans in repayment					72.3	%					60.3	%

Delinquencies as a percentage of Private Education Loans in repayment					10.0	%					6.1	%

Loans in forbearance as a percentage of loans in repayment and forbearance					4.8	%					12.4	%


	Managed Basis Private Education
	Loan Delinquencies
	September 30,						September 30,
	2009						2008
	Balance			%			Balance			%

Loans in-school/grace/deferment⁽¹⁾	$	14,047					$	15,522
Loans in forbearance⁽²⁾		1,325						2,244
Loans in repayment and percentage of each status:
Loans current		18,974			87.4	%		15,635			90.6	%
Loans delinquent 31-60 days⁽³⁾		863			4.0			610			3.6
Loans delinquent 61-90 days⁽³⁾		514			2.4			352			2.0
Loans delinquent greater than 90 days⁽³⁾		1,361			6.2			649			3.8

Total Private Education Loans in repayment		21,712			100	%		17,246			100	%

Total Private Education Loans, gross		37,084						35,012
Private Education Loan unamortized discount		(890	)					(863	)

Total Private Education Loans		36,194						34,149
Private Education Loan receivable for partially charged-off loans		635						257
Private Education Loan allowance for losses		(1,923	)					(1,606	)

Private Education Loans, net	$	34,906					$	32,800

Percentage of Private Education Loans in repayment					58.6	%					49.3	%

Delinquencies as a percentage of Private Education Loans in repayment					12.6	%					9.4	%

Loans in forbearance as a percentage of loans in repayment and forbearance					5.8	%					11.5	%


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

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

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

Allowance for Private Education Loan Losses

The following table summarizes changes in the allowance for Private Education Loan losses for the three and nine months ended September 30, 2009 and 2008.


	Activity in Allowance for Private Education Loan Losses
	On-Balance Sheet						Off-Balance Sheet						Managed Basis
	Three Months Ended						Three Months Ended						Three Months Ended
	September 30,			September 30,			September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008			2009			2008

Allowance at beginning of period	$	1,396		$	1,129		$	544		$	377		$	1,940		$	1,506
Provision for Private Education
Loan losses		287			136			126			66			413			202
Charge-offs		(293	)		(76	)		(150	)		(36	)		(443	)		(112	)
Reclassification of interest reserve⁽¹⁾		11			8			2			2			13			10

Allowance at end of period	$	1,401		$	1,197		$	522		$	409		$	1,923		$	1,606

Charge-offs as a percentage of average loans in repayment (annualized)		9.6	%		3.5	%		6.2	%		1.8	%		8.1	%		2.7	%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)		8.9	%		3.1	%		5.9	%		1.5	%		7.6	%		2.3	%
Allowance as a percentage of the ending total loan balance		5.7	%		5.6	%		3.9	%		3.0	%		5.1	%		4.6	%
Allowance as a percentage of ending loans in repayment		11.4	%		13.3	%		5.5	%		5.0	%		8.9	%		9.3	%
Average coverage of charge-offs (annualized)		1.2			3.9			.9			2.9			1.1			3.6
Ending total loans⁽²⁾	$	24,439		$	21,548		$	13,280		$	13,721		$	37,719		$	35,269
Average loans in repayment	$	12,083		$	8,703		$	9,585		$	8,103		$	21,668		$	16,806
Ending loans in repayment	$	12,254		$	9,016		$	9,458		$	8,230		$	21,712		$	17,246


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

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


	Activity in Allowance for Private Education Loan Losses
	On-Balance Sheet						Off-Balance Sheet						Managed Basis
	Nine Months Ended						Nine Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008			2009			2008

Allowance at beginning of period	$	1,308		$	1,004		$	505		$	362		$	1,813		$	1,366
Provision for Private Education
Loan losses		733			374			339			152			1,072			526
Charge-offs		(671	)		(206	)		(329	)		(109	)		(1,000	)		(315	)
Reclassification of interest reserve⁽¹⁾		31			25			7			4			38			29

Allowance at end of period	$	1,401		$	1,197		$	522		$	409		$	1,923		$	1,606

Charge-offs as a percentage of average loans in repayment (annualized)		7.7	%		3.5	%		4.6	%		1.9	%		6.3	%		2.7	%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)		7.1	%		3.0	%		4.3	%		1.6	%		5.9	%		2.3	%
Allowance as a percentage of the ending total loan balance		5.7	%		5.6	%		3.9	%		3.0	%		5.1	%		4.6	%
Allowance as a percentage of ending loans in repayment		11.4	%		13.3	%		5.5	%		5.0	%		8.9	%		9.3	%
Average coverage of charge-offs (annualized)		1.6			4.4			1.2			2.8			1.4			3.8
Ending total loans⁽²⁾	$	24,439		$	21,548		$	13,280		$	13,721		$	37,719		$	35,269
Average loans in repayment	$	11,634		$	7,933		$	9,543		$	7,794		$	21,177		$	15,727
Ending loans in repayment	$	12,254		$	9,016		$	9,458		$	8,230		$	21,712		$	17,246


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

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

The following table provides the detail for our traditional and non-traditional Managed Private Education Loans at September 30, 2009 and 2008.


	September 30, 2009									September 30, 2008
				Non-									Non-
	Traditional			Traditional			Total			Traditional			Traditional			Total

Ending total loans⁽¹⁾	$	32,891		$	4,828		$	37,719		$	30,177		$	5,092		$	35,269
Ending loans in repayment		18,922			2,790			21,712			14,605			2,641			17,246
Private Education Loan allowance for losses		1,005			918			1,923			681			925			1,606
Charge-offs as a percentage of average loans in repayment (annualized)		5.1	%		28.5	%		8.1	%		1.4	%		10.0	%		2.7	%
Allowance as a percentage of ending total loan balance		3.1	%		19.0	%		5.1	%		2.3	%		18.2	%		4.6	%
Allowance as a percentage of ending loans in repayment		5.3	%		32.9	%		8.9	%		4.7	%		35.0	%		9.3	%
Average coverage of charge-offs (annualized)		1.1			1.1			1.1			3.5			3.7			3.6
Delinquencies as a percentage of Private Education Loans in repayment		9.7	%		32.2	%		12.6	%		6.3	%		26.3	%		9.4	%
Delinquencies greater than 90 days as a percentage of Private Education Loans in repayment		4.6	%		17.8	%		6.3	%		2.3	%		11.9	%		3.8	%
Loans in forbearance as a percentage of loans in repayment and forbearance		5.4	%		8.1	%		5.8	%		11.0	%		14.4	%		11.5	%
Percentage of Private Education Loans with a cosigner		61	%		27	%		57	%		59	%		26	%		54	%
Average FICO at origination		725			623			713			723			622			710


⁽¹⁾		Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans.

Managed provision expense was $202 million in the third quarter of 2008, $362 million in the second quarter of 2009 and $413 million in the third quarter of 2009. The increase in provision expense from the year-ago period relates primarily to an increase in charge-off expectations as a result of the continued weakening of the U.S. economy. Provision expense remained elevated in the third quarter of 2009 compared to the prior quarter due to the continued uncertainty of the U.S. economy. The Private Education Loan portfolio had experienced a significant increase in delinquencies through the first quarter of 2009; however, delinquencies declined in the second and third quarters of 2009. The Company believes charge-offs peaked in the third quarter of 2009 and will decline in future quarters. The increase in charge-off levels through the third quarter of 2009 was generally anticipated and was previously reflected in our Allowance for Loan Losses. As of September 30, 2009, the Managed Private Education Loan allowance coverage of annualized current-quarter charge-offs ratio was 1.1 compared to 3.6 as of September 20, 2008. The decrease in the allowance coverage ratio to 1.1 was expected as the Company believes charge-offs peaked in the third quarter of 2009 and will decline in future quarters. The Allowance for Loan Losses as a percentage of ending Private Education Loans in repayment has remained relatively consistent at approximately 9 percent between September 30, 2008 and September 30, 2009, despite the very high levels of charge-offs over the last year. Managed delinquencies as a percentage of Private Education Loans in repayment decreased from 12.7 percent as of June 30, 2009 to 12.6 percent as of September 30, 2009. Managed Private Education Loans in forbearance as a percentage of loans in repayment and forbearance decreased from 6.5 percent as of June 30, 2009 to 5.8 percent at September 30, 2009. On a year-over-year basis, overall delinquencies as a percentage of loans in repayment increased from 9.4 percent to 12.6 percent, while forbearances decreased from 11.5 percent to 5.8 percent. As part of concluding that the Allowance for Loan Losses for Private Education Loan losses is appropriate as of September 30, 2009, the Company analyzed changes in the key ratios disclosed in the table above.

Borrowers use the proceeds of Private Education Loans to obtain higher education, which increases the likelihood of obtaining employment at higher income levels than would be available without the additional education. As a result, borrowers’ repayment capability is expected to improve between the time the loan is

made and the time they enter the post-education work force. Consistent with FFELP loans, we formerly allowed the loan repayment period on higher education Private Education Loans to begin six months after the borrower graduates (or “grace period”). This provides the borrower time after graduation to obtain a job to service the debt. For the Company’s Smart Option Student Loan product, borrowers are required to begin making interest only payments within 60 days of disbursements. For borrowers that need more time or experience hardships, we offer periods of forbearance similar to that provided to borrowers in the FFELP.

Forbearance involves granting the borrower a temporary cessation of payments (or temporary acceptance of smaller than scheduled payments) for a specified period of time. Using forbearance in this manner effectively extends the original term of the loan. Forbearance does not grant any reduction in the total repayment obligation (principal or interest). While a loan is in forbearance status, interest continues to accrue and is capitalized to principal when the loan re-enters repayment status. Our forbearance policies include limits on the number of forbearance months granted consecutively and the total number of forbearance months granted over the life of the loan. In some instances, we require good-faith payments before granting the forbearance. Exceptions to forbearance policies are permitted when such exceptions are judged to increase the likelihood of ultimate collection of the loan. Forbearance as a collection tool is used most effectively when applied based on a borrower’s unique situation, including assumptions based on historical information and judgments. We combine borrower information with a risk-based segmentation model to assist in our decision making as to who will be granted forbearance based on our expectation as to a borrower’s ability and willingness to repay their obligation. This strategy is aimed at mitigating the overall risk of the portfolio, as well as encouraging cash resolution of delinquent loans.

Forbearance may be granted to borrowers who are exiting their grace period to provide additional time to obtain employment and income to support their obligations, or to current borrowers who are faced with a hardship and request forbearance time to provide temporary payment relief. In these circumstances, a borrower’s loan is placed into a forbearance status in limited monthly increments and is reflected in the forbearance status at month-end during this time. At the end of their granted forbearance period, the borrower will enter repayment status as current and is expected to begin making their scheduled monthly payments on a go-forward basis.

Forbearance may also be granted to borrowers who are delinquent in their payments. In these circumstances, the forbearance cures the delinquency and the borrower is returned to a current repayment status. In more limited instances, delinquent borrowers will also be granted additional forbearance time. As we have obtained further experience about the effectiveness of forbearance, we have reduced the amount of time a loan will spend in forbearance, thereby increasing our ongoing contact with the borrower to encourage consistent repayment behavior once the loan is returned to a current repayment status. As a result, the balance of loans in a forbearance status as of month end has decreased over the course of 2008 and 2009. In addition, the monthly average amount of loans granted forbearance as a percentage of loans in repayment and forbearance declined to 5.5 percent for the third quarter of 2009 compared to the year-ago quarter of 6.1 percent. As of September 30, 2009, 3 percent of loans in current status were delinquent as of the end of the prior month, but were granted a forbearance that made them current during September. The majority of these borrowers would have previously received a forbearance which resulted in their loan being reflected in the forbearance status at month end, and eventually entering repayment status as current at the end of the forbearance period. These borrowers are now being placed in repayment status earlier than they previously would have been.

The table below reflects the historical effectiveness of using forbearance. Our experience has shown that three years after being granted forbearance for the first time, over 70 percent of the loans are current, paid in full, or receiving an in-school grace or deferment, and 14 percent have defaulted. The default experience associated with loans which utilize forbearance is considered in our allowance for loan losses.


Tracking by First Time in Forbearance Compared to All Loans Entering Repayment
	Status distribution						Status distribution
	36 months after			Status distribution			36 months after
	being granted			36 months after			entering repayment for
	forbearance for the			entering repayment			loans never entering
	first time			(all loans)			forbearance

In-school/grace/deferment		8.2	%		8.1	%		3.0	%
Current		52.9			58.5			64.7
Delinquent 31-60 days		3.2			2.0			.5
Delinquent 61-90 days		1.9			1.1			.2
Delinquent greater than 90 days		3.9			2.3			.3
Forbearance		6.3			4.5			—
Defaulted		13.8			7.2			5.1
Paid		9.8			16.3			26.2

Total		100	%		100	%		100	%

The tables below show the composition and status of the Managed Private Education Loan portfolio aged by number of months in active repayment status (months for which a scheduled monthly payment was due). As indicated in the tables, the percentage of loans in forbearance status decreases the longer the loans have been in active repayment status. At September 30, 2009, loans in forbearance status as a percentage of loans in repayment and forbearance are 7.6 percent for loans that have been in active repayment status for less than 25 months. The percentage drops to 2.6 percent for loans that have been in active repayment status for more than 48 months. Approximately 86 percent of our Managed Private Education Loans in forbearance status have been in active repayment status less than 25 months.


	Monthly Scheduled Payments Due									Not Yet in
September 30, 2009	0 to 24			25 to 48			More than 48			Repayment			Total

Loans in-school/grace/deferment	$	—		$	—		$	—		$	14,047		$	14,047
Loans in forbearance		1,135			133			57			—			1,325
Loans in repayment — current		11,594			4,685			2,695			—			18,974
Loans in repayment — delinquent 31-60 days		696			114			53			—			863
Loans in repayment — delinquent 61-90 days		422			63			29			—			514
Loans in repayment — delinquent greater than 90 days		1,124			162			75			—			1,361

Total	$	14,971		$	5,157		$	2,909		$	14,047			37,084

Unamortized discount														(890	)
Receivable for partially charged-off loans														635
Allowance for loan losses														(1,923	)

Total Managed Private Education Loans, net													$	34,906

Loans in forbearance as a percentage of loans in repayment and forbearance		7.6	%		2.6	%		2.0	%		—	%		5.8	%


	Monthly Scheduled Payments Due									Not Yet in
September 30, 2008	0 to 24			25 to 48			More than 48			Repayment			Total

Loans in-school/grace/deferment	$	—		$	—		$	—		$	15,522		$	15,522
Loans in forbearance		2,078			117			49			—			2,244
Loans in repayment — current		10,421			3,308			1,906			—			15,635
Loans in repayment — delinquent 31-60 days		499			71			40			—			610
Loans in repayment — delinquent 61-90 days		302			33			17			—			352
Loans in repayment — delinquent greater than 90 days		544			68			37			—			649

Total	$	13,844		$	3,597		$	2,049		$	15,522			35,012

Unamortized discount														(863	)
Receivable for partially charged-off loans														257
Allowance for loan losses														(1,606	)

Total Managed Private Education Loans, net													$	32,800

Loans in forbearance as a percentage of loans in repayment and forbearance		15.0	%		3.3	%		2.4	%		—	%		11.5	%

The table below stratifies the portfolio of Managed Private Education Loans in forbearance status as of the dates indicated by the cumulative number of months the borrower has used forbearance. As detailed in the table below, 4 percent of loans currently in forbearance have cumulative forbearance of more than 24 months.


	September 30, 2009					September 30, 2008
	Forbearance		% of			Forbearance		% of
Cumulative number of months borrower has used forbearance	Balance		Total			Balance		Total

Up to 12 months	$	928		70	%	$	1,520		67	%
13 to 24 months		344		26			598		27
More than 24 months		53		4			126		6

Total	$	1,325		100	%	$	2,244		100	%

The Company has also begun using loan modifications, in the form of interest rate reductions, as a collections tool to assist borrowers who may need temporary payment relief during this economic downturn. If the Company believes a loan modification may result in the borrower eventually being able to resume making full monthly payments, then the Company may temporarily reduce the borrower’s interest rate for up to one year. The borrower continues to make monthly payments during this period at a reduced interest rate. As of September 30, 2009, approximately $100 million of Private Education Loans have been modified under this loan modification program, of which approximately 50 percent were non-traditional Private Education Loans.

FFELP Loan Losses

FFELP Delinquencies and Forbearance

The tables below present our FFELP loan delinquency trends as of September 30, 2009 and 2008. Delinquencies have the potential to adversely impact earnings as they are an initial indication of the borrower’s potential to possibly default and as a result command a higher loan loss reserve than loans in current status. Delinquent loans also require increased servicing and collection efforts, resulting in higher operating costs.


	On-Balance Sheet FFELP
	Loan Delinquencies
	September 30, 2009						September 30, 2008
	Balance			%			Balance			%

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

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

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

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

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

Percentage of FFELP loans in repayment					52.1	%					56.3	%

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

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


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

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

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


	Off-Balance Sheet FFELP
	Loan Delinquencies
	September 30, 2009						September 30, 2008
	Balance			%			Balance			%

Loans in-school/grace/deferment⁽¹⁾	$	3,705					$	4,479
Loans in forbearance⁽²⁾		2,715						2,869
Loans in repayment and percentage of each status:
Loans current		11,584			83.1	%		12,743			82.2	%
Loans delinquent 31-60 days⁽³⁾		816			5.9			893			5.8
Loans delinquent 61-90 days⁽³⁾		393			2.8			422			2.7
Loans delinquent greater than 90 days⁽³⁾		1,148			8.2			1,446			9.3

Total FFELP loans in repayment		13,941			100	%		15,504			100	%

Total FFELP loans, gross		20,361						22,852
FFELP loan unamortized premium		588						576

Total FFELP loans		20,949						23,428
FFELP loan allowance for losses		(25	)					(29	)

FFELP loans, net	$	20,924					$	23,399

Percentage of FFELP loans in repayment					68.5	%					67.9	%

Delinquencies as a percentage of FFELP loans in repayment					16.9	%					17.8	%

FFELP loans in forbearance as a percentage of loans in repayment and forbearance					16.3	%					15.6	%


	Managed Basis FFELP
	Loan Delinquencies
	September 30, 2009						September 30, 2008
	Balance			%			Balance			%

Loans in-school/grace/deferment⁽¹⁾	$	54,500					$	44,535
Loans in forbearance⁽²⁾		16,174						14,904
Loans in repayment and percentage of each status:
Loans current		69,518			83.0	%		69,617			84.3	%
Loans delinquent 31-60 days⁽³⁾		5,041			6.0			4,600			5.6
Loans delinquent 61-90 days⁽³⁾		2,434			2.9			2,105			2.5
Loans delinquent greater than 90 days⁽³⁾		6,781			8.1			6,256			7.6

Total FFELP loans in repayment		83,774			100	%		82,578			100	%

Total FFELP loans, gross		154,448						142,017
FFELP loan unamortized premium		3,007						3,025

Total FFELP loans		157,455						145,042
FFELP loan allowance for losses		(181	)					(152	)

FFELP loans, net	$	157,274					$	144,890

Percentage of FFELP loans in repayment					54.2	%					58.2	%

Delinquencies as a percentage of FFELP loans in repayment					17.0	%					15.7	%

FFELP loans in forbearance as a percentage of loans in repayment and forbearance					16.2	%					15.3	%


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

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

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

Allowance for FFELP Loan Losses

The provision for FFELP loan losses represents the periodic expense of maintaining an allowance sufficient to absorb incurred Risk Sharing losses in the portfolio of FFELP loans.

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


	Activity in Allowance for FFELP Loan Losses
	On-Balance Sheet						Off-Balance Sheet						Managed Basis
	Three Months Ended						Three Months Ended						Three Months Ended
	September 30,			September 30,			September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008			2009			2008

Allowance at beginning of period	$	153		$	98		$	27		$	25		$	180		$	123
Provision for FFELP loan losses		21			40			1			10			22			50
Charge-offs		(17	)		(16	)		(3	)		(5	)		(20	)		(21	)
Increase (decrease) for student loan sales and other		(1	)		1			—			(1	)		(1	)		—

Allowance at end of period	$	156		$	123		$	25		$	29		$	181		$	152

Charge-offs as a percentage of average loans in repayment (annualized)		.1	%		.1	%		.1	%		.1	%		.1	%		.1	%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)		.1	%		.1	%		.1	%		.1	%		.1	%		.1	%
Allowance as a percentage of the ending total loan balance		.1	%		.1	%		.1	%		.1	%		.1	%		.1	%
Allowance as a percentage of ending loans in repayment		.2	%		.2	%		.2	%		.2	%		.2	%		.2	%
Average coverage of charge-offs (annualized)		2.3			1.9			2.0			1.3			2.3			1.8
Ending total loans, gross	$	134,087		$	119,165		$	20,361		$	22,852		$	154,448		$	142,017
Average loans in repayment	$	69,680		$	66,859		$	14,032		$	15,687		$	83,712		$	82,546
Ending loans in repayment	$	69,833		$	67,074		$	13,941		$	15,504		$	83,774		$	82,578


	Activity in Allowance for FFELP Loan Losses
	On-Balance Sheet						Off-Balance Sheet						Managed Basis
	Nine Months Ended						Nine Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008			2009			2008

Allowance at beginning of period	$	138		$	89		$	27		$	29		$	165		$	118
Provision for FFELP loan losses		81			76			10			18			91			94
Charge-offs		(61	)		(43	)		(11	)		(17	)		(72	)		(60	)
Student loan sales and securitization activity		(2	)		1			(1	)		(1	)		(3	)		—

Allowance at end of period	$	156		$	123		$	25		$	29		$	181		$	152

Charge-offs as a percentage of average loans in repayment (annualized)		.1	%		.1	%		.1	%		.1	%		.1	%		.1	%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)		.1	%		.1	%		.1	%		.1	%		.1	%		.1	%
Allowance as a percentage of the ending total loan balance		.1	%		.1	%		.1	%		.1	%		.1	%		.1	%
Allowance as a percentage of ending loans in repayment		.2	%		.2	%		.2	%		.2	%		.2	%		.2	%
Average coverage of charge-offs (annualized)		1.9			2.2			1.6			1.2			1.9			1.9
Ending total loans, gross	$	134,087		$	119,165		$	20,361		$	22,852		$	154,448		$	142,017
Average loans in repayment	$	69,196		$	65,692		$	14,455		$	16,325		$	83,651		$	82,017
Ending loans in repayment	$	69,833		$	67,074		$	13,941		$	15,504		$	83,774		$	82,578

Total Provisions for Loan Losses

The following tables summarize the total provisions for loan losses on both an on-balance sheet basis and a Managed Basis for the three and nine months ended September 30, 2009 and 2008.

Total on-balance sheet loan provisions


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

Private Education Loans	$	287	$	136	$	733	$	374
FFELP Loans		21		40		81		76
Mortgage and consumer loans		13		11		36		17

Total on-balance sheet provisions for loan losses	$	321	$	187	$	850	$	467

Total Managed Basis loan provisions


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

Private Education Loans	$	413	$	202	$	1,072	$	526
FFELP Loans		22		50		91		94
Mortgage and consumer loans		13		11		36		17

Total Managed Basis provisions for loan losses	$	448	$	263	$	1,199	$	637

Provision expense for Private Education Loans was previously discussed above (see “Private Education Loan Losses — Allowance for Private Education Loan Losses”).

Total Loan Charge-offs

The following tables summarize the total loan charge-offs on both an on-balance sheet basis and a Managed Basis for the three and nine months ended September 30, 2009 and 2008.

Total on-balance sheet loan charge-offs


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

Private Education Loans	$	293	$	76	$	671	$	206
FFELP Loans		17		16		61		43
Mortgage and consumer loans		9		4		24		11

Total on-balance sheet loan net charge-offs	$	319	$	96	$	756	$	260

Total Managed loan charge-offs


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

Private Education Loans	$	443	$	112	$	1,000	$	315
FFELP Loans		20		21		72		60
Mortgage and consumer loans		9		4		24		11

Total Managed loan charge-offs	$	472	$	137	$	1,096	$	386

Receivable for Partially Charged-Off Private Education Loans

The Company charges off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged off loans.” If actual periodic recoveries are less than expected, the difference is charged off and immediately included in provision expense.

The following tables summarize the activity in the receivable for partially charged-off loans (see “Allowance for Private Education Loan Losses” above for a further discussion) for the three and nine months ended September 30, 2009 and 2008.


	Activity in Receivable for Partially Charged-Off Loans
	On-balance sheet						Off-balance sheet						Managed Basis
	Three Months Ended						Three Months Ended						Three Months Ended
	September 30,			September 30,			September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008			2009			2008

Receivable at beginning of period	$	338		$	159		$	149		$	58		$	487		$	217
Expected future recoveries of current period defaults		108			34			55			17			163			51
Recoveries		(11	)		(9	)		(4	)		(2	)		(15	)		(11	)

Receivable at end of period	$	435		$	184		$	200		$	73		$	635		$	257


	Activity in Receivable for Partially Charged-Off Loans
	On-balance sheet						Off-balance sheet						Managed Basis
	Nine Months Ended						Nine Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008			2009			2008

Receivable at beginning of period	$	222		$	118		$	92		$	28		$	314		$	146
Expected future recoveries of current period defaults		243			93			119			51			362			144
Recoveries		(30	)		(27	)		(11	)		(6	)		(41	)		(33	)

Receivable at end of period	$	435		$	184		$	200		$	73		$	635		$	257

Student Loan Acquisitions

The following tables summarize the components of our student loan acquisition activity for the three and nine months ended September 30, 2009 and 2008.


	Three Months Ended
	September 30, 2009
	FFELP			Private			Total

Internal lending brands and Lender Partners	$	6,778		$	1,077		$	7,855
Other commitment clients		80			—			80
Spot purchases		456			—			456
Consolidations and clean-up calls of off-balance sheet securitized loans		1,201			130			1,331
Capitalized interest, premiums and discounts		647			158			805

Total on-balance sheet student loan acquisitions		9,162			1,365			10,527
Consolidations and clean-up calls of off-balance sheet securitized loans		(1,201	)		(130	)		(1,331	)
Capitalized interest, premiums and discounts — off-balance sheet securitized trusts		93			81			174

Total Managed student loan acquisitions	$	8,054		$	1,316		$	9,370

100


	Three Months Ended
	September 30, 2008
	FFELP			Private			Total

Internal lending brands and Lender Partners	$	6,187		$	2,151		$	8,338
Other commitment clients		193			—			193
Spot purchases		42			—			42
Consolidations from third parties		—			3			3
Consolidations and clean-up calls of off-balance sheet securitized loans		591			11			602
Capitalized interest, premiums and discounts		618			187			805

Total on-balance sheet student loan acquisitions		7,631			2,352			9,983
Consolidations and clean-up calls of off-balance sheet securitized loans		(591	)		(11	)		(602	)
Capitalized interest, premiums and discounts — off-balance sheet securitized trusts		128			123			251

Total Managed student loan acquisitions	$	7,168		$	2,464		$	9,632


	Nine Months Ended
	September 30, 2009
	FFELP			Private			Total

Internal lending brands and Lender Partners	$	17,985		$	2,971		$	20,956
Other commitment clients		283			—			283
Spot purchases		1,441			—			1,441
Consolidations and clean-up calls of off-balance sheet securitized loans		3,155			797			3,952
Capitalized interest, premiums and discounts		1,853			591			2,444

Total on-balance sheet student loan acquisitions		24,717			4,359			29,076
Consolidations and clean-up calls of off-balance sheet securitized loans		(3,155	)		(797	)		(3,952	)
Capitalized interest, premiums and discounts — off-balance sheet securitized trusts		268			325			593

Total Managed student loan acquisitions	$	21,830		$	3,887		$	25,717


	Nine Months Ended
	September 30, 2008
	FFELP			Private			Total

Internal lending brands and Lender Partners	$	15,209		$	5,567		$	20,776
Other commitment clients		637			—			637
Spot purchases		197			—			197
Consolidations from third parties		461			149			610
Consolidations and clean-up calls of off-balance sheet securitized loans		711			256			967
Capitalized interest, premiums and discounts		1,748			570			2,318

Total on-balance sheet student loan acquisitions		18,963			6,542			25,505
Consolidations and clean-up calls of off-balance sheet securitized loans		(711	)		(256	)		(967	)
Capitalized interest, premiums and discounts — off-balance sheet securitized trusts		347			477			824

Total Managed student loan acquisitions	$	18,599		$	6,763		$	25,362

101

Total On-Balance Sheet Assets — Lending Business Segment

The following table includes on-balance sheet asset information for our Lending business segment.


	September 30,		December 31,
	2009		2008

FFELP Stafford and Other Student Loans, net	$	43,258	$	44,025
FFELP Stafford Loans Held-for-Sale		23,846		8,451
FFELP Consolidation Loans, net		69,246		71,744
Private Education Loans, net		22,495		20,582
Other loans, net		455		729
Investments⁽¹⁾		12,422		8,445
Retained Interest in off-balance sheet securitized loans		1,838		2,200
Other⁽²⁾		10,520		9,947

Total assets	$	184,080	$	166,123


⁽¹⁾		Investments include cash and cash equivalents, short and long-term investments, restricted cash and investments, leveraged leases, and municipal bonds.

⁽²⁾		Other assets include accrued interest receivable, goodwill and acquired intangible assets, and other non-interest earning assets.

Loan Originations

The Company originates loans under its own brand names, which we refer to as internal lending brands, and also through Lender Partners under forward contracts to purchase loans at contractual prices.

Our FFELP internal brand originations were up sharply in the third quarter of 2009, increasing 28 percent from the year-ago quarter. Our FFELP Lender Partner originations increased 10 percent over the same period. A number of these Lender Partners, including some of our largest originators, have converted to third-party servicing arrangements in which we service loans on their behalf.

Private Education Loan originations declined 58 percent from the year-ago period to $893 million in the quarter ended September 30, 2009, as a result of a continued tightening of our underwriting criteria, an increase in guaranteed student loan limits and the Company’s withdrawal from certain markets.

At September 30, 2009, the Company was committed to purchase $1.3 billion of loans originated by our Lender Partners ($0.8 billion of FFELP loans and $0.5 billion of Private Education Loans). Approximately $0.3 billion of these FFELP loans were originated prior to CCRAA. Approximately $0.4 billion of these FFELP loans are eligible for ED’s Purchase and Participation Programs (see “LIQUIDITY AND CAPITAL RESOURCES — ED Funding Programs”).

102

The following tables summarize our loan originations by type of loan and source.


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

Loan Originations — Internal lending brands
Stafford	$	5,134	$	4,002	$	13,068	$	8,511
PLUS		582		502		1,341		1,175
GradPLUS		443		319		878		626

Total FFELP		6,159		4,823		15,287		10,312
Private Education Loans		871		1,934		2,599		5,012

Total	$	7,030	$	6,757	$	17,886	$	15,324


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

Loan Originations — Lender Partners
Stafford	$	703	$	655	$	1,826	$	3,275
PLUS		51		45		118		335
GradPLUS		27		11		54		59

Total FFELP		781		711		1,998		3,669
Private Education Loans		22		183		196		473

Total	$	803	$	894	$	2,194	$	4,142

103

Student Loan Activity

The following tables summarize the activity in our on-balance sheet, off-balance sheet and Managed portfolios of FFELP loans and Private Education Loans and highlight the effects of Consolidation Loan activity on our FFELP loan portfolios.


	On-Balance Sheet
	Three Months Ended September 30, 2009
	FFELP			FFELP						Total Private			Total On-
	Stafford and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	62,204		$	70,102		$	132,306		$	21,851		$	154,157
Net consolidations:
Incremental consolidations from third parties		—			—			—			—			—
Consolidations to third parties		(384	)		(191	)		(575	)		(2	)		(577	)

Net consolidations		(384	)		(191	)		(575	)		(2	)		(577	)
Acquisitions		7,645			316			7,961			1,235			9,196

Net acquisitions		7,261			125			7,386			1,233			8,619

Internal consolidations⁽²⁾		—			—			—			—			—
Securitization-related⁽³⁾		—			—			—			—			—
Repayments/claims/resales/other		(2,360	)		(981	)		(3,341	)		(589	)		(3,930	)

Ending balance	$	67,105		$	69,246		$	136,351		$	22,495		$	158,846


	Off-Balance Sheet
	Three Months Ended September 30, 2009
	FFELP			FFELP						Total Private			Total Off-
	Stafford and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	6,170		$	15,170		$	21,340		$	12,621		$	33,961
Net consolidations:
Incremental consolidations from third parties		—			—			—			—			—
Consolidations to third parties		(135	)		(56	)		(191	)		(4	)		(195	)

Net consolidations		(135	)		(56	)		(191	)		(4	)		(195	)
Acquisitions		30			63			93			81			174

Net acquisitions		(105	)		7			(98	)		77			(21	)

Internal consolidations⁽²⁾		—			—			—			—			—
Securitization-related⁽³⁾		—			—			—			—			—
Repayments/claims/resales/other		(130	)		(188	)		(318	)		(287	)		(605	)

Ending balance	$	5,935		$	14,989		$	20,924		$	12,411		$	33,335


	Managed Portfolio
	Three Months Ended September 30, 2009
	FFELP			FFELP						Total Private			Total
	Stafford and			Consolidation			Total			Education			Managed Basis
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	68,374		$	85,272		$	153,646		$	34,472		$	188,118
Net consolidations:
Incremental consolidations from third parties		—			—			—			—			—
Consolidations to third parties		(519	)		(247	)		(766	)		(6	)		(772	)

Net consolidations		(519	)		(247	)		(766	)		(6	)		(772	)
Acquisitions		7,675			379			8,054			1,316			9,370

Net acquisitions		7,156			132			7,288			1,310			8,598

Internal consolidations⁽²⁾		—			—			—			—			—
Securitization-related⁽³⁾		—			—			—			—			—
Repayments/claims/resales/other		(2,490	)		(1,169	)		(3,659	)		(876	)		(4,535	)

Ending balance⁽⁴⁾	$	73,040			84,235		$	157,275		$	34,906		$	192,181

Total Managed Acquisitions⁽⁵⁾	$	7,675		$	379		$	8,054		$	1,316		$	9,370


⁽¹⁾		FFELP category is primarily Stafford loans and also includes PLUS and HEAL loans.

⁽²⁾		Represents loans that we either own on-balance sheet or loans that we consolidated from our off-balance sheet securitization trusts.

⁽³⁾		Represents loans within securitization trusts that we are required to consolidate under GAAP once the trusts’ loan balances are below the clean-up call threshold.

⁽⁴⁾		As of September 30, 2009, the ending balance includes $29.7 billion of FFELP Stafford and Other Loans and $2.6 billion of FFELP Consolidation Loans disbursed on or after October 1, 2007, which are impacted by CCRAA legislation.

⁽⁵⁾		The Total Managed Acquisitions line includes incremental consolidations from third parties and acquisitions.

104


	On-Balance Sheet
	Three Months Ended September 30, 2008
	FFELP			FFELP						Total Private			Total On-
	Stafford and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	43,147		$	73,171		$	116,318		$	17,971		$	134,289
Net consolidations:
Incremental consolidations from third parties		—			—			—			3			3
Consolidations to third parties		(178	)		(148	)		(326	)		(9	)		(335	)

Net consolidations		(178	)		(148	)		(326	)		(6	)		(332	)
Acquisitions		6,641			398			7,039			2,338			9,377

Net acquisitions		6,463			250			6,713			2,332			9,045

Internal consolidations⁽²⁾		—			—			—			3			3
Repayments/claims/resales/other		(685	)		(855	)		(1,540	)		(469	)		(2,009	)

Ending balance	$	48,925		$	72,566		$	121,491		$	19,837		$	141,328


	Off-Balance Sheet
	Three Months Ended September 30, 2008
	FFELP			FFELP						Total Private			Total Off-
	Stafford and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	8,475		$	16,042		$	24,517		$	13,098		$	37,615
Net consolidations:
Incremental consolidations from third parties		—			—			—			—			—
Consolidations to third parties		(108	)		(34	)		(142	)		(8	)		(150	)

Net consolidations		(108	)		(34	)		(142	)		(8	)		(150	)
Acquisitions		61			68			129			123			252

Net acquisitions		(47	)		34			(13	)		115			102

Internal consolidations⁽²⁾		—			—			—			(3	)		(3	)
Repayments/claims/resales/other		(745	)		(360	)		(1,105	)		(247	)		(1,352	)

Ending balance	$	7,683		$	15,716		$	23,399		$	12,963		$	36,362


	Managed Portfolio
	Three Months Ended September 30, 2008
	FFELP			FFELP						Total Private			Total
	Stafford and			Consolidation			Total			Education			Managed Basis
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	51,622		$	89,213		$	140,835		$	31,069		$	171,904
Net consolidations:
Incremental consolidations from third parties		—			—			—			3			3
Consolidations to third parties		(286	)		(182	)		(468	)		(17	)		(485	)

Net consolidations		(286	)		(182	)		(468	)		(14	)		(482	)
Acquisitions		6,702			466			7,168			2,461			9,629

Net acquisitions		6,416			284			6,700			2,447			9,147

Internal consolidations⁽²⁾		—			—			—			—			—
Repayments/claims/resales/other		(1,430	)		(1,215	)		(2,645	)		(716	)		(3,361	)

Ending balance⁽³⁾	$	56,608		$	88,282		$	144,890		$	32,800		$	177,690

Total Managed Acquisitions⁽⁴⁾	$	6,702		$	466		$	7,168		$	2,464		$	9,632


⁽¹⁾		FFELP category is primarily Stafford loans and also includes PLUS and HEAL loans.

⁽²⁾		Represents loans that we either own on-balance sheet or loans that we consolidated from our off-balance sheet securitization trusts.

⁽³⁾		As of September 30, 2008, the ending balance includes $10.6 billion of FFELP Stafford and Other Loans and $2.6 billion of FFELP Consolidation Loans disbursed on or after October 1, 2007, which are impacted by CCRAA legislation.

⁽⁴⁾		The Total Managed Acquisitions line includes incremental consolidations from third parties and acquisitions.

105


	On-Balance Sheet
	Nine Months Ended September 30, 2009
	FFELP			FFELP						Total Private			Total On-
	Stafford and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	52,476		$	71,744		$	124,220		$	20,582		$	144,802
Net consolidations:
Incremental consolidations from third parties		—			—			—			—			—
Consolidations to third parties		(790	)		(385	)		(1,175	)		(5	)		(1,180	)

Net consolidations		(790	)		(385	)		(1,175	)		(5	)		(1,180	)
Acquisitions		20,691			871			21,562			3,562			25,124

Net acquisitions		19,901			486			20,387			3,557			23,944

Internal consolidations⁽²⁾		—			—			—			—			—
Securitization-related⁽³⁾		425			—			425			—			425
Repayments/claims/resales/other		(5,697	)		(2,984	)		(8,681	)		(1,644	)		(10,325	)

Ending balance	$	67,105		$	69,246		$	136,351		$	22,495		$	158,846


	Off-Balance Sheet
	Nine Months Ended September 30, 2009
	FFELP			FFELP						Total Private			Total Off-
	Stafford and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	7,143		$	15,531		$	22,674		$	12,917		$	35,591
Net consolidations:
Incremental consolidations from third parties		—			—			—			—			—
Consolidations to third parties		(317	)		(99	)		(416	)		(12	)		(428	)

Net consolidations		(317	)		(99	)		(416	)		(12	)		(428	)
Acquisitions		107			161			268			325			593

Net acquisitions		(210	)		62			(148	)		313			165

Internal consolidations⁽²⁾		—			—			—			—			—
Securitization-related⁽³⁾		(425	)		—			(425	)		—			(425	)
Repayments/claims/resales/other		(573	)		(604	)		(1,177	)		(819	)		(1,996	)

Ending balance	$	5,935		$	14,989		$	20,924		$	12,411		$	33,335


	Managed Portfolio
	Nine Months Ended September 30, 2009
	FFELP			FFELP						Total Private			Total
	Stafford and			Consolidation			Total			Education			Managed Basis
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	59,619		$	87,275		$	146,894		$	33,499		$	180,393
Net consolidations:
Incremental consolidations from third parties		—			—			—			—			—
Consolidations to third parties		(1,107	)		(484	)		(1,591	)		(17	)		(1,608	)

Net consolidations		(1,107	)		(484	)		(1,591	)		(17	)		(1,608	)
Acquisitions		20,798			1,032			21,830			3,887			25,717

Net acquisitions		19,691			548			20,239			3,870			24,109

Internal consolidations⁽²⁾		—			—			—			—			—
Securitization-related⁽³⁾		—			—			—			—			—
Repayments/claims/resales/other		(6,270	)		(3,588	)		(9,858	)		(2,463	)		(12,321	)

Ending balance⁽⁴⁾	$	73,040			84,235		$	157,275		$	34,906		$	192,181

Total Managed Acquisitions⁽⁵⁾	$	20,798		$	1,032		$	21,830		$	3,887		$	25,717


⁽¹⁾		FFELP category is primarily Stafford loans and also includes PLUS and HEAL loans.

⁽²⁾		Represents loans that we either own on-balance sheet or loans that we consolidated from our off-balance sheet securitization trusts.

⁽³⁾		Represents loans within securitization trusts that we are required to consolidate under GAAP once the trusts’ loan balances are below the clean-up call threshold.

⁽⁴⁾		As of September 30, 2009, the ending balance includes $29.7 billion of FFELP Stafford and Other Loans and $2.6 billion of FFELP Consolidation Loans disbursed on or after October 1, 2007, which are impacted by CCRAA legislation.

⁽⁵⁾		The Total Managed Acquisitions line includes incremental consolidations from third parties and acquisitions.

106


	On-Balance Sheet
	Nine Months Ended September 30, 2008
	FFELP			FFELP						Total Private			Total On-
	Stafford and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	35,726		$	73,609		$	109,335		$	14,818		$	124,153
Net consolidations:
Incremental consolidations from third parties		—			461			461			149			610
Consolidations to third parties		(519	)		(270	)		(789	)		(34	)		(823	)

Net consolidations		(519	)		191			(328	)		115			(213	)
Acquisitions		16,702			1,088			17,790			6,137			23,927

Net acquisitions		16,183			1,279			17,462			6,252			23,714

Internal consolidations⁽²⁾		(409	)		529			120			228			348
Off-balance sheet securitizations		—			—			—			—			—
Repayments/claims/resales/other		(2,575	)		(2,851	)		(5,426	)		(1,461	)		(6,887	)

Ending balance	$	48,925		$	72,566		$	121,491		$	19,837		$	141,328


	Off-Balance Sheet
	Nine Months Ended September 30, 2008
	FFELP			FFELP						Total Private			Total Off-
	Stafford and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	9,472		$	16,441		$	25,913		$	13,510		$	39,423
Net consolidations:
Incremental consolidations from third parties		—			—			—			—			—
Consolidations to third parties		(190	)		(57	)		(247	)		(51	)		(298	)

Net consolidations		(190	)		(57	)		(247	)		(51	)		(298	)
Acquisitions		183			165			348			477			825

Net acquisitions		(7	)		108			101			426			527

Internal consolidations⁽²⁾		(84	)		(36	)		(120	)		(228	)		(348	)
Off-balance sheet securitizations		—			—			—			—			—
Repayments/claims/resales/other		(1,698	)		(797	)		(2,495	)		(745	)		(3,240	)

Ending balance	$	7,683		$	15,716		$	23,399		$	12,963		$	36,362


	Managed Portfolio
	Nine Months Ended September 30, 2008
	FFELP			FFELP						Total Private			Total
	Stafford and			Consolidation			Total			Education			Managed Basis
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	45,198		$	90,050		$	135,248		$	28,328		$	163,576
Net consolidations:
Incremental consolidations from third parties		—			461			461			149			610
Consolidations to third parties		(709	)		(327	)		(1,036	)		(85	)		(1,121	)

Net consolidations		(709	)		134			(575	)		64			(511	)
Acquisitions		16,885			1,253			18,138			6,614			24,752

Net acquisitions		16,176			1,387			17,563			6,678			24,241

Internal consolidations⁽²⁾		(493	)		493			—			—			—
Off-balance sheet securitizations		—			—			—			—			—
Repayments/claims/resales/other		(4,273	)		(3,648	)		(7,921	)		(2,206	)		(10,127	)

Ending balance⁽³⁾	$	56,608		$	88,282		$	144,890		$	32,800		$	177,690

Total Managed Acquisitions⁽⁴⁾	$	16,885		$	1,714		$	18,599		$	6,763		$	25,362


⁽¹⁾		FFELP category is primarily Stafford loans and also includes PLUS and HEAL loans.

⁽²⁾		Represents loans that we either own on-balance sheet or loans that we consolidated from our off-balance sheet securitization trusts.

⁽³⁾		As of September 30, 2008, the ending balance includes $10.6 billion of FFELP Stafford and Other Loans and $2.6 billion of FFELP Consolidation Loans disbursed on or after October 1, 2007, which are impacted by CCRAA legislation.

⁽⁴⁾		The Total Managed Acquisitions line includes incremental consolidations from third parties and acquisitions.

107

Other Income — Lending Business Segment

The following table summarizes the components of “Core Earnings” other income, net, for our Lending business segment for the three and nine months ended September 30, 2009 and 2008.


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

Gains on debt repurchases	$	74	$	16	$	463	$	37
Late fees and forbearance fees		39		36		107		107
Gains on sales of loans		12		—		12		1
Other		4		3		9		16

Total other income, net	$	129	$	55	$	591	$	161

The change in other income over the prior periods presented is primarily the result of the gains on debt repurchased. The Company began repurchasing its outstanding debt in the second quarter of 2008. The Company repurchased $1.4 billion and $580 million face amount of its senior unsecured notes for the quarters ended September 30, 2009 and 2008, respectively, and repurchased $2.7 billion and $1.8 billion face amount of its senior unsecured notes for the nine months ended September 30, 2009 and 2008, respectively. Since the second quarter of 2008, the Company repurchased $4.6 billion face amount of its senior unsecured notes in the aggregate, with maturity dates ranging from 2008 to 2014.

The $12 million of gains on sales of loans in the third quarter 2009 related to the gain on sale of approximately $840 million face amount of FFELP loans to the ED as part of the ED Purchase Program.

Operating Expense — Lending Business Segment

The following table summarizes the components of operating expenses for our Lending business segment for the three and nine months ended September 30, 2009 and 2008.


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

Sales and originations	$	60	$	57	$	156	$	195
Servicing		71		59		202		181
Corporate overhead		23		26		77		84

Total operating expenses	$	154	$	142	$	435	$	460

Operating expenses for our Lending business segment include costs incurred to acquire student loans and to service our Managed student loan portfolio, as well as other general and administrative expenses. For the quarters ended September 30, 2009 and 2008, operating expenses for the Lending business segment totaled $154 million and $142 million, respectively. Operating expenses were 32 basis points of average Managed student loans in both the third quarters of 2009 and 2008.

108

ASSET PERFORMANCE GROUP (“APG”) BUSINESS SEGMENT

The following table includes the “Core Earnings” results of operations for our APG business segment.


	Three Months Ended September 30, 2009
	Purchased			Purchased
	Paper-			Paper-
	Non-			Mortgage/			Contingency
	Mortgage			Properties			& Other		Total APG

Contingency fee income	$	—		$	—		$	82	$	82
Collections revenue (loss)		21			(5	)		—		16

Total income (loss)		21			(5	)		82		98
Restructuring expenses		—			1			—		1
Operating expenses		33			6			41		80

Total expenses		33			7			41		81
Net interest expense		2			1			2		5

Income (loss) before income tax expense (benefit) and noncontrolling interest		(14	)		(13	)		39		12
Income tax expense (benefit)		(5	)		(5	)		15		5

Income (loss) before noncontrolling interest		(9	)		(8	)		24		7
Noncontrolling interest		—			—			—		—

“Core Earnings” net income (loss)	$	(9	)	$	(8	)	$	24	$	7


	Three Months Ended September 30, 2008
	Purchased			Purchased
	Paper-			Paper-
	Non-			Mortgage/			Contingency
	Mortgage			Properties			& Other		Total APG

Contingency fee income	$	2		$	—		$	87	$	89
Collections revenue (loss)		(39	)		(130	)		—		(169	)

Total income (loss)		(37	)		(130	)		87		(80	)
Restructuring expenses		4			—			—		4
Operating expenses		52			9			45		106

Total expenses		56			9			45		110
Net interest expense		3			1			2		6

Income (loss) before income tax expense (benefit) and noncontrolling interest		(96	)		(140	)		40		(196	)
Income tax expense (benefit)		(36	)		(51	)		14		(73	)

Income (loss) before noncontrolling interest		(60	)		(89	)		26		(123	)
Noncontrolling interest		1			—			—		1

“Core Earnings” net income (loss)	$	(61	)	$	(89	)	$	26	$	(124	)

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	Nine Months Ended September 30, 2009
	Purchased			Purchased
	Paper-			Paper-
	Non-			Mortgage/			Contingency
	Mortgage			Properties			& Other		Total APG

Contingency fee income	$	2		$	—		$	228	$	230
Collections revenue (loss)		88			(72	)		—		16

Total income (loss)		90			(72	)		228		246
Restructuring expenses		—			3			—		3
Operating expenses		108			20			132		260

Total expenses		108			23			132		263
Net interest expense		7			3			5		15

Income (loss) before income tax expense (benefit) and noncontrolling interest		(25	)		(98	)		91		(32	)
Income tax expense (benefit)		(9	)		(36	)		33		(12	)

Income (loss) before noncontrolling interest		(16	)		(62	)		58		(20	)
Noncontrolling interest		1			—			—		1

“Core Earnings” net income (loss)	$	(17	)	$	(62	)	$	58	$	(21	)


	Nine Months Ended September 30, 2008
	Purchased			Purchased
	Paper-			Paper-
	Non-			Mortgage/			Contingency
	Mortgage			Properties			& Other		Total APG

Contingency fee income	$	9		$	—		$	250	$	259
Collections revenue (loss)		70			(155	)		—		(85	)

Total income (loss)		79			(155	)		250		174
Restructuring expenses		5			—			5		10
Operating expenses		156			28			138		322

Total expenses		161			28			143		332
Net interest expense		10			4			6		20

Income (loss) before income tax expense (benefit) and noncontrolling interest		(92	)		(187	)		101		(178	)
Income tax expense (benefit)		(33	)		(69	)		37		(65	)

Income (loss) before noncontrolling interest		(59	)		(118	)		64		(113	)
Noncontrolling interest		3			—			—		3

“Core Earnings” net income (loss)	$	(62	)	$	(118	)	$	64	$	(116	)

The Company has concluded that its APG purchased paper businesses are no longer a strategic fit. The Company sold its international Purchased Paper — Non-Mortgage business in the first quarter of 2009. The Company continues to wind down the domestic side of its Purchased Paper — Non-Mortgage and Purchased Paper — Mortgage/Properties businesses. The Company will continue to consider opportunities to sell these businesses at acceptable prices in the future.

The Company’s domestic Purchased Paper — Non-Mortgage business has certain forward purchase obligations under which the Company was committed to buy purchased paper through April 2009. The Company has not bought any additional purchased paper in excess of these obligations. The Company recognized $9 million and $39 million of impairment in the third quarter of 2009 and 2008, respectively. The total impairment for the year ended December 31, 2008 was $55 million.

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The Company’s Purchased Paper — Mortgage/Properties business has not purchased any new mortgage/property assets since March 2008 and will work-out and liquidate its portfolio as quickly and economically as possible. During 2009, real estate values continued to decline as a result of the weakening U.S. economy and expected future resolution time-frames were extended. As a result, the Company recorded impairment of $12 million and $147 million in the third quarter of 2009 and 2008, respectively. The total impairment for the year ended December 31, 2008 was $262 million.

On October 22, 2009, GRP Loan, LLC and GRP Strategies, LLC, wholly-owned subsidiaries of the Company, entered into a definitive sale agreement to sell $367 million in assets, which is substantially all of the mortgage loan and real estate assets of the Purchased Paper — Mortgage/Properties business, for $279 million. The transaction closed on October 26, 2009. In connection with this transaction, the Company will recognize an after-tax loss of approximately $85 million to $95 million in the fourth quarter of 2009.

Purchased Paper — Non-Mortgage


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

Face value of purchases for the period	$	—		$	1,496		$	390		$	4,375
Purchase price for the period		—			116			30			384
Purchase price as a percentage of face value purchased		—	%		7.8	%		7.6	%		8.8	%
Gross Cash Collections (“GCC”)	$	72		$	166		$	315		$	497
Collections revenue (loss)		21			(39	)		88			70
Collections revenue (loss) as a percentage of GCC		34	%		(23	)%		29	%		14	%
Carrying value of purchased paper	$	373		$	544		$	373		$	544

Purchased Paper — Mortgage/Properties


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

Face value of purchases for the period	$	—		$	—		$	—		$	39
Collections revenue (loss), net of impairments		(5	)		(130	)		(72	)		(155	)
Collateral value of purchases		—			—			—			29
Purchase price for the period		—			—			—			19
Purchase price as a percentage of collateral fair value		—	%		—	%		—	%		66	%
Carrying value of purchased paper	$	375		$	798		$	375		$	798
Carrying value of purchased paper as a percentage of collateral fair value		68	%		69	%		68	%		69	%

The carrying value of purchased paper (the basis we carry on our balance sheet) as a percentage of collateral fair value has decreased in the third quarter of 2009 as a result of the impairment recognized this quarter.

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Contingency Inventory

The following table presents the outstanding inventory of receivables that are currently being serviced through our APG business segment.


	September 30,		December 31,		September 30,
	2009		2008		2008

Contingency:
Student loans	$	9,191	$	8,498	$	9,482
Other		1,472		1,752		1,714

Total	$	10,663	$	10,250	$	11,196

Operating Expenses — APG Business Segment

For the quarters ended September 30, 2009 and September 30, 2008, operating expenses for the APG business segment totaled $80 million and $106 million, respectively. The decrease in operating expenses from the year-ago quarter was primarily due to the Company’s continued cost reduction efforts and the reduction in the size of the purchased paper portfolios.

Total On-Balance Sheet Assets — APG Business Segment

At September 30, 2009 and December 31, 2008, the APG business segment had total assets of $1.4 billion and $2.1 billion, respectively.

CORPORATE AND OTHER BUSINESS SEGMENT

The following table includes “Core Earnings” results of operations for our Corporate and Other business segment.


					% Increase							% Increase
	Three Months				(Decrease)			Nine Months				(Decrease)
	Ended September 30,				2009 vs.			Ended September 30,				2009 vs.
	2009		2008		2008			2009		2008		2008

Net interest income after provisions for loan losses	$	2	$	2		—	%	$	3	$	3		—	%
Guarantor servicing fees		48		37		30			107		95		13
Loan servicing fees		17		6		183			35		17		106
Upromise		28		28		—			79		80		(1	)
Other		11		17		(35	)		38		50		(24	)

Total other income		104		88		18			259		242		7
Restructuring expenses		1		7		(86	)		3		22		(86	)
Operating expenses		75		68		10			211		213		(1	)

Total expenses		76		75		1			214		235		(9	)

Income (loss) before income tax expense		30		15		100			48		10		380
Income tax expense (benefit)		11		6		83			18		3		500

“Core Earnings” net income (loss)	$	19	$	9		111	%	$	30	$	7		329	%

Loan servicing fees increased in the third quarter 2009 over the year-ago quarters primarily due to additional loan conversion fees that were earned by the Company when third-party servicing clients sold their FFELP loans to ED under the ED Purchase Program in the third quarter of 2009.

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United Student Aid Funds, Inc. (“USA Funds”), the nation’s largest guarantee agency, accounted for 85 percent and 81 percent, respectively, of guarantor servicing fees and 3 percent and 12 percent, respectively, of revenues associated with other products and services for the quarters ended September 30, 2009 and 2008.

Operating Expenses — Corporate and Other Business Segment

The following table summarizes the components of operating expenses for our Corporate and Other business segment for the three and nine months ended September 30, 2009 and 2008.


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

Operating expenses	$	30	$	26	$	79	$	69
Upromise		22		22		66		70
General and administrative expenses		23		20		66		74

Total operating expenses	$	75	$	68	$	211	$	213

Operating expenses for our Corporate and Other business segment include direct costs incurred to service loans for unrelated third parties, perform guarantor servicing on behalf of guarantor agencies, operate our Upromise subsidiary, as well as information technology expenses related to these functions. Operating expenses also include unallocated corporate overhead expenses for centralized headquarters functions. For the quarters ended September 30, 2009 and 2008, operating expenses for the Corporate and Other business segment totaled $75 million and $68 million, respectively. The increase in operating expenses for the third quarter of 2009 versus the year-ago quarter was primarily due to higher expenses incurred to reconfigure the Company’s servicing system to meet the requirements of the ED Servicing Contract awarded to the Company on June 17, 2009 to service FFELP loans that will be sold to ED.

Total On-Balance Sheet Assets — Corporate and Other Business Segment

At September 30, 2009 and December 31, 2008, the Corporate and Other business segment had total assets of $946 million and $685 million, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The following “LIQUIDITY AND CAPITAL RESOURCES” discussion concentrates on our Lending business segment. Our APG contingency collections and Corporate and Other business segments are not capital intensive businesses and, as such, a minimal amount of debt capital is allocated to these segments.

Historically, we funded new loan originations with a combination of term unsecured debt and student loan asset-backed securities. Following the Proposed Merger announcement in April 2007, we temporarily suspended issuance of unsecured debt and began funding loan originations primarily through the issuance of student loan asset-backed securities and short-term secured student loan financing facilities. In June 2008, the Company accessed the corporate bond market with a $2.5 billion issue of 10-year senior unsecured notes. In August 2008, we began funding new FFELP Stafford and PLUS student loan originations for AY 2008-2009 pursuant to ED’s Loan Participation Program. During the fourth quarter of 2008, the Company began retaining its Private Education Loan originations in its banking subsidiary, Sallie Mae Bank, and funding these assets with term bank deposits. In May 2009, we began using the ED Conduit Program to fund FFELP Stafford and PLUS loans. We discuss these liquidity sources below.

In the near term, we expect to continue to use ED’s Purchase and Participation Programs to fund future FFELP Stafford and PLUS loan originations and to use deposits at Sallie Mae Bank and potentially term asset-backed securities to fund Private Education Loan originations. We plan to use term asset-backed securities, asset-backed financing facilities, cash flows provided by earnings and repayment of principal on our unencumbered student loan assets, as well as other sources, to refinance maturing debt and provide cash for operations and other needs.

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ED Funding Programs

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

On August 14, 2008, the Company received its initial advance under the Participation Program. As of September 30, 2009, the Company had $22.9 billion of advances outstanding under the Participation Program. Through October 15, 2009, the Company has sold to ED approximately $18.5 billion face amount of loans as part of the Purchase Program (approximately $840 million face amount was sold in the third quarter of 2009). Outstanding debt of $18.5 billion has been paid down related to the Participation Program in connection with these loan sales. The remaining loans are part of the AY 2009-2010 funding program and, given current market conditions, we expect to sell these loans in the third quarter of 2010.

Also pursuant to ECASLA, on January 15, 2009, ED published summary terms under which it will purchase eligible FFELP Stafford and PLUS loans from a conduit vehicle established to provide funding for eligible student lenders (the “ED Conduit Program”). Loans eligible for the ED Conduit Program must be first disbursed on or after October 1, 2003, but not later than July 1, 2009, and fully disbursed before September 30, 2009, and meet certain other requirements including with respect to borrower benefits. The ED Conduit Program was launched on May 11, 2009 and will accept eligible loans through July 1, 2010. The ED Conduit Program has a term of five years and will expire on January 19, 2014. Funding for the ED Conduit Program is provided by the capital markets at a cost based on market rates, with the Company being advanced 97 percent of the student loan face amount. The Student Loan Short-Term Notes (“SLST Notes”), issued by the ED Conduit, are supported by a combination of i) Funding Notes backed by FFELP student loans, ii) the Liquidity Agreement with the Federal Financing Bank (“FFB”), and iii) the Put Agreement provided by ED. If the conduit does not have sufficient funds to pay all SLST Notes, then those SLST Notes will be repaid with funds from the FFB. The FFB will hold the notes for a short period of time and, if at the end of that time, the SLST Notes still cannot be paid off, the underlying FFELP loans that serve as collateral to the ED Conduit will be sold to ED through the Put Agreement at a price of 97 percent of the face amount of the loans. As of September 30, 2009, approximately $14.1 billion face amount of our Stafford and PLUS loans were funded through the ED Conduit Program with a weighted average issuance cost of approximately 0.87 percent. As of September 30, 2009, there are approximately $1.1 billion face amount of additional FFELP Stafford and PLUS loans (excluding loans currently in the Participation Program) that can be funded through the ED Conduit Program.

Additional Funding Sources for General Corporate Purposes

In addition to funding FFELP loans through ED’s Participation and Purchase Programs and the ED Conduit Program, the Company employs other financing sources for general corporate purposes, which includes originating Private Education Loans, repurchases and repayments of unsecured debt obligations.

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Secured borrowings, including securitizations, asset-backed commercial paper (“ABCP”) borrowings and indentured trusts, comprised 82 percent of our Managed debt outstanding at September 30, 2009 versus 78 percent at September 30, 2008.

Sallie Mae Bank

During the fourth quarter of 2008, Sallie Mae Bank, our Utah industrial bank subsidiary, began expanding its deposit base to fund new Private Education Loan originations. Sallie Mae Bank raises deposits primarily through intermediaries in the retail brokered CD market. Given the disruptions in the capital markets during the first half of 2009, Sallie Mae Bank raised deposits in excess of loan growth for that period to prefund expected asset growth in the second half of 2009. As a result, in the third quarter of 2009, Sallie Mae Bank did not raise additional deposits. As of September 30, 2009, total term bank deposits were $5.9 billion. As of September 30, 2009, $4.2 billion of Private Education Loans were held at Sallie Mae Bank. We ultimately expect to raise additional long-term financing, through Private Education Loan securitizations or other financings, to fund these loans. In the near term, we expect Sallie Mae Bank to continue to fund newly originated Private Education Loans through long-term bank deposits.

ABS Transactions

On January 6, 2009, we closed a $1.5 billion 12.5 year asset-backed securities (“ABS”) based facility. This facility is used to provide up to $1.5 billion term financing for Private Education Loans. The fully-utilized cost of financing obtained under this facility is expected to be LIBOR plus 5.75 percent. In connection with this facility, we completed one Private Education Loan term ABS transaction totaling $1.5 billion in the first quarter of 2009. The net funding received under the asset-backed securities based facility for this issuance was $1.1 billion.

In April 2009, we completed three FFELP long-term ABS transactions totaling $5.1 billion. The FFELP transactions were composed primarily of FFELP consolidation loans which were not eligible for the ED Conduit Program or the Term Asset-Backed Securities Loan Facility (“TALF”) discussed below. Although we have demonstrated our access to the ABS market in 2009 and we expect ABS financing to remain a primary source of funding over the long term, we expect our transaction volumes to be more limited and pricing less favorable than prior to the credit market dislocation that began in the summer of 2007, with significantly reduced opportunities to place subordinated tranches of ABS with investors. At present, while the markets have demonstrated some signs of recovery, we are unable to predict when market conditions will allow for more regular, reliable and cost-effective access to the term ABS market. In May 2009, we completed a $2.6 billion Private Education Loan term ABS issue. In July 2009, we completed a $1.1 billion Private Education Loan term ABS issue. In August 2009, we completed a $1.7 billion Private Education Loan term ABS issue. These transactions were private placements and TALF-eligible. See “Term Asset-Backed Securities Loan Facility (“TALF”)” below for additional details.

Asset-Backed Financing Facilities

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On April 24, 2009, the Company extended the maturity of $21.8 billion of the 2008 FFELP ABCP Facility for one year to April 23, 2010. The Company also extended its 2008 Asset-Backed Loan Facility in the amount of $1.5 billion. The extended 2008 Asset-Backed Loan Facility matured on June 26, 2009 and was paid in full. A total of $86 million in fees were paid related to these extensions. The 2008 Private Education Loan ABCP Facility was paid off and terminated on April 24, 2009. The stated borrowing rate of the 2008 FFELP ABCP Facility is the applicable funding rate plus 130 basis points excluding upfront fees. The applicable funding rate generally will be either a LIBOR or commercial paper rate. The terms of the 2008 FFELP ABCP Facility call for an increase in the applicable funding spread to 300 basis points if the outstanding borrowing amount is not reduced to $15.2 billion and $10.9 billion as of June 30, 2009 and September 30, 2009, respectively. The outstanding borrowings were reduced to $12.5 billion and $9.4 billion on June 30, 2009 and September 30, 2009, respectively. If the Company does not negotiate an extension or pay off all outstanding amounts of the 2008 FFELP ABCP Facility at maturity, the facility will extend by 90 days with the interest rate generally increasing from LIBOR plus 250 basis points to 550 basis points over the 90 day period. The other terms of the facilities remained materially unchanged.

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

On February 6, 2009, the Federal Reserve Bank of New York published proposed terms for a program designed to facilitate renewed issuance of consumer and small business ABS at lower interest rate spreads. TALF was initiated on March 17, 2009 and currently provides investors who purchase eligible ABS with funding of up to five years. Eligible ABS include ‘AAA’ rated student loan ABS backed by FFELP and private student loans first disbursed since May 1, 2007. As of September 30, 2009, we had approximately $10.6 billion book basis of student loans (including $7.3 billion book basis of Private Education Loans and $3.3 billion book basis of Consolidation Loans) eligible to serve as collateral for ABS funded under TALF; this amount does not include loans eligible for ECASLA financing programs. While TALF has improved our access to and reduced our cost of ABS funding relative to 2009 pre-TALF levels, we are unable to predict, at this time, the full impact TALF will ultimately have on our funding activities. For student loan collateral, TALF is scheduled to expire on March 31, 2010.

On May 5, 2009, we priced a $2.6 billion Private Education Loan securitization which closed on May 12, 2009. The issue bears a coupon of 1-month LIBOR plus 6.0 percent and is callable at the issuer’s option at 93 percent of the outstanding balance of the ABS between November 15, 2011 and April 16, 2012. If the issue is called on November 15, 2011, we expect the effective cost of the financing will be approximately 1-month LIBOR plus 3.7 percent. This transaction was TALF-eligible.

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

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January 16, 2012, we expect the effective cost of the financing will be approximately Prime minus 0.71 percent. This transaction was TALF-eligible.

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

Auction Rate Securities

At September 30, 2009, we had $3.3 billion of taxable and $1.2 billion of tax-exempt auction rate securities outstanding in securitizations and indentured trusts, respectively, on a Managed Basis. Since February 2008, problems in the auction rate securities market as a whole led to failures of the auctions pursuant to which certain of our auction rate securities’ interest rates are set. As a result, all of the Company’s auction rate securities as of September 30, 2009 bore interest at the maximum rate allowable under their terms. The maximum allowable interest rate on our $3.3 billion of taxable auction rate securities is generally LIBOR plus 1.50 percent. The maximum allowable interest rate on many of the Company’s $1.2 billion of tax-exempt auction rate securities is a formula driven rate, which produced various maximum rates up to 2.25 percent during the third quarter of 2009.

Reset Rate Notes

Certain tranches of our term ABS are reset rate notes. Reset rate notes are subject to periodic remarketing, at which time the interest rates on the reset rate notes are reset. The Company also has the option to repurchase the reset rate note prior to a failed remarketing and hold it as an investment until such time it can be remarketed. In the event a reset rate note cannot be remarketed on its remarketing date, and is not repurchased, the interest rate generally steps up to and remains at LIBOR plus 0.75 percent, until such time as the bonds are successfully remarketed or repurchased. The Company’s repurchase of a reset rate note requires additional funding, the availability and pricing of which may be less favorable to the Company than it was at the time the reset rate note was originally issued. Unlike the repurchase of a reset rate note, the occurrence of a failed remarketing does not require additional funding. As a result of the ongoing dislocation in the capital markets, at September 30, 2009, $1.8 billion of our reset rate notes bore interest at, or were swapped to LIBOR plus 0.75 percent due to a failed remarketing. Until capital markets conditions improve, it is possible additional reset rate notes will experience failed remarketings. On October 26, 2009, the Company successfully remarketed a $590 million reset rate note at LIBOR plus 0.40 percent to maturity. This note had a short average life; other notes which were due to reset in October 2009 with longer average lives failed remarketing. As of September 30, 2009, on a Managed Basis, the Company had $2.4 billion and $2.5 billion of reset rate notes due to be remarketed in 2009 and 2010, respectively, and an additional $8.5 billion to be remarketed thereafter.

Primary Sources of Liquidity and Available Capacity

We expect to fund our ongoing liquidity needs, including the origination of new loans and the repayment of $0.5 billion of senior unsecured notes maturing in the remainder of 2009, through our current cash and investment portfolio, cash flow provided by earnings and repayment of principal on unencumbered student loan assets and distributions from our securitization trusts, the liquidity facilities made available by ED, TALF, the 2008 Asset-Backed Financing Facilities, the issuance of term ABS, term bank deposits, and, to a lesser extent, if possible, unsecured debt and other sources.

To supplement our funding sources, we maintained an additional $3.5 billion in unsecured revolving credit facilities as of September 30, 2009; $1.9 billion of our unsecured revolving facilities matures in October 2010 and $1.6 billion matures in October 2011. These figures do not include a $215 million commitment from Aurora Bank, FSB, formerly known as Lehman Brothers Bank, FSB, a subsidiary of Lehman Brothers Holdings Inc. (see “Counterparty Exposure,” below). On April 24, 2009, in conjunction with the extension of the 2008 ABCP Facilities, a $1.4 billion revolving credit facility maturing in October 2009 was retired and the $1.9 billion revolving credit facility maturing in October 2011 was reduced to $1.6 billion. The principal financial covenants

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in the unsecured revolving credit facilities require the Company to maintain consolidated tangible net worth of at least $1.38 billion at all times. Consolidated tangible net worth as calculated for purposes of this covenant was $3.1 billion as of September 30, 2009. The covenants also require the Company to meet either a minimum interest coverage ratio or a minimum net adjusted revenue test based on the four preceding quarters’ adjusted “Core Earnings” financial performance. The Company was compliant with both of the minimum interest coverage ratio and the minimum net adjusted revenue tests as of the quarter ended September 30, 2009. In the past, we have not relied upon our unsecured revolving credit facilities as a primary source of liquidity. Even though we have never borrowed under these facilities, they are available to be drawn upon for general corporate purposes.

During the quarter, the Company’s new financing transactions generated excess liquidity, some of which was used to repurchase $1.4 billion of the Company’s short-term senior unsecured notes, generating pre-tax gains of $74 million.

The following table details our primary sources of primary and stand-by liquidity and the available capacity at September 30, 2009 and December 31, 2008.


	September 30, 2009			December 31, 2008
	Available Capacity			Available Capacity

Sources of primary liquidity available for new FFELP Stafford and PLUS loan originations:
ED Purchase and Participation Programs⁽¹⁾		Unlimited	⁽¹⁾		Unlimited	⁽¹⁾
Sources of primary liquidity for general corporate purposes:
Unrestricted cash and liquid investments:
Cash and cash equivalents	$	5,187		$	4,070
Commercial paper and asset-backed commercial paper		850			801
Other⁽²⁾		151			133

Total unrestricted cash and liquid investments^(3)(4)(5)		6,188			5,004
Unused commercial paper and bank lines of credit⁽⁶⁾		3,485			5,192
2008 FFELP ABCP Facilities		1,057			807
2008 Private Education Loan ABCP Facility		—			332

Total sources of primary liquidity for general corporate purposes		10,730			11,335
Sources of stand-by liquidity:
Unencumbered FFELP loans, net⁽⁷⁾		2,660			5,366

Total sources of primary and stand-by liquidity for general corporate purposes⁽⁸⁾	$	13,390		$	16,701


⁽¹⁾		The ED Purchase and Participation Programs provide unlimited funding for eligible FFELP Stafford and PLUS loans made by the Company for the academic years 2008-2009 and 2009-2010. See “ED Funding Programs” discussed earlier in this section.

⁽²⁾		At September 30, 2009 and December 31, 2008, includes $42 million and $97 million, respectively, due from The Reserve Primary Fund (see “Counterparty Exposure” below).

⁽³⁾		At both September 30, 2009 and December 31, 2008, excludes $26 million of investments pledged as collateral related to certain derivative positions and $808 million and $82 million, respectively, of other non-liquid investments, classified as cash and investments on our balance sheet in accordance with GAAP.

⁽⁴⁾		At September 30, 2009 and December 31, 2008, includes $608 million and $1.6 billion, respectively, of cash collateral pledged by derivative counterparties and held by the Company in unrestricted cash.

⁽⁵⁾		At September 30, 2009 and December 31, 2008, includes $2.8 billion and $1.1 billion, respectively, of cash and liquid investments at Sallie Mae Bank, which Sallie Mae Bank is not authorized to dividend to the Company without FDIC approval. This cash will be used primarily to originate or acquire student loans.

⁽⁶⁾		At September 30, 2009 and December 31, 2008, excludes commitments of $215 million and $308 million, respectively, from Aurora Bank, FSB, formerly known as Lehman Brothers Bank, FSB, a subsidiary of Lehman Brothers Holdings Inc., which declared bankruptcy on September 15, 2008.

⁽⁷⁾		The balance at September 30, 2009 and December 31, 2008 included approximately $0.7 billion and $0.2 billion, respectively, of unencumbered FFELP loans qualified to be financed by ED’s Participation Program. Additionally, at September 30, 2009, $0.4 billion of loans qualified to be financed in the ED Conduit Program.

⁽⁸⁾		General corporate purposes primarily include originating Private Education Loans and repaying unsecured debt as it matures.

In addition to the assets listed in the table above, we hold on-balance sheet a number of other unencumbered assets, consisting primarily of Private Education Loans, Retained Interests and other assets. At

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September 30, 2009, we had a total of $32.2 billion of unencumbered assets, including goodwill and acquired intangibles. Total student loans, net, comprised $16.0 billion of this unencumbered asset total. Private Education Student Loans, net, comprised $13.3 billion of this unencumbered asset total.

Counterparty Exposure

Counterparty exposure related to financial instruments arises from the risk that a lending, investment or derivative counterparty will not be able to meet its obligations to the Company.

Aurora Bank, FSB, formerly known as Lehman Brothers Bank, FSB, a subsidiary of Lehman Brothers Holdings Inc., is a party to the Company’s unsecured revolving credit facilities under which they provide the Company with commitments totaling $215 million as of September 30, 2009. Lehman Brothers Holdings Inc. declared bankruptcy on September 15, 2008. The Company is operating under the assumption that the lending commitments of Aurora Bank, FSB, will not be honored if drawn upon.

To provide liquidity for future cash needs, SLM invests in high quality money market investments. At September 30, 2009, the Company had investments of $42 million with The Reserve Primary Fund (“The Fund”). In September 2008, the Company requested redemption of all monies invested in The Fund prior to The Fund’s announcement that it suspended distributions as a result of The Fund’s exposure to Lehman Brothers Holdings Inc.’s bankruptcy filing and The Fund’s net asset value being below one dollar per share. The Company was originally informed by The Fund that the Company would receive its entire investment amount. Subsequently, the SEC granted The Fund an indefinite extension to pay distributions as The Fund is being liquidated. The Company has received, to date, a total of $450 million of an initial investment of $500 million from The Fund. The Company anticipates further delay of remaining distributions and a potential loss on its investments, even though the Company is legally entitled to receive 100 percent of its remaining investment amount. In the fourth quarter of 2008, we recorded an impairment of $8 million related to our investment in the Fund.

Protection against counterparty risk in derivative transactions is generally provided by International Swaps and Derivatives Association, Inc. (“ISDA”) Credit Support Annexes (“CSAs”). CSAs require a counterparty to post collateral if a potential default would expose the other party to a loss. The Company is a party to derivative contracts for its corporate purposes and also within its securitization trusts. The Company has CSAs and collateral requirements with all of its corporate derivative counterparties requiring collateral to be exchanged based on the net fair value of derivatives with each counterparty above a threshold. Additionally, credit downgrades below a preset level can eliminate this threshold. The Company’s securitization trusts require collateral in all cases if the counterparty’s credit rating is withdrawn or downgraded below a certain level. If the counterparty does not post the required collateral or is downgraded further, the counterparty must find a suitable replacement counterparty or provide the trust with a letter of credit or a guaranty from an entity that has the required credit ratings. Failure to post the collateral or find a replacement counterparty could result in a termination event under the derivative contract. The Company considers counterparties’ credit risk when determining the fair value of derivative positions on its exposure net of collateral. Securitizations involving foreign currency notes issued after November 2005 also require the counterparty to post collateral to the trust based on the fair value of the derivative regardless of credit rating. The trusts are not required to post collateral to the counterparties. If we were unable to collect from a counterparty related to SLM Corporation and on-balance sheet trust derivatives, we would have a loss equal to the amount the derivative is recorded on our balance sheet. If we were unable to collect from a counterparty related to an off-balance sheet trust derivative, the value of our Residual Interest on our balance sheet would be reduced through earnings.

The Company has liquidity exposure related to collateral movements between SLM Corporation and its derivative counterparties. The collateral movements can increase or decrease our primary liquidity depending on the nature of the collateral (whether cash or securities), the Company’s and counterparties’ credit ratings and on movements in the value of the derivatives, which are primarily impacted by changes in interest rate and foreign exchange rates. These movements may require the Company to return cash collateral posted or may require the Company to access primary liquidity to post collateral to counterparties. As of September 30, 2009, the Company held $608 million cash collateral in unrestricted cash accounts. If the Company’s credit

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ratings are downgraded from current levels, it may be required to segregate such collateral in restricted accounts.

The table below highlights exposure related to our derivative counterparties at September 30, 2009.


				On-Balance Sheet			Off-Balance Sheet
	SLM Corporation			Securitizations			Securitizations
	Contracts			Contracts			Contracts

Exposure, net of collateral	$	360		$	1,247		$	633
Percent of exposure to counterparties with credit ratings below S&P AA- or Moody’s Aa3		59	%		42	%		29	%
Percent of exposure to counterparties with credit ratings below S&P A- or Moody’s A3		0	%		0	%		0	%

Managed Borrowings

The following tables present the ending balances of our Managed borrowings at September 30, 2009 and 2008, and the average balances and average interest rates of our Managed borrowings for the three and nine months ended September 30, 2009 and 2008. The average interest rates include derivatives that are economically hedging the underlying debt but do not qualify for hedge accounting treatment under ASC 815. (See “BUSINESS SEGMENTS — Pre-tax Differences between ‘Core Earnings’ and GAAP by Business Segment — Derivative Accounting — Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities.”)

Ending Balances


	As of September 30,
	2009						2008
	Ending Balance						Ending Balance
					Total						Total
	Short		Long		Managed		Short		Long		Managed
	Term		Term		Basis		Term		Term		Basis

Unsecured borrowings	$	4,330	$	24,869	$	29,199	$	7,262	$	31,796	$	39,058
Unsecured term bank deposits		762		5,129		5,891		744		—		744
Indentured trusts (on-balance sheet)		66		1,629		1,695		44		2,207		2,251
ED Participation Program facility (on-balance sheet)⁽¹⁾		22,864		—		22,864		3,555		—		3,555
ED Conduit Program facility (on-balance sheet)		14,190		—		14,190		—		—		—
ABCP borrowings (on-balance sheet)⁽²⁾		9,434		—		9,434		24,684		—		24,684
Securitizations (on-balance sheet)		—		88,961		88,961		—		81,554		81,554
Securitizations (off-balance sheet)		—		34,534		34,534		—		38,333		38,333
Other		1,732		—		1,732		1,979		—		1,979

Total	$	53,378	$	155,122	$	208,500	$	38,268	$	153,890	$	192,158


⁽¹⁾		The Company has the option of paying off this amount with cash or by putting the loans to ED as previously discussed.

⁽²⁾		Includes $1.9 billion outstanding in the 2008 Asset-Backed Loan Facility at September 30, 2008. There was no balance outstanding at September 30, 2009.

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Average Balances


	Three Months Ended September 30,										Nine Months Ended September 30,
	2009					2008					2009					2008
	Average		Average			Average		Average			Average		Average			Average		Average
	Balance		Rate			Balance		Rate			Balance		Rate			Balance		Rate

Unsecured borrowings	$	30,524		1.79	%	$	38,744		3.71	%	$	33,021		2.03	%	$	40,466		3.75	%
Unsecured term bank deposits		5,971		3.48			703		3.83			4,419		3.61			616		4.13
Indentured trusts (on-balance sheet)		1,743		.90			2,337		3.18			1,861		1.17			2,430		3.98
ED Participation Program facility (on-balance sheet)		19,886		.93			960		3.38			15,698		1.56			322		3.38
ED Conduit Program facility (on-balance sheet)		12,219		.87			—		—			5,037		.85			—		—
ABCP Borrowings(on-balance sheet)⁽¹⁾		11,639		2.68			23,611		5.65			18,935		2.98			24,954		5.39
Securitizations (on-balance sheet)		88,301		1.22			79,223		3.18			84,657		1.48			74,385		3.29
Securitizations (off-balance sheet)		34,813		.48			38,889		2.91			35,843		.89			40,253		3.30
Other		1,477		.25			2,518		2.12			1,240		.38			2,363		2.50

Total	$	206,573		1.27	%	$	186,985		3.54	%	$	200,711		1.63	%	$	185,789		3.68	%


⁽¹⁾		Includes the 2008 Asset-Backed Loan Facility.

Unsecured On-Balance Sheet Financing Activities

The following table presents the senior unsecured credit ratings assigned by major rating agencies as of November 3, 2009.

Moody’s

S&P

Fitch

Short-term unsecured debt

Not Prime

⁽¹⁾

A-3

⁽¹⁾

Long-term senior unsecured debt

Ba1

⁽¹⁾

BBB -

⁽¹⁾

BBB -


	⁽¹⁾	Under review for potential downgrade.

The table below presents our unsecured on-balance sheet funding by funding source for the three and nine months ended September 30, 2009 and 2008.


	Debt Issued For				Debt Issued For
	the Three Months				the Nine Months
	Ended				Ended				Outstanding at
	September 30,				September 30,				September 30,
	2009		2008		2009		2008		2009		2008

Retail notes	$	—	$	—	$	—	$	—	$	3,633	$	4,101
Foreign currency denominated notes⁽¹⁾		—		—		—		—		9,900		12,139
Extendible notes		—		—		—		—		—		2,249
Global notes (Institutional)		—		—		—		2,437		15,080		19,972
Medium-term notes (Institutional)		—		—		—		—		586		597

Total unsecured corporate borrowings		—		—		—		2,437		29,199		39,058
Unsecured term bank deposits		—		495		4,531		1,198		5,891		744

Total	$	—	$	495	$	4,531	$	3,635	$	35,090	$	39,802


⁽¹⁾		All foreign currency denominated notes are hedged using derivatives that exchange the foreign denomination for U.S. dollars.

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Securitization Activities

Securitization Program

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


	Three Months Ended September 30,
	2009									2008
			Loan									Loan
	No. of		Amount		Pre-Tax					No. of		Amount		Pre-Tax
	Transactions		Securitized		Gain		Gain %			Transactions		Securitized		Gain		Gain %

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

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

Securitizations — financings:
FFELP Stafford/PLUS loans⁽¹⁾		—		—							3		6,721
FFELP Consolidation Loans⁽¹⁾		—		—							—		—
Private Education Loans⁽¹⁾		2		3,766							—		—

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

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


	Nine Months Ended September 30,
	2009									2008
			Loan									Loan
	No. of		Amount		Pre-Tax					No. of		Amount		Pre-Tax
	Transactions		Securitized		Gain		Gain %			Transactions		Securitized		Gain		Gain %

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

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

Securitizations — financings:
FFELP Stafford/PLUS loans⁽¹⁾		—		—							9		18,546
FFELP Consolidation Loans⁽¹⁾		2		4,524							—		—
Private Education Loans⁽¹⁾		4		10,184							—		—

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

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


⁽¹⁾		In certain securitizations there are terms within the deal structure that result in such securitizations not qualifying for sale treatment and accordingly, they are accounted for on-balance sheet as 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 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.

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Retained Interest in Securitized Receivables


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

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


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

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


	As of September 30, 2008
	FFELP			Consolidation			Private
	Stafford and			Loan			Education
	PLUS			Trusts⁽¹⁾			Loan Trusts			Total

Fair value of Residual Interests	$	309		$	612		$	1,402		$	2,323
Underlying securitized loan balance		7,600			15,252			13,648			36,500
Weighted average life		3.0 yrs.			8.2 yrs.			6.6 yrs.
Prepayment speed (annual rate)⁽²⁾
Interim status		0	%		N/A			0	%
Repayment status		2-19	%		1-6	%		2-15	%
Life of loan — repayment status		12	%		4	%		6	%
Expected remaining credit losses (% of outstanding student loan principal)⁽³⁾		.11	%		.23	%		5.59	%
Residual cash flows discount rate		12.7	%		11.3	%		18.3	%


⁽¹⁾		Includes $641 million, $762 million, and $333 million related to the fair value of the Embedded Floor Income as of September 30, 2009, December 31, 2008, and September 30, 2008, respectively. Changes in the fair value of the Embedded Floor Income are primarily due to changes in the interest rates and the paydown of the underlying loans.

⁽²⁾		The Company uses CPR curves for Residual Interest valuations that are based on seasoning (the number of months since entering repayment). Under this methodology, a different CPR is applied to each year of a loan’s seasoning. Repayment status CPR used is based on the number of months since first entering repayment (seasoning). Life of loan CPR is related to repayment status only and does not include the impact of the loan while in interim status. The CPR assumption used for all periods includes the impact of projected defaults.

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

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

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Off-Balance Sheet Net Assets

The following table summarizes our off-balance sheet net assets at September 30, 2009 and December 31, 2008 on a basis equivalent to our GAAP on-balance sheet trusts, which presents the assets and liabilities in the off-balance sheet trusts as if they were being accounted for on-balance sheet rather than off-balance sheet. This presentation, therefore, includes a theoretical calculation of the premiums on student loans, the allowance for loan losses, and the discounts and deferred financing costs on the debt. However, this presentation does not include any impact of accounting under ASC 815 or ASC 830 for trust derivatives or foreign currency denominated debt. This presentation is not, nor is it intended to be, a liquidation basis of accounting. (See also “LENDING BUSINESS SEGMENT — Summary of our Managed Student Loan Portfolio — Ending Managed Student Loan Balances, net” and “LIQUIDITY AND CAPITAL RESOURCES — Managed Borrowings — Ending Balances” earlier in this section.)


	September 30,			December 31,
	2009			2008

Off-Balance Sheet Assets:
Total student loans, net	$	33,321		$	35,591
Restricted cash and investments		1,154			1,557
Accrued interest receivable		673			937

Total off-balance sheet assets		35,148			38,085
Off-Balance Sheet Liabilities:
Debt, par value		34,514			37,228
Debt, unamortized discount and deferred issuance costs		(51	)		(69	)

Total debt		34,463			37,159
Accrued interest payable		33			166

Total off-balance sheet liabilities		34,496			37,325

Off-Balance Sheet Net Assets	$	652		$	760

Servicing and Securitization Revenue

Servicing and securitization revenue, the ongoing revenue from securitized loan pools accounted for off-balance sheet as Qualifying Special Purpose Entities (“QSPEs”), includes the interest earned on the Residual Interest asset and the revenue we receive for servicing the loans in the securitization trusts. Interest income recognized on the Residual Interest is based on our anticipated yield determined by estimating future cash flows each quarter.

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The following table summarizes the components of servicing and securitization revenue for the three and nine months ended September 30, 2009 and 2008.


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

Servicing revenue	$	55		$	61		$	171		$	188
Securitization revenue, before net Embedded Floor Income, impairment and unrealized fair value adjustment		80			80			239			242

Servicing and securitization revenue, before net Embedded Floor Income, impairment and unrealized fair value adjustment		135			141			410			430
Embedded Floor Income		62			23			220			159
Less: Floor Income previously recognized in gain calculation		(55	)		(18	)		(156	)		(54	)

Net Embedded Floor Income		7			5			64			105

Servicing and securitization revenue, before impairment and unrealized fair value adjustment		142			146			474			535
Unrealized fair value adjustment		13			(81	)		(338	)		(361	)
Gain on consolidation of off-balance sheet trusts		—			—			11			—
Retained Interest impairment		—			—			—			—

Total servicing and securitization revenue	$	155		$	65		$	147		$	174

Average off-balance sheet student loans	$	33,929		$	36,864		$	34,797		$	38,063

Average balance of Retained Interest	$	1,819		$	2,426		$	1,943		$	2,703

Servicing and securitization revenue as a percentage of the average balance of off-balance sheet student loans (annualized)		1.81	%		.70	%		.57	%		.61	%

Servicing and securitization revenue is primarily driven by the average balance of off-balance sheet student loans, the amount of and the difference in the timing of Embedded Floor Income recognition on off-balance sheet student loans and the unrealized fair value adjustments.

The Company recorded net unrealized mark-to-market gains/(losses) of $13 million and $(81) million in the third quarter of 2009 and 2008, respectively, related to the Residual Interest.

As of September 30, 2009, the Company changed the following significant assumptions compared to those used as of June 30, 2009, to determine the fair value of the Residual Interests:


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

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

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		improved conditions in the credit markets. This discount rate is applied to the projected cash flows to arrive at a fair value representative of the current economic conditions.

Interest Rate Risk Management

Asset and Liability Funding Gap

The tables below present our assets and liabilities (funding) arranged by underlying indices as of September 30, 2009. In the following GAAP presentation, the funding gap only includes derivatives that qualify as effective ASC 815 hedges (those derivatives which are reflected in net interest margin, as opposed to those reflected in the “gains/(losses) on derivatives and hedging activities, net” line on the consolidated statements of income). The difference between the asset and the funding is the funding gap for the specified index. This represents our exposure to interest rate risk in the form of basis risk and repricing risk, which is the risk that the different indices may reset at different frequencies or may not move in the same direction or at the same magnitude.

Management analyzes interest rate risk on a Managed Basis, which consists of both on-balance sheet and off-balance sheet assets and liabilities and includes all derivatives that are economically hedging our debt whether they qualify as effective hedges under ASC 815 or not. Accordingly, we are also presenting the asset and liability funding gap on a Managed Basis in the table that follows the GAAP presentation.

GAAP Basis


Index	Frequency of					Funding
(Dollars in billions)	Variable Resets	Assets		Funding⁽¹⁾		Gap

3-month Commercial paper⁽²⁾	daily	$	127.4	$	22.9	$	104.5
3-month Treasury bill	weekly		6.6		.1		6.5
Prime	annual		.5		—		.5
Prime	quarterly		1.3		—		1.3
Prime	monthly		17.0		—		17.0
Prime	daily		—		2.8		(2.8	)
PLUS Index	annual		.5		—		.5
3-month LIBOR	daily		—		—		—
3-month LIBOR	quarterly		.1		105.6		(105.5	)
1-month LIBOR	monthly		4.8		2.6		2.2
CMT/CPI Index	monthly/quarterly		—		2.7		(2.7	)
Non Discrete reset⁽³⁾	monthly		—		25.8		(25.8	)
Non Discrete reset⁽⁴⁾	daily/weekly		12.6		2.2		10.4
Fixed Rate⁽⁵⁾			15.6		21.7		(6.1	)

Total		$	186.4	$	186.4	$	—


⁽¹⁾		Funding includes all derivatives that qualify as hedges under ASC 815.

⁽²⁾		Funding includes $22.9 billion of ED Participation Program facility which resets based on the prior quarter student loan commercial paper index.

⁽³⁾		Funding consists of auction rate securities, the 2008 ABCP Facilities and the ED Conduit Program facility.

⁽⁴⁾		Assets include restricted and non-restricted cash equivalents and other overnight type instruments.

⁽⁵⁾		Assets include receivables and other assets (including Retained Interests, goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity (excluding series B Preferred Stock).

The “Funding Gaps” in the above table are primarily interest rate mismatches in short-term indices between our assets and liabilities. We address this issue typically through the use of basis swaps that typically convert quarterly three-month LIBOR to other indices that are more correlated to our asset indices. These

126

basis swaps do not qualify as effective hedges under ASC 815 and as a result the effect on the funding index is not included in our interest margin and is therefore excluded from the GAAP presentation.

Managed Basis


Index	Frequency of					Funding
(Dollars in billions)	Variable Resets	Assets		Funding⁽¹⁾		Gap

3-month Commercial paper⁽²⁾	daily	$	146.0	$	22.9	$	123.1
3-month Treasury bill	weekly		8.9		5.9		3.0
Prime	annual		.9		—		.9
Prime	quarterly		6.1		1.5		4.6
Prime	monthly		24.3		13.1		11.2
Prime	daily		—		2.8		(2.8	)
PLUS Index	annual		.6		.1		.5
3-month LIBOR⁽³⁾	daily		—		89.4		(89.4	)
3-month LIBOR	quarterly		—		22.3		(22.3	)
1-month LIBOR	monthly		4.8		10.5		(5.7	)
1-month LIBOR	daily		—		2.0		(2.0	)
Non Discrete reset⁽⁴⁾	monthly		—		26.8		(26.8	)
Non Discrete reset⁽⁵⁾	daily/weekly		13.8		1.7		12.1
Fixed Rate⁽⁶⁾			11.7		18.1		(6.4	)

Total		$	217.1	$	217.1	$	—


⁽¹⁾		Funding includes all derivatives that management considers economic hedges of interest rate risk and reflects how we internally manage our interest rate exposure.

⁽²⁾		Funding includes $22.9 billion of ED Participation Program facility which resets based on the prior quarter student loan commercial paper index.

⁽³⁾		Funding includes $1.4 billion of auction rate securities.

⁽⁴⁾		Funding consists of auction rate securities, the 2008 ABCP Facilities and the ED Conduit Program facility.

⁽⁵⁾		Assets include restricted and non-restricted cash equivalents and other overnight type instruments.

⁽⁶⁾		Assets include receivables and other assets (including Retained Interests, goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity (excluding series B Preferred Stock).

We use interest rate swaps and other derivatives to achieve our risk management objectives. To the extent possible, we fund our assets with debt (in combination with derivatives) that has the same underlying index (index type and index reset frequency). When it is more economical, we also fund our assets with debt that has a different index and/or reset frequency than the asset, but only in instances where we believe there is a high degree of correlation between the interest rate movement of the two indices. For example, we use daily reset three-month LIBOR to fund a large portion of our daily reset three-month commercial paper indexed assets. In addition, we use quarterly reset three-month LIBOR to fund a portion of our quarterly reset Prime rate indexed Private Education Loans. We also use our monthly Non Discrete reset and 1-month LIBOR funding to fund various asset types. In using different index types and different index reset frequencies to fund our assets, we are exposed to interest rate risk in the form of basis risk and repricing risk, which is the risk that the different indices that may reset at different frequencies will not move in the same direction or at the same magnitude. While we believe that this risk is low as all of these indices are short-term with rate movements that are highly correlated over a long period of time, market disruptions can lead to a temporary divergence between indices as was experienced beginning in the second half of 2007 through the second quarter of 2009 with the commercial paper and LIBOR indices. As of September 30, 2009, on a Managed Basis, we have approximately $108.9 billion of FFELP loans indexed to three-month commercial paper (“3M CP”) that are funded with debt indexed to LIBOR. See “LENDING BUSINESS SEGMENT” in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” for further discussion of this CP/LIBOR relationship.

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When compared with the GAAP presentation, the Managed Basis presentation includes all of our off-balance sheet assets and funding, and also includes basis swaps that primarily convert quarterly three-month LIBOR to other indices that are more correlated to our asset indices.

Weighted Average Life

The following table reflects the weighted average life of our Managed earning assets and liabilities at September 30, 2009.


	On-Balance
(Averages in years)	Sheet		Managed

Earning assets
Student loans		7.8		7.8
Other loans		6.4		6.4
Cash and investments		.1		.1

Total earning assets		7.2		7.3

Borrowings
Short-term borrowings		.4		.4
Long-term borrowings		7.1		7.0

Total borrowings		5.0		5.3

Long-term debt issuances likely to be called by us or putable by the investor have been categorized according to their call or put dates rather than their maturity dates.

COMMON STOCK

The following table summarizes the Company’s common share repurchases and issuances for the three and nine months ended September 30, 2009 and 2008.


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

Common shares repurchased:
Benefit plans⁽¹⁾		.1		.5		.2		1.0

Total shares repurchased		.1		.5		.2		1.0

Average purchase price per share	$	17.81	$	28.20	$	22.91	$	24.60

Common shares issued		7.0		.4		7.4		1.9

Authority remaining at end of period for repurchases		38.8		38.8		38.8		38.8


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

The closing price of the Company’s common stock on September 30, 2009 was $8.72.

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Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity Analysis

The Company’s interest rate risk management seeks to limit the impact of short-term movements in interest rates on our results of operations and financial position. The following tables summarize the effect on earnings for the three and nine months ended September 30, 2009 and 2008 and the effect on fair values at September 30, 2009 and December 31, 2008, based upon a sensitivity analysis performed by management assuming a hypothetical increase in market interest rates of 100 basis points and 300 basis points while funding spreads remain constant. Additionally, as it relates to the effect on earnings, a sensitivity analysis was performed assuming the funding index increases 25 basis points while holding the asset index constant, if the funding index is different than the asset index. Both of these analyses do not consider any potential mark-to-market losses that may occur related to our Residual Interests that may result from asset and funding basis divergence or a higher discount rate that would be used to compute the present value of the cash flows if long-term interest rates increased. See Note 6, “Student Loan Securitization,” to the consolidated financial statements, which details the potential decrease to the fair value of the Residual Interest that could occur under the referenced interest rate environment.


	Three Months Ended September 30, 2009
											Asset and
											Funding
	Interest Rates:										Index
	Change from					Change from					Mismatches⁽¹⁾
	Increase of					Increase of					Increase of
	100 Basis					300 Basis					25 Basis
	Points					Points					Points
(Dollars in millions, except per share amounts)	$		%			$		%			$			%

Effect on Earnings
Increase/(decrease) in pre-tax net income before unrealized gains (losses) on derivative and hedging activities	$	8		3	%	$	37		16	%	$	(82	)		(36	)%
Unrealized gains (losses) on derivative and hedging activities		232		4,065			337		5,898			104			1,819

Increase in net income before taxes	$	240		103	%	$	374		160	%	$	22			9	%

Increase in diluted earnings per common share	$	.509		204	%	$	.794		318	%	$	.046			19	%


	Three Months Ended September 30, 2008
											Asset and
											Funding
	Interest Rates:										Index
	Change from					Change from					Mismatches⁽¹⁾
	Increase of					Increase of					Increase of
	100 Basis					300 Basis					25 Basis
	Points					Points					Points
(Dollars in millions, except per share amounts)	$		%			$		%			$			%

Effect on Earnings
Increase/(decrease) in pre-tax net income before unrealized gains (losses) on derivative and hedging activities	$	1		2	%	$	5		7	%	$	(76	)		(106	)%
Unrealized gains (losses) on derivative and hedging activities		203		107			382		201			92			48

Increase in net income before taxes	$	204		78	%	$	387		148	%	$	16			6	%

Increase in diluted earnings per common share	$	.438		110	%	$	.830		207	%	$	.033			8	%


⁽¹⁾		If an asset is not funded with the same index/frequency reset of the asset then it is assumed the funding index increases 25 basis points while holding the asset index constant.

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	Nine Months Ended September 30, 2009
													Asset and
													Funding
	Interest Rates:												Index
	Change from						Change from						Mismatches⁽¹⁾
	Increase of						Increase of						Increase of
	100 Basis						300 Basis						25 Basis
	Points						Points						Points
(Dollars in millions, except per share amounts)	$			%			$			%			$			%

Effect on Earnings
Increase/(decrease) in pre-tax net income before unrealized gains (losses) on derivative and hedging activities	$	(89	)		(18	)%	$	(84	)		(17	)%	$	(241	)		(48	)%
Unrealized gains (losses) on derivative and hedging activities		232			47			337			69			104			21

Increase in net income before taxes	$	143			1,210	%	$	253			2,139	%	$	(137	)		(1,157	)%

Increase in diluted earnings per common share	$	.305			180	%	$	.540			318	%	$	(.292	)		(172	)%


	Nine Months Ended September 30, 2008
												Asset and
												Funding
	Interest Rates:											Index
	Change from						Change from					Mismatches⁽¹⁾
	Increase of						Increase of					Increase of
	100 Basis						300 Basis					25 Basis
	Points						Points					Points
(Dollars in millions, except per share amounts)	$			%			$		%			$			%

Effect on Earnings
Increase/(decrease) in pre-tax net income before unrealized gains (losses) on derivative and hedging activities	$	(2	)		(2	)%	$	10		9	%	$	(218	)		(183	)%
Unrealized gains (losses) on derivative and hedging activities		203			162			382		305			92			73

Increase in net income before taxes	$	201			3,125	%	$	392		6,097	%	$	(126	)		(1,956	)%

Increase in diluted earnings per common share	$	.431			254	%	$	.841		495	%	$	(.270	)		(159	)%


⁽¹⁾		If an asset is not funded with the same index/frequency reset of the asset then it is assumed the funding index increases 25 basis points while holding the asset index constant.

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	At September 30, 2009
			Interest Rates:
			Change from						Change from
			Increase of						Increase of
			100 Basis						300 Basis
			Points						Points
(Dollars in millions)	Fair Value		$			%			$			%

Effect on Fair Values
Assets
Total FFELP student loans	$	133,756	$	(516	)		—	%	$	(1,063	)		(1	)%
Private Education Loans		19,872		—			—			—			—
Other earning assets		13,090		(4	)		—			(11	)		—
Other assets		14,361		(778	)		(5	)		(1,549	)		(11	)

Total assets	$	181,079	$	(1,298	)		(1	)%	$	(2,623	)		(1	)%

Liabilities
Interest bearing liabilities	$	164,606	$	(794	)		—	%	$	(2,014	)		(1	)%
Other liabilities		3,401		(196	)		(6	)		63			2

Total liabilities	$	168,007	$	(990	)		(1	)%	$	(1,951	)		(1	)%


	At December 31, 2008
			Interest Rates:
			Change from						Change from
			Increase of						Increase of
			100 Basis						300 Basis
			Points						Points
(Dollars in millions)	Fair Value		$			%			$			%

Effect on Fair Values
Assets
Total FFELP student loans	$	107,319	$	(758	)		(1	)%	$	(1,602	)		(1	)%
Private Education Loans		14,141		—			—			—			—
Other earning assets		9,265		(9	)		—			(25	)		—
Other assets		14,590		(848	)		(6	)		(2,108	)		(14	)

Total assets	$	145,315	$	(1,615	)		(1	)%	$	(3,735	)		(3	)%

Liabilities
Interest bearing liabilities	$	135,070	$	(837	)		(1	)%	$	(2,500	)		(2	)%
Other liabilities		3,604		(293	)		(8	)		(273	)		(8	)

Total liabilities	$	138,674	$	(1,130	)		(1	)%	$	(2,773	)		(2	)%

A primary objective in our funding is to minimize our sensitivity to changing interest rates by generally funding our floating rate student loan portfolio with floating rate debt. However, as discussed under “LENDING BUSINESS SEGMENT — Summary of our Managed Student Loan Portfolio — Floor Income — Managed Basis,” we can have a fixed versus floating mismatch in funding if the student loan earns at the fixed borrower rate and the funding remains floating. In addition, we can have a mismatch in the index (including the frequency of reset) of floating rate debt versus floating rate assets.

During the three and nine months ended September 30, 2009 and 2008, certain FFELP loans were earning Floor Income and we locked in a portion of that Floor Income through the use of Floor Income Contracts. The result of these hedging transactions was to convert a portion of the fixed rate nature of student

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loans to variable rate, and to fix the relative spread between the student loan asset rate and the variable rate liability.

In the above table, under the scenario where interest rates increase 100 and 300 basis points, the change in pre-tax net income before the unrealized gains (losses) on derivative and hedging activities is primarily due to the impact of (i) our unhedged on-balance sheet loans being in a fixed rate mode due to the Embedded Floor Income, while being funded with variable debt in low interest rate environments; and (ii) a portion of our variable assets being funded with fixed debt. Item (i) will generally cause income to decrease when interest rates increase from a low interest rate environment, whereas, item (ii) will generally offset this decrease. In the 100 and 300 basis point scenario for the three months ended September 30, 2009 and 2008, the increase in income resulted from item (ii) above that more than offset the impact of the low interest rate environment on item (i). The decrease in income for the nine months ended September 30, 2009, resulted from item (i) and its impact on Variable Rate Floor Income in the first half of the year. These loans reset to current market rates effective July 1, 2009.

Under the scenario in the tables above, called “Asset and Funding Index Mismatches,” the main driver of the decrease in pre-tax income before unrealized gains (losses) on derivative and hedging activities is the result of LIBOR-based debt funding commercial paper-indexed assets. See “LIQUIDITY AND CAPITAL RESOURCES — Interest Rate Risk Management — Asset and Liability Funding Gap” for a further discussion. Increasing the spread between indices will also impact the unrealized gains (losses) on derivatives and hedging activities as it relates to basis swaps. Basis swaps used to convert LIBOR-based debt to indices that we believe are economic hedges of the indices of the assets being funded resulted in an unrealized loss of $(114) million for the three and nine months ended September 30, 2009, and an unrealized loss of $(98) million for the three and nine months ended September 30, 2008. Offsetting this unrealized loss, are basis swaps that economically hedge our off-balance sheet Private Education Loan securitization trusts. Unrealized gains for these basis swaps totaled $218 million for the three and nine months ended September 30, 2009, and $190 million for the three and nine months ended September 30, 2008. The net impact of both of these items was an unrealized gain for all periods presented.

In addition to interest rate risk addressed in the preceding tables, the Company is also exposed to risks related to foreign currency exchange rates. Foreign currency exchange risk is primarily the result of foreign currency denominated debt issued by the Company. As it relates to the Company’s corporate unsecured and securitization debt programs used to fund the Company’s business, the Company’s policy is to use cross currency interest rate swaps to swap all foreign currency denominated debt payments (fixed and floating) to U.S. dollar LIBOR using a fixed exchange rate. In the tables above, there would be an immaterial impact on earnings if exchange rates were to decrease or increase, due to the terms of the hedging instrument and hedged items matching. The balance sheet interest bearing liabilities would be affected by a change in exchange rates; however, the change would be materially offset by the cross currency interest rate swaps in other assets or other liabilities. In the current economic environment, volatility in the spread between spot and forward foreign exchange rates has resulted in material mark-to-market impacts to current-period earnings which have not been factored into the above analysis. The earnings impact is noncash, and at maturity of the instruments, the cumulative mark-to-market impact will be zero.

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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See Note 1, “Significant Accounting Policies — Recently Issued Accounting Pronouncements,” to the consolidated financial statements.


Item 4.	Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2009. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer, concluded that, as of September 30, 2009, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

On April 20, 2009, the Company received a letter on behalf of a shareholder, SEIU Pension Plans Master Trust, demanding, among other things, that the Company’s Board of Directors take action to recover Company funds it alleges were “unjustly paid to certain current and former employees and executive officers of the Company” from 2005 to the present, file civil lawsuits against former and current executives, revise the executive compensation structure, and offer shareholders an annual nonbinding “say on pay.” Twenty-nine financial services companies received similar letters that same week. This letter was referred to the Board of Directors.

On August 3, 2009, the Company received the final audit report of ED’s Office of the Inspector General (“OIG”) related to the Company’s billing practices for Special Allowance Payments. Among other things, the OIG recommended that ED instruct the Company to return approximately $22 million in alleged special allowance overpayments. The Company continues to believe that its practices were consistent with longstanding ED guidance and all applicable rules and regulations and intends to continue disputing these findings. The OIG has audited other industry participants with regard to Special Allowance Payments for loans funded by tax exempt obligations and in certain cases the Secretary of ED has disagreed with the OIG’s recommendations.

We are 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 our reports to credit bureaus. In addition, the collections subsidiaries in our APG segment are routinely named in individual plaintiff or class action lawsuits in which the plaintiffs allege that we have violated a federal or state law in the process of collecting their accounts. Management believes that these claims, lawsuits and other actions will not have a material adverse effect on our business, financial condition or results of operations. Finally, from time to time, we receive information and document requests from state attorneys general and Congressional committees concerning certain of our business practices. Our practice has been and continues to be to cooperate with the state attorneys general and Congressional committees and to be responsive to any such requests.


Item 1A.	Risk Factors

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes the Company’s common share repurchases during the third quarter of 2009 in connection with the exercise of stock options and vesting of restricted stock to satisfy minimum statutory tax withholding obligations and shares tendered by employees to satisfy option exercise costs. See Note 9, “Stockholders’ Equity,” to the consolidated financial statements.


							Maximum Number
					Total Number of		of Shares That
					Shares Purchased		May Yet Be
	Total Number		Average Price		as Part of Publicly		Purchased Under
	of Shares		Paid per		Announced Plans		the Plans or
(Common shares in millions)	Purchased		Share		or Programs		Programs

Period:
July 1 — July 31, 2009		—	$	—		—		38.8
August 1 — August 31, 2009		—		—		—		38.8
September 1 — September 30, 2009		—		—		—		38.8

Total third quarter of 2009		—	$	—		—

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Item 3.	Defaults upon Senior Securities

Nothing to report.


Item 4.	Submission of Matters to a Vote of Security Holders

Nothing to report.


Item 5.	Other Information

Nothing to report.


Item 6.	Exhibits

The following exhibits are furnished or filed, as applicable:


10.5		SLM Corporation Directors Equity Plan, Non-Employee Director Restricted Stock Agreement 2009
10.6		SLM Corporation Directors Equity Plan, Non-Employee Director Stock Option Agreement 2009
31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		The following materials from SLM Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, formatted in XBRL (“Extensible Business Reporting Language”): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Changes in Stockholders’ Equity; (iv) the Consolidated Statements of Cash Flows; and (v) Notes to the Consolidated Financial Statements, tagged as blocks of text.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

SLM CORPORATION

(Registrant)


	By:	/s/ John F. Remondi

John F. Remondi

Vice Chairman and Chief Financial Officer

(Principal Financial and Accounting Officer)

Date: November 4, 2009

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GLOSSARY

Listed below are definitions of key terms that are used throughout this document. See also APPENDIX A, “FEDERAL FAMILY EDUCATION LOAN PROGRAM,” included in SLM Corporation’s (“the Company’s”) 2008 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 2, 2009, for a further discussion of the FFELP.

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 prepay 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” — The Company prepares 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”) Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” differs from GAAP. The Company refers to management’s basis of evaluating its segment results as “Core Earnings” presentations for each business segment and refers to these performance measures in its presentations with credit rating agencies and lenders. While “Core Earnings” results are not a substitute for reported results under GAAP, the Company relies on “Core Earnings” performance measures in operating each business segment because it believes these measures provide additional information regarding the operational and performance indicators that are most closely assessed by management.

“Core Earnings” performance measures are the primary financial performance measures used by management to 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 the Company’s chief operating decision makers. “Core Earnings” performance measures are used in developing the Company’s financial plans, tracking results, and establishing corporate performance targets and incentive compensation. Management believes this information provides additional insight into the financial performance of the Company’s core business activities. “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 16, “Segment Reporting,” to the consolidated financial statements and “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — BUSINESS SEGMENTS — Limitations of “Core Earnings” “ and “— Pre-tax Differences between ‘Core Earnings’ and GAAP by Business Segment” 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 reports on Form 10-Q, “Core Earnings” has been labeled as “ ‘Core’ net income” or “Managed net income” in certain instances.

Direct Loans — Educational loans provided by the FDLP (see definition, below) to students and parent borrowers directly through ED (see definition below) rather than through a bank or other lender.

Economic Floor Income — Economic Floor Income equals Gross Floor Income earned on Managed loans, minus the payments on Floor Income Contracts, plus the amortization of net premiums on both Fixed Rate and Variable Rate Floor Income Contracts (see definitions for capitalized terms, below).

ED — The U.S. Department of Education.

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Embedded 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 the Company. 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”) — 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 reimbursement on default claims higher than the legislated Risk Sharing (see definition below) levels on federally guaranteed student loans for all loans serviced for a period of at least 270 days before the date of default. 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, Risk Sharing may be applied retroactively to the date of the occurrence that resulted in noncompliance. The College Cost Reduction Act of 2007 (“CCRAA”) eliminated the EP designation effective October 1, 2007. See also Appendix A, “FEDERAL FAMILY EDUCATION LOAN PROGRAM,” included in the Company’s 2008 Annual Report on Form 10-K, filed with the SEC on March 2, 2009.

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

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

FFELP Consolidation Loans — Under the 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 loan 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). In April 2008, the Company suspended its participation in the FFELP Consolidation Loan program.

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

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

Floor Income — FFELP loans generally earn interest at the higher of either the borrower rate, which is fixed over a period of time, or a floating rate based on the SAP formula (see definition below). The Company generally finances its student loan portfolio with floating rate debt whose interest is matched closely to the floating nature of the applicable SAP formula. If interest rates decline to a level at which the borrower rate exceeds the SAP formula rate, the Company continues to earn interest on the loan at the fixed borrower rate while the floating rate interest on our debt continues to decline. In these interest rate environments, the Company refers to the additional spread it earns between the fixed borrower rate and the SAP formula rate as Floor Income. Depending on the type of 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, the Company 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, the Company may earn Floor Income to the next reset date.

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In accordance with legislation enacted in 2006, lenders are required to rebate Floor Income to ED for all 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.

Graphic Depiction of Floor Income:

Floor Income Contracts — The Company enters into contracts with counterparties under which, in exchange for an upfront fee representing the present value of the Floor Income that the Company expects to earn on a notional amount of underlying student loans being economically hedged, the Company will pay the counterparties the Floor Income earned on that notional amount over the life of the Floor Income Contract. Specifically, the Company agrees 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 the Company will earn over the period of the contract. Floor Income Contracts are not considered effective hedges under ASC 815, “Derivatives and Hedging,” and each quarter the Company must record the change in fair value of these contracts through income.

Gross Floor Income — Floor Income earned before payments on Floor Income Contracts.

Guarantors — State agencies or non-profit companies that guarantee (or insure) FFELP loans made by eligible lenders under The Higher Education Act of 1965 (“HEA”), as amended.

Lender Partners — Lender Partners are lenders who originate loans under forward purchase commitments under which the Company owns the loans from inception or, in most cases, acquires the loans soon after origination.

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Managed Basis — The Company generally analyzes the performance of its student loan portfolio on a Managed Basis. The Company views 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.

Private Education Loans — Education loans to students or parents of students that are not guaranteed under the FFELP. Private Education Loans include loans for higher education (undergraduate and graduate degrees) and for alternative education, such as career training, private kindergarten through secondary education schools and tutorial schools. Higher education loans have repayment terms similar to FFELP loans, whereby repayments begin after the borrower leaves school. The Company’s higher education Private Education Loans are not dischargeable in bankruptcy, except in certain limited circumstances. Repayment for alternative education generally begins immediately.

In the context of the Company’s Private Education Loan business, the Company uses the term “non-traditional loans” to describe education loans made to certain borrowers that have or are expected to have a high default rate as a result of a number of factors, including having a lower tier credit rating, low program completion and graduation rates or, where the borrower is expected to graduate, a low expected income relative to the borrower’s cost of attendance.

Proposed Merger — On April 16, 2007, the Company announced that a buyer group (“Buyer Group”) led by J.C. Flowers & Co. (“J.C. Flowers”), Bank of America, N.A. and JPMorgan Chase, N.A. (the “Merger”) signed a definitive agreement (“Merger Agreement”) to acquire the Company for approximately $25.3 billion or $60.00 per share of common stock. (See also “Merger Agreement” filed with the SEC on the Company’s Current Report on Form 8-K, dated April 18, 2007.) On January 25, 2008, the Company, Mustang Holding Company Inc. (“Mustang Holding”), Mustang Merger Sub, Inc. (“Mustang Sub”), J.C. Flowers, Bank of America, N.A. and JPMorgan Chase Bank, N.A. entered into a Settlement, Termination and Release Agreement (the “Agreement”). Under the Agreement, a lawsuit filed by the Company related to the Merger, as well as all counterclaims, was dismissed.

Repayment Borrower Benefits — Financial incentives offered to borrowers based on pre-determined qualifying factors, which are generally tied directly to making on-time monthly payments. The impact of Repayment 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. The Company occasionally changes Repayment Borrower Benefits programs in both amount and qualification factors. These programmatic changes must be reflected in the estimate of the Repayment Borrower Benefits discount when made.

Residual Interest — When the Company securitizes student loans, it retains the right to receive cash flows from the student loans sold to trusts that it sponsors 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 any Embedded Fixed Rate Floor Income described above. The Company values the Residual Interest at the time of sale of the student loans to the trust and as of 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) for our securitization transactions accounted for as sales.

Risk Sharing — When a FFELP loan first disbursed on and after July 1, 2006 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 is at risk for the remaining amount not guaranteed as a Risk Sharing loss on the loan. FFELP 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 Exceptional Performer designation from ED were subject to one-percent

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Risk Sharing for claims filed on or after July 1, 2006 and before October 1, 2007. The CCRAA reduces default insurance to 95 percent of the unpaid principal and accrued interest for loans first disbursed on or after October 1, 2012.

Special Allowance Payment (“SAP”) — FFELP loans disbursed prior to April 1, 2006 (with the exception of certain PLUS and SLS loans discussed below) 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 the Company. 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. The Company refers 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.

A schedule of SAP rates is set forth on pages A-7 and A-8 of the Company’s 2008 Annual Report on Form 10-K.

Variable Rate Floor Income — Variable Rate Floor Income is Floor Income that is earned only through the next reset date. For FFELP Stafford loans whose borrower interest rate resets annually on July 1, the Company may earn Floor Income or Embedded Floor Income based on a calculation of the difference between the borrower rate and the then current interest rate (see definitions for capitalized terms, above).

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