Sallie Mae 2005 Annual Report Download

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SLM CORPORATION ANNUAL REPORT 2005

Table of contents

  • Page 1
    S L M C O R P O R AT I O N A N N U A L R E P O R T 2 0 0 5

  • Page 2
    Everyone should have the chance to grow into a dream.

  • Page 3
    ... other sources, including private education loans and other financing products. Often, families circumvent the financial aid process entirely. For this reason, we added a direct-to-consumer initiative, Tuition Answer, in 2005. We originated more than THOMAS J. FITZPATRICK Chief Executive Officer...

  • Page 4
    ... total managed guaranteed portfolio at December 31 - has lengthened the average life of our assets to 8.3 years. Our success in growing loan originations is due in large part to Sallie Mae's 400-member campus-based sales force. These seasoned professionals provide service to more than 6,000 colleges...

  • Page 5
    Giving back Providing access to higher education for needy students - and serving the communities where our employees live and work - remains a focus for our company and our charitable organization, The Sallie Mae Fund. The Fund awarded more than $2.3 million in scholarships last year to help nearly...

  • Page 6
    4 S L M C O R P O R AT I O N A N N U A L R E P O R T 2 0 0 5

  • Page 7
    .... Private consolidation loans for debt-management assistance. Effective debt counseling is critical to the success of our customers, as well as the student loan industry and the American public who supports it. Today, federal student loan default rates are at historic low levels. Sallie Mae devotes...

  • Page 8
    6 S L M C O R P O R AT I O N A N N U A L R E P O R T 2 0 0 5

  • Page 9
    ... service to customers and return billions of taxpayer dollars annually, reducing the cost of the student loan program and providing the federal government with more dollars that can be directed toward other higher-education investments. Sallie Mae believes in giving back to the communities...

  • Page 10
    ... solely reliant on interest income from federal student loans as its sole source of revenue. Today, Sallie Mae has a healthy debt-management operation that has several specialized subsidiary companies that employ nearly one-third of our overall work force. The company has six internal lending brands...

  • Page 11
    ... company (as defined in Rule 12b-2 of the Exchange Act). Yes No ⌧ The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2005 was approximately $21,093,319,968 (based on closing sale price of $50.80 per share as reported for the New York Stock Exchange...

  • Page 12
    ... of applicable laws and regulations and from changes in these laws and regulations, which may reduce the volume, average term and costs of yields on student loans under the Federal Family Education Loan Program ("FFELP") or result in loans being originated or refinanced under non-FFELP programs or...

  • Page 13
    ... originated directly by ED under the FDLP. ED-The U.S. Department of Education. Embedded Fixed Rate/Variable Rate Floor Income-Embedded Floor Income is Floor Income (see definition below) that is earned on off-balance sheet student loans that are in securitization trusts sponsored by us. At the time...

  • Page 14
    ... borrower rate and the lender's expected yield based on the SAP formula is referred to as Floor Income. Our student loan assets are generally funded with floating rate debt, so when student loans are earning at the fixed borrower rate, decreases in interest rates may increase Floor Income. Graphic...

  • Page 15
    ... schools. Traditional higher education loans have repayment terms similar to FFELP loans, whereby repayments begin after the borrower leaves school. Repayment for alternative education or career training loans generally begins immediately. Privatization Act-The Student Loan Marketing Association...

  • Page 16
    ...ED are not subject to Risk Sharing. Special Allowance Payment ("SAP")-FFELP student loans originated prior to July 1, 2006 generally earn interest at the greater of the borrower rate or a floating rate determined by reference to the average of the applicable floating rates (91-day Treasury bill rate...

  • Page 17
    ... process through university-branded websites, tuition payment plans, call centers and other solutions that support the financial aid office. In recent years we have diversified our business through the acquisition of several companies that provide receivables management and debt collection services...

  • Page 18
    ... are federally insured. We serve a diverse range of clients that includes over 6,000 educational and financial institutions and state agencies. We also market student loans, both federal and private, directly to the consumer. We are the largest servicer of FFELP student loans, servicing a portfolio...

  • Page 19
    ...Education Loans Source: Based on estimates by Octameron Associates, "Don't Miss Out," 29th Edition, by College Board, "2005 Trends in Student Aid" and Sallie Mae. Includes tuition, room, board, transportation and miscellaneous costs for two and four year college degree-granting programs. Federally...

  • Page 20
    ...of higher education approved by ED are eligible to obtain FFELP loans. According to ED, roughly $350 million of such loans were originated in FFY 2005. Foreign students studying at U.S. institutions often seek financial aid and are eligible for several of Sallie Mae's Private Education Loan programs...

  • Page 21
    ...2005 to 2014. Demand for education credit will also increase due to the rise in non-traditional students (those not attending college directly from high school) and adult education. The following charts show the projected enrollment and average tuition and fee growth for four-year public and private...

  • Page 22
    ... Tuition & Fees 4-Year Private Tuition & Fees 4-Year Public Source: The College Board (1) Cost of attendance is in current dollars and includes tuition, fees, on-campus room and board fees. Sallie Mae's Lending Business Our primary marketing point-of-contact is the school's financial aid office...

  • Page 23
    ... from consolidation activity. During 2005, $17.1 billion of FFELP Stafford loans in our Managed loan portfolio consolidated either with us ($14.0 billion) or with other lenders ($3.1 billion). Consolidation Loans now represent over 73 percent of our on-balance sheet federally guaranteed student loan...

  • Page 24
    ...the Company. Under the Tuition Answer loan program, creditworthy parents, sponsors and students may borrow between $1,500 and $40,000 per year to cover any collegerelated expense. No school certification is required, although a borrower must provide enrollment documentation. At December 31, 2005, we...

  • Page 25
    ... approved our application for an industrial bank charter. Beginning in January 2006, Sallie Mae Bank began funding and originating Private Education Loans and federally guaranteed Consolidation Loans made by Sallie Mae to students and families nationwide. This allows us to capture the full economics...

  • Page 26
    ... management collections and debt purchase services across a wider customer base including large federal agencies, state agencies, credit card issuers, utilities, and other holders of consumer debt. In recent years we have diversified our DMO contingency revenue stream away from student loans...

  • Page 27
    ... are designed to prevent a default once a borrower's loan has been placed in delinquency status. Defaulted Student Loan Portfolio Management Services Our DMO business segment manages the defaulted student loan portfolios for six guarantors under long-term contracts. DMO's largest customer, USA Funds...

  • Page 28
    ...agencies and determining account placements to those agencies, processing loan consolidations and loan rehabilitations, and managing federal and state offset programs. Contingency Collection Services Our DMO business segment is also engaged in the collection of defaulted student loans and other debt...

  • Page 29
    ... activities required by ED. Loan servicing revenue was $44 million for 2005. REGULATION Like other participants in the FFELP program, the Company is subject, from time to time, to review of its student loan operations by ED and guarantee agencies. ED is authorized under its regulations to limit...

  • Page 30
    ...the HEA, generally, after a FFELP student loan is 90 days delinquent, we must report this information to at least one national credit bureau. Our DMO's debt collection and receivables management activities are subject to federal and state consumer protection, privacy and related laws and regulations...

  • Page 31
    ...or waivers from our Code of Business Conduct (to the extent applicable to our chief executive officer or chief financial officer) by posting such information on our website. In 2005, the Company submitted the annual certification of its chief executive officer regarding the Company's compliance with...

  • Page 32
    ...our federally insured and Private Education Loans the unamortized portion of the premiums and the discounts is included in the carrying value of the student loan on the consolidated balance sheet. We recognize income on our student loan portfolio based on the expected yield of the student loan after...

  • Page 33
    ...of Borrower Benefits programs. LENDING BUSINESS SEGMENT-PRIVATE EDUCATION LOANS Changes in the composition of our Managed student loan portfolio will increase the risk profile of our asset base and our capital requirements. As of December 31, 2005, 13 percent of our Managed student loans are Private...

  • Page 34
    ...defaulted consumer receivables at planned levels and at prices that management believes to be appropriate, we could experience short-term and long-term decreases in income. The availability of receivables portfolios at prices which generate an appropriate return on our investment depends on a number...

  • Page 35
    ... on the financial services industry, counter-party availability, changes affecting our assets, our corporate and regulatory structure, interest rate fluctuations, ratings agencies' actions, general economic conditions and the legal, regulatory, accounting and tax environments governing our funding...

  • Page 36
    ... on the Company. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-OTHER RELATED EVENTS AND INFORMATION-Reauthorization.") Our principal business is comprised of acquiring, originating, holding and servicing education loans made and guaranteed under the...

  • Page 37
    with ED, to maintain the federal guarantee on our FFELP loans. These requirements establish origination and servicing requirements, procedural guidelines and school and borrower eligibility criteria. The federal guarantee of FFELP loans is conditioned on loans being originated, disbursed or serviced...

  • Page 38
    ... by a mortgage. The Company believes that its headquarters, loan servicing centers data center, back-up facility and data management and collections centers are generally adequate to meet its long-term student loan and new business goals. The Company's principal office is currently in owned...

  • Page 39
    ... 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 debt management operation group...

  • Page 40
    ...from additional paid-in capital to common stock, the par value of the additional shares issued as a result of the stock split. Issuer Purchases of Equity Securities The following table summarizes the Company's common share repurchases during 2005 pursuant to the stock repurchase program (see Note 14...

  • Page 41
    ... share, after cumulative effect of accounting change ...Dividends per common share ...Return on common stockholders' equity ...Net interest margin ...Return on assets ...Dividend payout ratio...Average equity/average assets...Balance Sheet Data: Student loans, net ...Total assets...Total borrowings...

  • Page 42
    ... of other financial services, processing capabilities and information technology to meet the needs of educational institutions, lenders, students and their families, and guarantee agencies. SLM Corporation, more commonly known as Sallie Mae, is a holding company that operates through a number of...

  • Page 43
    ... by the Company, we have updated a number of estimates to account for the increase in Consolidation Loan activity. Premiums, Discounts and Borrower Benefits For both federally insured and Private Education Loans, we account for premiums paid, discounts received and certain origination costs incurred...

  • Page 44
    ... forward yield curve, as well as the Borrower Benefits program; • the calculation of the Embedded Floor Income associated with the securitized loan portfolio; • the CPR; • the discount rate used, which is intended to be commensurate with the risks involved; and • the expected credit losses...

  • Page 45
    ... based on loan program type, loan status (in-school, grace, repayment, forbearance, delinquency), underwriting criteria, existence or absence of a co-borrower, and aging. We then apply default and collection rate projections to each category. Our higher education Private Education Loan programs...

  • Page 46
    ...) on default claims on federally guaranteed student loans that are serviced by Sallie Mae Servicing for a period of at least 270 days before the date of default and will no longer be subject to the two percent Risk Sharing on these loans. The Company is entitled to receive this benefit as long as...

  • Page 47
    ... levels of Consolidation Loan volume, which, in turn, has had a significant effect on a number of accounting estimates in recent years. As long as long-term interest rates remain at historically low levels, we expect the Consolidation Loan program to continue to be an attractive option for borrowers...

  • Page 48
    ... Borrower Benefits. (2) Off-Balance Sheet Student Loans Estimate Consolidating Lender Effect on Estimate CPR Accounting Effect Residual Interest Sallie Mae or other lenders Loan prepaid Increase • Reduction in fair market value of Residual Interest resulting in either an impairment charge...

  • Page 49
    ... for losses ...Gains on student loan securitizations . Servicing and securitization revenue . . Losses on securities, net...Gains (losses) on derivative and hedging activities, net ...Guarantor servicing fees ...Debt management fees...Collections revenue ...Other income ...Operating expenses...Loss...

  • Page 50
    Condensed Balance Sheets December 31, 2005 2004 Increase (decrease) 2005 vs. 2004 2004 vs. 2003 $ % $ % Assets FFELP Stafford and Other Student Loans, net ...Consolidation Loans, net ...Private Education Loans, net ...Other loans, net ...Cash and investments ...Restricted cash and investments......

  • Page 51
    ... Loan activity. The increase in impairment losses was partially offset by an increase in securitization gains of $177 million primarily caused by higher percentage gains on the 2005 Private Education Loan securitizations. The year-over-year increase in debt management fees and collections revenue...

  • Page 52
    ... table are adjusted for the impact of certain tax-exempt and taxadvantaged investments based on the marginal federal corporate tax rate of 35 percent. Years ended December 31, 2005 2004 2003 Increase (decrease) 2005 vs. 2004 2004 vs. 2003 $ % $ % Interest income Student loans ...Other loans...

  • Page 53
    ... earning assets and interest bearing liabilities. 2005 Balance Rate Years ended December 31, 2004 2003 Balance Rate Balance Rate Average Assets FFELP Stafford and Other Student Loans...Consolidation Loans...Private Education Loans ...Other loans...Cash and investments ...Total interest earning...

  • Page 54
    ... Income ...Consolidation Loan Rebate Fees ...Offset Fees...Borrower Benefits ...Premium and discount amortization ...Student loan net yield ...Student loan cost of funds...Student loan spread ...Off-Balance Sheet Servicing and securitization revenue, before Floor Income...Floor Income, net of Floor...

  • Page 55
    ...Borrower Benefits and Private Education Loan programs and have made modeling refinements to better reflect current and future conditions. The effects of the changes in estimates on the student loan spread are summarized in the table below: Years Ended December 31, 2005 2004 Dollar Value Basis Points...

  • Page 56
    ...school. This unprecedented volume of Consolidation Loan requests resulted in a majority of the applications being processed in the third and fourth quarters. The increase to premium amortization in 2005 can mainly be attributed to this surge in Consolidation Loan activity as we write-off the balance...

  • Page 57
    ... 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...

  • Page 58
    ... 31, 2005 Corporate Lending DMO and Other Managed interest income: Managed FFELP Stafford and Other Student Loans...Managed Consolidation Loans...Managed Private Education Loans ...Other loans...Cash and investments ...Total Managed interest income ...Managed interest expense ...Net interest income...

  • Page 59
    ... Company's GAAP-based financial information, management evaluates the Company's business segments under certain non-GAAP performance measures that we refer to as "core earnings" for each business segment, and we refer to this information in our presentations with credit rating agencies and lenders...

  • Page 60
    ... 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...

  • Page 61
    ... and hedging activities, net" are primarily caused by interest rate volatility, changing credit spreads and changes in our stock price during the period as well as the volume and term of derivatives not receiving hedge treatment. Our Floor Income Contracts are written options which must meet...

  • Page 62
    ... in the income statement. Generally, a decrease in current interest rates and the respective forward interest rate curves results in an unrealized loss related to our written Floor Income Contracts which is offset by an increase in the value of the economically hedged student loans. This increase...

  • Page 63
    ...2005 2004 2003 Reclassification of realized gains (losses) on derivative and hedging activities: Net settlement expense on Floor Income Contracts reclassified to net interest income ...Net settlement expense on interest rate swaps reclassified to net interest income ...Net realized losses on closed...

  • Page 64
    ...loans, they 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 the federally guaranteed and privately...

  • Page 65
    ... for the borrower, older Consolidation Loans with higher borrower rates can earn Floor Income over an extended period of time. In both 2004 and 2005, substantially all Floor Income was earned on Consolidation Loans. The HEA requires lenders to rebate Floor Income on all FFELP loans originated after...

  • Page 66
    ... our Managed student loan portfolio, up from 11 percent in 2004. Private Education Loans consist of two general types: those that meet the needs of borrowers at higher education schools and other Title IV eligible schools, and those that are used to meet the needs of students in alternative learning...

  • Page 67
    ... for our Lending business segment. Years ended December 31, 2005 2004 2003 % Increase (Decrease) 2005 vs. 2004 2004 vs. 2003 Managed Basis interest income: Managed FFELP Stafford and Other Student Loans...Managed Consolidation Loans...Managed Private Education Loans ...Other loans...Cash and...

  • Page 68
    ... tables summarize the components of our Managed student loan portfolio and show the changing composition of our portfolio. Ending Balances: December 31, 2005 FFELP Stafford and Other(1) Consolidation Loans Total FFELP Private Education Loans Total On-balance sheet: In-school...Grace and repayment...

  • Page 69
    ...2004 FFELP Stafford and Other(1) Consolidation Total FFELP Loans Private Education Loans Total On-balance sheet In-school...Grace and repayment ...Total on-balance sheet, gross ...On-balance sheet unamortized premium/(discount) ...On-balance sheet allowance for losses ...Total on-balance sheet, net...

  • Page 70
    Average Balances: Year ended December 31, 2005 FFELP Stafford and Other(1) Consolidation Loans Total FFELP Private Education Loans Total On-balance sheet...Off-balance sheet ...Total Managed ...% of on-balance sheet FFELP ...% of Managed FFELP ...% of total ... $ 20,720 24,182 $ 44,902 31% 44% 39% ...

  • Page 71
    ... in the table below: Years Ended December 31, 2005 2004 Dollar Value Basis Points Dollar Value Basis Points Changes in critical accounting estimates: Effect on premium/discount: FFELP Stafford and Consolidation Loans...Private Education Loans ...Total effect on premium/discount ...Borrower Benefits...

  • Page 72
    ...still in school. This unprecedented volume of Consolidation Loan requests resulted in a majority of the applications being processed in the third quarter. The increase to premium amortization in 2005 can mainly be attributed to this surge in Consolidation Loan activity as we write-off the balance of...

  • Page 73
    ... detail under "LIQUIDITY AND CAPITAL RESOURCES-Securitization Activities," when we securitize a portfolio of student loans, we estimate the future Fixed Rate Embedded Floor Income earned on off-balance sheet student loans using a discounted cash flow option pricing model and recognize the fair value...

  • Page 74
    ...loans in our Managed student loan portfolio to earn Floor Income after December 31, 2005 and 2004. December 31, 2005 Fixed Variable borrower borrower Rate rate Total December 31, 2004 Fixed Variable borrower borrower Rate rate Total (Dollars in billions) Student loans eligible to earn Floor Income...

  • Page 75
    ... to absorb losses inherent in our Private Education Loan portfolio at the reporting date based on a projection of probable net credit losses. The maturing of our Private Education Loan portfolios has provided us with more historical data on borrower default behavior such that we now analyze...

  • Page 76
    ... between our on-balance sheet and our Managed results is due to the difference in the mix of Private Education Loans on-and off-balance sheet. Certain loan types with higher expected default rates, such as career training and those loan programs targeted to borrowers with lower FICO scores, have not...

  • Page 77
    ...of both on and off-balance sheet residing in the Managed presentation. When Private Education Loans in the majority of our securitized trusts become 180 days delinquent, we typically exercise our contingent call option to repurchase these loans at par value out of the trust and record a loss for the...

  • Page 78
    ... increased servicing and collection costs in the event the delinquent accounts charge off. On-Balance Sheet Private Education Loan Delinquencies December 31, 2005 December 31, 2004 December 31, 2003 Balance % Balance % Balance % Loans in-school/grace/deferment(1) ...Loans in forbearance(2) ...Loans...

  • Page 79
    ...% Managed Basis Private Education Loan Delinquencies December 31, 2005 December 31, 2004 December 31, 2003 Balance % Balance % Balance % Loans in-school/grace/deferment(1) ...Loans in forbearance(2) ...Loans in repayment and percentage of each status: Loans current ...Loans delinquent 31-60 days...

  • Page 80
    ... the post-education work force. We generally allow the loan repayment period on traditional Private Education Loans, except those generated by our SLM Financial subsidiary, to begin six to nine months after the student leaves school. This provides the borrower time to obtain a job to service his or...

  • Page 81
    ... and status of the Private Education Loan portfolio by number of months aged from the first date of repayment: Months since entering repayment After Dec. 31, 25 to 48 More than 2005(1) months 48 months December 31, 2005 1 to 24 months Total Loans in-school/grace/deferment ...Loans in forbearance...

  • Page 82
    ...make timely payments as they have recently graduated. On a percentage basis, the figures are within management expectations. The table below stratifies the portfolio of Managed Private Education Loans in forbearance by the cumulative number of months the borrower has used forbearance as of the dates...

  • Page 83
    ... 23 5 $100 The decrease in FFELP Stafford and Other Student Loans charge-offs in 2005 is due to the Company earning the EP designation in the fourth quarter of 2004. However, recently passed legislation will reduce the default insurance on loans serviced under the EP designation to 99 percent from...

  • Page 84
    ... These decreases were primarily due to higher interest rates causing a slowdown in mortgage refinancings over the last two years. Student Loan Acquisitions In 2005, 75 percent of our Managed student loan acquisitions (exclusive of loans acquired through business acquisitions and capitalized interest...

  • Page 85
    ... the amount and rate of the student loan premiums paid. Years ended December 31, Volume 2005 Rate Premium Volume 2004 Rate Premium Student loan premiums paid: Sallie Mae brands ...Lender partners ...Total Preferred Channel ...Other purchases(1) ...Subtotal base purchases...Consolidations ...Total...

  • Page 86
    ... table includes on-balance sheet asset information for our Lending business segment. 2005 December 31, 2004 2003 FFELP Stafford and Other Student Loans, net ...Consolidation Loans, net ...Managed Private Education Loans, net ...Other loans, net ...Investments(1) ...Residual Interest in off-balance...

  • Page 87
    ... the activity in our Managed portfolio of student loans for the years ended December 31, 2005, 2004 and 2003. Years Ended December 31, 2005 2004 2003 Beginning balance ...Acquisitions ...Capitalized interest ...Repayments, claims, other ...Charge-offs to reserves and securitization trusts...Loan...

  • Page 88
    ...-performing and nonperforming mortgage loans. In our DMO segment, nearly half of our revenues are still earned from our student loan contingency collection fee business in which we provide default management services to guarantor agencies, colleges and universities and ED. In recent years, we have...

  • Page 89
    ... to build on customer relationships through value added services. In the purchased receivables business, we focus on a variety of consumer debt types with emphasis on charged off credit card receivables and distressed mortgage receivables. We purchase these portfolios at a discount to their face...

  • Page 90
    ... for the period from September 16 to December 31. Fee Income and Collections Revenue On August 31, 2005, we acquired 100 percent of GRP, a debt management company that acquires and manages portfolios of sub-performing and non-performing mortgage loans, substantially all of which are secured by one...

  • Page 91
    ... half of 2005. Typically, revenue recognition based on a portfolio's effective interest rate is a lower percentage of cash collections in the early stages of servicing a portfolio. Purchased Paper-Mortgage/Properties Year ended December 31, 2005(1) Face value of purchases...Collections revenue...

  • Page 92
    ... account maintenance, and guarantee fulfillment. In our Loan Servicing operating unit, we originate and service student loans on behalf of lenders who are unrelated to SLM Corporation. Such activities include processing correspondence and filing claims, originating and disbursing Consolidation Loans...

  • Page 93
    ... USA Funds, the nation's largest guarantee agency, accounted for 82 percent, 85 percent, and 86 percent, respectively, of guarantor servicing fees and 27 percent, 16 percent, and 2 percent, respectively, of revenues associated with other products and services for the years ended December 31, 2005...

  • Page 94
    ... securitized loans when borrowers choose to refinance their loans through a Consolidation Loan with the Company. At the same time, we must maintain earnings spreads by controlling interest rate risk. Our main source of funding is student loan securitizations and we have built a highly liquid market...

  • Page 95
    ...several new SLM Corporation long-term debt structures that further diversify our funding sources and substantially increased our fixed income investor base. In total, at December 31, 2005, on-balance sheet debt, exclusive of on-balance sheet securitizations and secured indentured trusts, totaled $41...

  • Page 96
    ... credit ratings on our debt from major rating agencies. S&P Moody's Fitch Short-term unsecured debt ...Long-term unsecured debt ... A-1 A P-1 A2 F1+ A+ The table below presents our unsecured on-balance sheet funding by funding source for the years ended December 31, 2005 and 2004. Debt Issued...

  • Page 97
    ...Stock at our option on any dividend payment date on or after June 15, 2010, at the redemption price of $100 per share plus accrued and unpaid dividends for the then quarterly dividend period, if any. The Series B Preferred Stock is not convertible into or exchangeable for any of our other securities...

  • Page 98
    ... accounted for on-balance sheet as variable interest entities ("VIEs"). These securitization structures were developed to broaden and diversify the investor base for Consolidation Loan securitizations by allowing us to issue bonds with shorter expected maturities and with non-amortizing, fixed rate...

  • Page 99
    ... activity to a level that correlates with the volume of student loan purchases. Liquidity Risk and Funding-Long-Term With the dissolution of the GSE, our long-term funding, credit spread and liquidity exposure to the corporate and asset-backed capital markets has increased significantly. A major...

  • Page 100
    ... expected credit losses (as a% of securitized loan balance outstanding)(2) ...(1) The FFELP Stafford/PLUS loan CPR assumption was increased to account for the continued high levels of Consolidation Loan activity over the last several years. Due to reintroduction of a one percent Risk Sharing loss...

  • Page 101
    ... by the effect of higher than expected Consolidation Loan activity on FFELP Stafford/PLUS student loan securitizations and the effect of market interest rates on the Embedded Floor Income included in the Retained Interest. When loans in a securitization trust consolidate, they are a prepayment to...

  • Page 102
    ... charges are recorded as a loss and are included as a reduction to securitization revenue. We receive annual servicing fees of 90 basis points, 50 basis points and 70 basis points of the outstanding securitized loan balance related to our FFELP Stafford/PLUS, Consolidation Loan and Private Education...

  • Page 103
    ... implementation, and customer attrition due to potential negative publicity. The federal guarantee on our student loans and our designation as an Exceptional Performer by ED is conditioned on compliance with origination and servicing standards set by ED and guarantor agencies. A mitigating factor...

  • Page 104
    ...preferences of students and their families; • borrower default rates on Private Education Loans; • continued access to the capital markets for funding at favorable spreads particularly for our nonfederally insured Private Education Loan portfolio; and • our operating execution and efficiencies...

  • Page 105
    ... risk. As part of the HEA, the student loan program is periodically amended and must be "reauthorized" every six years. Past changes included reduced loan yields paid to lenders in 1993 and 1998, increased fees paid by lenders in 1993, decreased level of the government guaranty in 1993 and reduced...

  • Page 106
    ... AND CAPITAL RESOURCES-Securitization Activities- Liquidity Risk and Funding-Long-Term") Credit Risk We bear the full risk of borrower and closed school losses experienced in our Private Education Loan portfolio. These loans are underwritten and priced according to risk, generally determined...

  • Page 107
    ...bill...Prime ...Prime ...Prime ...PLUS Index ...3-month LIBOR ...3-month LIBOR ...1-month LIBOR ...CMT/CPI index...Non Discreet reset(2) ...Non Discreet reset(3) ...Fixed Rate(4) ...Total ...(1) (2) daily weekly annual quarterly monthly annual daily quarterly monthly monthly/quarterly monthly daily...

  • Page 108
    ... addition, we use quarterly reset 3-month LIBOR to fund a portion of our quarterly reset Prime rate indexed Private Education Loans. We also use our monthly Non Discreet reset funding (asset-backed commercial paper program and auction rate securities) to fund various asset types. In using different...

  • Page 109
    ... our Managed earning assets and liabilities at December 31, 2005. (Averages in years) On-Balance Sheet Off-Balance Sheet Managed Earning assets Student loans...Other loans ...Cash and investments ...Total earning assets ...Borrowings Short-term borrowings...Long-term borrowings ...Total borrowings...

  • Page 110
    ... our FFELP student loan portfolio from Stafford loans to Consolidation Loans has lengthened the Managed weighted average life of the student loan portfolio from 8.2 years at December 31, 2004, to 9.0 years at December 31, 2005. COMMON STOCK The following table summarizes our common share repurchases...

  • Page 111
    ...rebate Floor Income under the new loans issued after April 1, 2006. The major new student loan provisions include the following, with effective dates generally July 1, 2006 unless otherwise indicated: • Lenders rebate Floor Income on new loans after April 1, 2006. • Borrower origination fees are...

  • Page 112
    ...formula remains the weighted average of the rates on the underling loans, rounded up to the nearest eighth. The Reauthorization Legislation does not end the single holder rule affecting loan consolidations, although Congress may do so in the future. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS See Note...

  • Page 113
    ... 31, 2005 and 2004, 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. Year ended December 31, 2005 Interest Rates: Change from Change from increase...

  • Page 114
    ... 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," in the current low interest rate environment, we can...

  • Page 115
    ... 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...

  • Page 116
    ... is incorporated into this Annual Report by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information set forth in Note 16 to the consolidated financial statements, "Stock-Based Compensation Plans," listed under the heading...

  • Page 117
    ...A-Federal Family Education Loan Program (b) Exhibits *2 **3.1 **3.2 **4 *10.1††*10.2††*10.3††*10.4††*10.5††*10.6††*10.7††Agreement and Plan of Reorganization by and among the Student Loan Marketing Association, SLM Holding Corporation, and Sallie Mae Merger Company...

  • Page 118
    ...President and Chief Executive Officer, effective as of June 1, 2005 Sallie Mae Deferred Compensation Plan for Key Employees Restatement Effective January 1, 2005 SLM Corporation Incentive Plan Performance Stock Term Sheet "Core" Net Income Target Stock Option Agreement SLM Corporation Incentive Plan...

  • Page 119
    ... to the correspondingly numbered exhibits to the ...Annual Report on Form 10-K for the year ended December 31, 2004 •• Filed with the Securities and Exchange Commission with the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 ••• Filed with the Securities...

  • Page 120
    ... Vice Chairman and Chief Executive Officer Pursuant to the requirement of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ THOMAS...

  • Page 121
    Signature Title Date /s/ A. ALEXANDER PORTER, JR. A. Alexander Porter, Jr. /s/ WOLFGANG SCHOELLKOPF Wolfgang Schoellkopf /s/ STEVEN L. SHAPIRO Steven L. Shapiro Barry L. Williams Director Director Director Director March 9, 2006 March 9, 2006 March 9, 2006 March 9, 2006 111

  • Page 122
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  • Page 123
    CONSOLIDATED FINANCIAL STATEMENTS INDEX Page Management's Annual Report on Internal Control over Financial Reporting ...Report of Independent Registered Public Accounting Firm...Consolidated Balance Sheets ...Consolidated Statements of Income ...Consolidated Statements of Changes in Stockholders' ...

  • Page 124
    ...supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. In making this assessment, our management used the criteria established...

  • Page 125
    ... accompanying Management's Annual Report on Internal Control over Financial Reporting that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring...

  • Page 126
    ... to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As described in Management's Annual Report on Internal Control over Financial Reporting, management has...

  • Page 127
    ... per share amounts) December 31, 2005 December 31, 2004 Assets FFELP Stafford and Other Student Loans (net of allowance for losses of $6,311 and $0, respectively) ...Consolidation Loans (net of allowance for losses of $8,639 and $7,778, respectively) ...Private Education Loans (net of allowance...

  • Page 128
    SLM CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Dollars and shares in thousands, except per share amounts) Years Ended December 31, 2005 2004 2003 Interest income: FFELP Stafford and Other Student Loans...Consolidation Loans ...Private Education Loans ...Other loans ...Cash and investments ......

  • Page 129
    ..., net of tax ...Minimum pension liability adjustment ...Comprehensive income ...Cash dividends: Common stock ($.74 per share) ...Preferred stock ($3.48 per share) ...Issuance of common shares ...Tax benefit related to employee stock option and purchase plan . Repurchase of common shares: Open market...

  • Page 130
    ... related to employee stock option and purchase plan . Repurchase of common shares: Equity forwards: Exercise cost, cash...Exercise cost, net settlement ...Gain on settlement ...Benefit plans ...Balance at December 31, 2005 ... Preferred Stock Shares 3,300,000 Common Stock Shares Issued Treasury...

  • Page 131
    ... activities Short-term borrowings issued ...Short-term borrowings repaid ...Long-term borrowings issued ...Long-term borrowings repaid ...Borrowings collateralized by loans in trust-issued ...Borrowings collateralized by loans in trust-activity ...GSE debt extinguishment ...Common stock issued...

  • Page 132
    ...Education ("ED"). The Company's primary business is to originate and hold student loans. The Company also provides fee-based related products and services and earns fees for student loan and guarantee servicing, and student loan default management and loan collections. The Company originates student...

  • Page 133
    ... of federally insured student loans, Private Education Loans, student loan participations, lines of credit, academic facilities financings, and other private consumer and mortgage loans, are generally carried at amortized cost, which includes unamortized premiums, unearned discounts and capitalized...

  • Page 134
    ... starting their careers). This is referred to as forbearance status. For the federally insured loan portfolios, the Company's loan servicing division, Sallie Mae Servicing, was re-designated as an Exceptional Performer ("EP") by ED, for a renewable one-year period beginning on October 19, 2005, in...

  • Page 135
    ... Risk Sharing provision. When calculating this allowance, the Company considers trends in student loan claims rejected for payment by guarantors based on periodic evaluations of its loan portfolios considering past experience, changes to federal student loan programs, current economic conditions...

  • Page 136
    ... dissolved by the Company and at least 10 percent of the fair value of its interests is held by independent third parties. • The activities in which the trust can participate are significantly limited. These activities are entirely specified up-front in the legal documents creating the QSPE...

  • Page 137
    ...time of the sale of the student loans and each subsequent quarter. This estimate is based on an option valuation and a discounted cash flow calculation that considers the current borrower rate, Special Allowance Payment ("SAP") spreads and the term for which the loan is eligible to earn Floor Income...

  • Page 138
    ..., no servicing asset or obligation is recorded at the time of securitization. Derivative Accounting SFAS No. 133 The Company accounts for its derivatives, which include interest rate swaps, cross-currency interest rate swaps, interest rate futures contracts, interest rate cap contracts, Floor Income...

  • Page 139
    ... of income. Debt Management Fees and Collections Revenue In the purchased receivables business, the Company focuses on various types of consumer debt with an emphasis on charged off credit card receivables, as well as sub-performing and nonperforming mortgage loans. The Company accounts for...

  • Page 140
    ... loan origination and account maintenance services for guarantor agencies, ED, educational institutions and financial institutions. The fees associated with these services are accrued as earned. The Company is party to a guarantor servicing contract with United Student Aid Funds, Inc. ("USA Funds...

  • Page 141
    ...Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB No. 25, the Company does not recognize compensation expense on fixed award plans unless the exercise price of its employee stock options is less than the market price of the underlying stock on the date of...

  • Page 142
    ... are adjusted in the period that the tax change is enacted. "Income tax expense" includes (i) deferred tax expense, which represents the net change in the deferred tax asset or liability balance during the year plus any change in a valuation allowance, and (ii) current tax expense, which represents...

  • Page 143
    ... In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections," which is a replacement of APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements." This statement changes the requirements for the accounting for...

  • Page 144
    ... continues to accrue on loans in these in-school, grace, deferment and forbearance periods. FFELP loans originated prior to October 1, 1993 are insured for 100 percent of their unpaid balance against the borrower's default, death, disability or bankruptcy. As of December 31, 2005, insurance on F-22

  • Page 145
    ... Company's student loan portfolio by program. December 31, 2005 Ending Balance % of Balance Year ended December 31, 2005 Average Effective Interest Average Balance Rate FFELP Stafford and Other Student Loans, net(1) ...Consolidation Loans, net ...Private Education loans, net ...Total student loans...

  • Page 146
    ... loan losses for both the Private Education Loan and federally insured student loan portfolios for the years ended December 31, 2005, 2004, and 2003. Years ended December 31, 2005 2004 2003 Balance at beginning of period ...Additions Provisions for student loan losses...Provision for Risk Sharing...

  • Page 147
    ... Student Loans based on the one percent reduction in default insurance for servicers with the EP designation. Allowance for Private Education Loan Losses The Company's allowance for Private Education Loan losses is an estimate of losses in the portfolio at the balance sheet date that will be charged...

  • Page 148
    ...,415 The Company charges the borrower fees on certain Private Education Loans, both at origination and when the loan enters repayment. Such fees are deferred and recognized into income as a component of interest over the estimated average life of the related pool of loans. These fees are charged to...

  • Page 149
    ... servicing and collection costs. 2005 Balance December 31, 2004 Balance % 2003 Balance (Dollars in millions) % % Loans in-school/grace/deferment(1) ...Loans in forbearance(2) ...Loans in repayment and percentage of each status: Loans current...Loans delinquent 31-60 days(3) ...Loans delinquent...

  • Page 150
    ... Amortized Cost Market Value Investments Available-for-sale U.S. Treasury and other U.S. government agency obligations: U.S. Treasury backed securities ...U.S. Treasury securities ...U.S. government agencies obligations...State and political subdivisions of the U.S.: Student loan revenue bonds...

  • Page 151
    ... and other U.S. government agency obligations: U.S. Treasury backed securities ...U.S. government-guaranteed securities ...U.S. Treasury securities ...U.S. government agencies obligations...State and political subdivisions of the U.S.: Student loan revenue bonds ...Other securities: Certificates of...

  • Page 152
    ... $21 million, respectively, that are general obligations of American Airlines and Federal Express Corporation. The direct financing leases are carried in other assets on the balance sheet. In 2005, the Company recorded an after-tax charge of $25 million or $.05 per share which primarily reflects the...

  • Page 153
    ... of Southwest Student Services Corporation (see Note 11, "Acquisitions"), the Company acquired certain tax exempt bonds that enable the Company to earn a 9.5 percent Special Allowance Payment ("SAP") rate on student loans funded by those bonds in indentured trusts. If the student loan is removed...

  • Page 154
    ... ...Corporate and Other ...Total ... $ 195 88 56 $ 339 $ 245 118 1 $ 364 $ 440 206 57 $ 703 In 2005, the Company acquired one debt management company and closed on the second step of the acquisitions of a majority owned debt management company and a majority owned student lending business as...

  • Page 155
    ..."). Payments and receipts on the Company's interest rate swaps are not reflected in the above tables. As of December 31, 2005, the Company has $5.5 billion in revolving credit facilities which provide liquidity support for general corporate purposes including backup for its commercial paper program...

  • Page 156
    ... NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts, unless otherwise stated) 8. Long-Term Borrowings The following tables summarize outstanding long-term borrowings at December 31, 2005 and 2004, the weighted average stated interest rates at the...

  • Page 157
    ...Company also had $3.4 billion and $6.9 billion of long-term debt outstanding as of December 31, 2005 and 2004, respectively, related to additional secured, limited obligation or non-recourse borrowings related to several indenture trusts. The face value of on-balance sheet student loans that secured...

  • Page 158
    ...maturities based on the Company's current estimates regarding loan prepayment speeds. The projected principal paydowns of $3.4 billion shown in year 2006 relate to the on-balance sheet securitization trust debt. In May 2003, the Company completed a private offering of $2 billion aggregate principal...

  • Page 159
    ... and as a result were required to be accounted for on-balance sheet as VIEs. These securitization structures were developed to broaden and diversify the investor base for Consolidation Loan securitizations by allowing the Company to issue bonds with non-amortizing, fixed rate and foreign currency...

  • Page 160
    ... December 31, (Dollars in millions) 2005 2004 2003 Net proceeds from new securitizations completed during the period ...Purchases of delinquent Private Education Loans from securitization trusts...Servicing fees received(1) ...Cash distributions from trusts related to Residual Interests ...(1) $13...

  • Page 161
    ... expected credit losses (as a% of securitized loan balance outstanding)(2) ...(1) The FFELP Stafford/PLUS loan CPR assumption was increased to account for the continued high levels of Consolidation Loan activity over the last several years. Due to the reintroduction of a one percent Risk Sharing...

  • Page 162
    ... in lower interest rates by consolidating their loans prior to the July 1 interest rate reset for FFELP Stafford loans. These applications were processed through the Company's securitizations in both the third and fourth quarter of 2005. The level and timing of Consolidation Loan activity is highly...

  • Page 163
    ... ended December 31, 2005 FFELP Stafford and Other Student Consolidation Private Education Loan Trusts(5) Loan Trusts(5) Loan Trusts (Dollars in millions) Fair value of Residual Interest (millions) ...Weighted-average life (in years)...Prepayment speed assumptions (annual rate) ...Impact on fair...

  • Page 164
    ... due to hardship or other factors, consistent with the established loan program servicing policies and procedures. The period of delinquency is based on the number of days scheduled payments are contractually past due. (3) 10. Derivative Financial Instruments Risk Management Strategy The Company...

  • Page 165
    ...due to their credit rating being below the threshold in the collateral agreement. Ultimately, the Company's exposure related to a swap counterparty failing to make its required payments is limited to the trust assets (primarily student loans and cash) which collateralize the outstanding bonds in the...

  • Page 166
    ...they are accounted for as trading. The Company sells interest rate floors to hedge the Embedded Floor Income options in student loan assets. These relationships do not satisfy hedging qualifications under SFAS No. 133, but are considered economic hedges for risk management purposes. The Company uses...

  • Page 167
    SLM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts, unless otherwise stated) 10. Derivative Financial Instruments (Continued) usually possess a term of up to ten years with a pay rate indexed to 91-day Treasury bill, 3-month ...

  • Page 168
    ... reach in the debt management business and closed on the second step of the acquisitions of AFS Holdings, LLC and its subsidiaries Arrow Financial Services, LLC and Arrow Funding, LLC ("AFS") and Education Assistance Foundation ("EAF") and its affiliate, Student Loan Finance Association ("SLFA") and...

  • Page 169
    ...full-service, accounts receivable management company that purchases charged off debt, conducts contingency collection work and performs third party receivables servicing across a number of consumer asset classes. Under the terms of the September 2004 purchase agreement, the Company has the option to...

  • Page 170
    .... 142 as discussed further in Note 2, "Significant Accounting Policies." Education Assistance Foundation and Student Loan Finance Association On July 1, 2005, the Company closed the second step in a two step purchase of the secondary market and related businesses of EAF and SLFA and its subsidiaries...

  • Page 171
    ...Student Loans For both FFELP loans and Private Education Loans, fair value is determined by modeling loan level cash flows using market-based assumptions to determine aggregate portfolio yield, net present value and average life. The FFELP loan valuations also include an analysis of the Floor Income...

  • Page 172
    ... by a combination of pricing through standard bond pricing formulas using current market interest rates, foreign currency exchange rates, and credit spreads, and obtaining fair values from third parties. The following table summarizes the fair values of the Company's financial assets and liabilities...

  • Page 173
    ... its loan origination and servicing platforms, its family of lending brands and strategic lending partners. The Company offers a line of credit to certain financial institutions and other institutions in the higher education community for the purpose of buying or originating student loans. In...

  • Page 174
    ... Company has violated a federal or state law in the process of collecting their account. Management believes that these claims, lawsuits and other actions will not have a material adverse effect on its business, financial condition or results of operations. 14. Stockholders' Equity Preferred Stock...

  • Page 175
    ...'s option on any dividend payment date on or after June 15, 2010, at the redemption price of $100 per share plus accrued and unpaid dividends for the then quarterly dividend period, if any. The Series B Preferred Stock is not convertible into or exchangeable for any of the Company's other securities...

  • Page 176
    ... periods presented by reclassifying from additional paid-in capital to common stock the par value of the additional shares issued as a result of the stock split. Common Stock Repurchase Program and Equity Forward Contracts The Company regularly repurchases its common stock through both open market...

  • Page 177
    ... forward activity for the years ended December 31, 2005 and 2004. Years ended December 31, 2005 2004 (Shares in millions) Common shares repurchased: Open market ...Equity forwards ...Benefit plans(1) ...Total shares repurchased...Average purchase price per share(2) ...Common shares issued...Equity...

  • Page 178
    ... conditions, into shares of SLM common stock at an initial conversion price of $65.98. The investors generally can only convert the debentures if the Company's common stock has appreciated to 130 percent of the conversion price ($85.77) for a prescribed period, or the Company calls the debentures...

  • Page 179
    ... for debt expense of Co-Cos, net of taxes ...Net income attributable to common stock, adjusted...Denominator (Shares in thousands): Weighted-average shares used to compute basic EPS ...Effect of dilutive securities: Dilutive effect of stock options, deferred compensation, restricted stock units...

  • Page 180
    ... options granted to officers and management employees under the plans generally vest upon the Company's common stock price reaching a closing price equal to or greater than 20 percent above the fair market value of the common stock on the date of grant for five days, but no earlier than 12 months...

  • Page 181
    ... period, less 15 percent, up to a maximum purchase price of $10,000 plus accrued interest. In 2000, the Company established a replacement option program to assist executive officers in meeting their share ownership targets. Under the replacement program, officers and Board members have been eligible...

  • Page 182
    ... stock-based compensation to non-employee directors of the Company under the Directors Stock Plan. Awards under the Directors Stock Plan may be in the form of stock options and/or stock. The maximum term for stock options is 10 years and the exercise price must be equal to or greater than the market...

  • Page 183
    ... TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts, unless otherwise stated) 16. Stock-Based Compensation Plans (Continued) At December 31, 2005, the outstanding Board of Directors options had a weighted-average remaining contractual life of 5.6 years...

  • Page 184
    ... has an account, for record keeping purposes only, to which credits are allocated each payroll period based on a percentage of the participant's compensation for the current pay period. The applicable percentage is determined by the participant's number of years of service with the Company. If an...

  • Page 185
    ... The following tables provide a reconciliation of the changes in the qualified and nonqualified plan benefit obligations and fair value of assets for the years ended December 31, 2005 and 2004, respectively, and a statement of the funded status as of December 31 of both years based on a December...

  • Page 186
    ... the net periodic pension cost are as follows: December 31, 2005 2004 Discount rate ...Expected return on plan assets ...Rate of compensation increase ... 5.75% 8.50% 4.00% 6.25% 8.50% 4.00% To develop the expected long-term rate of return on assets assumption for the portfolio, the Company...

  • Page 187
    ...of the plan's U.S. equity focused fund managers follows a value oriented investment strategy. The current money market position is being held for benefit payments and in anticipation of allocating funds to an international fund manager once the final selection is made. Cash Flows The Company did not...

  • Page 188
    ... section 401(k) of the Internal Revenue Code. The Sallie Mae 401(k) Savings Plan covers substantially all employees of the Company outside of Debt Management Operations. Participating employees as of July 1, 2005 may contribute up to 75 percent of eligible compensation; between July 1, 2004 and June...

  • Page 189
    ... 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 federally guaranteed student loans, which are administered by ED in the FFELP, and Private Education...

  • Page 190
    ..., processing borrower payments, originating and disbursing consolidation loans on behalf of the lender, and other administrative activities required by ED. The Company's other products and services include comprehensive financing and loan delivery solutions that it provides to college financial aid...

  • Page 191
    ...the tables below. Segment Results and Reconciliations to GAAP Year ended December 31, 2005 Corporate Segment Totals DMO and Other Adjustments Total GAAP (Dollars in millions) Lending Interest income: FFELP Stafford and Other Student Loans . . Consolidation Loans...Private Education Loans ...Other...

  • Page 192
    ... per share amounts, unless otherwise stated) 18. Segment Reporting (Continued) (Dollars in millions) Lending Year ended December 31, 2004 Corporate Segment Totals DMO and Other Adjustments Total GAAP Interest income: FFELP Stafford and Other Student Loans...Consolidation Loans ...Private Education...

  • Page 193
    ..., floor income related to the Company's student loans, and certain other items that management does not consider in evaluating the Company's operating results. The following table reflects aggregate adjustments associated with these areas for the years ended December 31, 2005, 2004, and 2003. Years...

  • Page 194
    ... effect of accounting change" in the consolidated statements of income. (4) (5) (6) 19. Income Taxes Reconciliations of the statutory U.S. federal income tax rates to the Company's effective tax rate follow: Years ended December 31, 2005 2004 2003 Statutory rate...Equity forward contracts...

  • Page 195
    ... the following: December 31, 2005 2004 Deferred tax assets: Loan reserves...Market value adjustments on investments ...Deferred revenue ...Accrued expenses not currently deductible ...Warrants issuance ...Partnership income...Loan origination services...In-substance defeasance transactions ...Other...

  • Page 196
    ... process. The IRS is currently completing its examination of the Company's 2000 through 2002 income tax returns. 20. Quarterly Financial Information (unaudited) 2005 First Quarter Second Quarter Third Quarter Fourth Quarter Net interest income...Less: provisions for losses ...Net interest income...

  • Page 197
    SLM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts, unless otherwise stated) 20. Quarterly Financial Information (unaudited) (Continued) 2004 First Quarter Second Quarter Third Quarter Fourth Quarter Net interest income...Less: ...

  • Page 198
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  • Page 199
    ... on eligible student loans. Special allowance payments raise the yield to student loan lenders when the statutory borrower interest rate is below an indexed market value. Four types of FFELP student loans are currently authorized under the Higher Education Act: • Subsidized Federal Stafford Loans...

  • Page 200
    ... loans, the special allowance payments to lenders are based upon the three-month commercial paper (financial) rate plus 2.34 percent (1.74 percent during in-school, grace and deferment periods) for Stafford Loans and 2.64 percent for PLUS and Consolidation Loans. The 1999 act did not change the rate...

  • Page 201
    ... pay a guaranty agency may garnish without borrower consent. • Streamlines mandatory forbearances to accommodate verbal requests. Eligible Lenders, Students and Educational Institutions Lenders eligible to make loans under the FFELP generally include banks, savings and loan associations, credit...

  • Page 202
    ... for financial aid. Some of this need may be met by grants, scholarships, institutional loans and work assistance. A student's "unmet need" is further reduced by the amount of loans for which the borrower is eligible. Special Allowance Payments The Higher Education Act provides for quarterly special...

  • Page 203
    ...In-School, Grace or Deferment 2.34% for Stafford Loans that are in Repayment 2.64% for PLUS and Consolidation loans • Special allowance payments are available on variable rate PLUS Loans and SLS Loans only if the variable rate, which is reset annually, exceeds the applicable maximum borrower rate...

  • Page 204
    ... Loan can be fixed or variable. Variable rates are reset annually each July 1 based on the bond equivalent rate of 91-day Treasury bills auctioned at the final auction held before the preceding June 1. Stafford Loan interest rates are presented below. Trigger Date Borrower Rate Maximum Borrower Rate...

  • Page 205
    ...that period. If the loan is not held by an eligible lender in accordance with the requirements of the Higher Education Act and the applicable guarantee agreement, the loan may lose its federal assistance. Loan Limits. The Higher Education Act generally requires that lenders disburse student loans in...

  • Page 206
    ... to school at least half-time. Additional deferrals are available, when the borrower is: • enrolled in an approved graduate fellowship program or rehabilitation program; or • seeking, but unable to find, full-time employment (subject to a maximum deferment of 3 years); or • having an economic...

  • Page 207
    ... a PLUS or SLS Loan is eligible to receive special allowance payments during any quarter if: • the borrower rate is set at the maximum borrower rate and • the sum of the average of the bond equivalent rates of 3-month Treasury bills auctioned during that quarter and the applicable interest rate...

  • Page 208
    ... October 7, 1998) repayment plans, and loans are repaid over periods determined by the sum of the Consolidation Loan and the amount of the borrower's other eligible student loans outstanding. The maximum maturity schedule is 30 years for indebtedness of $60,000 or more. Guarantee Agencies under the...

  • Page 209
    ... all loans guaranteed by the agency in repayment status at the beginning of the federal fiscal year. The second trigger is when the amount of defaults exceeds 9 percent of the loans in repayment. Guarantee agency reinsurance rates are presented in the table below. Claims Paid Date Maximum 5% Trigger...

  • Page 210
    ... and collections and program awareness and oversight. These activities are funded by revenues from the following statutorily prescribed sources plus earnings on investments. Source Basis Insurance Premium...(Changes to Federal Default Fee July 1, 2006) Loan Processing and Issuance Fee...Account...

  • Page 211
    ... payments received from the Department, Insurance Premiums and the complement of the reinsurance on recoveries. The fund is federal property and its assets may only be used to pay insurance claims and to pay Default Aversion Fees. Recoveries on defaulted loans are deposited into the Agency...

  • Page 212
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  • Page 213
    ... Board of Directors Sallie Mae Executive Management Corporate Information SALLIE MAE HEADQUARTERS Albert L. Lord Chairman Wolfgang Schoellkopf Lead Independent Director Ann Torre Bates Strategic & Financial Consultant Charles L. Daley Director, Executive Vice President & Secretary TEB Associates...

  • Page 214
    SLM CORPORATION 12061 BLUEMONT WAY RESTON, VIRGINIA 20190 www.salliemae.com Copyright 2006 SLM Corporation. All Rights Reserved. SLM Corporation and its subsidiaries are not sponsored by or agencies of the United States of America.