Sallie Mae 2005 Annual Report Download - page 162

SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)
F-40
9. Student Loan Securitization (Continued)
For the years ended December 31, 2005, 2004 and 2003 the Company recorded impairment charges to
the Retained Interests of $260 million, $80 million and $96 million, respectively. The impairment charge in
2005 was primarily caused by the record levels of consolidation activity as well as the Company increasing
its expected future CPR assumptions used to value the Residual Interest as of September 30, 2005. This
surge in Consolidation Loan activity was due to FFELP Stafford borrowers locking 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 volatile, and in response the Company
continues to revise its estimates of the effects of Consolidation Loan activity on its Retained Interests.
Additional impairment may be recorded in future periods if Consolidation Loan activity remains higher
than projected. The 2005 impairment charge was also due to the re-introduction of a one percent Risk
Sharing loss assumption in the Company’s FFELP residuals related to the reauthorization of the Higher
Education Act. (See “OTHER RELATED EVENTS AND INFORMATION—Reauthorization” for a
full update of the HEA.) This comprised $23 million of the total impairment charge for 2005. See
“Allowance for FFELP Student Loans” for further discussion regarding the change in the Risk Sharing
exposure.
The impairment charge for 2004 is primarily the result of (a) FFELP Stafford loans consolidating at
levels faster than projected resulting in $47 million of impairment and (b) rising interest rates during the
second quarter 2004 which decreased the value of the Floor Income component of the Company’s
Retained Interest resulting in $33 million of impairment. Impairment for 2003 was primarily due to
FFELP Stafford loans prepaying faster than projected. These impairment charges were recorded as a loss
and included as a reduction to securitization revenue.
The following table reflects key economic assumptions used in the valuation of the Retained Interest
at December 31, 2005, and the sensitivity of the current fair value of the Retained Interests to adverse
changes in those assumptions. The effect of a variation in a particular assumption on the fair value of the
Retained 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 and should be used with caution, as the actual results could be materially
different than these estimates.