Sallie Mae 2005 Annual Report Download - page 20

10
the eligible lender) has been designated by ED as an Exceptional Performer (“EP”), the guarantee covers
100 percent and 99 percent of the student loan’s principal and accrued interest for claims filed before and
after July 1, 2006, respectively.
Effective for a renewable one-year period beginning in October 2005, the Company’s loan servicing
division, Sallie Mae Servicing, is designated as an EP by ED in recognition of meeting certain performance
standards set by ED in servicing FFELP loans. As a result of this designation, the Company received 100
percent reimbursement (declining to 99 percent on July 1, 2006 under the Reauthorization Legislation
discussed below) 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 the
Company remains in compliance with the required servicing standards, which are assessed on an annual
and quarterly basis through compliance audits and other criteria. The EP designation applies to all FFELP
loans that are serviced by the Company as well as default claims on federally guaranteed student loans that
the Company owns but are serviced by other service providers with the EP designation.
FFELP student loans are guaranteed by state agencies or non-profit companies called guarantors,
with ED providing reinsurance to the guarantor. Guarantors are responsible for performing certain
functions necessary to ensure the program’s soundness and accountability. These functions include
reviewing loan application data to detect and prevent fraud and abuse and to assist lenders in preventing
default by providing counseling to borrowers. Generally, the guarantor is responsible for ensuring that
loans are being serviced in compliance with the requirements of the HEA. When a borrower defaults on a
FFELP loan, we submit a claim form to the guarantor who pays us 100 percent of the principal and
accrued interest. (See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS—OTHER RELATED EVENTS AND
INFORMATION—Reauthorization” for a description of certain HEA reauthorization proposals that
would reduce the guarantee and APPENDIX A to this document for a more complete description of the
role of guarantors.)
Private Education Loan Products
In addition to federal loan programs, which have statutory limits on annual and total borrowing, we
sponsor a variety of Private Education Loan programs and purchase loans made under such programs to
bridge the gap between the cost of education and a student’s resources. The majority of our higher
education Private Education Loans is made in conjunction with a FFELP Stafford loan, so they are
marketed to schools through the same marketing channels—and by the same sales force—as FFELP loans.
In 2004, we expanded our direct-to-consumer loan marketing channel with our Tuition Answer(SM) loan
program where we originate and purchase loans outside of the traditional financial aid process. We also
originate and purchase Private Education Loans, marketed by our SLM Financial subsidiary to career
training, technical and trade schools, tutorial and learning centers, and private kindergarten through
secondary education schools. These loans are primarily made at schools not eligible for Title IV loans.
Private Education Loans are discussed in more detail below.
International Education Lending
United States citizens studying abroad at institutions 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 when obtaining a U.S. co-signer. To serve our international
customers, we have established a unit to take advantage of combined international lending opportunities
by actively marketing FFELP and Private Education Loans to U.S. students studying abroad and by