Sallie Mae 2005 Annual Report Download - page 24

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several years, the growth of Private Education Loans has accelerated due to tuition increasing faster than
the rate of inflation coupled with stagnant FFELP lending limits. This rapid growth coupled with the
relatively higher spreads has led to Private Education Loans contributing a higher percentage of our net
interest margin in each of the last four years. We expect this trend to continue in the foreseeable future. In
2005, Private Education Loans contributed 25 percent of the overall net interest income after provisions,
up from 17 percent in 2004.
Since we bear the full credit risk for Private Education Loans, they are underwritten and priced
according to credit risk based upon standardized consumer credit scoring criteria. To mitigate some of the
credit risk, we provide price and eligibility incentives for students to obtain a credit-worthy co-borrower.
Approximately 50 percent of our Private Education Loans have a co-borrower. Due to their higher risk
profile, Private Education Loans earn higher spreads than their FFELP loan counterparts. In 2005, Private
Education Loans earned an average spread, before provisions for loan losses, of 4.62 percent versus an
average spread of 1.39 percent for FFELP loans, excluding the impact from the update to our estimates for
the qualification for Borrower Benefits.
Our largest Private Education Loan program is the Signature Loan® offered to undergraduates and
graduates through the financial aid offices of colleges and universities and packaged with traditional
FFELP loans. We also offer specialized loan products to graduate and professional students primarily
through our MBALoans®, LAWLOANS® and MEDLOANS(SM) programs. Generally, these loans, which
are made by lender partners and sold to the Company, do not require borrowers to begin repaying their
loans until after graduation and allow a grace period from six to nine months.
In the third quarter of 2004 we began to offer Tuition Answer(SM) loans directly to the consumer
through targeted direct mail campaigns and web-based initiatives. Tuition Answer loans are made by a
lender-partner and are sold to 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 college-
related expense. No school certification is required, although a borrower must provide enrollment
documentation. At December 31, 2005, we had $877 million of Tuition Answer loans outstanding.
We also offer alternative Private Education Loans for information technology, cosmetology,
mechanics, medical/dental/lab, culinary and broadcasting. On average, these training programs typically
last fewer than 12 months. Generally, these loans require the borrower to begin repaying his or her loan
immediately; however, students can opt to make relatively small payments while enrolled. At
December 31, 2005, we had $1.7 billion of SLM Financial alternative Private Education Loans outstanding.
Acquisitions
Beginning in 1999 with the purchase of Nellie Mae, we have acquired several companies in the student
loan industry that have increased our sales and marketing capabilities, added significant new brands and
greatly enhanced our product offerings. Strategic student lending acquisitions have included SLFR and
USA Group, Inc. (“USA Group”) in 2000, AMS in 2003, Southwest and SLFA in 2004 and 2005,
respectively. In conjunction with the SLFA transaction, NELA, a non-profit regional guarantor, entered
into an affiliation with USA Funds, the nation’s largest guarantor and Sallie Mae’s largest guarantor
servicing client. In connection with this affiliation with USA Funds, we entered into a contract with NELA
to provide comprehensive operational and other guarantor services to NELA. The following table provides
a timeline of strategic acquisitions that have played a major role in the growth of our Lending business.