Sallie Mae 2005 Annual Report Download - page 76
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66
The difference in the impact of the change in estimate on the allowance for loan losses 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 yet been securitized and as
such the on-balance sheet portfolio contains loans with higher delinquency rates. Because the required
allowance under the new methodology is more directly tied to the current status of the portfolio, the on-
balance sheet portfolio reserve requirements increased while at the same time the off-balance sheet
portfolio reserve requirements decreased with the net effect being a decrease in the Managed Basis
allowance. The difference in the composition of our on-balance sheet and off-balance sheet portfolios also
caused the disparity in the impact of the change in recovery methodology for loans on-balance sheet versus
off-balance sheet. The on-balance sheet portfolio has higher expected gross charge-offs and was therefore
more heavily affected by the change in estimate on the related expected recoveries.
During the year there is seasonality in the provisions for loan losses that is primarily driven by the
seasonality of loans entering repayment. The majority of loans typically enter repayment in the second and
fourth quarters. This increase in loans entering repayment often leads to a near-term increase in early-
stage delinquencies or forbearance usage in the first and third quarters for the affected borrowers, which in
turn leads to a spike in the provisions for those quarters. Therefore, all other factors being equal, the
provisions for loan losses will be higher in the first and third quarters.
Activity in the Allowance for Private Education Loan Losses
As discussed in detail under “CRITICAL ACCOUNTING POLICIES AND ESTIMATES,” the
provisions for student loan losses represents the periodic expense of maintaining an allowance sufficient to
absorb losses, net of recoveries, inherent in the portfolio of Private Education Loans.