Sallie Mae 2006 Annual Report Download - page 11

(See “LENDING BUSINESS SEGMENT — Competition.”) Total FFELP and FDLP volume for FFY 2006
grew by seven percent, with the FFELP portion growing nine percent.
The Higher Education Act (the “HEA”) includes regulations that cover every aspect of the servicing of a
federally guaranteed student loan, including communications with borrowers, loan originations and default
aversion. Failure to service a student loan properly could jeopardize the guarantee on federal student loans.
This guarantee generally covers 98 and 97 percent of the student loan’s principal and accrued interest for loans
disbursed before and after July 1, 2006, respectively, except when the servicer has been designated by ED as
an Exceptional Performer (“EP”) in which case the guarantee covers 99 percent. In the case of death, disability
or bankruptcy of the borrower, the guarantee covers 100 percent of the student loan’s principal and accrued
interest.
Effective for a renewable one-year period beginning in October 2005, the Company’s loan servicing
division, Sallie Mae Servicing, was 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 through June 30, 2006 and 99 percent reimbursement on and after July 1, 2006 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. 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. As of February 28, 2007,
ED has not renewed Sallie Mae Servicing as an EP pending resolution of outstanding issues with ED
concerning certain fees we charge certain borrowers. The Company believes these fees are charged consistent
with prior ED guidance. Until the outstanding issues with ED are resolved, Sallie Mae Servicing’s EP
designation remains in effect.
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 reimburses us for principal and accrued interest subject to the Risk Sharing and EP criteria
discussed above (See APPENDIX A, “FEDERAL FAMILY EDUCATION LOAN PROGRAM,” 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 are 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 under which 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.
Drivers of Growth in the Student Loan Industry
The growth in our Managed student loan portfolio is driven by the growth in the overall student loan
marketplace, as well as by our own market share gains. Rising enrollment and college costs have resulted in a
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