Sallie Mae 2006 Annual Report Download - page 130

2. Significant Accounting Policies (Continued)
the definition of a QSPE and are not consolidated. The Company’s accounting treatment for its on-balance
sheet securitizations, which are not QSPEs, are governed by FIN No. 46(R) and are consolidated in the
accompanying financial statements as the Company is the primary beneficiary.
Use of Estimates
The Company’s financial reporting and accounting policies conform to generally accepted accounting
principles in the United States of America (“GAAP”). The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Key accounting policies that include significant judgments and estimates include valuation and
income recognition related to securitization activities (gain on sale and the related retained interest), loan
effective interest method (student loan premiums, discounts and Borrower Benefits), provisions for loan losses,
and derivative accounting.
Consolidation activity has a significant effect on a number of accounting estimates. Accordingly, the
Company has continually updated its estimates used to develop the cash flows and effective yield calculations
as they relate to the amortization of student loan premiums and discounts, Borrower Benefits and the valuation
and income recognition of the Residual Interest.
Loans
Loans, consisting of federally insured student loans, Private Education Loans, student loan participations,
lines of credit, academic facilities financings, and other private consumer and mortgage loans, are generally
carried at amortized cost, which includes unamortized premiums, unearned discounts and capitalized origina-
tion costs and fees.
If the Company has the ability and intent to hold loans for the forseeable future, such loans are held for
investment and therefore carried at amortized cost. Any loans held for sale are carried at the lower of cost or
fair value. The Company actively securitizes loans but securitization is viewed as one of many different
sources of financing. At the time of a funding need, the most advantageous funding source is identified and, if
that source is the securitization program, loans are selected based on the required characteristics to structure
the desired transaction (i.e., type of loan, mix of interim vs. repayment status, credit rating, maturity dates,
etc.). The Company structures securitizations to obtain the most favorable financing terms and as a result, due
to some of the structuring terms, certain transactions qualify for sale treatment under SFAS No. 140 while
others do not qualify for sale treatment and are recorded as financings. All student loans are initially
categorized as held for investment until there is certainty as to each specific loans ultimate financing because
the Company does not securitize all loans and not all securitizations qualify as sales. It is only when the
Company has selected the loans to securitize and that securitization transaction qualifies as a sale under
SFAS No. 140 has the Company made the decision to sell such loans. At that time, the loans selected are
transferred into the held-for-sale classification and carried at the lower of cost or fair value. If the Company
anticipates recognizing a gain related to the impending securitization, then the fair value of the loans is higher
than their respective cost basis and no valuation allowance is needed.
Private Education Loans which are not guaranteed by the federal government are charged off against the
allowance for loan loss at 212 days past due and any subsequent recoveries are recorded directly to the
allowance. When the loan charges off, any accrued interest is charged off against interest income. FFELP
loans are guaranteed (subject to legislative risk sharing requirements) as to both principal and interest, and
F-11
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)