Sallie Mae 2006 Annual Report Download - page 131

2. Significant Accounting Policies (Continued)
therefore continue to accrue interest until such time that they are paid by the guarantor. Loans in forbearance
or deferment status are not considered past due.
Student Loan Income
The Company recognizes student loan income as earned, adjusted for the amortization of premiums and
capitalized direct origination costs, accretion of discounts, and after giving effect to borrower utilization of
incentives for timely payment (“Borrower Benefits”). These adjustments are made in accordance with
SFAS No. 91, “Accounting for Non-Refundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases,” which requires income to be recognized based upon the expected
yield of the loan over its life after giving effect to prepayments and extensions, and to estimates related to
Borrower Benefits. Premiums, discounts, and capitalized direct origination costs are amortized over the
estimated life of the loan, which includes an estimate of prepayment speeds. The estimate of the prepayment
speed must consider the effect of consolidations, voluntary prepayments and student loan defaults, all of which
shorten the life of loan. Prepayment speed estimates must also consider the utilization of deferment and
forbearance, which lengthen the life of loan, coupled with, management’s expectation of future activity. For
Borrower Benefits, the estimates of their effect on student loan yield are based on analyses of historical
payment behavior of borrowers who are eligible for the incentives and its effect on the ultimate qualification
rate for these incentives. The Company periodically evaluates the assumptions used to estimate its loan life
and the qualification rates used for Borrower Benefits. In instances where there are modifications to the
assumptions, amortization is adjusted on a cumulative basis to reflect the change since the acquisition of the
loan. Additionally, interest earned on student loans reflects potential non-payment adjustments in accordance
with the Company’s non-accrual policy as discussed further in “Allowance for Student Loan Losses” below.
The Company pays an annual 105 basis point Consolidation Loan Rebate Fee on FFELP Consolidation
Loans. The Company was also required to pay an annual 30 basis point Offset Fee unique to the GSE on
Stafford and PLUS student loans purchased and held on or after August 10, 1993 until the GSE was dissolved
on December 29, 2004. These fees are netted against student loan income.
Allowance for Student Loan Losses
The Company has established an allowance for student loan losses that is an estimate of probable losses
inherent in the FFELP and Private Education Loan portfolios at the balance sheet date. The Company presents
student loans net of the allowance on the balance sheet. Amounts of estimated probable losses are currently
expensed as provisions of loan losses in the income statement. Actual losses are charged off, net of estimated
recoveries, to the allowance for loan losses.
In evaluating the adequacy of the allowance for losses on the Private Education Loan portfolio, the
Company considers several factors including: the credit profile of the borrower and/or co-borrower, its status,
i.e. whether it is in repayment versus being in a permitted non-paying status, months of repayment,
delinquency status, type of program and trends in defaults in the portfolio based on Company and industry
data. (See also Note 4, “Allowance for Student Loan Losses.”) When calculating the Private Education Loan
allowance for losses, the Company’s methodology divides the portfolio into categories of similar risk
characteristics based on loan program type, underwriting criteria and the existence or absence of a co-
borrower, with a further breakdown for each of the factors mentioned above with these categories. The
Company then applies default and recovery rate projections to each category. The Company’s loss estimates
are based on a loss emergence period of two years, including when borrowers are in school. Private Education
Loan principal is charged off against the allowance when the loan exceeds 212 days delinquency. Subsequent
recoveries on loans charged off are recorded directly to the allowance. The Company’s collection policies
F-12
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)