Sallie Mae 2006 Annual Report Download - page 146

4. Allowance for Student Loan Losses
The Company’s provisions for loan losses represents the periodic expense of maintaining an allowance
sufficient to absorb losses, net of recoveries, inherent in the student loan portfolios. The evaluation of the
provisions for student loan losses is inherently subjective as it requires material estimates that may be
susceptible to significant changes. The Company believes that the allowance for student loan losses is
appropriate to cover probable losses in the student loan portfolios.
The following table summarizes changes in the allowance for student loan losses for both the Private
Education Loan and federally insured student loan portfolios for the years ended December 31, 2006, 2005,
and 2004.
2006 2005 2004
Years Ended December 31,
Balance at beginning of period ...................... $219,062 $ 179,664 $ 211,709
Provisions for student loan losses ................... 271,890 187,693 133,123
Charge-offs.................................... (164,600) (157,947) (117,441)
Recoveries .................................... 22,599 19,580 14,138
Net charge-offs ................................. (142,001) (138,367) (103,303)
Reductions for student loan sales and securitizations ..... (20,290) (9,928) (35,887)
Reduction in federal Risk Sharing allowance/provision for
EP designation ............................... — — (32,709)
Other ........................................ — — 6,731
Balance at end of period ........................... $328,661 $ 219,062 $ 179,664
In addition to the provisions for student loan losses, provisions for other losses totaled $15 million,
$15 million, and $11 million for the years ended December 31, 2006, 2005, and 2004, respectively.
Allowance for Private Education Loan Losses
The Company’s allowance for Private Education Loan losses is an estimate of losses in the portfolio at
the balance sheet date that will be charged off in subsequent periods. The maturing of the Company’s Private
Education Loan portfolios has provided more historical data on borrower default behavior such that those
portfolios can now be analyzed to determine the effects that the various stages of delinquency have on
borrower default behavior and ultimate charge-off. In 2005, the Company changed its estimate of the
allowance for loan losses to include a migration analysis of delinquent and current accounts, in addition to
other considerations. A migration analysis is a technique used to estimate the likelihood that a loan receivable
may progress through the various delinquency stages and ultimately charge off. Previously, the Company
calculated its allowance for Private Education Loan losses by estimating the probable losses in the portfolio
based primarily on loan characteristics and where pools of loans were in their life with less emphasis on
current delinquency status of the loan. Also, in the prior methodology for calculating the allowance, some loss
rates were based on proxies and extrapolations of FFELP loan loss data.
The Company also transitioned to a migration analysis to revise its estimates pertaining to its non-accrual
policy for interest income. Under this methodology, the amount of uncollectible accrued interest on Private
Education Loans is estimated and written off against current period interest income. Under the Company’s
prior methodology, Private Education Loans continued to accrue interest, including in periods of forbearance,
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SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)