Sallie Mae 2006 Annual Report Download - page 34

the GSE has been replaced primarily by securitizations. In addition to securitizations, we have access to a
number of additional sources of liquidity including an asset-backed commercial paper program, unsecured
revolving credit facilities, and other unsecured corporate debt and equity security issuances.
We manage our business through two primary operating segments: the Lending operating segment and the
DMO operating segment. Accordingly, the results of operations of the Company’s Lending and DMO
operating segments are presented separately below under “BUSINESS SEGMENTS.” These operating
segments are considered reportable segments under the Financial Accounting Standards Board’s (“FASB”)
Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise
and Related Information,” based on quantitative thresholds applied to the Company’s financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our
consolidated financial statements, which have been prepared in accordance with generally accepted accounting
principles in the United States of America (“GAAP”). The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
the reported amounts of income and expenses during the reporting periods. We base our estimates and
judgments on historical experience and on various other factors that we believe are reasonable under the
circumstances. Actual results may differ from these estimates under varying assumptions or conditions. Note 2
to the consolidated financial statements, “Significant Accounting Policies,” includes a summary of the
significant accounting policies and methods used in the preparation of our consolidated financial statements.
On a quarterly basis, management evaluates its estimates, particularly those that include the most difficult,
subjective or complex judgments and are often about matters that are inherently uncertain. These estimates
relate to the following accounting policies that are discussed in more detail below: application of the effective
interest method for loans (premiums, discounts and Borrower Benefits), securitization accounting and Retained
Interests, allowance for loan losses, and derivative accounting. In recent years, we have frequently updated a
number of estimates to account for the continued high level of FFELP Consolidation Loan activity. Also, a
number of these estimates affect life-of-loan calculations. Since our student loans have long average lives, the
cumulative effect of relatively small changes in estimates can be material.
Premiums, Discounts and Borrower Benefits
For both federally insured and Private Education Loans, we account for premiums paid, discounts
received, capitalized direct origination costs incurred on the origination of student loans, and the impact of
Borrower Benefits in accordance with SFAS No. 91, “Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” The unamortized portion
of the premiums and the discounts is included in the carrying value of the student loans on the consolidated
balance sheet. We recognize income on our student loan portfolio based on the expected yield of the student
loan after giving effect to the amortization of purchase premiums and accretion of student loan discounts, as
well as the impact of Borrower Benefits. Premiums, capitalized direct origination costs and discounts received
are amortized over the estimated life of the loan, which includes an estimate of prepayment speeds. Estimates
for future prepayments are incorporated in an estimated Constant Prepayment Rate (“CPR”), which is
primarily based upon the historical prepayments due to consolidation and defaults, extensions from the
utilization of forbearance, as well as, management’s expectation of future prepayments and extensions. 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 the evaluation of the ultimate
qualification rate for these incentives. We periodically evaluate the assumptions used to estimate the loan life
and qualification rates, and in instances where there are modifications to the assumptions, amortization is
adjusted on a cumulative basis to reflect the change.
The estimate of the CPR measures the rate at which loans in the portfolio pay before their stated maturity.
A number of factors can affect the CPR estimate such as the rate of consolidation activity and default rates.
Changes in CPR estimates are discussed in more detail below. The impact of Borrower Benefits is dependent
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