Sallie Mae 2006 Annual Report Download - page 36

uncollectible accrued interest on Private Education Loans and write off that amount against current period
interest income.
When calculating the allowance for loan loses on Private Education Loan loss, we divide the portfolio
into categories of similar risk characteristics based on loan program type, loan status (in-school, grace,
repayment, forbearance, delinquency), underwriting criteria, existence or absence of a co-borrower, and aging.
We then apply default and collection rate projections to each category. Our higher education Private Education
Loan programs (90 percent of the Managed Private Education Loan portfolio at December 31, 2006) do not
require the borrowers to begin repayment until six months after they have graduated or otherwise left school.
Consequently, our loss estimates for these programs are minimal while the borrower is in school. Our career
training and alternative Private Education Loan programs (10 percent of the Managed Private Education Loan
portfolio at December 31, 2006) generally require the borrowers to start repaying their loans immediately. At
December 31, 2006, 46 percent of the principal balance in the higher education Managed Private Education
Loan portfolio is related to borrowers who are still in-school and not required to make payments. As the
current portfolio ages, an increasing percentage of the borrowers will leave school and be required to begin
payments on their loans. The allowance for losses will change accordingly with the percentage of borrowers in
repayment.
Our loss estimates are based on a loss emergence period of two years. Similar to the rules governing
FFELP payment requirements, our collection policies allow for periods of nonpayment for borrowers
requesting additional payment grace periods upon leaving school or experiencing temporary difficulty meeting
payment obligations. This is referred to as forbearance status and is considered separately in our allowance of
loan losses. The majority of forbearance occurs early in the repayment term when borrowers are starting their
careers (see “LENDING BUSINESS SEGMENT — Private Education Loans — Delinquencies”). At Decem-
ber 31, 2006, 9 percent of the Managed Private Education Loan portfolio in repayment and forbearance was in
forbearance status. The loss emergence period is in alignment with our typical collection cycle and takes into
account these periods of nonpayment.
In general, Private Education Loan principal is charged off against the allowance when the loan exceeds
212 days delinquency. Recoveries on loans charged off are considered when calculating the allowance for loan
losses, and actual cash recoveries are therefore recorded directly to the allowance.
As a result of Sallie Mae Servicing’s Exceptional Performer (“EP”) designation for ED, the Company
received 100 percent reimbursement (declining to 99 percent on July 1, 2006 under the Reconciliation
Legislation, discussed below) 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.
The Reconciliation Legislation, signed into law on February 8, 2006, reduced the level of default
insurance from 98 percent to 97 percent (effectively increasing Risk Sharing from two percent to three
percent) on loans disbursed after July 1, 2006 for lenders without the EP designation. Furthermore, the bill
reduced the default insurance paid to lenders/servicers with the EP designation to 99 percent from 100 percent
on claims filed on or after July 1, 2006. As a result of the amended insurance levels, we established a Risk
Sharing allowance as of December 31, 2005 for an estimate of losses on FFELP student loans based on the
one percent reduction in default insurance for servicers with the EP designation. The reserve was established
using a migration analysis similar to that described above for the Private Education Loans before applying the
appropriate Risk Sharing percentage.
The evaluation of the provisions for loan losses is inherently subjective, as it requires material estimates
that may be susceptible to significant changes. Management believes that the allowance for loan losses is
appropriate to cover probable losses in the student loan portfolio.
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