Sallie Mae 2006 Annual Report Download - page 38

Effect of Consolidation Activity
The schedule below summarizes the impact of loan consolidation on each affected financial statement
line item.
On-Balance Sheet Student Loans
Estimate
Consolidating
Lender Effect on Estimate CPR Accounting Effect
Premium ........ Sallie Mae Term extension Decrease Estimate Adjustment
(1)
— increase
unamortized balance of premium.
Reduced amortization expense going
forward.
Premium ........ Other lenders Loan prepaid Increase Estimate Adjustment
(1)
— decrease
unamortized balance of premium or
accelerated amortization of premium.
Borrower Benefits. . Sallie Mae Term extension N/A Existing Borrower Benefits reserve
reversed into income — new
FFELP Consolidation Loan benefit
amortized over a longer term.
(2)
Borrower Benefits. . Other lenders Loan prepaid N/A Borrower Benefits reserve reversed
into income.
(2)
(1)
As estimates are updated, in accordance with SFAS No. 91, the premium balance must be adjusted from inception to reflect the new
expected term of the loan, as if it had been in place from inception.
(2)
Consolidation estimates also affect the estimates of borrowers who will eventually qualify for Borrower Benefits.
Off-Balance Sheet Student Loans
Estimate
Consolidating
Lender Effect on Estimate CPR Accounting Effect
Residual Interest. . Sallie Mae or other lenders Loan prepaid Increase • Reduction in fair market
value of Residual Interest
resulting in either an
impairment charge or
reduction in prior
unrealized market value
gains recorded in other
comprehensive income.
• Decrease in prospective
effective yield used to
recognize interest
income.
Derivative Accounting
We use interest rate swaps, foreign currency swaps, interest rate futures contracts, Floor Income Contracts
and interest rate cap contracts as an integral part of our overall risk management strategy to manage interest
rate and foreign currency risk arising from our fixed rate and floating rate financial instruments. We account
for these instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” which requires that every derivative instrument, including certain derivative instruments embedded
in other contracts, be recorded at fair value on the balance sheet as either an asset or liability. We determine
the fair value for our derivative instruments primarily by using pricing models that consider current market
inputs and the contractual terms of the derivative contracts. The fair value of some derivatives are determined
using counterparty valuations. Pricing models and their underlying assumptions impact the amount and timing
of unrealized gains and losses recognized; the use of different pricing models or assumptions could produce
different financial results. As a matter of policy, we compare the fair values of our derivatives that we
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