Sallie Mae 2007 Annual Report Download - page 16

less other financial aid received. In 2007, we originated $606 million of GradPLUS loans which represented
two percent of our Preferred Channel Originations.
Private Education Loans
The rising cost of education has led students and their parents to seek additional private sources to
finance their education. Private Education Loans are often packaged as supplemental or companion products to
FFELP loans. Over the last several years, the growth of Private Education Loans has continued due to tuition
increasing faster than the rate of inflation coupled with stagnant FFELP lending limits. This growth combined
with the relatively higher spreads has led to Private Education Loans contributing a higher percentage of our
net interest margin in recent years. We expect this trend to continue in the foreseeable future in part due to
margin erosion for FFELP student loans. In 2007, Private Education Loans contributed 36 percent of our
overall “Core Earnings” net interest income before provisions for loan losses plus other income, up from
29 percent in 2006.
The Higher Education Reconciliation Act of 2005 increased FFELP loan limits on July 1, 2007 for
freshman and sophomores. This, along with the introduction of GradPLUS Loans discussed above, will
somewhat offset the rate of growth in Private Education Loans in the future. We believe this loss of future
Private Education Loan volume for graduate students will be replaced by an increase in federally insured
loans.
Since we bear the full credit risk for Private Education Loans, they are underwritten and priced according
to credit risk based upon customized consumer credit scoring criteria. We mitigate some of this credit risk by
providing price and eligibility incentives for students to obtain a credit-worthy cosigner, and 52 percent of our
Managed Private Education Loans have a cosigner. Due to their higher risk profile, Private Education Loans
earn higher spreads than their FFELP loan counterparts. In 2007, Private Education Loans earned an average
“Core Earnings” spread (before provisions for loan losses and the Interim ABCP Facility Fees) of 5.15 percent
versus an average “Core Earnings” spread of 1.04 percent for FFELP loans (before provisions for loan losses
and the Interim ABCP Facility Fees).
Our largest Private Education Loan program is the Signature Student Loan», which is offered to
undergraduates and graduates through the financial aid offices of colleges and universities to supplement
traditional FFELP loans. We also offer specialized loan products to graduate and professional students
primarily through our MBA Loans», LAWLOANS»and, Sallie Mae Medical School Loans»and Sallie Mae
DENTALoans»programs. Generally, these loans do not require borrowers to begin repaying their loans until
after graduation and allow a grace period from six to nine months.
In 2004 we began to offer Tuition Answer»loans directly to the consumer through targeted direct mail
campaigns and Web-based initiatives. Under the Tuition Answer loan program, creditworthy parents, sponsors
and students may borrow between $1,500 and $40,000 per year to cover any qualified higher education
expense, but now capped at the full cost of tuition and board at the school they attend. No school certification
is required, although a borrower must provide enrollment documentation. At December 31, 2007, we had
$3.3 billion of Tuition Answer loans outstanding in our Managed student loan portfolio.
We also offer alternative Private Education Loans for information technology, cosmetology, mechanics,
medical/dental/lab, culinary and broadcasting education programs. On average, these career training programs
typically last fewer than 12 months. These loans require the borrower to begin repaying the loan immediately;
however, students can opt to make relatively small payments while enrolled. At December 31, 2007, we had
$2.4 billion of career training loans outstanding.
Acquisitions
We have acquired several companies in the student loan industry that have increased our sales and
marketing capabilities, added significant new brands and greatly enhanced our product offerings. The following
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