Sallie Mae 2007 Annual Report Download - page 42

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Consolidation activity affects each estimate differently depending on whether the original loans being
consolidated were on-balance sheet or off-balance sheet and whether the resulting consolidation is retained by
us or consolidated with a third party. When we consolidate a loan that was in our portfolio, the term of that
loan is generally extended and the term of the amortization of associated student loan premiums and discounts
is likewise extended to match the new term of the loan. In that process, the unamortized premium balance
must be adjusted to reflect the new expected term of the consolidated loan as if it had been in place from
inception.
The estimate of the CPR also affects the estimate of the average life of securitized trusts and therefore
affects the valuation of the Residual Interest. Prepayments shorten the average life of the trust, and if all other
factors remain equal, will reduce the value of the Residual Interest, the securitization gain on sale and the
effective yield used to recognize interest income. Prepayments on student loans in our securitized trusts are
significantly impacted by the rate at which securitized loans are consolidated. When a loan is consolidated
from the trust either by us or a third party, the loan is treated as a prepayment. In cases where the loan is
consolidated by us, it will be recorded as an on-balance sheet asset. We discuss the effects of changes in our
CPR estimates in “LIQUIDITY AND CAPITAL RESOURCES — Securitization Activities and Liquidity Risk
and Funding Long-Term.”
The increased activity in FFELP Consolidation Loans has led to demand for the consolidation of Private
Education loans. Private Education Consolidation Loans provide an attractive refinancing opportunity to
certain borrowers because they allow borrowers to lower their monthly payments by extending the life of the
loan and/or lowering their interest rate. Consolidation of Private Education Loans from off-balance sheet
Private Education Loan trusts will increase the CPR used to value the Residual Interest.
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.
Repayment Borrower Benefits. . Sallie Mae Term extension N/A Existing Repayment
Borrower Benefits reserve
reversed into income —
new FFELP Consolidation
Loan benefit amortized
over a longer term.
(2)
Repayment Borrower Benefits. . Other lenders Loan prepaid N/A Repayment 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 Repayment Borrower Benefits.
41