Sallie Mae 2008 Annual Report Download - page 131

2. Significant Accounting Policies (Continued)
which are held-for-sale do not have the associated premium, discount, and capitalized origination costs and
fees amortized into interest income and there is also no related allowance for loan loss.
As market conditions warrant, the Company actively securitizes loans but securitization is viewed as one
of many different sources of financing. At the time of a funding need, the most advantageous funding source
is identified and, if that source is the securitization program, loans are selected based on the required
characteristics to structure the desired transaction (e.g., type of loan, mix of interim vs. repayment status,
credit rating, maturity dates, etc.). The Company structures securitizations to obtain the most favorable
financing terms and as a result, due to some of the structuring terms, certain transactions qualify for sale
treatment under SFAS No. 140 while others do not qualify for sale treatment and are recorded as financings.
All student loans are initially categorized as held for investment until there is certainty as to each specific
loan’s ultimate financing because the Company does not securitize all loans and not all securitizations qualify
as sales. It is only when the Company has selected the loans to securitize and that securitization transaction
qualifies as a sale under SFAS No. 140 has the Company made the decision to sell such loans. At that time,
the loans selected are transferred into the held-for-sale classification and carried at the lower of cost or fair
value. If the Company anticipates recognizing a gain related to the impending securitization, then the fair
value of the loans is higher than their respective cost basis and no valuation allowance is needed.
Under the “Ensuring Continued Access to Student Loans Act of 2008,” ED has implemented the Loan
Purchase Commitment Program (“Purchase Program”). Under the Purchase Program, ED will purchase eligible
FFELP loans at a set price by September 30, 2009 at the option of the Company. The Company is classifying
all loans eligible to be sold to ED under the Purchase Program as held-for-sale. The Company currently has
the ability and intent to sell such loans to ED under the Purchase Program due to the current environment in
the capital markets. These loans are included in the “FFELP Stafford Held-for-Sale Loans” line on the
consolidated balance sheets.
Student Loan Income
The Company recognizes student loan interest income as earned, adjusted for the amortization of
premiums and capitalized direct origination costs, accretion of discounts, and after giving effect to borrower
utilization of incentives for timely payment (“Repayment Borrower Benefits”). These adjustments are made in
accordance with SFAS No. 91, “Accounting for Non-Refundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases,” which requires income to be recognized based upon
the expected yield of the loan over its life after giving effect to prepayments and extensions, and to estimates
related to Repayment Borrower Benefits. As a result, for loans that are held for investment, premiums,
discounts, and capitalized direct origination costs and fees are amortized over the estimated life of the loan,
which includes an estimate of prepayment speeds. The estimate of the prepayment speed must consider the
effect of consolidations, voluntary prepayments and student loan defaults, all of which shorten the life of loan.
Prepayment speed estimates must also consider the utilization of deferment and forbearance, which lengthen
the life of loan, coupled with management’s expectation of future activity. For Repayment 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 its effect on the ultimate qualification rate for these
incentives. The Company periodically evaluates the assumptions used to estimate its loan life and the
qualification rates used for Repayment Borrower Benefits. In instances where there are changes to the
assumptions, amortization is adjusted on a cumulative basis to reflect the change since the acquisition of the
loan. The Company pays an annual 105 basis point Consolidation Loan Rebate Fee on FFELP Consolidation
Loans which is netted against student loan income. Additionally, interest earned on student loans reflects
F-11
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)