Sallie Mae 2008 Annual Report Download - page 133

2. Significant Accounting Policies (Continued)
market value of the loan at the time of purchase, in accordance with the American Institute of Certified Public
Accountants’ (“AICPA”) Statement of Position (“SOP”) 03-3, “Accounting for Certain Loans or Debt
Securities Acquired in a Transfer.” Beginning in October 2008, the Company decided to no longer exercise its
contingent call option. The losses recorded upon repurchase, pertaining to the contingent call option and
specialty claims, for the years ended December 31, 2008, 2007, and 2006 were $141 million, $123 million,
and $48 million, respectively, and were recorded in the “Losses on loans and securities, net” line item in the
consolidated statements of income. Subsequent to buyback, the Company accounts for these loans under
SOP 03-3 in the same manner as discussed under “Collections Revenue” for the Company’s purchased paper
portfolio. The initial valuation at buyback uses a discount rate similar to that used in valuing the Private
Education Loan Residual Interests as that rate takes into account the credit and liquidity risks inherent in the
loans being repurchased. Interest income recognized is recorded as part of student loan interest income.
Cash and Cash Equivalents
Cash and cash equivalents includes term federal funds, Eurodollar deposits, money market funds and
bank deposits with original terms to maturity of less than three months.
Restricted Cash and Investments
Restricted cash primarily includes amounts for on-balance sheet student loan securitizations and other
secured borrowings. This cash must be used to make payments related to trust obligations. Amounts on
deposit in these accounts are primarily the result of timing differences between when principal and interest is
collected on the trust assets and when principal and interest is paid on trust liabilities.
In connection with the Company’s tuition payment plan product, the Company receives cash from
students and parents that in turn is owed to schools. This cash, a majority of which has been deposited at
Sallie Mae Bank, is held in escrow for the beneficial owners. In addition, the cash rebates that Upromise
members earn from qualifying purchases from Upromise’s participating companies are held in trust for the
benefit of the members. This cash is restricted to certain investments until distributed in accordance with the
Upromise member’s request and the terms of the Upromise service. Upromise, which acts as the trustee for
the trust, has deposited a majority of the cash with Sallie Mae Bank pursuant to a money market deposit
account agreement between Sallie Mae Bank and the trust. Subject to capital requirements and other laws,
regulations and restrictions applicable to Utah industrial banks, the cash that is deposited with Sallie Mae
Bank in connection with the tuition payment plan and the Upromise rebates described above is not restricted
and, accordingly, is not included in restricted cash and investments in the Company’s consolidated financial
statements, as there is no restriction surrounding the use of funds by the Company.
Securities pledged as collateral related to the Company’s derivative portfolio where the counterparty has
rights of rehypothecation, are classified as restricted. When the counterparty does not have these rights, the
security is recorded in investments and disclosed as pledged collateral in the notes. Cash balances that the
Company’s indentured trusts deposit in guaranteed investment contracts that are held in trust for the related
note holders are classified as restricted investments. Finally, cash received from lending institutions that is
invested pending disbursement for student loans is restricted and cannot be disbursed for any other purpose.
Investments
Investments are held to provide liquidity and to serve as a source of income. The majority of the
Company’s investments are classified as available-for-sale and such securities are carried at fair value, with
the temporary changes in fair value carried as a separate component of stockholders’ equity. Changes in fair
value for available-for-sale securities that have been designated as the hedged item in a SFAS No. 133 fair
F-13
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)