Sallie Mae 2008 Annual Report Download - page 195

16. Fair Values of Financial Instruments (Continued)
• In the consolidated balance sheet for instruments carried at lower of cost or fair value with impairment
charges recorded in the consolidated statement of income; and
• In the notes to the financial statements as required by SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments.’’
Fair value under SFAS No. 157 is defined as the price to sell an asset or transfer a liability in an orderly
transaction between willing and able market participants. In general, the Company’s policy in estimating fair
values is to first look at observable market prices for identical assets and liabilities in active markets, where
available. When these are not available, other inputs are used to model fair value such as prices of similar
instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads (including for the
Company’s liabilities), relying first on observable data from active markets. Additional adjustments may be
made for factors including liquidity, credit, bid/offer spreads, etc., depending on current market conditions.
Transaction costs are not included in the determination of fair value. When possible, the Company seeks to
validate the model’s output to market transactions. Depending on the availability of observable inputs and
prices, different valuation models could produce materially different fair value estimates. The values presented
may not represent future fair values and may not be realizable.
Under SFAS No. 157, the Company categorizes its fair value estimates based on a hierarchical framework
associated with three levels of price transparency utilized in measuring financial instruments at fair value.
Classification is based on the lowest level of input that is significant to the fair value of the instrument. The
three levels are as follows:
• Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the
reporting entity has the ability to access at the measurement date. The types of financial instruments
included in level 1 are highly liquid instruments with quoted prices;
• Level 2 — Inputs from active markets, other than quoted prices for identical instruments, are used to
model fair value. Significant inputs are directly observable from active markets for substantially the full
term of the asset or liability being valued; and
• Level 3 — Pricing inputs significant to the valuation are unobservable. Inputs are developed based on
the best information available; however, significant judgment is required by management in developing
the inputs.
Student Loans
The Company’s FFELP loans and Private Education Loans are accounted for at cost or at the lower of
cost or market if the loan is held-for-sale (see Note 2, “Significant Accounting Policies — Loans,” for a
discussion of the accounting treatment); however, the fair value is disclosed in compliance with SFAS No. 107.
FFELP loans classified as held-for-sale are those which the Company has the ability and intent to sell under
various ED loan purchase programs. In these instances, the FFELP loans are valued using the committed sales
price under the programs. For all other FFELP loans and Private Education Loans, fair value was determined
by modeling loan level cash flows using stated terms of the assets and internally-developed assumptions to
determine aggregate portfolio yield, net present value and average life. The significant assumptions used to
project cash flows are prepayment speeds, default rates, cost of funds, required return on equity, and expected
Repayment Borrower Benefits to be earned. In addition, the Floor Income component of the Company’s
FFELP loan portfolio is valued through discounted cash flow and option models using both observable market
inputs and internally developed inputs. Significant inputs into the models are not observable.
F-75
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)