Sallie Mae 2009 Annual Report Download - page 254

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The following example shows the mechanics of Floor Income for a typical fixed rate FFELP Consolida-
tion Loan (with a commercial paper-based SAP spread of 2.64 percent):
Fixed Borrower Rate ...................................................... 7.25%
SAP Spread over Commercial Paper Rate ....................................... (2.64)%
Floor Strike Rate
(1)
....................................................... 4.61%
(1)
The interest rate at which the underlying index (Treasury bill or commercial paper) plus the fixed SAP spread equals the fixed
borrower rate. Floor Income is earned anytime the interest rate of the underlying index declines below this rate.
Based on this example, if the quarterly average commercial paper rate is over 4.61 percent, the holder of
the student loan will earn at a floating rate based on the SAP formula, which in this example is a fixed spread
to commercial paper of 2.64 percent. On the other hand, if the quarterly average commercial paper rate is
below 4.61 percent, the SAP formula will produce a rate below the fixed borrower rate of 7.25 percent and
the loan holder earns at the borrower rate of 7.25 percent.
Graphic Depiction of Floor Income:
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
4.00% 5.00% 6.00% 7.00%
Commercial Paper Rate
Floor Strike Rate @ 4.61%
Lender Yield
Floor Income
Fixed Borrower Rate = 7.25%
Special Allowance Payment (SAP) Rate = 2.64%
Floating Debt Rate
Fixed Borrower Rate
Y
ield
Floor Income Contracts — The Company enters into contracts with counterparties under which, in
exchange for an upfront fee representing the present value of the Floor Income that the Company expects to
earn on a notional amount of underlying student loans being economically hedged, the Company will pay the
counterparties the Floor Income earned on that notional amount over the life of the Floor Income Contract.
Specifically, the Company agrees to pay the counterparty the difference, if positive, between the fixed
borrower rate less the SAP (see definition below) spread and the average of the applicable interest rate index
on that notional amount, regardless of the actual balance of underlying student loans, over the life of the
contract. The contracts generally do not extend over the life of the underlying student loans. This contract
effectively locks in the amount of Floor Income the Company will earn over the period of the contract. Floor
Income Contracts are not considered effective hedges under ASC 815, “Derivatives and Hedging,” and each
quarter the Company must record the change in fair value of these contracts through income.
Gross Floor Income — Floor Income earned before payments on Floor Income Contracts.
Guarantor(s) — State agencies or non-profit companies that guarantee (or insure) FFELP loans made by
eligible lenders under The Higher Education Act of 1965 (“HEA”), as amended.
G-3