Sallie Mae 2009 Annual Report Download - page 29

similar risk characteristics based on loan program type, school type and loan status. We then apply the default
rate projections, net of applicable Risk Sharing, to each category for the current period to perform our
quantitative calculation. Once the quantitative calculation is performed, management reviews the adequacy of
the allowance for loan losses, in the same manner described above for Private Education Loans, and
determines if qualitative adjustments need to be considered.
Premium and Discount Amortization
For both federally insured and Private Education Loans, we account for premiums paid, discounts
received, and capitalized direct origination costs incurred on the origination of student loans in accordance
with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 310,
“Receivables.” The unamortized portion of the premiums and the discounts is included in the carrying value of
the student loans on the consolidated balance sheet. We recognize income on our student loan portfolio based
on the expected yield over the estimated life of the student loan after giving effect to the amortization of
purchase premiums and accretion of student loan discounts. In arriving at the expected yield, we make a
number of estimates that when changed are reflected as a cumulative adjustment to interest income in the
current period. The most critical estimates for premium and discount amortization are incorporated in the
Constant Prepayment Rate (“CPR”), which measures the rate at which loans in the portfolio pay down
principal compared to their stated terms. The CPR estimate is based on historical prepayments due to
consolidation activity, defaults, and term extensions from the utilization of forbearance as well as
management’s qualitative expectation of future prepayments and term extensions.
As a result of the CCRAA and the current U.S. economic and credit environment, we, as well as many
other industry competitors, have suspended our FFELP consolidation program. In lieu of consolidation, we
may offer a term extension option for FFELP loans based on the borrower’s total indebtedness. Based upon
these market factors, we have updated our CPR assumptions that are affected by consolidation activity, and we
have updated the estimates used in developing the cash flows and effective yield calculations as they relate to
the amortization of student loan premium and discount amortization.
Consolidation activity affects estimates 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.
At the beginning of 2008, when we evaluated our estimates by taking into consideration the suspension of
our FFELP consolidation program, there was an expectation of increased external consolidations to third
parties but an overall decrease in total consolidation activity (when taking into account both internal
consolidations and consolidations to third parties) due to a lack of financial incentive for lenders to continue
offering a consolidation product. External consolidations did not significantly increase as expected; therefore,
the consolidation assumptions implemented in the first quarter of 2008 were reduced during the third quarter
of 2008, as we made the decision to lower the consolidation rate as additional information became available.
This consolidation assumption was reduced again in the third quarter of 2009 as additional information
became available. The total GAAP impact to interest income of CPR assumption changes in 2009 and 2008,
related to FFELP loans, was $37.2 million and $20.1 million, respectively.
Additionally, in previous years, the increased activity in FFELP Consolidation Loans had led to demand
for the consolidation of Private Education Loans. The private loan consolidation assumption was established in
2007 and was changed to explicitly consider private loan consolidation in the same manner as for FFELP.
Because of limited historical data on private loan consolidation, the assumption primarily relies on near term
plan data and timing assumptions. In the second quarter of 2008, due to funding limitations, we suspended
making private consolidation loans, which impacted this assumption. The total GAAP impact to interest
income of CPR assumption changes in 2009 and 2008, related to Private Education Loans, was ($2.4) million
and $9.4 million, respectively.
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