Sallie Mae 2010 Annual Report Download - page 84

FFELP Loans are guaranteed as to their principal and accrued interest in the event of default subject to a
Risk Sharing level based on the date of loan disbursement. For loans disbursed after October 1, 1993, and
before July 1, 2006, we receive 98 percent reimbursement on all qualifying default claims. For loans disbursed
on or after July 1, 2006, we receive 97 percent reimbursement. For loans disbursed prior to October 1, 1993,
we receive 100 percent reimbursement.
Similar to the allowance for Private Education Loan losses, the allowance for FFELP Loan losses uses
historical experience of borrower default behavior and a two year loss confirmation period to estimate the
credit losses incurred in the loan portfolio at the reporting date. We 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, we review the adequacy of the allowance for loan losses and
determine if qualitative adjustments need to be considered.
Premium and Discount Amortization
The most judgmental estimate for premium and discount amortization on student loans is the Constant
Prepayment Rate (“CPR”), which measures the rate at which loans in the portfolio pay down principal compared
to their stated terms. Loan consolidation, default, term extension and other prepayment factors affecting our CPR
estimates are affected by changes in our business strategy, changes in our competitor’s business strategies,
FFELP legislative changes, interest rates and changes to the current economic and credit environment. When we
determine the CPR we begin with historical prepayment rates due to consolidation activity, defaults, payoffs and
term extensions from the utilization of forbearance. We make judgments about which historical period to start
with and then make further judgments about whether that historical experience is representative of future
expectations and whether additional adjustment may be needed to those historical prepayment rates.
In the past the consolidation of FFELP Loans and Private Education Loans significantly affected our
CPRs and updating those assumptions often resulted in material adjustments to our amortization expense. 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 Loans consolidation program and Private Education Loans
consolidation program. We do not expect to consolidate FFELP Loans in the future and do not currently
expect others to actively consolidate our FFELP Loans. As a result, we expect CPRs related to our FFELP
Loans to remain relatively stable over time. We expect that in the future both we and our competitors will
begin to consolidate Private Education Loans. This is built into the CPR assumption we use for Private
Education Loans. However, it is difficult to accurately project the timing and level at which this consolidation
activity will begin and our assumption may need to be updated by a material amount in the future based on
changes in the economy and marketplace. The level of defaults is a significant component of our FFELP Loan
and Private Education Loan CPR. This component of the FFELP Loan and Private Education Loan CPR is
estimated in the same manner as discussed in “Critical Accounting Policies and Estimates — Allowance for
Loan Loss” of this Item 7 — the only difference is for premium and discount amortization purposes the
estimate of defaults is a life of loan estimate whereas for allowance for loan loss it is a two-year estimate.
Fair Value Measurement
The most significant assumptions used in fair value measurements, including those related to credit and
liquidity risk, are as follows:
1. Investments — Our investments primarily consist of overnight/weekly maturity instruments with high
credit quality counterparties. However, we consider credit and liquidity risk involving specific
instruments in determining their fair value and, when appropriate, have adjusted the fair value of
these instruments for the effect of credit and liquidity risk. These assumptions have further been
validated by the successful maturity of these investments in the period immediately following the end
of the reporting period.
2. Derivatives — When determining the fair value of derivatives, we take into account counterparty
credit risk for positions where we are exposed to the counterparty on a net basis by assessing
exposure net of collateral held. The net exposure for each counterparty is adjusted based on market
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