Sallie Mae 2011 Annual Report Download - page 121

SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
securitize and that securitization transaction qualifies as a sale do we transfer the loans into the held-for-sale
classification and carry them at the lower of cost or fair value. If we anticipate recognizing a gain related to the
impending securitization, then the fair value of the loans is higher than their respective cost basis and no
valuation allowance is recorded.
Under The Ensuring Continued Access to Student Loans Act of 2008 (“ECASLA”), ED implemented the
Loan Purchase Commitment Program (the “Purchase Program”) and Loan Participation Purchase Program (the
“Participation Program”). Under the Purchase Program, ED agreed to purchase eligible FFELP Loans at a set
price by September 30, 2010 at our option. Because we had the intent to sell such loans to ED we classified all
loans eligible to be sold to ED under the Purchase Program as held-for-sale. These loans were included in the
“FFELP Stafford Held-for-Sale Loans” line on our consolidated balance sheets.
Student Loan Income
For loans classified as held-for-investment, we recognize student loan interest income as earned, adjusted
for the amortization of premiums and capitalized direct origination costs, accretion of discounts, and Repayment
Borrower Benefits. These adjustments result in income being recognized based upon the expected yield of the
loan over its life after giving effect to prepayments and extensions, and to estimates related to Repayment
Borrower Benefits. The estimate of the prepayment speed includes the effect of consolidations, voluntary
prepayments and student loan defaults, all of which shorten the life-of-loan. Prepayment speed estimates also
consider the utilization of deferment, forbearance and extended repayment plans which lengthen the life-of-loan.
For Repayment Borrower Benefits, the estimates of their effect on student loan yield are based on analyses of
historical payment behavior of borrowers who are eligible for the incentives and its effect on the ultimate
qualification rate for these incentives. If our expectation is that the utilization of Repayment Borrower Benefits
was to increase in future periods, it would reduce our current student loan yield. We regularly evaluate the
assumptions used to estimate the prepayment speeds and the qualification rates used for Repayment Borrower
Benefits. In instances where there are changes to the assumptions, amortization is adjusted on a cumulative basis
to reflect the change since the acquisition of the loan. We also pay an annual 105 basis point Consolidation Loan
Rebate Fee on FFELP Consolidation Loans which is netted against student loan interest income. Additionally,
interest earned on student loans reflects potential non-payment adjustments in accordance with our uncollectible
interest recognition policy as discussed further in “Allowance for Loan Losses” of this Note 2. We do not
amortize any premiums, discounts or other adjustments to the basis of student loans when they are classified as
held-for-sale.
Allowance for Loan Losses
We consider a loan to be impaired when, based on current information, a loss has been incurred and it is
probable that we will not receive all contractual amounts due. When making our assessment as to whether a loan
is impaired, we also take into account more than insignificant delays in payment. We generally evaluate impaired
loans on an aggregate basis by grouping similar loans. Impaired loans also include those loans which are
individually assessed and measured for impairment, such as in a troubled debt restructuring. We maintain an
allowance for loan losses at an amount sufficient to absorb losses incurred in our portfolios at the reporting date
based on a projection of estimated probable credit losses incurred in the portfolio.
In determining the allowance for loan losses, we estimate the principal amount of loans that will default
over the next two years (two years being the expected period between a loss event and default) and how much we
expect to recover over time related to the defaulted amount. Our historical experience indicates that, on average,
the time between the date that a borrower experiences a default causing event (i.e., the loss trigger event) and the
date that we charge off the unrecoverable portion of that loan is two years. Additionally we estimate an
allowance amount sufficient to cover life-of-loan expected losses for loans classified as a troubled debt
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