Sallie Mae 2011 Annual Report Download - page 122

SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
restructuring (see “Allowance for Private Education Loan Losses” to this Note 2). We start with historical
experience of customer default behavior. 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 default rates. We also take the economic
environment into consideration when calculating the allowance for loan loss. We analyze key economic statistics
and the effect we expect it to have on future defaults. Key economic statistics analyzed as part of the allowance
for loan loss are unemployment rates (total and specific to college graduates) and other asset type delinquency
rates (e.g., credit cards and mortgages). Significantly more judgment has been required over the last several
years, compared with years prior, in light of the recent downturn in the U.S. economy and high levels of
unemployment and its effect on our customer’s ability to pay their obligations.
We estimate the allowance for loan losses for our loan portfolio using an analysis of delinquent and current
accounts. Our model is used to estimate the likelihood that a loan receivable may progress through the various
delinquency stages and ultimately charge off. The evaluation of the allowance for loan losses is inherently
subjective, as it requires material estimates that may be susceptible to significant changes. Our default estimates
are based on a loss confirmation period of two years (i.e., our allowance for loan loss covers the next two years
of expected charge-offs). The two-year estimate for the allowance for loan losses is subject to a number of
assumptions. If actual future performance in delinquency, charge-offs and recoveries are significantly different
than estimated, this could materially affect our estimate of the allowance for loan losses and the related provision
for loan losses on our income statement.
Below we describe in further detail our policies and procedures for the allowance for loan losses as they
relate to our Private Education Loan and FFELP Loan portfolios.
Allowance for Private Education Loan Losses
We determine the collectability of our Private Education Loan portfolio by evaluating certain risk
characteristics. We consider school type, credit score, existence of a cosigner, loan status and loan seasoning as
the key credit quality indicators because they have the most significant effect on our determination of the
adequacy of our allowance for loan losses. The type of school borrowers attend can have an impact on their job
prospects after graduation and therefore affects their ability to make payments. Credit scores are an indicator of
the credit worthiness of a borrower and the higher the credit score the more likely it is the borrower will be able
to make all of their contractual payments. Loan status affects the credit risk because a past due loan is more
likely to result in a credit loss than an up-to-date loan. Additionally, loans in a deferred payment status have
different credit risk profiles compared with those in current pay status. Loan seasoning affects credit risk because
a loan with a history of making payments generally has a lower incidence of default than a loan with a history of
making infrequent or no payments. The existence of a cosigner lowers the likelihood of default. We monitor and
update these credit quality indicators in the analysis of the adequacy of our allowance for loan losses on a
quarterly basis.
To estimate the probable credit losses incurred in the loan portfolio at the reporting date, we use historical
experience of borrower payment behavior in connection with the key credit quality indicators and incorporate
management expectation regarding macroeconomic and collection procedure factors. Similar to estimating
defaults, we use historical borrower payment behavior to estimate the timing and amount of future recoveries on
charged-off loans. We use judgment in determining whether historical performance is representative of what we
expect to collect in the future. We then apply the default and collection rate projections to each category of loans.
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. Additionally, we consider changes in laws and
regulations that could potentially impact the allowance for loan losses.
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