Sallie Mae 2012 Annual Report Download - page 124

SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
Loans
Loans, consisting primarily of federally insured student loans and Private Education Loans, that we have the
ability and intent to hold for the foreseeable future are classified as held-for-investment and are carried at
amortized cost. Amortized cost includes the unamortized premiums, discounts, and capitalized origination costs
and fees, all of which are amortized to interest income as further discussed below. Loans which are held-for-
investment also have an allowance for loan loss as needed. Any loans we have not classified as held-for-
investment are classified as held-for-sale, and carried at the lower of cost or fair value. Loans are classified as
held-for-sale when we have the intent and ability to sell such loans. Loans which are held-for-sale do not have
the associated premium, discount, and capitalized origination costs and fees amortized into interest income. In
addition, once a loan is classified as held-for-sale, there is no further adjustment to the loan’s allowance for loan
losses that existed immediately prior to the reclassification to held-for-sale.
As market conditions permit, we may securitize loans as a source of financing for those loans. If we elect to
use a securitization program to finance loans, loans are selected based on the required characteristics to structure
the desired transaction at the most favorable financing terms (e.g., type of loan, mix of interim vs. repayment
status, credit rating and maturity dates). Due to some of the structuring terms, certain transactions may qualify for
sale treatment while others do not qualify for sale treatment and are recorded as financings.
All of our student loans, except for those which were sold under ED’s Purchase Program, as defined and
discussed in Note 6, “Borrowings,” are initially categorized as held-for-investment until there is certainty as to
each specific loan’s ultimate financing because we do not securitize all loans and currently all of our
securitizations do not qualify for sale treatment. It is only when we have selected the loans to 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.
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 customers who are eligible for the incentives and its effect on the ultimate
qualification rate for these incentives. 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.
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