Sallie Mae 2015 Annual Report Download - page 109

SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
2. Significant Accounting Policies (Continued)
F-19
• Level 3 — Pricing inputs significant to the valuation are unobservable. Inputs are developed based on the best
information available. However, significant judgment is required by us in developing the inputs.
Loan Interest Income
For loans classified as held for investment, we recognize interest income as earned, adjusted for the amortization of
deferred direct origination costs. This adjustment is recognized based upon the expected yield of the loan over its life after
giving effect to prepayments and extensions. The estimate of the prepayment speed includes the effect of voluntary
prepayments, student loan defaults, and consolidation (if the loan is consolidated to a third-party), 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. We regularly evaluate the assumptions used to estimate the prepayment speeds. In instances
where there are changes to the assumptions, amortization is adjusted on a cumulative basis to reflect the change since the
origination of the loan. We also pay to the U.S. Department of Education (“ED”) an annual 105 basis point consolidation loan
rebate fee on FFELP consolidation loans, which is netted against loan interest income. Additionally, interest earned on
education 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 adjustments to the basis of education
loans when they are classified as held-for-sale.
We recognize certain fee income (primarily late fees) on education loans when earned according to the contractual
provisions of the promissory notes, as well as our expectation of collectability. Fee income is recorded when earned in “other
non-interest income” in the accompanying consolidated statements of income.
Interest Expense
Interest expense is based upon contractual interest rates adjusted for the amortization of issuance costs. We incur interest
expense on interest bearing deposits comprised of non-maturity savings deposits, brokered and retail CDs, brokered MMDAs
and secured financings. Interest expense is recognized when amounts are contractually due to deposit and debt holders and is
adjusted for net payments/receipts related to interest rate swap agreements that qualify and are designated hedges of interest
bearing liabilities. Interest expense also includes the amortization of deferred gains and losses on closed hedge transactions that
qualified as hedges. Amortization of debt issuance costs, premiums, discounts and terminated hedge-basis adjustments are
recognized using the effective interest rate method. We incur certain fees related to our Private Education Loan asset-backed
commercial paper facility (the “ABCP Facility”), including an unused ABCP Facility fee, and also incur fees related to our term
asset-backed securities ("ABS"). These fees are included in interest expense. Refer to Note 8, “Deposits,” and Note 9,
“Borrowings” for further details of our interest bearing liabilities.
Gains on Sale of Loans, Net
We participate and sell loans to third-parties and affiliates, including entities that were related parties prior to the Spin-
Off. These sales may occur through whole loan sales or securitization transactions that qualify for sales treatment. If a transfer
of loans qualifies as a sale, we derecognize the loan and recognize a gain or loss as the difference between the carry basis of the
loan sold and liabilities retained and the compensation received. We recognize the results of a transfer of loans based upon the
settlement date of the transaction. These loans were initially recorded as held for investment, and were transferred to held-for-
sale immediately prior to sale or securitization.
Prior to the Spin-Off, the Bank sold loans to an entity that is now a subsidiary of Navient when loans became 90 days
delinquent and to facilitate securitization transactions. Prior to the Spin-Off, the Bank sold $805 million and $2.4 billion of
loans resulting in a net gain on sale of loans of $36 million and $197 million for the years ended December 31, 2014 and 2013,
respectively. Subsequent to the Spin-Off, we sold loans through loan sales and securitization transactions with third-parties