Sallie Mae 2015 Annual Report Download - page 31

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We continue to rely on Navient’s Private Education Loan data and, because of Navient's indemnification obligations, have
significant exposures to risks related to its creditworthiness. If we are unable to rely on these data or to obtain
indemnification payments from Navient, we could experience higher than expected costs and operating expenses and our
results of operations, cash flows and financial condition could be materially and adversely affected.
Navient regularly provides us with a significant amount of current and historical data on their portfolios of private
education loans, including data that supports, among other things, the tracking of loan performance metrics such as default and
recovery rates on those loans, including loans classified as troubled debt restructurings, and, in connection with our ABS
financing transactions, to provide investors with historical information about Private Education Loan performance. We also use
these metrics in the development of certain critical accounting assumptions.
Navient has also agreed to be responsible, and indemnify us, for all claims, actions, damages, losses or expenses that may
arise from the conduct of all activities of pre-Spin-Off SLM occurring prior to the Spin-Off other than those specifically
excluded in the Separation and Distribution Agreement. Some significant examples of the types of indemnification obligations
Navient has include:
• Pursuant to a tax sharing agreement, Navient has agreed to indemnify us for $283 million in deferred taxes that the
Company will be legally responsible for but that relate to gains recognized by the Company’s predecessor on debt
repurchases made prior to the Spin-Off. The remaining amount of this indemnification receivable at December 31,
2015 is $170 million. In addition, Navient has agreed to indemnify us for uncertain pre-Spin-Off tax positions.
• Separate and apart from Navient's direct responsibility for its own actions and those of its subsidiaries, Navient will
indemnify the Company and the Bank for any liabilities, costs or expenses they may incur arising from any action or
threatened action related to the servicing, operations and collections activities of pre-Spin-Off SLM and its subsidiaries
with respect to Private Education Loans and FFELP Loans that were assets of the Bank or Navient at the time of the
Spin-Off; provided that written notice is provided to Navient prior to the third anniversary date of the Spin-Off, April
30, 2017. Navient will not indemnify for changes in law or changes in prior existing interpretations of law that occur
on or after April 30, 2014.
• Navient has responsibility to assume new or ongoing litigation matters relating to the conduct of most pre-Spin-Off
SLM businesses and servicing and collection activities operated or conducted prior to the Spin-Off.
• Under the terms of the Separation and Distribution Agreement, Navient is responsible for funding all liabilities, costs
and expenses under the FDIC Consent Order and the DOJ Consent Order, other than fines directly levied against the
Bank in connection with these matters. Under the DOJ Consent Order, Navient is solely responsible for reimbursing
SCRA benefits and related compensation on behalf of both its subsidiary, Navient Solutions, Inc., and the Bank.
The Separation and Distribution Agreement provides specific processes and procedures pursuant to which we may submit
claims for indemnification to Navient and, to date, Navient has acknowledged and accepted substantially all claims that we
have submitted. Nonetheless, if for any reason Navient is unable or unwilling to pay claims made against it, our costs,
operating expenses, cash flows and financial condition could be materially and adversely affected over time.
Sallie Mae and Navient are each subject to restrictions under a tax sharing agreement between them, and a violation of the
tax sharing agreement may result in tax liability to Sallie Mae and to its stockholders.
In connection with the Spin-Off, we entered into a tax sharing agreement with Navient to preserve the tax-free treatment
of the separation and distribution of Navient. Under this tax sharing agreement, both we and Navient are restricted from
engaging in certain transactions that could prevent the Spin-Off from being tax-free to us and our stockholders at the time of the
Spin-Off for U.S. federal income tax purposes. Compliance with the tax sharing agreement and the restrictions therein may
limit our near-term ability to pursue certain strategic transactions or engage in activities that might be beneficial from a business
perspective, including mergers and acquisitions transactions. This may result in missed opportunities or the pursuit of business
strategies that may not be as beneficial for us and which may negatively affect our anticipated profitability. If Navient fails to
comply with the restrictions in the tax sharing agreement and as a result the Spin-Off is determined to have been taxable for
U.S. federal income tax purposes, we and our stockholders at the time of the Spin-Off that are subject to U.S. federal income
tax could incur significant U.S. federal income tax liabilities. Although the tax sharing agreement provides that Navient is
required to indemnify us for taxes incurred that may arise were Navient to fail to comply with its obligations under the tax