Sallie Mae 2015 Annual Report Download - page 71

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We consider a loan to be delinquent 31 days after the last payment was contractually due. We use a model to estimate the
amount of uncollectible accrued interest on Private Education Loans and reserve for that amount against current period interest
income.
FFELP Loans are insured as to their principal and accrued interest in the event of default, subject to a Risk Sharing level
based on the date of loan disbursement. These insurance obligations are supported by contractual rights against the United
States. For loans disbursed after October 1, 1993, and before July 1, 2006, we receive 98 percent reimbursement on all
qualifying default claims. For loans disbursed on or after July 1, 2006, we receive 97 percent reimbursement. For loans
disbursed prior to October 1, 1993, we receive 100 percent reimbursement.
The allowance for FFELP Loan losses uses historical experience of customer default, behavior and a two-year loss
emergence period to estimate the credit losses incurred in the loan portfolio at the reporting date. We apply the default rate
projections, net of applicable Risk Sharing, to each category for the current period to perform our quantitative calculation. 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.
Fair Value Measurement
The most significant assumptions used in fair value measurements, including those related to credit and liquidity risk, are
as follows:
1. Derivatives - When determining the fair value of derivatives, we take into account counterparty credit risk for
positions where we are exposed to the counterparty on a net basis by assessing exposure net of collateral held. The
net exposure for each counterparty is adjusted based on market information available for that specific counterparty,
including spreads from credit default swaps. Additionally, when the counterparty has exposure to us related to our
derivatives, we fully collateralize the exposure, minimizing the adjustment necessary to the derivative valuations
for our own credit risk. A major indicator of market inactivity is the widening of the bid/ask spread in these
markets. In general, the widening of counterparty credit spreads and reduced liquidity for derivative instruments as
indicated by wider bid/ask spreads will reduce the fair value of derivatives.
2. Education Loans - Our Private Education Loans and FFELP Loans are accounted for at cost or at the lower of cost
or fair value if the loan is held-for-sale. The fair values of our education loans are disclosed in Notes to
Consolidated Financial Statements, Note 15, “Fair Value Measurements.” For both Private Education Loans and
FFELP Loans accounted for at cost, fair value is determined by modeling loan level cash flows using stated terms
of the assets and internally developed assumptions to determine aggregate portfolio yield, net present value and
average life. The significant assumptions used to project cash flows are prepayment speeds, default rates, cost of
funds, the amount funded by deposits versus equity, and required return on equity. Significant inputs into the
models are not generally market-observable. They are either derived internally through a combination of historical
experience and management’s expectation of future performance (in the case of prepayment speeds, default rates,
and capital assumptions) or are obtained through external broker quotes (as in the case of cost of funds). When
possible, market transactions are used to validate the model and, when appropriate, the model is calibrated to these
market transactions. During 2015, we had several sales of Private Education Loans through securitization
transactions. We were able to use the market data from these sales to validate the model and, when appropriate,
calibrated the model to these market transactions.
For further information regarding the effect of our use of fair values on our results of operations, see Notes to
Consolidated Financial Statements, Note 15, “Fair Value Measurements.”
Derivative Accounting
The most significant judgments related to derivative accounting are: (1) concluding the derivative is an effective hedge
and qualifies for hedge accounting and (2) determining the fair value of certain derivatives and hedged items. To qualify for
hedge accounting, a derivative must be concluded to be a highly effective hedge upon designation and on an ongoing basis.
There are no “bright line” tests on what is considered a highly effective hedge. We use a historical regression analysis to prove
ongoing and prospective hedge effectiveness. See the previous discussion in the section titled “Critical Accounting Policies and