UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
¥
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Ñscal year ended December 31, 2004
or
n
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission Ñle numbers 001-13251
SLM Corporation
(Exact Name of Registrant as SpeciÑed in Its Charter)
Delaware
(State of Other Jurisdiction of
Incorporation or Organization)
12061 Bluemont Way, Reston, Virginia
(Address of Principal Executive OÇces)
52-2013874
(I.R.S. Employer
IdentiÑcation No.)
20190
(Zip Code)
(703) 810-3000
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.20 per share.
Name of Exchange on which Listed:
New York Stock Exchange
6.97% Cumulative Redeemable Preferred Stock, Series A, par value $.20 per share
Name of Exchange on which Listed:
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the registrant: (1) has Ñled all reports required to be Ñled by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to Ñle
such reports), and (2) has been subject to such Ñling requirements for the past 90 days. Yes ¥
No n
No n
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¥
The aggregate market value of voting stock held by non-aÇliates of the registrant as of June 30, 2004 was approximately
$17,463,295,382.85 (based on closing sale price of $40.45 per share as reported for the New York Stock Exchange Ì Composite
Transactions).
As of February 28, 2005, there were 421,654,978 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the registrant's Annual Meeting of Shareholders scheduled to be held May 19,
2005 are incorporated by reference into Part III of this Report.
Indicate by check mark if disclosure of delinquent Ñlers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in deÑnitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. ¥
This report contains forward-looking statements and information that are based on management's current
expectations as of the date of this document. When used in this report, the words ""anticipate,'' ""believe,''
""estimate,'' ""intend'' and ""expect'' and similar expressions are intended to identify forward-looking state-
ments. These forward-looking statements are subject to risks, uncertainties, assumptions and other factors that
may cause the actual results to be materially diÅerent from those reÖected in such forward-looking statements.
These factors include, among others, changes in the terms of student loans and the educational credit
marketplace arising from the implementation of applicable laws and regulations and from changes in these
laws and regulations, which may reduce the volume, average term and costs of yields on student loans under
the Federal Family Education Loan Program (""FFELP'') or result in loans being originated or reÑnanced
under non-FFELP programs or may aÅect the terms upon which banks and others agree to sell FFELP loans
to SLM Corporation, more commonly known as Sallie Mae, and its subsidiaries (collectively, ""the
Company''). The Company could also be aÅected by changes in the demand for educational Ñnancing or in
Ñnancing preferences of lenders, educational institutions, students and their families; changes in the general
interest rate environment and in the securitization markets for education loans, which may increase the costs
or limit the availability of Ñnancings necessary to initiate, purchase or carry education loans; losses from loan
defaults; and changes in prepayment rates and credit spreads.
GLOSSARY
Listed below are deÑnitions of key terms that are used throughout this document. See also APPEN-
DIX A, ""FEDERAL FAMILY EDUCATION LOAN PROGRAM,'' for a further discussion of the
FFELP.
Consolidation Loans Ì Under the FFELP, borrowers with eligible student loans may consolidate them
into one note with one lender and convert the variable interest rates on the loans being consolidated into a
Ñxed rate for the life of the loan. The new note is considered a Consolidation Loan. Typically a borrower can
consolidate their student loans only once unless the borrower has another eligible loan with which to
consolidate with the existing Consolidation Loan. The borrower rate on a Consolidation Loan is Ñxed for the
term of the loan and is set by the weighted-average interest rate of the loans being consolidated, rounded up to
the nearest 1/8th of a percent, not to exceed 8.25 percent. In low interest rate environments, Consolidation
Loans provide an attractive reÑnancing opportunity to borrowers because they allow borrowers to consolidate
variable rate loans into a long-term Ñxed rate loan. Holders of Consolidation Loans are eligible to earn interest
under the Special Allowance Payment (""SAP'') formula (see deÑnition below).
Consolidation Loan Rebate Fee Ì All holders of Consolidation Loans are required to pay to the
U.S. Department of Education (""ED'') an annual 105 basis point Consolidation Loan Rebate Fee on all
outstanding principal and accrued interest balances of Consolidation Loans purchased or originated after
October 1, 1993, except for loans for which consolidation applications were received between October 1, 1998
and January 31, 1999, where the Consolidation Loan Rebate Fee is 62 basis points.
Constant Prepayment Rate (""CPR'') Ì A variable in life of loan estimates that measures the rate at
which loans in the portfolio pay before their stated maturity. The CPR is directly correlated to the average life
of the portfolio. CPR equals the percentage of loans that prepay annually as a percentage of the beginning of
period balance.
Direct Loans Ì Student loans originated directly by ED under the William D. Ford Federal Direct
Student Loan Program (""FDLP'').
ED Ì The U.S. Department of Education.
Embedded Floor Income Ì Embedded Floor Income is Floor Income (see deÑnition below) that is
earned on oÅ-balance sheet student loans that are in securitization trusts sponsored by us. At the time of the
securitization, the option value of Embedded Fixed Rate Floor Income is included in the initial valuation of
the Residual Interest (see deÑnition below) and the gain or loss on sale of the student loans. Embedded Floor
Income is also included in the quarterly fair value adjustments of the Residual Interest.
2
Exceptional Performer (""EP'') Designation Ì The EP designation is determined by ED in recognition
of meeting certain performance standards set by ED in servicing FFELP loans. Upon receiving the EP
designation, the EP servicer receives 100 percent reimbursement on default claims on federally guaranteed
student loans for all loans serviced for a period of at least 270 days before the date of default and will no longer
be subject to the two percent Risk Sharing (see deÑnition below) on these loans. The EP servicer is entitled to
receive this beneÑt as long as it remains in compliance with the required servicing standards, which are
assessed on an annual and quarterly basis through compliance audits and other criteria.
FDLP Ì The William D. Ford Federal Direct Student Loan Program.
FFELP Ì The Federal Family Education Loan Program (see also APPENDIX A), formerly the
Guaranteed Student Loan Program.
Fixed Rate Floor Income Ì We refer to Floor Income (see deÑnition below) associated with student
loans whose borrower rate is Ñxed to term (primarily Consolidation Loans) as Fixed Rate Floor Income.
Floor Income Ì Our portfolio of FFELP student loans earns interest at the higher of a Öoating rate based
on the Special Allowance Payment or SAP formula (see deÑnition below) set by ED and the borrower rate,
which is Ñxed over a period of time. We generally Ñnance our student loan portfolio with Öoating rate debt
over all interest rate levels. In low and/or declining interest rate environments, when the Ñxed borrower rate is
higher than the rate produced by the SAP formula, our student loans earn at a Ñxed rate while the interest on
our Öoating rate debt continues to decline. In these interest rate environments, we earn additional spread
income that we refer to as Floor Income. Depending on the type of the student loan and when it was
originated, the borrower rate is either Ñxed to term or is reset to a market rate each July 1. As a result, for
loans where the borrower rate is Ñxed to term, we may earn Floor Income for an extended period of time, and
for those loans where the borrower interest rate is reset annually on July 1, we may earn Floor Income to the
next reset date.
The following example shows the mechanics of Floor Income for a typical Ñxed rate Consolidation Loan
originated after July 1, 2004 (with a commercial paper-based SAP spread of 2.64 percent):
Fixed Borrower Rate: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SAP Spread over Commercial Paper Rate: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Floor Strike Rate(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3.375%
(2.640)%
0.735%
(1) The interest rate at which the underlying index (Treasury bill or commercial paper) plus the Ñxed SAP
spread equals the Ñxed borrower rate. Floor Income is earned anytime the interest rate of the underlying
index declines below this rate.
Based on this example, if the quarterly average commercial paper rate is over 0.735 percent, the holder of
the student loan will earn at a Öoating rate based on the SAP formula, which in this example is a Ñxed spread
to commercial paper of 2.64 percent. On the other hand, if the quarterly average commercial paper rate is
below 0.735 percent, the SAP formula will produce a rate below the Ñxed borrower rate of 3.375 percent and
the loan holder earns at the borrower rate of 3.375 percent. The diÅerence between the Ñxed borrower rate and
the lender's expected yield based on the SAP formula is referred to as Floor Income. Our student loan assets
are generally funded with Öoating rate debt, so when student loans are earning at the Ñxed borrower rate,
decreases in interest rates may increase Floor Income.
3
Graphic Depiction of Floor Income:
6.00%
5.00%
4.00%
Fixed Borrower Rate = 3.375%
Special Allowance Payment (SAP) Spread = 2.64%
Lender Yield
Yield
3.00%
Fixed Borrower Rate
2.00%
Floor Income
Floating Rate Debt
1.00%
0.00%
Floor Strike Rate @ 0.735%
1.00%
2.00%
3.00%
Commercial Paper Rate
Floor Income Contracts Ì We enter into contracts with counterparties under which, in exchange for an
upfront fee representing the present value of the Floor Income that we expect to earn on a notional amount of
student loans being hedged, we will pay the counterparties the Floor Income earned on that notional amount
of student loans over the life of the Floor Income Contract. SpeciÑcally, we agree to pay the counterparty the
diÅerence, if positive, between the Ñxed borrower rate less the SAP spread and the average of the applicable
interest rate index on that notional amount of student loans for a portion of the estimated life of the student
loan. This contract eÅectively locks in the amount of Floor Income we will earn over the period of the
contract. Floor Income Contracts are not considered eÅective hedges under Statement of Financial
Accounting Standards (""SFAS'') No. 133, ""Accounting for Derivative Instruments and Hedging Activities,''
and each quarter we must record the change in fair value of these contracts through income.
GSE Ì The Student Loan Marketing Association was a federally chartered government-sponsored
enterprise and wholly owned subsidiary of SLM Corporation that was dissolved under the terms of the
Privatization Act (see deÑnition below) on December 29, 2004.
HEA Ì The Higher Education Act of 1965, as amended.
Managed Basis Ì We generally analyze the performance of our student loan portfolio on a Managed
Basis, under which we view both on-balance sheet student loans and oÅ-balance sheet student loans owned by
the securitization trusts as a single portfolio, and the related on-balance sheet Ñnancings are combined with
oÅ-balance sheet debt. When the term Managed is capitalized in this document, it is referring to Managed
Basis.
OÅset Fee Ì We were required to pay to ED an annual 30 basis point OÅset Fee on the outstanding
balance of StaÅord and PLUS student loans purchased and held by the GSE after August 10, 1993. The fee
did not apply to student loans sold to securitized trusts or to loans held outside of the GSE. This fee no longer
applies, as the GSE was dissolved under the terms of the Privatization Act on December 29, 2004.
Preferred Channel Originations Ì Preferred Channel Originations are comprised of: 1) student loans
that are originated by lenders with forward purchase commitment agreements with Sallie Mae and are
committed for sale to Sallie Mae, such that we either own them from inception or acquire them soon after
4
origination, and 2) loans that are originated by internal Sallie Mae brands. (See also ""RECENT DEVELOP-
MENTS Ì Bank One/JPMorgan Chase Relationships'' for a discussion related to our lender partners.)
Preferred Lender List Ì To streamline the student loan process, most higher education institutions
select a small number of lenders to recommend to their students and parents. This recommended list is
referred to as the Preferred Lender List.
Private Education Loans (formerly referred to as ""Private Credit Student Loans'') Ì Education loans
to students or parents of students that are not guaranteed or reinsured under the FFELP or any other federal
student loan program. Private Education Loans include loans for traditional higher education, undergraduate
and graduate degrees, and for alternative education, such as career training, private kindergarten through
secondary education schools and tutorial schools. Traditional higher education loans have repayment terms
similar to FFELP loans, whereby repayments begin after the borrower leaves school. Repayment for
alternative education or career training loans begins immediately.
Privatization Act Ì The Student Loan Marketing Association Reorganization Act of 1996.
Residual Interest Ì When we securitize student loans, we retain the right to receive cash Öows from the
student loans sold to trusts we sponsor in excess of amounts needed to pay servicing, derivative costs (if any),
other fees, and the principal and interest on the bonds backed by the student loans. The Residual Interest is
the present value of the future expected cash Öows from oÅ-balance sheet student loans in securitized trusts,
which includes the present value of Embedded Fixed Rate Floor Income described above. We value the
Residual Interest at the time of sale of the student loans to the trust and at each subsequent quarter.
Retained Interest Ì The Retained Interest includes the Residual Interest (deÑned above) and servicing
rights (as the Company retains the servicing responsibilities).
Risk Sharing Ì When a FFELP loan defaults, the federal government guarantees 98 percent of the
principal balance plus accrued interest and the holder of the loan generally must absorb the two percent not
guaranteed as a Risk Sharing loss on the loan. FFELP student loans acquired after October 1, 1993 are subject
to Risk Sharing on loan default claim payments unless the default results from the borrower's death, disability
or bankruptcy. FFELP loans serviced by a servicer that has EP designation from ED are not subject to Risk
Sharing.
Special Allowance Payment (""SAP'') Ì FFELP student loans generally earn interest at the greater of
the borrower rate or a Öoating rate determined by reference to the average of the applicable Öoating rates
(91-day Treasury bill rate or commercial paper) in a calendar quarter, plus a Ñxed spread that is dependent
upon when the loan was originated and the loan's repayment status. If the resulting Öoating rate exceeds the
borrower rate, ED pays the diÅerence directly to us. This payment is referred to as the Special Allowance
Payment or SAP and the formula used to determine the Öoating rate is the SAP formula. We refer to the Ñxed
spread to the underlying index as the Special Allowance spread.
Title IV Programs and Title IV Loans Ì Student loan programs created under Title IV of the HEA,
including the FFELP and the FDLP, and student loans originated under those programs, respectively.
Wind-Down Ì The dissolution of the GSE under the terms of the Privatization Act (see deÑnition
above).
Variable Rate Floor Income Ì For FFELP StaÅord student loans whose borrower interest rate resets
annually on July 1, we may earn Floor Income or Embedded Floor Income (see deÑnitions above) based on a
calculation of the diÅerence between the borrower rate and the then current interest rate. We refer to this as
Variable Rate Floor Income because Floor Income is earned only through the next reset date.
5
Item 1. Business
INTRODUCTION TO SLM CORPORATION
PART I.
SLM Corporation, more commonly known as Sallie Mae, is the market leader in education Ñnance. SLM
Corporation is a holding company that operates through a number of subsidiaries and references in this annual
report to ""the Company'' refer to SLM Corporation and its subsidiaries. We were formed 32 years ago as the
Student Loan Marketing Association, a federally chartered government-sponsored enterprise (the ""GSE''),
with the goal of furthering access to higher education by acting as a secondary market for student loans. In
2004, we completed the historic privatization process that began in 1997 and resulted in the Wind-Down of
the GSE. We completed the Wind-Down by defeasing the GSE's remaining debt obligations and dissolving its
federal charter on December 29, 2004.
We are the largest private source of funding, delivery and servicing support for education loans in the
United States primarily through our participation in the FFELP. We originate, acquire and hold student loans,
with the net interest income and gains on the sales of student loans in securitization being the primary source
of our earnings. We also earn fees for pre- and post- default receivables management services. We have
structured the Company to be the premier player in every phase of the student loan life cycle Ì from
originating and servicing student loans to ultimately the debt management of delinquent and defaulted student
loans. We also provide a wide range of Ñnancial services, processing capabilities and information technology to
meet the needs of educational institutions, lenders, students and their families, and guarantee agencies. In
2004, we expanded our brand and geographical reach in the student loan business through two acquisitions.
In recent years we have diversiÑed our business through the acquisition of several companies that provide
default management and loan collections services. Initially these acquisitions were concentrated in the student
loan industry, but in 2004 we acquired AFS Holdings, LLC, the parent company of Arrow Financial Services
LLC (collectively, ""AFS''), a debt management company that services several industries outside of student
loans. With a vast array of products and service oÅerings, we are positioned to meet the growing demand for
post-secondary education credit and related services. At the end of 2004, we had over 9,000 employees.
We believe that what distinguishes us from our competition is the breadth and sophistication of the
products and services we oÅer to colleges, universities and students in addition to FFELP and Private
Education Loans. These include the streamlining of the Ñnancial aid process through university-branded
websites, call centers and other solutions that support the Ñnancial aid oÇce.
BUSINESS SEGMENTS
We provide a comprehensive array of credit products and related services to the higher education
community through two primary business segments: our Lending business segment and our Debt Manage-
ment Operations business segment, which we refer to as our DMO business. Within our Corporate and Other
business segment, we also provide a number of complementary products and services to Ñnancial aid oÇces
and schools that are managed within smaller operating segments, the most prominent being our Guarantor
Servicing and Loan Servicing businesses. Each of these operating businesses has unique characteristics and
faces diÅerent opportunities and challenges.
We generate the largest share of earnings in our Lending business from the spread between the yield we
receive on our Managed portfolio of student loans, and the cost of funding these loans. This spread income is
reported on our income statement as ""net interest income'' for on-balance sheet loans, and ""gains on student
loan securitizations'' and ""servicing and securitization revenue'' for oÅ-balance sheet loans. Total revenues for
this segment were $3.1 billion in 2004. We incur servicing, selling and administrative expenses in providing
these products and services.
In our DMO business, we earn fee revenue for portfolio management, debt collection and default
prevention services on a contingent fee basis concentrated mainly in the education Ñnance marketplace. The
acquisition of AFS has expanded our capabilities such that we also purchase delinquent and defaulted
6
receivables and earn revenues from collections on these portfolios. Total revenues from the DMO business
were $340 million in 2004.
SFAS No. 131, ""Disclosures about Segments of an Enterprise and Related Information,'' requires public
companies to report Ñnancial and descriptive information about their reportable operating segments. In
accordance with SFAS No. 131, we included in Note 18 to our consolidated Ñnancial statements, ""Segment
Reporting,'' separate Ñnancial information about our operating segments that is evaluated regularly by the
""chief operating decision makers'' in deciding how to allocate resources and in assessing the operating results
of the business.
LENDING BUSINESS SEGMENT
In our Lending business segment, we originate and acquire both federally guaranteed student loans which
are administered by ED, and Private Education Loans, which are not federally guaranteed. Private Education
Loans are primarily used to supplement FFELP loans in meeting the cost of education. We manage the largest
portfolio of student loans in the industry, serving more than seven million borrowers through our ownership
and management of $107.4 billion in Managed student loans, of which $96.0 billion or 89 percent are federally
insured. We serve a diverse range of clients that includes over 6,000 educational and Ñnancial institutions and
state agencies. We are also the largest servicer of student loans, servicing more than eight million borrowers
totaling $110.5 billion in student loans. In addition to education lending, we also originate mortgage and
consumer loans with the intent of selling most of these loans. In 2004 we originated $1.5 billion in mortgage
and consumer loans and the mortgage and consumer loan portfolio totaled $449 million at December 31, 2004,
of which $167 million pertains to mortgages in the held for sale portfolio.
Student Lending Marketplace
The following chart shows the estimated sources of funding for attending two-year and four-year colleges
for the academic year (""AY'') ended June 30, 2004 (AY 2003-2004). Approximately 35 percent of the
funding comes from federally guaranteed student loans and Private Education Loans. The parent/student
contribution comes from investments, current period earnings and other loans obtained without going through
the normal Ñnancial aid process.
Sources of Funding for College Attendance – AY 2003-2004(1)
Total Projected Cost – $186 Billion
(dollars in billions)
Parent/Student
Contributions
$57
$55
Federally
Guaranteed
Student Loans
$11
Private Education
Loans
$63
Other
(includes scholarships, grants, tax relief
and other aid from states, colleges,
employers and other sources)
(1) Source: Based on estimates by Octameron Associates, “Don’t Miss Out,” 27th Edition, by College Board,
“2004 Trends in Student Aid” and Sallie Mae. Includes tuition, room, board, transportation and miscellaneous
costs for two-year and four-year college degree-granting programs.
Federally Guaranteed Student Lending Programs
There are two competing programs that provide student loans where the ultimate credit risk lies with the
federal government: the FFELP and the FDLP. FFELP loans are provided by private sector institutions and
are ultimately guaranteed by ED. FDLP loans are funded by taxpayers and provided to borrowers directly by
ED on terms similar to student loans in the FFELP. In addition to these government guaranteed programs,
7
Private Education Loans are made by Ñnancial institutions where the lender assumes the credit risk of the
borrower.
For the federal Ñscal year (""FFY'') ended September 30, 2004 (FFY 2004), ED estimated that the
FFELP's market share in federally guaranteed student loans was 75 percent, up from 74 percent in FFY 2003.
See ""LENDING BUSINESS SEGMENT Ì Competition.'' Total FFELP and FDLP volume for FFY 2004
grew by 14 percent, with the FFELP portion growing 16 percent. Based on current industry trends,
management expects the federal student loan market growth will continue in low double digits over the next
three years.
The HEA includes regulations that cover every aspect of the servicing of a student loan, including
communications with borrowers, loan originations and default aversion. Failure to service a student loan
properly could jeopardize the guarantee on these federal student loans. This guarantee generally covers
98 percent of the student loan's principal and accrued interest, except in the case of death, disability, or
bankruptcy of the borrower, or when an eligible lender or lender servicer (as agent for the eligible lender) has
been designated by ED as an Exceptional Performer (""EP''). In these cases, the guarantee covers 100 percent
of the student loan's principal and accrued interest. In October 2004, we were designated as an EP and since
that time all principal and interest on FFELP student loans serviced by us are 100 percent guaranteed.
FFELP student loans are guaranteed by state or non-proÑt agencies called guarantors, with ED providing
reinsurance to the guarantor. Guarantors are responsible for performing certain functions necessary to ensure
the program's soundness and accountability. These functions include reviewing loan application data to detect
and prevent fraud and abuse and to assist lenders in preventing default by providing counseling to borrowers.
Generally, the guarantor is responsible for ensuring that loans are being serviced in compliance with the
requirements of the HEA. When a borrower defaults on a FFELP loan, we submit a claim form to the
guarantor who pays us 100 percent of the principal and accrued interest. See ""OTHER RELATED EVENTS
AND INFORMATION Ì Reauthorization and Budget Proposals'' for a description of certain HEA
reauthorization proposals that would reduce the guarantee and APPENDIX A to this document for a more
complete description of the role of guarantors.
Private Education Loan Products
In addition to federal loan programs, which have statutory limits on annual and total borrowing, we
sponsor a variety of Private Education Loan programs and purchase loans made under such programs to bridge
the gap between the cost of education and a student's resources. Most of our higher education Private
Education Loans are made in conjunction with a FFELP StaÅord loan, so they are marketed to schools
through the same marketing channels as FFELP loans by the same sales force. In 2004, we expanded our
direct to consumer loan marketing channel with our Tuition AnswerSM loan program where we originate and
purchase loans outside of the traditional Ñnancial aid process. We also originate and purchase alternative
Private Education Loans, which are marketed by our SLM Financial subsidiary to technical and trade schools,
tutorial and learning centers, and private kindergarten through secondary education schools. These loans are
primarily made at schools not eligible for Title IV loans. Private Education Loans are discussed in more detail
below.
Drivers of Growth in the Student Loan Industry
The growth in our Managed student loan portfolio, which includes both on-balance sheet and oÅ-balance
sheet student loans, is driven by the growth in the overall student loan marketplace, which has grown due to
rising enrollment and college costs, as well as by our own market share gains. The size of the federally insured
student loan market has more than doubled over the last ten years with student loan originations growing from
$23.4 billion in FFY 1995 to $52.1 billion in FFY 2004.
According to the College Board, tuition and fees at four-year public institutions and four-year private
institutions have increased 36 percent and 51 percent, respectively, in constant, inÖation adjusted dollars, since
AY 1994-1995. Under the FFELP, there are limits to the amount students can borrow each academic year.
These loan limits have not changed since 1992. As a result, more students and parents are turning to Private
Education Loans to meet an increasing portion of their education Ñnancing needs. See ""OTHER RELATED
8
EVENTS AND INFORMATION Ì Reauthorization and Budget Proposals'' for a description of proposals
that would increase loan limits. Loans Ì both federal and private Ì as a percentage of total student aid have
increased from 52 percent of total student aid in AY 1993-1994 to 56 percent in AY 2003-2004. Private
Education Loans approximated 17 percent of total federally guaranteed student loans and Private Education
Loans in AY 2003-2004.
ED predicts that the college-age population will increase approximately 10 percent from 2004 to 2013.
Demand for education credit will also increase due to the rise in non-traditional students (those not attending
college directly from high school) and adult education. The following charts show the projected enrollment
and average tuition and fee growth for four-year public and private colleges and universities.
Projected Enrollment
(in millions)
19
18
17
16
15
80
70
60
50
40
30
20
10
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: National Center for Education Statistics (NCES)
Cost of Attendance
Cumulative % Increase From AY 1994
95-96
96-97
97-98
98-99
99-00
00-01
01-02
02-03
03-04
04-05
Tuition & Fees 4-Year Private
Tuition & Fees 4-Year Public
Source: The College Board
Cost of attendance includes tuition, fees, on-campus room and board fees
9
Sallie Mae's Lending Business
Our primary marketing point-of-contact is the school's Ñnancial aid oÇce where we focus on delivering
Öexible and cost-eÅective products to the school and its students. Our sales force, which works with Ñnancial
aid administrators on a daily basis, is the largest in the industry and currently markets the following internal
lender brands: Academic Management Services Corp. (""AMS''), Nellie Mae, Sallie Mae Educational Trust,
SLM Financial, Student Loan Funding Resources (""SLFR''), Southwest Student Services (""Southwest'')
and Student Loan Finance Association (""SLFA''). We also actively market the loan guarantee of United
Student Aid Funds, Inc. (""USA Funds'') and its aÇliate Northwest Education Loan Association (""NELA'')
through a separate sales force.
We acquire student loans from three principal sources:
‚ our Preferred Channel;
‚ Consolidation Loans; and
‚ strategic acquisitions.
Over the past several years we have successfully changed our business model from a wholesale purchaser
of loans on the secondary market, to a direct origination model where we control the front-end origination
process. This provides us with higher yielding loans that have a longer duration because we originate or
purchase them at or immediately after full disbursement. The key measure of this successful transition is the
growth in our Preferred Channel Originations, which, in 2004, accounted for 78 percent of Managed student
loan acquisitions (exclusive of loans acquired through business acquisitions). These are our most valuable
loans because they cost the least to acquire and remain in our portfolio the longest. In 2004, we originated
$18.0 billion in student loans through our Preferred Channel, of which a total of $5.7 billion or 32 percent was
originated through our owned brands, $6.9 billion or 38 percent was originated through our largest lending
partners, Bank One and JPMorgan Chase, and $5.4 billion or 30 percent was originated through other lender
partners. Currently, we purchase substantially all student loans originated by JPMorgan Chase through a joint
venture arrangement, which resulted in $2.7 billion of origination volume in 2004.
During 2004, Bank One and JPMorgan Chase completed their merger. Following this merger, we entered
into a comprehensive agreement with Bank One under which our previous marketing service and loan
purchase agreements were terminated for which we received combined termination fees of $23 million and the
ExportSS» loan purchase agreement was extended for three years. Under this agreement we will acquire
substantially all of Bank One's origination volume through 2008.
The separate joint venture with JPMorgan Chase was not aÅected by the merger, although JPMorgan
Chase has rejected our initial oÅer to renew the agreements that support the joint venture and has Ñled a
petition in a Delaware Chancery Court seeking to dissolve the joint venture. Under the terms of the joint
venture agreements, if by May 31, 2005 the parties are unable to reach an agreement to renew or extend these
agreements, then either party may trigger a ""Dutch Auction'' process. Under the terms of the current joint
venture agreements we will continue to acquire all JPMorgan Chase-branded student loans originated through
the joint venture through September 2007. The lawsuit seeks to dissolve the joint venture before the other
party can invoke the Dutch Auction process. A JPMorgan Chase request with the Chancery Court for an
expedited schedule for a Ñnal hearing on the merits has been stayed pending settlement discussions among the
parties. See ""Legal Proceedings'' and ""RECENT DEVELOPMENTS Ì Bank One/JPMorgan Chase Joint
Venture.''
Our Preferred Channel Originations growth has been fueled by both FDLP and new school conversions,
same school sales growth, and growth in the for-proÑt sector. Since 1999, we have partnered with over 100
schools that have chosen to return to the FFELP from the FDLP. Our FFELP originations at these schools
totaled over $1.4 billion in 2004. In addition to winning new schools, we have also forged broader relationships
with many of our existing school clients. Consistent with enrollment trends, our FFELP and private
originations at for-proÑt schools have grown faster than at traditional higher education schools.
10
In 2004, the 22 percent of Managed student loans we acquired outside of our Preferred Channel was
through Consolidation Loans from third parties (12 percent), spot purchases (8 percent) and other forward
purchase commitments (2 percent).
Consolidation Loans
Over the past three years, we have seen a surge in consolidation activity as a result of historically low
interest rates that has contributed to the changing composition of our student loan portfolio. Consolidation
Loans earn a lower yield than FFELP StaÅord Loans due primarily to the Consolidation Loan Rebate Fee.
This negative impact is somewhat mitigated by the longer average life of Consolidation Loans. We have made
a substantial investment in consolidation marketing to protect our asset base and grow our portfolio, including
targeted direct mail campaigns and web-based initiatives for borrowers. In 2004, this investment resulted in a
net Managed portfolio gain of $504 million from consolidation activity. During 2004, $10.7 billion of FFELP
StaÅord loans in our Managed loan portfolio consolidated either with us ($8.6 billion) or with other lenders
($2.1 billion). Consolidation Loans now represent over 50 percent of our federally guaranteed Managed
student loan portfolio and over 60 percent of our on-balance sheet owned portfolio.
Private Education Loans
We sponsor a variety of Private Education Loan programs that bridge the gap between the cost of
education and a student's resources, including federally guaranteed loans. Since we bear the full credit risk for
Private Education Loans, they are underwritten and priced according to credit risk based upon standardized
consumer credit scoring criteria. To mitigate some of the credit risk, we provide price and eligibility incentives
for students to obtain a credit-worthy co-borrower. Approximately 48 percent of our Private Education Loans
have a co-borrower. Due to their higher risk proÑle, Private Education Loans earn higher spreads than their
FFELP loan counterparts. In 2004, Private Education Loans earned an average spread, after provision for loan
losses, of 2.69 percent versus an average spread of 1.59 percent for FFELP loans.
The rising cost of education has led students and their parents to seek additional private credit sources to
Ñnance their education. Private Education Loans are often packaged as supplemental or companion products
to FFELP loans and priced and underwritten competitively to provide additional value for our school
relationships. In certain situations, the school shares the borrower credit risk. Over the last several years, the
growth of Private Education Loans has accelerated due to tuition increasing faster than the rate of inÖation
coupled with no increase in the FFELP lending limits. This rapid growth coupled with the relatively higher
spreads has led to Private Education Loans contributing a higher percentage of our net interest margin in each
of the last three years and we expect this trend to continue in the foreseeable future. In 2004, Private
Education Loans contributed 17 percent of the overall net interest income after provision, up from 15 percent
in 2003.
Private Education Loan Programs
Our largest Private Education Loan program is the Signature Loan» oÅered to undergraduates and
graduates through the Ñnancial aid oÇces of colleges and universities and packaged with the traditional
FFELP and PLUS loan products. We also oÅer specialized loan products to graduate and professional
students primarily through our MBALoans»,LAWLOANS» and MEDLOANSSM programs. Generally,
these loans, which are made by lender partners and sold to the Company, do not require the borrower to begin
repaying his or her loan until after graduation and allow a grace period from six to nine months.
In the third quarter of 2004 we began to oÅer Tuition AnswerSM loans direct to the consumer through
targeted direct mail campaigns and web-based initiatives. Tuition Answer loans are made by a lender-partner
and are sold to the Company. Under the Tuition Answer loan program, creditworthy parents, sponsors and
students may borrow between $1,500 and $30,000 per year (limit raised to $40,000 per year in 2005) to cover
any college-related expense. No school certiÑcation is required, although a borrower must provide enrollment
documentation. At December 31, 2004, we had $95 million of Tuition Answer loans outstanding.
11
Through SLM Financial, a wholly-owned subsidiary of SLM Corporation, we oÅer Private Education
Loan products to Ñnance the needs of students in career training, lifelong learning programs such as technical
and trade schools, tutorial and learning centers, and private kindergarten through secondary schools. The
major Ñelds of study for the technical and trade schools include information technology, cosmetology,
mechanics, medical/dental/lab, culinary and broadcasting. On average, these training programs typically last
fewer than 12 months. Generally, these loans require the borrower to begin repaying his or her loan
immediately; however, students can opt to make relatively small payments while enrolled. At December 31,
2004, we had $1.3 billion of SLM Financial Private Education Loans outstanding.
Acquisitions
An important component of our growth strategy has been strategic acquisitions. Beginning in 1999 with
the purchase of Nellie Mae, we have acquired several companies in the student loan industry that have
increased our sales and marketing capabilities, added signiÑcant new brands and greatly enhanced our product
oÅerings. Strategic student lending acquisitions have included Student Loan Funding Resources and USA
Group, Inc. (""USA Group'') in 2000, and AMS in 2003. We continued this strategy in 2004 by acquiring two
companies (1) Arizona-based, Southwest Student Services Corporation (""Southwest'') and (2) Student
Loan Finance Association that included a controlling interest in the business of Washington Student
Loan Finance Association and Idaho Student Loan Finance Association (collectively, ""SLFA''). The SLFA
acquisition is a two-step transaction that will be completed in 2005. In conjunction with the SLFA transaction,
NELA, a non-proÑt regional guarantor, entered into an aÇliation with USA Funds, the nation's largest
guarantor and Sallie Mae's largest guarantor servicing client. NELA contracted for Sallie Mae to provide
comprehensive operational and other guarantor services to NELA.
In connection with both 2004 acquisitions, we acquired sizable loan portfolios ($4.8 billion from
Southwest and $1.4 billion from SLFA). Southwest is among the top 30 originators of federal student loans,
issuing approximately $300 million in StaÅord and PLUS loans and $1.5 billion in Consolidation Loans
annually, and is the nation's ninth largest holder of federal student loans. Southwest provides student loans and
related services nationally with a primary focus on colleges and universities in Arizona and Florida, providing
us with an enhanced presence in these fast growing areas of the country. SLFA enhances our presence in the
Northwest and enables us to expand our guarantor servicing business.
Financing
With the completion of the GSE Wind-Down, we now fund our operations exclusively through non-GSE
sources, primarily through the issuance of SLM Corporation (""SLM'') student loan asset-backed securities
(securitization) and SLM debt securities. We issue these securities in both the domestic and overseas capital
markets using both public oÅerings and private placements. The major objective when Ñnancing our business
is to minimize interest rate risk on a pooled basis to the extent practicable through match funding of the
interest rate characteristics of our assets and liabilities. As part of this process, we use derivative Ñnancial
instruments extensively to reduce our interest rate and foreign currency exposure. Interest rate risk
management helps us to achieve a stable student loan spread irrespective of the interest rate environment and
changes in asset mix. We continuously look for ways to minimize funding costs and to provide liquidity for our
student loan acquisitions. To that end, we are continually expanding and diversifying our pool of investors by
establishing debt programs in multiple markets that appeal to varied investor bases and by educating potential
investors about our business. Finally, we take appropriate steps to ensure suÇcient liquidity by Ñnancing in
multiple markets, which include the institutional, retail, Öoating-rate, Ñxed-rate, unsecured, asset-backed,
domestic and international markets.
Securitization is and will continue to be our principal source of non-GSE Ñnancing, and over time, we
expect approximately 70 percent of our annual funding needs will be satisÑed by securitizing our loan assets
and issuing asset-backed securities.
12
Competition
Our primary competitor for federally guaranteed student loans is the FDLP, which in its Ñrst four years of
existence (FFYs 1994-1997) grew market share from 4 percent to a peak of 34 percent in 1997, but has
steadily declined since then to a 25 percent share in 2004 for the total federally sponsored student loan market.
We also face competition for both federally guaranteed and non-guaranteed student loans from a variety of
Ñnancial institutions including banks, thrifts and state-supported secondary markets. Sallie Mae's FFY 2004
Preferred Channel FFELP originations totaled $13.4 billion, representing a 26 percent market share.
In the FFELP student lending marketplace, we are seeing increased use of discounts and borrower
beneÑts, as well as heightened interest in the school-as-lender model in which graduate and professional
schools make FFELP StaÅord loans directly to eligible borrowers. The schools do not typically hold the loans,
preferring to sell them in the secondary market. This greatly increases our cost of acquisition when compared
to our Preferred Channel volume. According to ED, 71 institutions used the school-as-lender model for FFY
2004, with total school-as-lender volume of $2.1 billion.
Certain lenders, state agencies and non-proÑt organizations oÅer deeply discounted or zero fee pricing on
StaÅord loans in which the lender pays the mandatory three percent origination fee on behalf of the borrower.
As a result, the lenders have increased their market share of FFELP student lending. To compete more
eÅectively with those lenders, we have launched a zero fee pricing initiative. In addition, on a school-by-school
basis, we have begun to oÅer more competitive pricing solutions that include zero fee options. This
competitive strategy is designed to boost our Preferred Channel volume and to protect and grow our volume at
speciÑc schools. While the goal of this pricing initiative and the pricing solutions is to grow our FFELP loan
volume, this strategy will reduce our margins on the aÅected student loans.
DEBT MANAGEMENT OPERATIONS BUSINESS SEGMENT
Through the Ñve operating units that comprise our DMO business segment, we provide a wide range of
accounts receivable and collections services including defaulted student loan portfolio management services,
contingency collections services for student loans and other asset classes, student loan default aversion
services, and accounts receivable management and collection for purchased portfolios of receivables that have
been charged oÅ by their original creditors.
Beginning with the acquisition of USA Group in 2000, our DMO business was built to service the student
loan marketplace through a broad array of default management services on a contingency fee or other pay for
performance basis. We have since acquired three additional companies that strengthened our presence in the
student loan market and diversiÑed our product oÅerings to include a full range of receivables management
and collections services for a diverse customer base including large federal agencies, state agencies, credit card
issuers, utilities, and other holders of consumer debt.
In September 2004, we acquired a majority interest with an option to purchase the remaining shares of
AFS. AFS primarily purchases and services defaulted consumer receivables from credit grantors or resellers
and then attempts to collect a suÇcient amount to cover its investment and earn a return from each purchased
portfolio. AFS also collects on behalf of debt owners on a contingency fee basis and provides Ñrst-party
delinquent and default servicing.
The acquisition of AFS was important to our DMO business segment for two main reasons. It has further
diversiÑed our DMO revenues outside of the education marketplace and provided a servicing platform and a
disciplined portfolio pricing approach from years of experience in the purchase of delinquent and defaulted
receivables. The addition of AFS also enables us to oÅer the purchase of distressed or defaulted debt to our
partner schools as an additional method of enhancing their receivables management strategies.
In 2004, our DMO business earned revenues totaling $340 million and net income of $111 million, which
represented increases of 31 percent and 32 percent over 2003, respectively. The 2004 results included slightly
more than three full months of AFS operating activities. Our largest customer, USA Funds, accounted for
over 50 percent of our revenue in 2004. With the AFS acquisition, we expect USA Funds to account for less
than 40 percent in 2005.
13
Products and Services
Defaulted Student Loan Portfolio Management Services
Our DMO business segment manages the defaulted student loan portfolios for six guarantors under long-
term contracts. DMO's largest customer, USA Funds, represents approximately 24 percent of defaulted
student loan portfolios in the market. Our portfolio management services include selecting collection agencies
and determining account placements to those agencies, processing loan consolidations and loan rehabilitations
and managing federal and state oÅset programs.
Contingency Collection Services
Our DMO business segment is also engaged in the collection of defaulted student loans and other debt on
behalf of various clients including guarantor agencies, large federal agencies, credit card issuers, utilities, and
other retail clients earning fees that are contingent on the amounts collected. We also provide collection
services for ED and now control approximately 13 percent of the total market for such services. We also have
relationships with more than 1,000 colleges and universities to provide collection services for delinquent
student loans and other receivables from various campus-based programs.
Student Loan Default Aversion Services
We provide default aversion services for four guarantors, including the nation's largest, USA Funds.
These services are designed to prevent a default once a borrower's loan has been placed in delinquency status.
Collection of Purchased Receivables
Our DMO business purchases delinquent and defaulted receivables from credit originators and other
holders of receivables at a signiÑcant discount from the face value of the debt instruments. Collections are
generated through both internal and external work strategies. Depending on the characteristics of the portfolio,
revenue is recognized using either the eÅective interest method or cost recovery method.
First-Party Servicing
We provide accounts receivable outsourcing solutions for credit grantors. The focus of our Ñrst-party
group is on the collection of delinquent accounts to minimize further delinquency and ultimately prevent
accounts from reaching charge oÅ.
Competition
The private sector collections industry is highly fragmented with few large companies and a large number
of small scale companies. The DMO businesses that provide third-party collections services for ED, FFELP
guarantors and other federal holders of defaulted debt are highly competitive. In addition to competing with
other collection enterprises, we also compete with credit grantors who each have unique mixes of internal
collections, outsourced collections, and debt sales. Although the scale, diversiÑcation, and performance of our
DMO business has been a competitive advantage, increasing acquisition trends in the receivables management
industry could bring about greater competition.
In the purchased portfolio business, the marketplace is trending more toward open market competitive
bidding rather than solicitation by sellers to a select group of potential buyers. Price inÖation and the
availability of capital into the sector contribute to this trend. Unlike many of our competitors, our DMO
business does not rely solely on purchased portfolio revenue. This enables us to maintain pricing discipline and
purchase only those portfolios that are expected to meet our proÑtability and strategic goals. Portfolios are
purchased individually on a spot basis or through contractual relationships with sellers to purchase regular
monthly portfolios at set prices. We compete primarily on price, but also on the basis of our reputation,
industry experience and relationships.
14
CORPORATE AND OTHER BUSINESS SEGMENT
Guarantor Services
We earn fees for providing a full complement of administrative services to FFELP guarantors. FFELP
student loans are guaranteed by these agencies, with ED providing reinsurance to the guarantor. The
guarantors are non-proÑt institutions or state agencies that, in addition to providing the primary guarantee on
FFELP loans, are responsible for other guarantor servicing activities including:
‚ guarantee issuance Ì the initial approval of loan terms and guarantee eligibility;
‚ account maintenance Ì maintaining and updating of records on guaranteed loans; and
‚ guarantee fulÑllment Ì review and processing of guarantee claims.
See in APPENDIX A, ""FEDERAL FAMILY EDUCATION LOAN PROGRAM Ì Guarantor Funding''
for details of the fees paid to guarantors.
Currently, we provide a variety of these services to ten guarantors and, in 2004, we processed $13.5 billion
in new FFELP loan guarantees, of which $9.9 billion was for USA Funds, the nation's largest guarantor. We
now process guarantees for approximately 25 percent of the FFELP and FDLP loan market. Guarantor
servicing revenue, which included guaranty issuance and account maintenance fees, was $120 million for 2004,
85 percent of which we earned from services performed on behalf of USA Funds.
Our primary non-proÑt competitors in guarantor servicing are state and non-proÑt guarantee agencies
that provide third-party outsourcing to other guarantors. Our primary for-proÑt competitor is GuaranTec,
LLP, an outsourcing company that is a subsidiary of Nelnet, Inc.
Loan Servicing
We earn fees by providing a full complement of activities required to service student loans on behalf of
other lenders. Such servicing activities generally commence once a loan has been fully disbursed and include
processing correspondence and Ñling claims, originating and disbursing Consolidation Loans on behalf of the
lender, and other administrative activities required by ED. Loan servicing revenue was $55 million for 2004.
REGULATION
Like other participants in the FFELP program, the Company is subject, from time to time, to review of
its student loan operations by ED and guarantee agencies. ED is authorized under its regulations to limit,
suspend or terminate lenders from participating in the FFELP, as well as impose civil penalties if lenders
violate program regulations. The laws relating to the FFELP program are subject to revision from time to
time. See ""OTHER RELATED EVENTS AND INFORMATION Ì Reauthorization and Budget Propos-
als.'' In addition, Sallie Mae, Inc., as a servicer of student loans, is subject to certain ED regulations regarding
Ñnancial responsibility and administrative capability that govern all third-party servicers of insured student
loans. Failure to satisfy such standards may result in the loss of the government guarantee of the payment of
principal and accrued interest on defaulted FFELP loans. Also, in connection with our guarantor servicing
operations, the Company must comply with, on behalf of its guarantor servicing customers, certain ED
regulations that govern guarantor activities as well as agreements for reimbursement between the Secretary of
Education and the Company's guarantor servicing customers. Failure to comply with these regulations or the
provisions of these agreements may result in the termination of the Secretary of Education's reimbursement
obligation.
Our DMO's consumer debt collection and receivables management activities are subject to federal and
state consumer protection, privacy and related laws and regulations that extensively regulate the relationship
15
between consumer debt collectors and debtors. Some of the more signiÑcant federal laws and regulations that
are applicable to our DMO business include:
‚ the Fair Debt Collection Practices Act;
‚ the Fair Credit Reporting Act;
‚ the Gramm-Leach-Bliley Act, including the Financial Privacy Rule and the Safeguard Rule; and
‚ the U.S. Bankruptcy Code.
In addition, our DMO business is subject to state laws and regulations similar to the federal laws and
regulations listed above. Finally, certain DMO subsidiaries are subject to regulation under the HEA and under
the various laws and regulations that govern government contractors.
Hemar Insurance Corporation of America (""HICA''), our South Dakota insurance subsidiary, is subject
to the ongoing regulatory authority of the South Dakota Division of Insurance and that of comparable
governmental agencies in six other states. Management intends to dissolve HICA by the end of 2005.
PRIVATIZATION
The GSE was established in 1972 as a for-proÑt corporation under an Act of Congress for the purpose of
creating a national secondary market in federal student loans. Having accomplished our original mission and
with the creation of a federal competitor, the FDLP, we obtained congressional and shareholder approval to
transform from the GSE to a private sector corporation. As a result, SLM Corporation was formed as a
Delaware corporation in 1997. On December 29, 2004, we completed the Wind-Down of the operations of the
GSE, defeased the GSE's remaining obligations and dissolved the GSE's federal charter.
During the course of developing the Wind-Down plan, management was advised by its tax counsel that,
while the matter is not certain, under current authority, the defeasance of certain GSE bonds that mature after
December 29, 2004 could be construed to be a taxable event for taxable holders of those bonds.
16
A signiÑcant beneÑt of shedding our GSE status is the ability to originate student loans directly, reducing
our dependence on other student loan originators. Privatization has also facilitated our entry into other credit
and fee-based businesses within and beyond the student loan industry. The principal cost of privatization is the
elimination of our access to the federal agency funding market.
AVAILABLE INFORMATION
The Securities and Exchange Commission (the
""SEC'') maintains an Internet site
(http://www.sec.gov) that contains periodic and other reports such as annual, quarterly and current reports on
Forms 10-K, 10-Q and 8-K, respectively, as well as proxy and information statements regarding SLM
Corporation and other companies that Ñle electronically with the SEC. Copies of our annual reports on
Form 10-K and our quarterly reports on Form 10-Q are available on our website free of charge as soon as
reasonably practicable after we electronically Ñle such reports with the SEC. Investors and other interested
parties can also access these reports at www.salliemae.com/investors.
Our Code of Business Conduct, which applies to Board members and all employees, including our chief
executive oÇcer, principal Ñnancial oÇcer and principal accounting oÇcer, is also available, free of charge, on
our website at www.salliemae.com/about/business conduct.html. We intend to disclose any amendments to
or waivers from our Code of Business Conduct (to the extent applicable to our chief executive oÇcer,
principal Ñnancial oÇcer, or principal accounting oÇcer or director) by posting such information on our
website.
In 2004, the Company submitted the annual certiÑcation of its chief executive oÇcer regarding the
Company's compliance with the NYSE's corporate governance listing standards, pursuant to Sec-
tion 303A.12(a) of the NYSE Listed Company Manual. The Company delivered a supplemental written
aÇrmation to the NYSE in February 2005 following a change in the memberships of both the Company's
Audit Committee and its Nominations Committee.
In addition, we Ñled as exhibits to the Company's Annual Report on Form 10-K for the year ended
December 31, 2003 and to this Annual Report on Form 10-K, the certiÑcations required under Section 302 of
the Sarbanes-Oxley Act of 2002.
17
Item 2. Properties
The following table lists the principal facilities owned by the Company:
Location
Function
Approximate
Square Feet
Reston, VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Headquarters
Fishers, INÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loan Servicing and Data Center
Wilkes Barre, PA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loan Servicing Center
Killeen, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loan Servicing Center
Lynn Haven, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loan Servicing Center
Castleton, INÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loan Servicing Center
Marianna, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Back-up/Disaster Recovery Facility for
Loan Servicing
Big Flats, NY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Debt Management and Collections
Center
Gilbert, AZ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Southwest Student Services
Headquarters
Swansea, MA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ AMS Headquarters
Arcade, NY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Debt Management and Collections
Center
Perry, NY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Debt Management and Collections
Center
240,000
450,000
135,000
136,000
133,000
100,000
94,000
60,000
60,000
36,000
34,000
20,000
In December 2003, the Company sold its prior Reston, Virginia headquarters and leased approximately
229,000 square feet of that building from the purchaser through August 21, 2004. The Company completed
the construction of a new headquarters building in Reston, Virginia in August 2004 that has approximately
240,000 square feet of space. All Reston-based employees were moved into the new headquarters in August
2004.
The Company leases approximately 36,000 square feet for its SLM Financial headquarters and operations
in Marlton, New Jersey. The Company also leases approximately 71,000 square feet for its debt management
and collections center in Summerlin, Nevada. In addition, the Company leases approximately 80,000 square
feet of oÇce space in Cincinnati, Ohio for the headquarters and debt management and collections center for
General Revenue Corporation. In the Ñrst quarter of 2004, the Company entered into a 10-year lease with the
Wyoming County Industrial Development Authority with a right of reversion to the Company for the Arcade
and Perry, New York facilities. The Company also leases an additional 10,000 square feet in Perry, New York
for Pioneer Credit Recovery, Inc.'s debt management and collections business. In addition, net of the space it
subleases, the Company leases approximately 6,000 square feet of oÇce space in Washington, D.C. With the
exception of the Pennsylvania loan servicing center, none of the Company's facilities is encumbered by a
mortgage. The Company believes that its headquarters, loan servicing centers data center, back-up facility and
data management and collections centers are generally adequate to meet its long-term student loan and new
business goals. The Company's principal oÇce is currently in owned space at 12061 Bluemont Way, Reston,
Virginia, 20190.
Item 3. Legal Proceedings
On February 17, 2005, JPMorgan Chase, through its aÇliates, petitioners TCB Education First
Marketing Corporation and Chase Education Holdings, Inc., Ñled a petition in the Delaware Chancery Court
for New Castle County seeking to dissolve the limited liability companies that comprise our joint venture with
JPMorgan Chase. Those limited liability companies, Chase Education First LLC and Education First Finance
LLC, and Sallie Mae, Inc., a wholly owned subsidiary of SLM Corporation, were named as respondents in the
petition. JPMorgan Chase's central claim in the petition is that a change in our business model from a
secondary market into an originator of student loans has undermined the business of the joint venture, which is
18
to market JPMorgan Chase-branded student loans. We believe that this claim is untenable because we began
originating loans approximately four years before the parties comprehensively renegotiated and amended the
joint venture eÅective July 16, 2002. Chase also claims that the dutch auction dissolution provision, which was
a negotiated provision in the joint venture agreements, is an inadequate remedy. On February 22, 2005, the
petitioners Ñled a request with the Chancery court seeking an expedited schedule for a Ñnal hearing on the
merits. That request has been stayed pending settlement discussions among the parties. See ""RECENT
DEVELOPMENTS Ì Bank One/JPMorgan Chase Relationships'' and ""JPMorgan Chase Joint Venture.''
The Company and various aÇliates are defendants in a lawsuit brought by College Loan Corporation
(""CLC'') in the United States District Court for the Eastern District of Virginia alleging various breach of
contract and common law tort claims in connection with CLC's consolidation loan activities. The Complaint
sought compensatory damages of at least $60 million. On June 25, 2003, the jury returned a verdict in favor of
the Company on all counts. CLC subsequently Ñled an appeal. On January 31, 2005, the United States Court
of Appeals for the Fourth Circuit overturned the jury verdict on the grounds that the trial judge's pretrial
rulings improperly limited CLC's proof at trial and remanded the case to the District Court for further
proceedings. The Court of Appeals decision did not address the merits of the case. We Ñled a petition for
rehearing or alternatively a rehearing en banc, which the Fourth Circuit denied. The Company currently
intends to defend this case on the merits at the District Court. PlaintiÅs are seeking punitive damages in
addition to the compensatory damages.
The Company was named as a defendant in a putative class action lawsuit brought by three Wisconsin
residents on December 20, 2001 in the Superior Court for the District of Columbia. The lawsuit sought to
bring a nationwide class action on behalf of all borrowers who allegedly paid ""undisclosed improper and
excessive'' late fees over the past three years. The plaintiÅs sought damages of one thousand Ñve hundred
dollars per violation plus punitive damages and claimed that the class consisted of two million borrowers. In
addition, the plaintiÅs alleged that the Company charged excessive interest by capitalizing interest quarterly in
violation of the promissory note. On February 27, 2003, the Superior Court granted the Company's motion to
dismiss the complaint in its entirety. On March 4, 2004, the District of Columbia Court of Appeals aÇrmed
the Superior Court's decision granting our motion to dismiss the complaint, but granted plaintiÅs leave to re-
plead the Ñrst count, which alleged violations of the D.C. Consumer Protection Procedures Act. On
September 15, 2004, the plaintiÅs Ñled an amended class action complaint. On October 15, 2004, the
Company Ñled a motion to dismiss the amended complaint with the Superior Court for failure to state a claim
and non-compliance with the Court of Appeals' ruling. On December 27, 2004, the Superior Court granted
our motion to dismiss the plaintiÅs' amended compliant. PlaintiÅs again appealed the Superior Court's
December 27, 2004 dismissal order to the Court of Appeals. The Company believes that it will prevail on the
merits of this case if it becomes necessary to further litigate this matter.
In July 2003, a borrower in California Ñled a class action complaint against the Company and certain of
its aÇliates in state court in San Francisco in connection with a monthly payment amortization error
discovered by the Company in the fourth quarter of 2002. The complaint asserts claims under the California
Business and Professions Code and other California statutory provisions. The complaint further seeks certain
injunctive relief and restitution. On May 14, 2004, the court issued an order dismissing two of the three counts
of the complaint. The case is currently in the discovery phase. While management is conÑdent of a favorable
outcome in this case, management believes that even an adverse ruling will not have a materially adverse
eÅect on the Company's Ñnancial condition or results of operations.
The Company continues to cooperate with the SEC concerning an informal investigation that the SEC
initiated on January 14, 2004. Although there are currently no data requests outstanding and the SEC has not
sought to interview any additional witnesses, discussions with the SEC are ongoing. The investigation concerns
certain 2003 year-end accounting entries made by employees of one of the Company's debt collection agency
subsidiaries. The Company's Audit Committee engaged outside counsel to investigate the matter and
management conducted its own investigation. These investigations by the Audit Committee and management
have been completed and the amounts in question were less than $100,000.
19
We are also subject to various claims, lawsuits and other actions that arise in the normal course of
business. Most of these matters are claims by borrowers disputing the manner in which their loans have been
processed or the accuracy of our reports to credit bureaus. In addition, the collections subsidiaries in our debt
management operation group are routinely named in individual plaintiÅ or class action lawsuits in which the
plaintiÅs allege that we have violated a federal or state law in the process of collecting their account.
Management believes that these claims, lawsuits and other actions will not have a material adverse eÅect on
our business, Ñnancial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Nothing to report.
PART II.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
The Company's common stock is listed and traded on the New York Stock Exchange under the symbol
SLM. The number of holders of record of the Company's common stock as of March 4, 2005 was 741. The
following table sets forth the high and low sales prices for the Company's common stock for each full quarterly
period within the two most recent Ñscal years.
Common Stock Prices
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ High
Low
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ High
Low
$43.00
36.79
$37.72
33.73
$42.49
36.80
$42.92
36.32
$44.75
36.43
$42.42
37.88
$54.44
41.60
$40.11
35.70
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
The Company paid quarterly cash dividends of $.08 per share on the common stock for the Ñrst quarter of
2003, $.17 for the last three quarters of 2003 and for the Ñrst quarter of 2004, $.19 for the last three quarters of
2004, and declared a quarterly cash dividend of $.19 for the Ñrst quarter of 2005.
In May 2003, the Company announced a three-for-one stock split of the Company's common stock to be
eÅected in the form of a stock dividend. The additional shares were distributed on June 20, 2003 for all
shareholders of record on June 6, 2003. All share and per share amounts presented have been retroactively
restated for the stock split. Stockholders' equity has been restated to give retroactive recognition to the stock
split for all periods presented, by reclassifying from additional paid-in capital to common stock, the par value
of the additional shares issued as a result of the stock split.
20
Issuer Purchases of Equity Securities
The following table summarizes the Company's common share repurchases during 2004 pursuant to the
stock repurchase program (see Note 15 to the consolidated Ñnancial statements, ""Common Stock'') Ñrst
authorized in September 1997 by the Board of Directors. Since the inception of the program, which has no
expiration date, the Board of Directors has authorized the purchase of up to 308 million shares as of
December 31, 2004. Included in this total are 30 million additional shares authorized for repurchase by the
Board in October 2004.
Total Number
of Shares
Purchased(1)
Average Price
Paid per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans
or Programs(2)
(Common shares in millions)
Period:
January 1 Ó March 31, 2004 ÏÏÏÏÏÏÏÏÏ
April 1 Ó June 30, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏ
July 1 Ó September 30, 2004 ÏÏÏÏÏÏÏÏÏ
October 1 Ó October 31, 2004 ÏÏÏÏÏÏÏÏ
November 1 Ó November 30, 2004 ÏÏÏÏ
December 1 Ó December 31, 2004 ÏÏÏÏ
Total fourth quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8.6
6.2
11.5
Ì
8.4
Ì
8.4
Year ended December 31, 2004 ÏÏÏÏÏÏ
34.7
$31.26
38.08
38.91
$ Ì
43.71
Ì
$43.71
$38.03
7.9
6.1
11.4
Ì
7.9
Ì
7.9
33.3
34.2
20.7
8.4
36.1
35.8
35.8
(1) The total number of shares purchased includes: i) shares purchased under the stock repurchase program
discussed above, and ii) shares purchased in connection with the exercise of stock options and vesting of
performance stock to satisfy minimum statutory tax withholding obligations and shares tendered by
employees to satisfy option exercise costs (which combined totaled 1.4 million shares for 2004).
(2) Reduced by outstanding equity forward contracts.
21
Item 6. Selected Financial Data
Selected Financial Data 2000-2004
(Dollars in millions, except per share amounts)
The following table sets forth selected Ñnancial and other operating information of the Company. The
selected Ñnancial data in the table is derived from the consolidated Ñnancial statements of the Company. The
data should be read in conjunction with the consolidated Ñnancial statements, related notes, and ""MANAGE-
MENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS'' included in this Form 10-K.
2004
2003
2002
2001
2000
Operating Data:
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic earnings per common share, before
cumulative eÅect of accounting change
Basic earnings per common share, after
cumulative eÅect of accounting change
Diluted earnings per common share, before
cumulative eÅect of accounting change
Diluted earnings per common share, after
cumulative eÅect of accounting change
Dividends per common share ÏÏÏÏÏÏÏÏÏÏÏ
Return on common stockholders' equity ÏÏ
Net interest marginÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Return on assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividend payout ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average equity/average assets ÏÏÏÏÏÏÏÏÏÏÏ
Balance Sheet Data:
Student loans, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Book value per common share ÏÏÏÏÏÏÏÏÏÏ
Other Data:
OÅ-balance sheet securitized student
$ 1,299
1,914
$ 1,326
1,534
$ 1,425
792
$ 1,126
384
$
642
465
4.36
4.36
4.04
4.04
.74
73%
1.92
2.80
18
3.73
3.08
3.37
2.91
3.18
.59
66%
2.53
2.89
19
4.19
1.69
1.69
1.64
1.64
.28
46%
2.92
1.60
17
3.44
.78
.78
.76
.76
.24
30%
2.33
.78
32
2.66
.95
.95
.92
.92
.22
49%
1.52
1.06
24
2.34
$65,981
84,094
78,122
3,102
6.93
$50,047
64,611
58,543
2,630
5.51
$42,339
53,175
47,861
1,998
4.00
$41,001
52,874
48,350
1,672
3.23
$37,647
48,792
45,375
1,415
2.54
loans, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$41,457
$38,742
$35,785
$30,725
$29,868
22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended December 31, 2002-2004
(Dollars in millions, except per share amounts)
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Some of the statements contained in this annual report discuss future expectations and business strategies
or include other ""forward-looking'' information. Those statements are subject to known and unknown risks,
uncertainties and other factors that could cause the actual results to diÅer materially from those contemplated
by the statements. The forward-looking information is based on various factors and was derived using
numerous assumptions. We undertake no obligation to publicly update or revise any forward-looking
statements.
OVERVIEW
We are the largest source of funding, delivery and servicing support for education loans in the United
States primarily through our participation in the FFELP. Our primary business is to originate, acquire and
hold student loans, with the net interest income and gains on the sales of student loans in securitization being
the primary source of our earnings. We also earn fees for pre-default and post-default receivables management
services. We are now engaged in every phase of the student loan life cycle Ì from originating and servicing
student loans to default prevention and ultimately the collection on defaulted student loans. We also provide a
wide range of Ñnancial services, processing capabilities and information technology to meet the needs of
educational institutions, lenders, students and their families, and guarantee agencies. SLM Corporation, more
commonly known as Sallie Mae, is a holding company that operates through a number of subsidiaries and
references in this annual report to ""the Company'' refer to SLM Corporation and its subsidiaries.
We have used both internal growth and strategic acquisitions to attain our leadership position in the
education Ñnance marketplace. We have the largest sales force in the student loan industry that delivers our
product oÅerings on campuses. The core of our marketing strategy is to promote our on-campus brands, which
generate student loan originations through our Preferred Channel. Loans generated through our Preferred
Channel are more proÑtable than loans acquired through our forward purchase commitments or the spot
market since they are owned earlier in the student loan's life and we generally incur lower costs on such loans.
We have built brand leadership between the Sallie Mae name, the brands of our subsidiaries and those of our
lender partners, such that we capture the volume of three of the top Ñve originators of FFELP loans. These
sales and marketing eÅorts are supported by the largest and most diversiÑed servicing capabilities in the
industry, providing an unmatched array of servicing capability to Ñnancial aid oÇces.
In recent years we have diversiÑed our business through the acquisition of several companies that provide
default management and loan collections services, all of which are combined in our Debt Management
Operations (""DMO'') business segment. Initially these acquisitions concentrated in the student loan industry,
but through a 2004 acquisition we expanded our capabilities to include a full range of accounts receivable
management services to a number of diÅerent industries. The DMO business segment has been expanding
rapidly such that revenue grew 31 percent in 2004 and we now employ over 3,000 people in this segment.
In December 2004, we completed the Wind-Down of the GSE and are now a fully privatized company.
We have defeased all remaining GSE debt obligations and dissolved the GSE's federal charter. The liquidity
provided to the Company by the GSE has been replaced by non-GSE Ñnancing, including securitizations
originated by non-GSE subsidiaries of SLM Corporation. This funding transformation was accomplished by
increasing and diversifying our investor base over the last three years. We now have a number of sources of
liquidity including the formation of our Ñrst asset-backed commercial paper program ($5 billion in available
borrowings) and our unsecured revolving credit facilities, which were increased from $3 billion to $5 billion in
2004.
23
See ""STUDENT LOAN MARKETING ASSOCIATION Ì Privatization Act Ì Completion of the
GSE Wind-Down'' for a more detailed discussion of the GSE Wind-Down.
On December 16, 2004, the Financial Accounting Standards Board (""FASB'') issued Statement of
Financial Accounting Standards (""SFAS'') No. 123(R), ""Share-Based Payment,'' which is a revision of
SFAS No. 123, ""Accounting for Stock-Based Compensation.'' Generally, the approach in SFAS No. 123(R)
is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the income statement
based on their fair values. Pro forma disclosure is no longer an alternative. The new standard will be eÅective
for public entities (excluding small business issuers) in the Ñrst interim or annual reporting period beginning
after June 15, 2005, irrespective of the entity's Ñscal year. Early adoption is permitted in periods in which
Ñnancial statements have not yet been issued. SFAS No. 123(R) allows for two transition alternatives for
public companies: (a) modiÑed-prospective transition or (b) modiÑed-retrospective transition. We are still
evaluating both methods, but have tentatively decided to apply the modiÑed-retrospective transition alterna-
tive for all periods presented and will recognize compensation cost in the amounts previously reported in the
pro forma footnote disclosure under the provisions of SFAS No. 123. Had we adopted SFAS No. 123(R) in
2004, our diluted earnings per share would have been $.08 lower and the eÅect going forward should have a
similar eÅect on diluted earnings per share.
BUSINESS SEGMENTS
We manage our business through two primary business segments: the Lending business segment and the
DMO business segment. These businesses are considered reportable segments under SFAS No. 131,
""Disclosures about Segments of an Enterprise and Related Information,'' based on quantitative thresholds
applied to the Company's Ñnancial statements. In addition, we provide other complementary products and
services, including guarantor and student loan servicing through smaller business units that do not meet such
thresholds and are aggregated in the Corporate and Other business segment for Ñnancial reporting purposes.
Since our business segments operate in distinct business environments, the discussion herein of the results
of our operations is primarily presented on a segment basis. The Lending business segment includes all
discussion of income and related expenses associated with net interest margin, student loan spread and its
components, securitization gains and the ongoing servicing and securitization income, derivative market value
gains and losses, and other fees earned on our Managed portfolio of student loans.
The DMO business segment reÖects the fees earned and expenses incurred to operate our DMO business.
Our Corporate and Other business segment includes our remaining fee businesses and other corporate
expenses that do not pertain directly to the primary segments identiÑed above.
SFAS No. 131 requires public companies to report Ñnancial and descriptive information about their
reportable operating segments. This is the Ñrst year that the Company has been required to present segment
information in accordance with SFAS No. 131, and we have included this information for all periods
presented in our Ñnancial statements as required by SEC rules. The segment information that follows in this
""MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RE-
SULTS OF OPERATIONS'' (""MD&A'') includes certain condensed Ñnancial information in accordance
with generally accepted accounting principles in the United States (""GAAP''). In accordance with SFAS
No. 131, in Note 18 to our consolidated Ñnancial statements, ""Segment Reporting,'' we present separate
Ñnancial information about our operating segments that is used regularly by the ""chief operating decision
makers'' in deciding how to allocate resources and in assessing the operating results of the business. The
Ñnancial information included in Note 18 reÖects certain non-GAAP performance measures, which we refer
to as ""core cash'' measures. These ""core cash'' measures are discussed in greater detail below in ""ALTER-
NATIVE PERFORMANCE MEASURES.''
Lending Business Segment
In our Lending business segment, we originate and acquire federally guaranteed student loans, which are
administered by the U.S. Department of Education (""ED''), and Private Education Loans, which are not
24
federally guaranteed. The majority of our Private Education Loans are made in conjunction with a FFELP
StaÅord loan and as a result are marketed through the same marketing channels as FFELP StaÅord Loans.
While FFELP student loans and Private Education Loans have diÅerent overall risk proÑles due to the federal
guarantee of the FFELP student loans, they share many of the same characteristics such as similar repayment
terms, the same marketing channel and sales force, and are originated and serviced on the same platform.
Finally, where possible, the borrower receives a single bill for both the federally guaranteed and privately
underwritten loans.
The earnings growth in our Lending business segment is a product of the growth in our Managed portfolio
of student loans and the earning spread on those loans. In 2004, the Managed portfolio grew by 21 percent to
$107 billion at December 31, 2004. As a result of receiving the Exceptional Performer (""EP'') Designation
from ED, approximately 93 percent of our Managed FFELP student loans are 100 percent guaranteed by the
federal government and as such represent high quality assets with very little credit risk. At December 31,
2004, our Managed FFELP student loan portfolio was $96.0 billion or 89 percent of our total Managed student
loans.
Trends in the Lending Business Segment
The growth in our Lending business segment has been largely driven by the steady growth in the demand
for post-secondary education in the United States over the last decade. This growth is evident in the volume of
loans we originated or acquired in 2004. We acquired or originated $29.9 billion of student loans in 2004, a
45 percent increase over the $20.7 billion in 2003. Of this, we originated $18.0 billion of student loans through
our Preferred Channel, an increase of 18 percent over the $15.2 billion of student loans originated through our
Preferred Channel in 2003. We also acquired $6.2 billion of student loans through two acquisitions.
We expect the growth in the demand for post-secondary education to continue in the future due to a
number of factors. First, the college age population will continue to grow. ED predicts that the college age
population will increase 10 percent by 2013. Second, we project an increase in non-traditional students (those
not attending college directly from high school) and adult education. Third, tuition costs have risen 36 percent
for four-year public institutions and 51 percent for four-year private institutions on an inÖation-adjusted basis
since the academic year (""AY'') 1993-1994 and are projected to continue to rise at a pace greater than
inÖation. Management believes that the twin factors of increasing demand for education coupled with rising
tuition costs will drive growth in education Ñnancing well into the next decade.
During 2004, we renegotiated our agreement with Bank One. Under the current agreement we will
purchase all Bank One student loans originated on our platform through 2008. This volume represents the vast
majority of loans originated under that brand name. However, we are no longer obligated to promote the Bank
One brand on college campuses, allowing us to increase the marketing of the Sallie Mae family of brands as
well as other lending partners.
Over the past three years, we have seen a surge in Consolidation Loan activity as a result of historically
low interest rates which has substantially changed the composition of our student loan portfolio. Consolidation
Loans earn a lower yield than FFELP StaÅord Loans due primarily to the 105 basis point Consolidation Loan
Rebate Fee. This negative impact is somewhat mitigated by higher SAP spreads, the longer average life of
Consolidation Loans and the greater potential to earn Floor Income. Since interest rates on Consolidation
Loans are Ñxed to term for the borrower, older Consolidation Loans with higher borrower rates can earn Floor
Income over an extended period of time. In 2004, substantially all Floor Income was earned on Consolidation
Loans. Borrowers typically do not consolidate loans prior to repayment. During 2004, $10.7 billion of FFELP
StaÅord loans in our Managed loan portfolio consolidated either with us ($8.6 billion) or with other lenders
($2.1 billion). The net result of consolidation activity in 2004 was a portfolio gain of $504 million.
Consolidation Loans now represent over 60 percent of our on-balance sheet federally guaranteed student loan
portfolio and over 50 percent of our Managed portfolio.
FFELP loan limits have not been raised since 1992. See ""OTHER RELATED EVENTS AND
INFORMATION Ì Reauthorization and Budget Proposals'' for a description of proposals that would
increase loan limits. To meet the increasing cost of higher education, students and parents have turned to
25
alternative sources of education Ñnancing. A large and growing source of this supplemental education
Ñnancing is provided through campus-based Private Education Loans, of which we are the largest provider.
The Private Education Loan portfolio grew by 38 percent in 2004 to $11.5 billion and now represents
11 percent of our Managed student loan portfolio, up from 9 percent in 2003.
Private Education Loans consist of two general types: those that meet the needs of borrowers of higher
education schools and other Title IV eligible schools, and those that are used to meet the needs of students in
alternative learning programs such as career training, distance learning and lifelong learning programs. Unlike
FFELP loans, Private Education Loans are subject to the full credit risk of the borrower. We manage this
additional risk through tested loan underwriting standards and a combination of higher interest rates and loan
origination fees that compensate us for the higher risk. As a result, we earn higher spreads on Private
Education Loans than on FFELP loans. Private Education Loans will continue to be an important driver of
future earnings growth as the demand for post-secondary education grows and costs increase much faster than
increases in federal loan limits.
We also originate lesser quantities of mortgage and consumer loans with the intent of immediately selling
the majority of the mortgage loans. Mortgage and consumer loan originations and the mortgage loan portfolio
we hold were 8 percent and 1 percent, respectively, of total loan originations and total loans outstanding as of
and for the year ended December 31, 2004.
Student Loan Spread
An important performance measure closely monitored by management is the student loan spread. The
student loan spread is the diÅerence between the interest earned on the student loan assets and the interest
paid on the debt funding those loans. A number of factors can aÅect the overall student loan spread such as:
‚ the mix of student loans in the portfolio, with Consolidation Loans having the lowest spread and
Private Education Loans having the highest spread;
‚ the premiums paid and capitalized costs incurred to acquire student loans which negatively impact the
spread through subsequent amortization;
‚ the type and level of borrower beneÑt programs;
‚ the level of Floor Income; and
‚ funding and hedging costs.
The replacement of GSE debt with non-GSE debt has increased our funding costs and, coupled with the
rapid growth in Consolidation Loans, has put pressure on our student loan spread. We are actively managing
these adverse eÅects by originating a higher percentage of student loans through our Preferred Channel and by
increasing the percentage of Private Education Loans in our Managed portfolio. Absent changes to the spread
through government legislation, see ""OTHER RELATED EVENTS AND INFORMATION Ì
Reauthorization and Budget Proposals,'' we expect the Managed student loan spread to remain close to the
1.80 percent earned in the fourth quarter of 2004.
Funding and Interest Rate Risk
We depend on the debt capital markets to support our business plan. We have developed diverse funding
sources to ensure continued access to the capital markets now that we can no longer access GSE funding. Our
biggest funding challenge going forward is to maintain cost eÅective liquidity to fund the growth in the
Managed portfolio of student loans as well as to reÑnance previously securitized loans when consolidated back
on-balance sheet from our securitization trusts. At the same time, we must maintain earnings spreads and
control interest rate risk to preserve earnings growth. Our main source of funding is student loan securitiza-
tions and we have built a highly liquid market for such Ñnancings, as evidenced by the $29.7 billion of student
loans securitized in twelve term securitization transactions in 2004 and $30.1 billion in sixteen term
securitization transactions in 2003. While securitizations provide the majority of our funding requirements, we
also rely on unsecured debt obligations as a source of liquidity. In 2004, we issued $15 billion of SLM
26
Corporation, term, unsecured debt raising the total of such debt to $33.3 billion at December 31, 2004, a
64 percent increase over December 31, 2003. In addition, in 2004, we closed a $5 billion asset-backed
commercial paper program and increased our revolving credit facility from $3 billion to $5 billion. We rely
heavily on derivative transactions to economically hedge our interest rate risk between our assets and
liabilities. Derivatives allow us to eÇciently match Öoating rate assets with Öoating rate debt and also better
match the underlying indices of the variable rate assets and liabilities.
Over the last three years, we have designed several new securitization structures to enable us to fund the
longer average life of Consolidation Loans to terms. In certain Consolidation Loan securitization structures,
we do not qualify for oÅ-balance sheet accounting treatment and the Consolidation Loans remain on our
balance sheet.
Even though we believe our derivatives are economic hedges, changes in interest rates can cause volatility
in our earnings for the market value of our derivatives that do not qualify for hedge accounting treatment
under SFAS No. 133, ""Accounting for Derivative Instruments and Hedging Activities.'' Under SFAS
No. 133, these changes in derivative market values are recorded through earnings with no consideration for the
corresponding change in the fair value of the hedged item. As a result, our earnings are highly susceptible to
changes in interest rates caused by these one-sided marks-to-market. Changes in interest rates can also have a
material eÅect on the amount of Floor Income earned in our student loan portfolio and the valuation of our
Retained Interest asset. Our earnings can also be materially aÅected by changes in our estimate of the rate at
which loans may prepay in our portfolios as measured by the Constant Prepayment Rate (""CPR''). The value
of the Retained Interests on FFELP StaÅord securitizations is particularly aÅected by the level of
Consolidation Loan activity. We face a number of other challenges and risks that can materially aÅect our
future results such as changes in:
‚ applicable laws and regulations, which may change the volume, average term, eÅective yields and
reÑnancing options of student loans under the FFELP or provide advantages to competing FEELP and
non-FFELP loan providers;
‚ demand and competition for education Ñnancing;
‚ Ñnancing preferences of students and their families;
‚ borrower default rates on Private Education Loans;
‚ continued access to the capital markets for funding at favorable spreads particularly for our non-
federally insured Private Education Loan portfolio; and
‚ our operating execution and eÇciencies, including errors, omissions, and eÅectiveness of internal
control.
Recent Developments Ì Acquisitions in the Lending Business Segment
We completed two acquisitions in the Lending business segment in 2004 and two acquisitions in 2003.
We accounted for these transactions under the purchase method of accounting as deÑned in SFAS No. 141,
""Business Combinations,'' and allocated the purchase price to the fair market value of the assets acquired,
including identiÑable intangible assets and goodwill.
Southwest Student Services Corporation
On October 15, 2004, we completed our purchase of the outstanding stock of Southwest Student Services
Corporation (""Southwest''), an originator, holder and servicer of student loans from the Helios Education
Foundation for total consideration of approximately $533 million including cash of $525 million and restricted
stock of $8 million. The transaction included Southwest's $4.8 billion student loan portfolio (and the related
funding), its Arizona-based loan origination and servicing center and its sales and marketing operations. In
addition to increasing our student loan portfolio, the purchase has expanded our loan origination capability and
broadened our market reach. Southwest is among the top 30 originators of federal student loans, issuing
approximately $300 million in FFELP StaÅord and PLUS loans and $1.5 billion in Consolidation Loans
27
annually, and it is the nation's ninth largest holder of federal student loans. Southwest provides student loans
and related services nationally with a primary focus on colleges and universities in Arizona and Florida.
Southwest employs nearly 300 individuals.
Education Assistance Foundation and Student Loan Finance Association
On December 14, 2004, we closed the Ñrst step in a two step purchase of the secondary market and
related businesses of Education Assistance Foundation (""EAF'') and its aÇliate, Student Loan Finance
Association (""SLFA'') for a purchase price of approximately $435 million. As speciÑed in the purchase
agreement, concurrent with the consummation of the transaction, the sellers used $391 million of the purchase
price to defease the debt funding certain loans acquired by the Company as part of this transaction. SLFA is a
Northwest regional leader in education loan funding and acquisition. The Ñrst step of the transaction included
SLFA's $1.8 billion student loan portfolio (and the related funding) and its origination franchise. In addition,
as a part of this transaction, we entered into a full service guarantor servicing contract with EAF's aÇliate,
Northwest Education Association (""NELA''), a guarantee agency for FFELP student loans that serves the
PaciÑc Northwest. In a related transaction, NELA became an aÇliate of USA Funds, the Company's largest
guarantor servicing client. The second step of the transaction is expected to close in 2005.
Academic Management Services Corporation
On November 17, 2003, the Company purchased all of the outstanding stock of Academic Management
Services Corporation (""AMS'') for a purchase price of approximately $77 million including cash considera-
tion and certain acquisition costs. We allocated the purchase price primarily to the $1.4 billion student loan
portfolio and intangible assets including goodwill. In addition to the student loan portfolio, the purchase
expanded our loan origination capability and enhanced our oÅerings to college and university business oÇces.
Debt Management Operations (""DMO'') Business Segment
In our DMO business segment, we have traditionally provided portfolio management, debt collection and
default prevention services on a contingency fee basis, concentrating primarily in the education Ñnance
marketplace. Our investment in AFS Holdings, LLC, the parent company of Arrow Financial Services
(collectively, ""AFS''), has expanded our capabilities such that we now purchase delinquent and defaulted
receivables and earn revenues from collections on those portfolios.
Of our service areas, the contingency collections business is the most mature. While student loan
contingency collections and other fee services will continue to be the core of DMO fee income, purchased
portfolio revenue, primarily from credit card accounts, is expected to account for a larger component of DMO
revenue in the future.
The private sector collections industry is highly fragmented with few large public companies and a large
number of small scale privately-held companies. The collections industry segments that provide third-party
collections services for ED, FFELP guarantors and other federal holders of defaulted debt are highly
competitive. Among the asset classes, credit card collections are the most competitive in both contingency
collections and purchased paper activities.
In the education Ñnance marketplace, we are subject to the political risks associated with the FFELP as
they relate to guarantors, our primary customers. An example of this risk is the proposed reduction in
collections revenues in the President's proposed budget for Federal Fiscal Year (""FFY'') 2006. See ""OTHER
RELATED EVENTS AND INFORMATION Ì Reauthorization and Budget Proposals.''
In the purchased receivables business we have experienced increased competition in bidding for portfolio
purchases, which has driven up prices in competitive bidding situations. We are responding to this challenge
through enhanced servicing eÇciencies and continuing to build on customer relationships through value added
services.
28
Recent Developments Ì Acquisitions in the DMO Business Segment
AFS Holdings, LLC
On September 16, 2004, we acquired 64 percent of AFS, a full-service, accounts receivable management
company that purchases charged-oÅ debt, conducts contingency collection work and performs Ñrst-party
receivables servicing across asset classes, for a purchase price of approximately $165 million including cash
consideration and certain acquisition costs. Under the terms of the agreement, we have the option to purchase
the remaining interest in AFS Holdings, LLC over a three-year period. The acquisition was accounted for
under the purchase accounting method. AFS employs nearly 1,300 individuals at locations in Niles, Illinois;
Gaithersburg, Maryland; San Diego, California; Whitewater, Wisconsin; and Rockville Centre, New York. It
will retain its brand and senior management team.
AFS primarily purchases and services defaulted consumer receivables from credit grantors or resellers
and then focuses its collection eÅorts to cover its investment and earn a suÇcient return from the purchased
portfolio. AFS also collects on behalf of debt owners on a contingency fee basis and provides Ñrst-party
delinquent and default receivables servicing.
The purchased receivables business has potential for greater proÑtability than the contingency fee
business due in large part to the maturity of the contingency business and the pricing risks and rewards
associated with purchasing delinquent or defaulted debt. Our acquisition of AFS was important for two main
reasons. It has further diversiÑed our DMO revenues outside of the education marketplace and provides a
disciplined pricing framework and servicing platform as well as years of experience in the purchase of
delinquent and defaulted receivables. The addition of AFS also enables us to oÅer the purchase of distress or
defaulted debt to our partner schools as an additional method of enhancing their receivables management
strategies.
Corporate and Other Business Segment
Our Corporate and Other business segment reÖects the aggregate activity of our smaller operating units
including our Guarantor Servicing and Loan Servicing business units, other products and services, as well as
corporate expenses that do not pertain directly to our business segments.
In our Guarantor Servicing business unit, we provide a full complement of administrative services to
FFELP guarantors including guarantee issuance, processing, account maintenance, and guarantee fulÑllment.
In our Loan Servicing business unit, we originate and service student loans on behalf of lenders who are
unrelated to SLM Corporation. Such activities include processing correspondence and Ñling claims, originat-
ing and disbursing Consolidation Loans on behalf of the lender, and other administrative activities required by
ED.
29
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The MD&A discusses our consolidated Ñnancial statements, which have been prepared in accordance
with GAAP. The preparation of these Ñnancial statements requires management to make estimates and
assumptions that aÅect the reported amounts of assets and liabilities and the reported amounts of income and
expenses during the reporting periods. We base our estimates and judgments on historical experience and on
various other factors that we believe are reasonable under the circumstances. Actual results may diÅer from
these estimates under varying assumptions or conditions. Note 2 to the consolidated Ñnancial statements,
""SigniÑcant Accounting Policies,'' includes a summary of the signiÑcant accounting policies and methods
used in the preparation of our consolidated Ñnancial statements.
On an ongoing basis, management evaluates its estimates, particularly those that include the most
diÇcult, subjective or complex judgments and are often about matters that are inherently uncertain. These
estimates relate to the following accounting policies that are discussed in more detail below: securitization
accounting and Retained Interests, loan eÅective interest method (premium/borrower beneÑts), provision for
loan losses, and derivative accounting. Also, as part of our regular quarterly evaluation of the critical estimates
used by the Company, we have updated a number of estimates to account for the increase in Consolidation
Loan activity.
Premiums, Discounts and Borrower BeneÑts
For both federally insured and Private Education Loans, we account for premiums paid, discounts
received and certain origination costs incurred on the origination and acquisition of student loans in
accordance with SFAS No. 91, ""Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases.'' The unamortized portion of the premiums and the
discounts is included in the carrying value of the student loan on the consolidated balance sheet. We recognize
income on our student loan portfolio based on the expected yield of the student loan after giving eÅect to the
amortization and accretion of purchase premiums and student loan discounts, as well as the borrower beneÑt
discount. In arriving at the expected yield, we must make a number of estimates that when changed must be
reÖected in the balance from the inception of the student loan. The most sensitive estimate for premium and
discount amortization is the estimate of the CPR, which measures the rate at which loans in the portfolio pay
before their stated maturity. The CPR is used in calculating the average life of the portfolio. A number of
factors can aÅect the CPR estimate such as the rate of Consolidation Loan activity, securitization activity and
default rates. Changes in CPR estimates are discussed in more detail below.
In addition to the CPR, the estimate of the borrower beneÑt discount is dependent on the estimate of the
number of borrowers who will eventually qualify for these beneÑts. For competitive purposes, we frequently
change the borrower beneÑt programs in both amount and qualiÑcation factors. These programmatic changes
must be reÖected in the estimate of the borrower beneÑt discount.
EÅects of Consolidation Loan Activity on Estimates
The combination of aggressive marketing in the student loan industry and the ability to obtain a long-
term, Ñxed rate loan at low interest rates has led to continued high levels of Consolidation Loan volume,
which, in turn, has had a signiÑcant eÅect on a number of accounting estimates in recent years. As long as
interest rates remain at historically low levels, and absent any changes in the HEA, we expect the
Consolidation Loan program to continue to be an attractive option for borrowers. We have updated our
assumptions that are aÅected primarily by Consolidation Loan activity and updated the estimates used in
developing the cash Öows and eÅective yield calculations as they relate to the amortization of student loan
premiums and discounts, borrower beneÑts, residual interest income and the valuation of the Residual
Interest.
Loan consolidation activity aÅects each estimate diÅerently depending on whether the original FFELP
StaÅord loans being consolidated were on-balance sheet or oÅ-balance sheet and whether the resulting
Consolidation Loan is retained by us or consolidated with a third party. When we consolidate a FFELP
StaÅord loan that was in our portfolio, the term of that loan is extended and the term of the amortization of
30
the capitalized acquisition costs (premium) is likewise extended to match the new term of the loan. In that
process the premium must be adjusted from inception to reÖect the new term of the consolidated loan. The
schedule below summarizes the impact of loan consolidation on each aÅected Ñnancial statement line item.
Consolidation Loans in Securitizations
The estimate of the CPR also aÅects the estimate of the average life of securitized trusts and therefore
aÅects the valuation estimate of the Residual Interest. Prepayments shorten the average life of the trust, and if
all other factors remain equal, will reduce the value of the Residual Interest asset, the securitization gain on
sale and the eÅective yield used to recognize interest income. Prepayments on student loans in securitized
trusts are primarily driven by the rate at which securitized FFELP StaÅord loans are consolidated. When a
loan is consolidated from the trust either by us or a third party, the loan is treated as a prepayment. In cases
where the loan is consolidated by us, it will be recorded as an on-balance sheet asset. We discuss the eÅects of
changes in our CPR estimates in ""RESULTS OF OPERATIONS Ì LENDING BUSINESS SEG-
MENT Ì Student Loans'' and ""RESULTS OF OPERATIONS Ì LIQUIDITY AND CAPITAL RE-
SOURCES Ì Securitization Activities.''
EÅect of Increasing Consolidation Activity
On-Balance Sheet Student Loans
Estimate
Consolidating
Lender
EÅect on Estimate
CPR
Accounting EÅect
Premium
Sallie Mae
Term extension
Decrease Estimate Adjustment(1) Ì
Premium
Other lenders
StaÅord loan prepaid
Increase
Borrower BeneÑts Sallie Mae
Term extension
N/A
Borrower BeneÑts Other lenders
StaÅord loan prepaid N/A
increase unamortized balance
of premium. Reduced annual
amortization expense going
forward.
Estimate Adjustment(1) Ì
decrease unamortized balance
of premium or accelerated
amortization of premium.
Original StaÅord loan
expected beneÑt expense
reversed Ì new Consolidation
Loan beneÑt amortized over a
longer term.(2)
Borrower beneÑt reserve
reversed into income.(2)
(1) As estimates are updated, in accordance with SFAS No. 91, the premium balance must be adjusted from
inception to reÖect the new expected term of the loan.
(2) Consolidation estimates also aÅect the estimates of borrowers who will eventually qualify for borrower
beneÑts.
31
OÅ-Balance Sheet Student Loans
Estimate
Residual Interest
Consolidating
Lender
EÅect on Estimate
CPR
Accounting EÅect
Sallie Mae or
other lenders
FFELP StaÅord
loan is prepaid
Increase
‚ Reduction in fair market
value of Residual Interest
asset resulting in either an
impairment charge or
reduction in prior market
value gains recorded in other
comprehensive income.
‚ Decrease in prospective
eÅective yield used to
recognize interest income.
Securitization Accounting and Retained Interests
We regularly engage in securitization transactions as part of our Ñnancing strategy. As described in more
detail in "" RESULTS OF OPERATIONS Ì LIQUIDITY AND CAPITAL RESOURCES Ì Securitiza-
tion Activities,'' in a securitization we sell student loans to a trust that issues bonds backed by the student
loans as part of the transaction. When our securitizations meet the sale criteria of SFAS No. 140,
""Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities Ì a
Replacement of SFAS No. 125,'' we record a gain on the sale of the student loans which is the diÅerence
between the allocated cost basis of the assets sold and the relative fair value of the assets received. The
primary judgment in determining the fair value of the assets received is the valuation of the residual interest.
The Retained Interests in each of our securitizations are treated as available-for-sale securities in
accordance with SFAS No. 115, ""Accounting for Certain Investments in Debt and Equity Securities,'' and
therefore must be marked-to-market with temporary unrealized gains and losses recognized, net of tax, in
accumulated other comprehensive income in stockholders' equity. Since there are no quoted market prices for
our Retained Interests, we estimate their fair value both initially and each subsequent quarter using the key
assumptions listed below:
‚ the projected net interest yield from the underlying securitized loans, which can be impacted by the
forward yield curve;
‚ the calculation of the Embedded Floor Income associated with the securitized loan portfolio;
‚ the CPR;
‚ the discount rate used, which is intended to be commensurate with the risks involved; and
‚ the expected credit losses from the underlying securitized loan portfolio.
We recognize interest income and periodically evaluate our Retained Interests for other than temporary
impairment in accordance with the Emerging Issues Task Force (""EITF'') Issue No. 99-20 ""Recognition of
Interest Income and Impairment on Purchased and Retained BeneÑcial Interests in Securitized Financial
Assets.'' Under this standard, on a quarterly basis we estimate the cash Öows to be received from our Retained
Interests and these revised cash Öows are used prospectively to calculate a yield for income recognition. In
cases where our estimate of future cash Öows results in a decrease in the yield used to recognize interest
income compared to the prior quarter, the Retained Interest is written down to fair value, Ñrst to the extent of
any unrealized gain in accumulated other comprehensive income, then through earnings as an other than
temporary impairment. These estimates are the same as those used for the valuation of the Residual Interest
discussed above.
We also receive income for servicing the loans in our securitization trusts. We assess the amounts
received as compensation for these activities at inception and on an ongoing basis to determine if the amounts
32
received are adequate compensation as deÑned in SFAS No. 140. To the extent such compensation is
determined to be no more or less than adequate compensation, no servicing asset or obligation is recorded.
Provision for Loan Losses
The provision for loan losses represents the periodic expense of maintaining an allowance suÇcient to
absorb losses, net of recoveries, inherent in the student loan portfolios. The allowance for Private Education
Loan losses is an estimate of probable losses in the portfolio at the balance sheet date that will be charged oÅ
in subsequent periods. We estimate our losses using historical data from our Private Education Loan
portfolios, extrapolations of FFELP loan loss data, current trends and relevant industry information. As our
Private Education Loan portfolios continue to mature, more reliance is placed on our own historic Private
Education Loan charge-oÅ and recovery data. Accordingly, during the third quarter of 2004, we updated our
expected default assumptions to further align the allowance estimate with our collection experience and the
terms and policies of the individual Private Education Loan programs. We use this data in internally
developed models to estimate the amount of losses, net of subsequent collections, projected to occur in the
Private Education Loan portfolios.
When calculating the Private Education Loan loss reserve, we divide the portfolio into categories of
similar risk characteristics based on loan program type, underwriting criteria, existence or absence of a co-
borrower, repayment begin date, repayment status, and aging. We then apply default and collection rate
projections to each category. The repayment begin date indicates when the borrower is required to begin
repaying their loan. Our career training Private Education Loan programs (13 percent of the Managed Private
Education Loan portfolio at December 31, 2004) generally require the borrowers to start repaying their loans
immediately. Our higher education Private Education Loan programs (87 percent of the Managed Private
Education Loan portfolio at December 31, 2004) do not require the borrowers to begin repayment until six
months after they have graduated or otherwise left school. Consequently, our loss estimates for these programs
are minimal while the borrower is in school. At December 31, 2004, 45 percent of the principal balance in the
higher education Managed Private Education Loan portfolio related to borrowers who are still in-school and
not required to make payments. As the current portfolio ages, an increasing percentage of the borrowers will
leave school and be required to begin payments on their loans. The allowance for losses will change
accordingly with the percentage of borrowers in repayment.
Our loss estimates include losses to be incurred over the loss conÑrmation period, which is two years for
career training loans beginning when the loan is originated and Ñve years for higher education loans beginning
when the borrower leaves school. Similar to the rules governing FFELP payment requirements, our collection
policies allow for periods of nonpayment for borrowers requesting additional payment grace periods upon
leaving school or experiencing temporary diÇculty meeting payment obligations. This is referred to as
forbearance status. The vast majority of forbearance occurs early in the repayment term when borrowers are
starting their careers (see ""RESULTS OF OPERATIONS Ì LENDING BUSINESS SEGMENT Ì
Student Loans Ì Delinquencies''). At December 31, 2004, 4 percent of the Managed Private Education Loan
portfolio was in forbearance status. The loss conÑrmation period is in alignment with our typical collection
cycle and takes into account these periods of nonpayment.
Private Education Loan principal is charged oÅ against the allowance at 212 days delinquency. Private
Education Loans continue to accrue interest, including in periods of forbearance, until they are charged oÅ
and removed from the active portfolio, at which time the accrued interest is charged oÅ against interest
income. Recoveries on loans charged oÅ are recorded directly to the allowance.
EÅective for a renewable one-year period beginning on October 19, 2004, Sallie Mae, Inc.'s loan servicing
division, Sallie Mae Servicing, was designated as an Exceptional Performer (""EP'') by ED in recognition of
meeting certain performance standards set by ED in servicing FFELP loans. As a result of this designation,
the Company receives 100 percent reimbursement on default claims on federally guaranteed student loans that
are serviced by Sallie Mae Servicing for a period of at least 270 days before the date of default and will no
longer be subject to the two percent Risk Sharing on these loans. The Company is entitled to receive this
33
beneÑt as long as the Company remains in compliance with the required servicing standards, which are
assessed on an annual and quarterly basis through compliance audits and other criteria. The 100 percent
reimbursement applies to all FFELP loans that are serviced by the Company as well as default claims on
federally guaranteed student loans that the Company owns but are serviced by other service providers with the
EP designation. At December 31, 2004, approximately 88 percent of the Company's on-balance sheet
federally insured loans are no longer subject to Risk Sharing. As a result of this designation, the Company has
reduced the balance in the allowance for loan losses by $33 million.
Accordingly, the evaluation of the provision for loan losses is inherently subjective, as it requires material
estimates that may be susceptible to signiÑcant changes. Management believes that the allowance for loan
losses is appropriate to cover probable losses in the student loan portfolio.
Derivative Accounting
We use interest rate swaps, foreign currency swaps, interest rate futures contracts, Floor Income
Contracts and interest rate cap contracts as an integral part of our overall risk management strategy to manage
interest rate risk arising from our Ñxed rate and Öoating rate Ñnancial instruments. We account for these
instruments in accordance with SFAS No. 133 which requires that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded at fair value on the balance sheet as
either an asset or liability. We determine the fair value for our derivative instruments using pricing models that
consider current market values and the contractual terms of the derivative contracts. Pricing models and their
underlying assumptions impact the amount and timing of unrealized gains and losses recognized; the use of
diÅerent pricing models or assumptions could produce diÅerent Ñnancial results. As a matter of policy, we
compare the fair values of our derivatives that we calculate to those provided by our counterparties on a
monthly basis. Any signiÑcant diÅerences are identiÑed and resolved appropriately.
We make certain judgments in the application of hedge accounting under SFAS No. 133. The most
signiÑcant judgment relates to the application of hedge accounting in connection with our forecasted debt
issuances. Under SFAS No. 133, if the forecasted transaction is probable to occur then hedge accounting may
be applied. We regularly update our probability assessment related to such forecasted debt issuances. This
assessment includes analyzing prior debt issuances and assessing changes in our future funding strategies.
SFAS No. 133 requires that changes in the fair value of derivative instruments be recognized currently in
earnings unless speciÑc hedge accounting criteria as speciÑed by SFAS No. 133 are met. We believe that all of
our derivatives are eÅective economic hedges and are a critical element of our interest rate risk management
strategy. However, under SFAS No. 133, some of our derivatives, primarily Floor Income Contracts, certain
Eurodollar futures contracts, certain basis swaps and equity forwards, do not qualify for ""hedge treatment''
under SFAS No. 133. Therefore, changes in market value along with the periodic net settlements must be
recorded through the derivative market value adjustment in the income statement with no consideration for
the corresponding change in fair value of the hedged item. The derivative market value adjustment is primarily
caused by interest rate volatility and changing credit spreads during the period and the volume and term of
derivatives not receiving hedge accounting treatment. See also ""ALTERNATIVE PERFORMANCE
MEASURES Ì Derivative Accounting'' for a detailed discussion of our accounting for derivatives.
34
SELECTED FINANCIAL DATA
Condensed Statements of Income
Years Ended December 31,
2003
2002
2004
Increase (decrease)
2004 vs. 2003
%
$
2003 vs. 2002
%
$
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,299
111
$1,326
147
$ 1,425
117
$ (27)
(36)
(2)% $ (99)
(7)%
26
30
Net interest income after provision for losses ÏÏÏÏ
Gains on student loan securitizations ÏÏÏÏÏÏÏÏÏÏÏ
Servicing and securitization revenue ÏÏÏÏÏÏÏÏÏÏÏÏ
Losses on securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative market value adjustment ÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantor servicing fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt management fees and collections revenue ÏÏ
Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss on GSE debt extinguishment and defeasance
Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interest in net earnings of subsidiaries ÏÏ
Cumulative eÅect of accounting changeÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,188
375
561
(49)
849
120
340
289
895
221
642
1
Ì
1,914
12
1,179
744
667
(10)
(238)
128
259
249
795
Ì
779
Ì
130
1,534
12
(24)
1
(50)
(16)
(390)
457
(6)
31
16
13
100
(18)
100
(100)
25
Ì
9
(369)
(106)
(39)
1,087
(8)
81
40
100
221
(137)
1
(130)
380
Ì
(129)
406
(172)
(10)
120
(21)
(8) (400)
78
844
21
22
39
73
13
29
15
105
Ì
Ì
81
348
Ì
Ì
Ì
130
742
Ì
94
Ì
1,308
338
839
(2)
(1,082)
106
186
220
690
Ì
431
Ì
Ì
792
12
780
Net income attributable to common stock ÏÏÏÏÏÏÏ
$1,902
$1,522
$
$ 380
25% $ 742
95%
Basic earnings per common share, before
cumulative eÅect of accounting change ÏÏÏÏÏÏÏ
$ 4.36
$ 3.08
$
1.69
$ 1.28
42% $ 1.39
82%
Basic earnings per common share, after
cumulative eÅect of accounting change ÏÏÏÏÏÏÏ
$ 4.36
$ 3.37
$
1.69
$ .99
29% $ 1.68
99%
Diluted earnings per common share, before
cumulative eÅect of accounting change ÏÏÏÏÏÏÏ
$ 4.04
$ 2.91
$
1.64
$ 1.13
39% $ 1.27
77%
Diluted earnings per common share, after
cumulative eÅect of accounting change ÏÏÏÏÏÏÏ
$ 4.04
$ 3.18
$
1.64
$ .86
27% $ 1.54
94%
Dividends per common shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ .74
$ .59
$ .28
$ .15
25% $ .31
111%
35
Condensed Balance Sheets
December 31,
2004
2003
2004 vs. 2003
%
$
2003 vs. 2002
%
$
Increase (decrease)
Assets
Federally insured student loans, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loans, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Academic facilities Ñnancings and other loans, net ÏÏÏÏÏÏ
Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restricted cash and investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained Interest in securitized receivables ÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill and acquired intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$60,561
5,420
1,048
6,975
2,211
2,316
1,066
4,497
$45,577
4,470
1,031
6,896
1,106
2,476
592
2,463
$ 14,984
950
17
79
1,105
(160)
474
2,034
33% $ 8,413
(705)
21
(171)
2
2,382
1
630
100
330
(6)
6
80
551
83
23%
(14)
(14)
53
132
15
1
29
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$84,094
$64,611
$ 19,483
30% $11,436
22%
Liabilities and Stockholders' Equity
Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 2,207
75,915
2,798
$18,735
39,808
3,438
$(16,528)
36,107
(640)
(88)% $(6,884)
91
(19)
17,566
122
(27)%
79
4
Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
80,920
61,981
18,939
Minority interest in subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' equity before treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock held in treasury at cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
72
5,129
2,027
3,102
Ì
3,180
550
2,630
72
1,949
1,477
472
31
100
61
269
18
10,804
21
(1,523)
(2,155)
(32)
(80)
632
32
Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$84,094
$64,611
$ 19,483
30% $11,436
22%
36
RESULTS OF OPERATIONS
As discussed in detail above in the ""OVERVIEW'' section, we have two primary business segments,
Lending and DMO, plus a Corporate and Other business segment. Since these business segments operate in
distinct business environments, after a general discussion of the consolidated results of operations, the
discussion herein of the results of our operations is primarily presented on a segment basis. The Lending
business segment includes all discussion of income and related expenses associated with net interest margin,
student loan spread and its components, securitization gains and the ongoing servicing and securitization
income, derivative market value gains and losses, and other fees earned on our Managed portfolio of student
loans.
The DMO business segment reÖects the fees earned and expenses incurred to operate our DMO business.
Our Corporate and Other business segment includes our ancillary fee businesses and other corporate expenses
that do not pertain directly to the primary segments identiÑed above. Unless otherwise noted, the Ñnancial
information contained herein is in accordance with GAAP. We also present Ñnancial information for our
reportable operating segments in Note 18 to our consolidated Ñnancial statements, ""Segment Reporting,''
which reÖects ""core cash'' measures. ""Core cash'' measures are discussed in detail below in ""ALTERNA-
TIVE PERFORMANCE MEASURES.''
CONSOLIDATED EARNINGS SUMMARY
The main drivers of our net income are the growth in our Managed student loan portfolio, which drives
net interest income and securitization transactions, market value gains and losses on derivatives that do not
receive hedge accounting treatment, the timing and size of securitization gains, growth in our fee-based
business and expense control.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
For the year ended December 31, 2004, our net income was $1.9 billion ($4.04 diluted earnings per
share) versus net income of $1.5 billion ($3.18 diluted earnings per share) in 2003. The increase in net income
from 2003 to 2004 is due to several factors. The principal driver of the growth in net income was a $1.1 billion
pre-tax increase in the derivative market value adjustment. The derivative market value gain can primarily be
attributed to the positive eÅect that the increase in forward interest rates had on the valuation of our Floor
Income Contracts and to gains on our equity forward contracts caused by the increase in the market value of
our common stock. In 2004, other income (which includes guarantor servicing fees, debt management fees
and collections revenue, and other fee-based income) increased by 18 percent to $749 million versus 2003.
This increase can mainly be attributed to an increase in revenue from our DMO segment, late and other
borrower fees and to termination fees from Bank One. In 2003, other income beneÑted from a $40 million gain
on the sale of our prior headquarters building. The year-over-year increases in other income were oÅset by
$369 million in lower securitization gains due to 2004 Consolidation Loan securitizations not qualifying for
oÅ-balance sheet treatment and $106 million in lower servicing and securitization revenue due to primarily
lower Embedded Floor Income.
Net income in 2004 was also negatively impacted by a $221 million pre-tax loss related to the repurchase
and defeasance of $3.0 billion of GSE debt in connection with the GSE Wind-Down and a 13 percent increase
in other operating expenses to $895 million versus 2003. This increase can be attributed to acquisitions and
increased servicing and debt management expenses consistent with the growth in borrowers and the growth in
the debt management business. Also, in 2004, net interest income after provision for loan losses was relatively
Öat versus 2003 caused by two oÅsetting factors: the increase in net interest income, driven by an $11 billion
increase in our average balance of on-balance sheet student loans, and oÅset by the reduction in Floor Income
caused by higher interest rates.
Our Managed student loan portfolio grew by $18.6 billion, from $88.8 billion at December 31, 2003 to
$107.4 billion at December 31, 2004. This growth was fueled by the $29.9 billion in new Managed student
loans acquired in 2004, a 45 percent increase over the $20.7 billion acquired in 2003. In 2004, we originated
37
$18.0 billion of student loans through our Preferred Channel, an increase of 18 percent over the $15.2 billion
originated in 2003.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Net income for the year ended December 31, 2003 was $1.5 billion ($3.18 diluted earnings per share)
versus $792 million ($1.64 diluted earnings per share) in 2002. The increase in net income from 2002 to 2003
is mainly due to an increase in securitization gains, a pre-tax $844 million reduction in the loss on the
derivative market value adjustment, an increase in fee-based income, and a $130 million unrealized gain on
our equity forward positions, which was reÖected as a cumulative eÅect of accounting change for the adoption
of SFAS No. 150, ""Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity.'' These increases were oÅset by decreases in student loan income, decreases in servicing and
securitization revenue resulting from changes in accounting estimates in the fourth quarter of 2003, reduced
levels of Floor Income, an increase in operating expenses due to the acquisitions, and increases in debt
management and servicing expenses consistent with the growth in the debt management business.
For the year ended December 31, 2003, managed student loans increased 14 percent in 2003 to
$88.8 billion at December 31, 2003. In 2003, we acquired $20.7 billion of student loans, a 25 percent increase
over the $16.5 billion acquired in 2002. Of the student loans acquired, we originated $15.2 billion through our
Preferred Channel, an increase of 23 percent over the $12.4 billion originated in 2002.
LENDING BUSINESS SEGMENT
The following table includes the results of operations for our Lending business segment.
Condensed Statements of Income
Year Ended December 31,
2003
2002
2004
% Increase (Decrease)
2004 vs. 2003
2003 vs. 2002
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: provision for loan losses ÏÏÏÏÏÏÏÏÏ
$1,299
111
$1,326
147
$1,425
117
(2)%
(25)
(7)%
26
Net interest income after provision for
loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before income taxes and
cumulative eÅect of accounting
change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,188
1,899
681
2,406
585
Income before cumulative eÅect of
accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of accounting change
1,821
Ì
1,179
1,289
431
2,037
729
1,308
130
1,308
203
367
1,144
403
741
Ì
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,821
$1,438
$ 741
1
47
58
18
(20)
39
(100)
27%
(10)
535
17
78
81
77
100
94%
38
The following table includes asset information for our Lending business segment.
Federally insured student loans, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loans, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Academic facilities Ñnancings and other loans, netÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained Interest in securitized receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004
$60,561
5,420
1,048
8,914
2,315
4,792
December 31,
2003
$45,577
4,470
1,031
7,741
2,472
2,600
2002
$37,164
5,175
1,202
4,794
2,137
1,926
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$83,050
$63,891
$52,398
(1) Investments include cash and cash equivalents, short and long term investments, restricted cash and
investments, leveraged leases, and municipal bonds.
(2) Other assets include accrued interest receivable, goodwill and acquired intangible assets and other non-
interest earning assets.
Net Interest Income
Net interest income, including interest income and interest expense, is derived primarily from our
portfolio of student loans that remain on-balance sheet and to a lesser extent from other loans, cash and
investments. The ""Taxable Equivalent Net Interest Income'' analysis below is designed to facilitate a
comparison of non-taxable asset yields to taxable yields on a similar basis. Additional information regarding
the return on our student loan portfolio is set forth under ""Student Loans Ì Student Loan Spread Analysis.''
Information regarding the provision for losses is contained in Note 4 to the consolidated Ñnancial statements,
""Allowance for Student Loan Losses.''
Taxable Equivalent Net Interest Income
The amounts in the following table are adjusted for the impact of certain tax-exempt and tax-advantaged
investments based on the marginal federal corporate tax rate of 35 percent.
Interest income
Student loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Academic facilities Ñnancings and other
loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Taxable equivalent adjustment ÏÏÏÏÏÏÏÏÏ
Total taxable equivalent interest income ÏÏÏ
Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,742
1,434
Years Ended December 31,
2002
2003
2004
2004 vs. 2003
%
$
2003 vs. 2002
%
$
Increase (decrease)
$2,426
$2,121
$2,450
$305
14% $(329)
(13)%
74
233
9
77
150
16
2,364
1,022
96
88
18
(3)
83
(7)
(4)
55
(44)
2,652
1,210
378
412
16
40
(19)
62
(2)
(288)
(188)
(20)
70
(11)
(11)
(16)
Taxable equivalent net interest income ÏÏÏÏ
$1,308
$1,342
$1,442
$(34)
(3)% $(100)
(7)%
39
Average Balance Sheets
The following table reÖects the rates earned on interest earning assets and paid on interest bearing
liabilities for the years ended December 31, 2004, 2003 and 2002. This table reÖects the net interest margin for
the entire Company on a consolidated basis. It is included in the Lending segment discussion because that
segment includes substantially all interest earning assets and interest bearing liabilities.
2004
Years Ended December 31,
2003
2002
Balance
Rate
Balance
Rate
Balance
Rate
Average Assets
Federally insured student loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Academic facilities Ñnancings and other loans ÏÏÏÏÏ
Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$51,091
4,795
1,004
11,321
4.09% $40,108
5,019
7.00
1,129
7.72
6,840
2.11
4.52% $38,023
5,059
6.13
1,460
7.27
4,885
2.36
5.55%
6.69
7.19
1.98
Total interest earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
68,211
4.02% 53,096
4.45% 49,427
5.37%
Non-interest earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6,497
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$74,708
5,950
$59,046
4,758
$54,185
Average Liabilities and Stockholders' Equity
Six month Öoating rate notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other short-term borrowingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 1,586
9,010
58,134
1.23% $ 2,988
22,007
2.07
28,407
2.11
1.14% $ 3,006
27,159
1.64
19,757
2.21
1.76%
1.97
3.15
Total interest bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
68,730
2.09% 53,402
1.91% 49,922
2.42%
Non-interest bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3,195
2,783
Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏ
$74,708
3,169
2,475
$59,046
2,397
1,866
$54,185
Net interest margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.92%
2.53%
2.92%
Rate/Volume Analysis
The following rate/volume analysis shows the relative contribution of changes in interest rates and asset
volumes.
Taxable
equivalent
increase
(decrease)
Increase
(decrease)
attributable to
change in
Rate
Volume
2004 vs. 2003
Taxable equivalent interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 378
412
$(201)
(16)
$579
428
Taxable equivalent net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (34)
$(185)
$151
2003 vs. 2002
Taxable equivalent interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(288)
(188)
$(409)
(358)
$121
170
Taxable equivalent net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(100)
$ (51)
$(49)
40
The decrease in the net interest margin from the year ended December 31, 2003 to the year ended
December 31, 2004 was primarily due to the decrease in Floor Income and other student loan spread related
items as discussed under ""Student Loans Ì Student Loan Spread Analysis.'' The decrease in the net interest
margin was also due to the eÅect of the GSE Wind-Down. Without the low funding cost provided by the
GSE, the margin on our highly liquid, short-term investments turns negative. Also, we have replaced short-
term GSE Ñnancing with longer term more expensive non-GSE Ñnancing.
Student Loans
For both federally insured student loans and Private Education Loans, we account for premiums paid,
discounts received and certain origination costs incurred on the origination and acquisition of student loans in
accordance with SFAS No. 91. The unamortized portion of the premiums and discounts are included in the
carrying value of the student loan on the consolidated balance sheet. We recognize income on our student loan
portfolio based on the expected yield of the student loan after giving eÅect to the amortization of purchase
premiums and the accretion of student loan discounts, as well as the discount expected to be earned through
borrower beneÑt programs. Discounts on Private Education Loans are deferred and accreted to income over
the lives of the student loans. In the table below, this accretion of discounts is netted with the amortization of
the premiums.
Student Loan Spread Analysis Ì On-Balance Sheet
The following table analyzes the reported earnings from student loans both on-balance sheet and those
oÅ-balance sheet in securitization trusts. For student loans oÅ-balance sheet, we will continue to earn
securitization and servicing fee revenues over the life of the securitized loan portfolios. The oÅ-balance sheet
information is discussed in more detail in ""LIQUIDITY AND CAPITAL RESOURCES Ì Securitization
Activities Ì Servicing and Securitization Revenue'' where we analyze the on-going servicing revenue and
Residual Interest earned on the securitized portfolios of student loans. For an analysis of our student loan
41
spread for the entire portfolio of Managed student loans on a similar basis to the on-balance sheet analysis, see
""Student Loan Spread Analysis Ì Managed Basis.''
Years Ended December 31,
2003
2004
2002
On-Balance Sheet
Student loan yield, before Floor Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Floor Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidation Loan Rebate FeesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OÅset FeesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Borrower beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Premium and discount amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4.53%
.73
(.58)
(.03)
(.18)
(.13)
4.28%
1.23
(.50)
(.07)
(.06)
(.18)
4.98%
1.48
(.40)
(.10)
(.08)
(.19)
Student loan net yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Student loan cost of funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4.34
(2.01)
4.70
(1.70)
5.69
(2.30)
Student loan spread ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2.33%
3.00%
3.39%
OÅ-Balance Sheet
Servicing and securitization revenue, before Floor Income ÏÏÏÏÏÏ
Floor Income, net of Floor Income previously recognized in gain
on sale calculationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.17%
1.27%
1.49%
.21
.47
1.11
Servicing and securitization revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.38%
1.74%
2.60%
Average Balances
On-balance sheet student loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OÅ-balance sheet student loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$55,885
40,558
$45,127
38,205
$43,082
32,280
Managed student loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$96,443
$83,332
$75,362
The primary driver of Öuctuations in our on-balance sheet student loan spread is the level of Floor
Income earned in the period. In 2004, 2003 and 2002, we earned gross Floor Income of $408 million (73 basis
points), $554 million (123 basis points) and $636 million (148 basis points), respectively. The reduction in
Floor Income is due to the increase in short-term interest rates in 2004. We believe that we have economically
hedged most of the Floor Income through the sale of Floor Income Contracts. When we sell a Floor Income
Contract we receive an upfront fee and agree to pay the counterparty the Floor Income earned on a notional
amount of student loans. These contracts do not qualify for accounting hedge treatment and as a result are
excluded from net interest income and from the above student loan spread analysis. Instead, payments of Floor
Income under these contracts are required to be reported with other cumulative realized and unrealized gains
and losses in the derivative market value adjustment line in the income statement. For the years ended
December 31, 2004, 2003 and 2002, net Floor Income for on-balance sheet student loans was $40 million
(7 basis points), $146 million (32 basis points) and $219 million (51 basis points), respectively. Payments on
Floor Income Contracts associated with on-balance sheet student loans for the years ended December 31,
2004, 2003 and 2002 totaled $368 million (66 basis points), $408 million (91 basis points) and $417 million
(97 basis points), respectively.
In addition to Floor Income Contracts, we also extensively use basis swaps to manage our basis risk
associated with interest rate sensitive assets and liabilities. These swaps also do not qualify as accounting
hedges and are likewise required to be accounted for in the derivative market value adjustment and not part of
the cost of funds in the above table. Had net settlements of these swaps been included with the associated
debt, our on-balance sheet cost of funds would have been 2.02 percent, 1.65 percent and 2.31 percent,
respectively, for the years ended December 31, 2004, 2003 and 2002.
42
Discussion of the Year-over-Year EÅect of Changes in Accounting Estimates on the On-Balance Sheet
Student Loan Spread
As discussed in detail and summarized in a table under ""CRITICAL ACCOUNTING POLICIES
AND ESTIMATES,'' we periodically update our estimates for changes in the student loan portfolio. Under
SFAS No. 91, these changes in estimates must be reÖected in the balance of the student loan from inception.
We have also updated our estimates to reÖect programmatic changes in our borrower beneÑt and Private
Education Loan programs and have made modeling reÑnements to better reÖect current and future conditions.
The eÅects of the changes in estimates on the student loan spread are summarized in the table below:
(Dollars in millions)
Dollar Value
Basis Points
Dollar Value
Basis Points
Years Ended December 31,
2004
2003
Changes in critical accounting estimates:
EÅect on premium/discount:
FFELP StaÅord and Consolidation
LoansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loans ÏÏÏÏÏÏÏÏÏÏÏÏ
Total eÅect on premium/discount ÏÏÏÏÏÏ
Borrower beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$Ì
(8)
(8)
5
Total changes in estimates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(3)
Ì
(1)
(1)
1
Ì
$(19)
(23)
(42)
10
$(32)
(4)
(5)
(9)
2
(7)
In 2004, based on our ongoing analysis of our Private Education Loan portfolio, we determined that the
portfolio was repaying slower than previously estimated, and in response we increased the period for which we
amortize student loan discounts resulting in an increase to the unamortized student loan discount balance of
$8 million during 2004. In response to the continued high rate of Consolidation Loan activity, we lowered our
estimate of the number of StaÅord borrowers who will eventually qualify for borrower beneÑts and revised the
term over which beneÑts are expected to be realized. As a result, we recorded a $5 million reduction in the
liability for borrower beneÑts. The net eÅect of these updates to our estimates in 2004 was a $3 million or
1 basis point reduction in the student loan spread.
In 2003, we updated our estimates to reÖect the increase in Consolidation Loan activity. We decreased
the CPR for FFELP StaÅord loans to reÖect the extension of the term of these loans when consolidated into a
Sallie Mae Consolidation Loan, which results in an increase to the unamortized student loan premium. At the
same time, we increased the CPR for the Consolidation Loan portfolio, which had the opposite eÅect on the
premium balance and premium amortization. The net eÅect of these changes was a $19 million adjustment to
decrease the unamortized student loan premium and increase current period amortization expense. We also
decreased our estimate of the CPR associated with our Private Education Loan program to reÖect slower than
anticipated repayments resulting in a $23 million increase in the unamortized student loan discount. Also, in
2003, we reduced our estimate of the number of borrowers who eventually qualify for FFELP StaÅord
borrower beneÑts resulting in a $10 million estimate adjustment to reduce the estimated borrower beneÑt
liability and increase student loan income. The net eÅect of these updates to our estimates in 2003 was a
$32 million or 7 basis point reduction in the student loan spread.
Discussion of Year-over-Year Fluctuations in On-Balance Sheet Student Loan Spread in Addition to
Changes in Accounting Estimates
The decrease in the 2004 student loan spread versus the prior year is primarily due to the higher average
balance of Consolidation Loans as a percentage of the on-balance sheet portfolio. Consolidation Loans have
lower spreads than other FFELP loans due to the 105 basis point Consolidation Loan Rebate Fee, more robust
borrower beneÑts, and higher funding costs due to their longer terms. These negative eÅects are partially oÅset
by lower student loan premium amortization due to the extended term and a higher SAP yield. The average
43
balance of Consolidation Loans grew as a percentage of the average on-balance sheet FFELP student loan
portfolio from 56 percent in 2003 to 62 percent in 2004.
Other factors that negatively impacted the student loan spread are lower Floor Income due to higher
average interest rates, higher spreads on our debt funding student loans as a result of the GSE Wind-Down,
and higher borrower beneÑt costs. These negative factors were partially oÅset by the absence of OÅset Fees on
GSE Ñnanced loans and higher student loan yields. The increase in funding costs is due to the replacement of
lower cost, primarily short-term GSE funding with longer term, higher cost non-GSE funding. In 2004, GSE
liabilities were heavily weighted to short term in anticipation of the GSE Wind-Down. The increase in
borrower beneÑt costs can be attributable to an increase in the estimate of borrowers qualifying for the beneÑt
and to changes to certain programs that shorten the periods required to qualify, primarily as they relate to
Consolidation Loans. These changes had a greater eÅect on the on-balance sheet student loan spread due to
the higher percentage of Consolidation Loans. These negative eÅects were partially oÅset by the increase in
Private Education Loans in the on-balance sheet student loan portfolio and lower net premium/discount
amortization.
In addition to the eÅects of estimate adjustments, the student loan spread decreased by 32 basis points
from 2002 to 2003. This decrease was primarily due to the higher average balance of Consolidation Loans,
lower Floor Income and higher funding spreads on the debt. These negative eÅects were partially oÅset by the
increase in Private Education Loans in the on-balance sheet student loan portfolio.
Student Loan Spread Analysis Ì Managed Basis
The following table analyzes the earnings from our portfolio of Managed student loans on a ""core cash''
basis (see ""ALTERNATIVE PERFORMANCE MEASURES''). This analysis includes both on-balance
sheet and oÅ-balance sheet loans in securitization trusts and derivatives economically hedging these line items
and excludes Floor Income while including the amortization of upfront payments on Floor Income Contracts.
Years Ended December 31,
2003
2004
2002
Managed Basis student loan yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidation Loan Rebate FeesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OÅset FeesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Borrower beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Premium and discount amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4.59%
(.42)
(.02)
(.08)
(.13)
4.26%
(.36)
(.04)
(.05)
(.10)
4.94%
(.26)
(.06)
(.11)
(.25)
Managed Basis student loan net yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Managed Basis student loan cost of funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3.94
(2.06)
3.71
(1.71)
4.26
(2.38)
Managed Basis student loan spread ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.88%
2.00%
1.88%
Average Balances
On-balance sheet student loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OÅ-balance sheet student loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$55,885
40,558
$45,127
38,205
$43,082
32,280
Managed student loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$96,443
$83,332
$75,362
Discussion of the Year-over-Year EÅect of Changes in Accounting Estimates on the Managed Student
Loan Spread
As discussed in detail and summarized in a table at ""CRITICAL ACCOUNTING POLICIES AND
ESTIMATES,'' we periodically update our estimates for changes in the student loan portfolio. Under
SFAS No. 91, these changes in estimates must be reÖected in the balance from inception of the student loan.
We have also updated our estimates to reÖect programmatic changes in our borrower beneÑt and Private
44
Education Loan programs and have made modeling reÑnements to better reÖect current and future conditions.
The eÅects of the changes in estimates are summarized in the table below:
(Dollars in millions)
Dollar Value
Basis Points
Dollar Value
Basis Points
Years Ended December 31,
2004
2003
Changes in critical accounting estimates:
EÅect on premium/discount:
FFELP StaÅord and Consolidation
LoansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loans ÏÏÏÏÏÏÏÏÏÏÏÏ
Total eÅect on premium/discount ÏÏÏÏÏÏ
Borrower beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 36
(24)
12
22
Total changes in estimates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 34
4
(3)
1
2
3
$ 51
(23)
28
39
$ 67
6
(3)
3
5
8
In 2004, we updated our estimates of average life associated with our FFELP StaÅord and Consolidation
Loan programs. The net eÅect of these changes was a $36 million adjustment to increase the unamortized
student loan premium. The diÅerence between the eÅect for on-balance sheet and oÅ-balance sheet was
primarily due to a reÑnement in our estimates for oÅ-balance sheet loans that did not have the same eÅect on-
balance sheet and to the diÅerent mix of FFELP StaÅord and Consolidation Loans on-balance sheet versus
the mix on a Managed Basis.
In 2004, based on our ongoing analysis of our Managed Private Education Loan portfolio, we determined
that the portfolio was repaying at a slower rate than previously estimated. In response, we increased the period
for which we amortize student loan discounts resulting in an increase to the unamortized student loan discount
balance of $24 million during 2004.
Additionally, the continued high rate of Consolidation Loan activity results in fewer StaÅord borrowers
qualifying for borrower beneÑts. In response to this trend, we lowered our estimate of the number of StaÅord
borrowers who will eventually qualify for borrower beneÑts and revised the term over which beneÑts are
expected to be realized. As a result, we recorded a $22 million reduction in the liability for borrower beneÑts
during 2004. The net eÅect of these updates to our estimates in 2004 was a $34 million or 3 basis point
increase in the Managed student loan spread.
In 2003, we made similar updates to our estimates of the CPR to reÖect the eÅect of the increase in
Consolidation Loan activity on our FFELP StaÅord and Consolidation Loan portfolios. The net eÅect of these
changes was a $51 million adjustment to increase the unamortized student loan premium and decrease current
period amortization expense. We also updated our estimate of the CPR associated with our Private Education
Loan program which resulted in a $23 million adjustment to increase the unamortized student loan discount
and decrease current period discount amortization. Also, in 2003, we reduced our estimate of the number of
borrowers who eventually qualify for FFELP StaÅord borrower beneÑts resulting in a $39 million adjustment
to reduce the estimated borrower beneÑt liability and increase student loan income. The net eÅect of these
updates to our estimates in 2003 was a $67 million or 8 basis point increase in the student loan spread.
Discussion of Year-over-Year Fluctuations in Managed Student Loan Spread in Addition to Changes in
Accounting Estimates
The decrease in the 2004 student loan spread versus 2003, in addition to the changes in estimates
disclosed above, is primarily due to the higher average balance of Consolidation Loans as a percentage of the
Managed portfolio. Consolidation Loans have lower spreads than other FFELP loans due to the 105 basis
point Consolidation Loan Rebate Fee, higher qualiÑcation rates for borrower beneÑts, and higher funding
costs due to their longer terms. These negative eÅects are partially oÅset by lower student loan premium
amortization due to the extended term and a higher SAP yield. The average balance of Consolidation Loans
45
grew as a percentage of the average Managed FFELP student loan portfolio from 39 percent in 2003 to
46 percent in 2004.
Our student loan spread was negatively impacted by higher spreads on our debt funding student loans,
which was partially oÅset by the absence of OÅset Fees on GSE Ñnanced loans. The increase in funding costs
is due to the replacement of lower cost primarily short-term GSE funding with longer term, higher cost non-
GSE funding in connection with the GSE Wind-Down.
The 2004 student loan spread beneÑted from the increase in the average balance of Managed Private
Education Loans as a percentage of the average Managed student loan portfolio from 9 percent in 2003 to
11 percent in 2004. Private Education Loans are subject to credit risk and therefore earn higher spreads which
averaged 4.29 percent for the year ended December 31, 2004 versus a spread of 1.59 percent for the Managed
guaranteed student loan portfolio.
In addition to the estimate adjustments discussed above, the increase in the 2003 student loan spread
versus 2002 was due to the increase in the percentage of Private Education Loans in the Managed student loan
portfolio partially oÅset by the higher credit spreads on the debt funding student loans due to the GSE Wind-
Down, and the increase of Consolidation Loans as a percentage of the total portfolio.
Floor Income
For on-balance sheet student loans, gross Floor Income is included in student loan income whereas
payments on Floor Income Contracts are included in the derivative market value adjustment line in other
income. The following table summarizes the components of Floor Income from on-balance sheet student
loans, net of payments under Floor Income Contracts, for the years ended December 31, 2004, 2003 and 2002.
Fixed
borrower
Rate
$ 406
Floor Income:
Gross Floor Income ÏÏÏ
Payments on Floor
Income Contracts ÏÏÏ
(368)
Net Floor Income ÏÏÏÏ
$
38
Net Floor Income in
2004
Variable
borrower
Rate
Total
Years Ended December 31,
2003
Variable
borrower
Rate
Fixed
borrower
Rate
Total
Fixed
borrower
Rate
2002
Variable
borrower
Rate
Total
$ 2
Ì
$ 2
$ 408
$ 523
(368)
(408)
$
40
$ 115
$31
Ì
$31
$ 554
$ 513
$123
$ 636
(408)
(409)
(8)
(417)
$ 146
$ 104
$115
$ 219
basis points ÏÏÏÏÏÏÏÏ
7
Ì
7
25
7
32
24
27
51
The decrease in net Floor Income for the year ended December 31, 2004 versus the prior year is due to
higher interest rates reducing gross Floor Income and a higher percentage of Floor Income eligible student
loans economically hedged through Floor Income Contracts oÅsetting the increase in Consolidation Loans
eligible to earn Ñxed rate Floor Income.
As discussed in more detail under ""LIQUIDITY AND CAPITAL RESOURCES Ì Securitization
Activities,'' when we securitize a portfolio of student loans, we estimate the future Fixed Rate Embedded
Floor Income earned on oÅ-balance sheet student loans using a discounted cash Öow option pricing model and
recognize the fair value of such cash Öows in the initial gain on sale and subsequent valuations of the Residual
Interest. Variable Rate Embedded Floor Income is recognized as earned in servicing and securitization
revenue.
The decrease in Variable Rate Floor Income in 2003 versus 2002 is primarily due to the decline in
Treasury bill and commercial paper rates from the July 1, 2001 reset of borrower rates, which resulted in
$106 million of Variable Rate Floor Income earned in the Ñrst half of 2002. Treasury bill and commercial
paper rates did not decline as steeply in the second half of 2002 or in 2003. The increase in Fixed Rate Floor
46
Income is primarily due to the increase in the average balance of Consolidation Loans, partially oÅset by
slightly higher Treasury bill rates.
Student Loan Floor Income Contracts
The following table analyzes the ability of the FFELP student loans in our Managed student loan
portfolio to earn Floor Income after December 31, 2004 and 2003.
(Dollars in billions)
Student loans eligible to earn Floor Income:
December 31, 2004
Variable
borrower
Rate
Fixed
borrower
Rate
Total
December 31, 2003
Variable
borrower
Rate
Fixed
borrower
Rate
Total
On-balance sheet student loans ÏÏÏÏÏÏÏÏÏÏ
OÅ-balance sheet student loansÏÏÏÏÏÏÏÏÏÏ
$ 40.5
7.4
$14.0
24.6
$ 54.5
32.0
$ 26.7
8.1
$12.5
23.5
$ 39.2
31.6
Managed student loans eligible to earn Floor
Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: Economically hedged Floor Income ÏÏÏ
Net Managed student loans eligible to earn
47.9
(27.8)
38.6
Ì
86.5
(27.8)
34.8
(14.7)
36.0
Ì
70.8
(14.7)
Floor Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 20.1
$38.6
$ 58.7
$ 20.1
$36.0
$ 56.1
Net Managed student loans earning Floor
Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
2.4
$ Ì
$
2.4
$ 16.6
$31.2
$ 47.8
The following table shows the average Managed balance of Consolidation Loans whose Fixed Rate Floor
Income is economically hedged as of January 1, 2005 through the end of 2008 through Floor Income
Contracts. These loans are both on and oÅ-balance sheet and the related hedges do not qualify as eÅective
SFAS No. 133 hedges.
(Dollars in billions)
2005
2006
2007
2008
Average balance of Consolidation Loans whose Floor Income is
economically hedged (Managed Basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$26
$24
$9
$8
Activity in the Allowance for Private Education Loan Losses
As discussed in detail under ""CRITICAL ACCOUNTING POLICIES AND ESTIMATES,'' the
provision for student loan losses represents the periodic expense of maintaining an allowance suÇcient to
absorb losses, net of recoveries, inherent in the portfolio of Private Education Loans.
47
The following table summarizes changes in the allowance for Private Education Loan losses for the years
ended December 31, 2004, 2003 and 2002.
Activity in Allowance for Private Education Loan Losses
On-Balance Sheet
OÅ-Balance Sheet
Managed Basis
Years Ended December 31,
Years Ended December 31,
Years Ended December 31,
2004
2003
2002
2004
2003
2002
2004
2003
2002
Allowance at beginning of year
Provision for loan lossesÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 166
130
Ì
(110)
14
$ 181
107
21
(83)
11
$ 194
94
(27)
(76)
9
$
Net charge-oÅsÏÏÏÏÏÏÏÏÏÏÏÏÏ
(96)
(72)
(67)
$
93
28
Ì
(6)
Ì
(6)
Balance before securitization
of Private Education Loans
Reduction for securitization of
Private Education Loans ÏÏÏ
200
237
194
115
(28)
(71)
(13)
28
Allowance at end of yearÏÏÏÏÏ
$ 172
$ 166
$ 181
$ 143
$
13
10
(1)
Ì
Ì
Ì
22
71
93
$ Ì $
Ì
Ì
Ì
Ì
Ì
Ì
13
259
158
Ì
(116)
14
(102)
$ 194
117
20
(83)
11
$ 194
94
(27)
(76)
9
(72)
(67)
315
259
194
Ì
Ì
Ì
$ 13
$
315
$ 259
$ 194
Net charge-oÅs as a
percentage of average loans
in repayment ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Allowance as a percentage of
the ending total loan
balanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Allowance as a percentage of
3.57%
2.59%
2.40%
.22%
Ì% Ì%
1.92%
1.85%
2.25%
3.07%
3.57%
3.38%
2.31%
2.37% 1.93%
2.67%
3.02%
3.22%
ending loans in repaymentÏÏ
6.05%
6.50%
6.05%
4.27%
4.99% 3.50%
5.08%
5.86%
5.77%
Allowance coverage of net
charge-oÅsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average total loansÏÏÏÏÏÏÏÏÏÏ
Ending total loans ÏÏÏÏÏÏÏÏÏÏ
Average loans in repayment ÏÏ
Ending loans in repayment ÏÏÏ
1.79
$4,795
$5,592
$2,697
$2,842
2.30
$5,018
$4,636
$2,772
$2,551
2.72
$5,059
$5,356
$2,774
$2,992
24.81
$5,495
$6,205
$2,611
$3,352
Ì
$2,284
$3,928
$1,116
$1,870
Ì
$139
$660
$182
$364
3.09
$10,290
$11,797
$ 5,307
$ 6,194
3.60
$7,303
$8,564
$3,888
$4,421
2.91
$5,198
$6,016
$2,955
$3,356
The allowance for Private Education Loan losses is an estimate of probable losses in the portfolio at the
balance sheet date that will be charged oÅ in subsequent periods. We estimate our losses using historical data
from our Private Education Loan portfolios, extrapolations of FFELP loan loss data, current trends and
relevant industry information. As our Private Education Loan portfolios continue to mature, more reliance is
placed on our own historic Private Education Loan charge-oÅ and recovery data. We use this data in internally
developed models to estimate losses, net of subsequent collections, projected to occur in the Private Education
Loan portfolios.
On-Balance Sheet versus Managed Presentation
All Private Education Loans are initially acquired on-balance sheet. When we securitize Private
Education Loans, we reduce the on-balance sheet allowance for amounts previously provided for in the
allowance and then provide for these loans in the Managed presentation only as they are no longer legally
owned by the Company.
When Private Education Loans in securitized trusts become 180 days delinquent, we typically exercise
our contingent call option to repurchase these loans at par value out of the trust and record a loss for the
diÅerence in the par value paid and the fair market value of the loan at the time of purchase. If these loans
reach the 212-day delinquency, a charge-oÅ for the remaining balance of the loan is triggered. On a Managed
Basis, the losses recorded under GAAP at the time of repurchase of delinquent Private Education Loans are
48
considered charge-oÅs when the delinquent Private Education Loans reach the 212-day charge-oÅ date. These
charge-oÅs are shown in the oÅ-balance sheet section in the above table.
The oÅ-balance sheet allowance is increasing as more loans are securitized but is lower than the on-
balance sheet percentage when measured as a percentage of ending loans in repayment because of the
diÅerent mix of loans on-balance sheet and oÅ-balance sheet. Certain loan types with higher expected default
rates, such as career training, have not yet been securitized. Additionally, a larger percentage of the oÅ-
balance sheet loan borrowers are still in-school status and not required to make payments on their loans. Once
repayment begins, the allowance requirements increase to reÖect the increased risk of loss as loans enter
repayment.
Managed Basis Private Education Loan Loss Allowance Discussion
The increase in the provision for Managed Private Education Loans of $41 million from 2003 to 2004 is
primarily due to the $2.3 billion increase in Managed Private Education Loans that have transitioned to out-
of-school status over the prior year. For the year ended December 31, 2004, Private Education Loan charge-
oÅs increased by $33 million over the prior year, which is due primarily to the continued growth and maturity
of loans in repayment. As discussed further below, while the delinquency and forbearance amounts Öuctuate
from quarter to quarter, they will increase with the growth in the repayment portfolio. We utilize the expertise
of our collection organization, including our debt management operation, to minimize charge-oÅs in our own
portfolio and to increase recoveries on charged-oÅ loans. The allowance as a percentage of loans in repayment
decreased year-over-year from 5.86 percent to 5.08 percent. This reduction is primarily attributable to the
changing mix of the portfolio and the updates in our default assumptions in the third quarter of 2004.
Delinquencies
The table below presents our Private Education Loan delinquency trends as of December 31, 2004, 2003
and 2002. Delinquencies have the potential to adversely impact earnings through increased servicing and
collection costs in the event the delinquent accounts charge oÅ.
On-Balance Sheet Private Education Loan Delinquencies
December 31,
2003
2004
2002
Balance
%
Balance
%
Balance
%
Loans in-school/grace/deferment(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans in forbearance(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans in repayment and percentage of each status:
$2,787
166
Loans current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans delinquent 31-60 days(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans delinquent 61-90 days ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans delinquent greater than 90 days ÏÏÏÏÏÏÏÏÏÏÏ
Total Private Education Loans in repayment ÏÏÏÏÏÏ
Total Private Education Loans, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loan unamortized discount ÏÏÏÏÏÏÏ
Total Private Education Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loan allowance for losses ÏÏÏÏÏÏÏÏ
2,555
124
56
107
2,842
5,795
(203)
5,592
(172)
$1,970
236
$2,171
285
89.9% 2,268
115
4.4
62
2.0
106
3.7
88.9% 2,776
102
4.5
43
2.4
71
4.2
100% 2,551
100.0% 2,992
92.8%
3.4
1.4
2.4
100%
4,757
(121)
4,636
(166)
5,448
(92)
5,356
(181)
Private Education Loans, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$5,420
$4,470
$5,175
Percentage of Private Education Loans in repayment
49.0%
53.6%
54.9%
Delinquencies as a percentage of Private Education
Loans in repayment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10.1%
11.1%
7.2%
49
OÅ-Balance Sheet Private Education Loan Delinquencies
December 31,
2003
2002
2004
Balance
%
Balance
%
Balance
%
Loans in-school/grace/deferment(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans in forbearance(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans in repayment and percentage of each status:
$2,622
334
$1,858
255
Loans current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans delinquent 31-60 days(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans delinquent 61-90 days ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans delinquent greater than 90 days ÏÏÏÏÏÏÏÏÏÏÏ
Total Private Education Loans in repayment ÏÏÏÏÏÏ
Total Private Education Loans, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loan unamortized discount ÏÏÏÏÏÏÏ
Total Private Education Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loan allowance for losses ÏÏÏÏÏÏÏÏ
3,191
84
28
49
3,352
6,308
(103)
6,205
(143)
Private Education Loans, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$6,062
Percentage of Private Education Loans in repayment
53.1%
95.2% 1,796
39
2.5
15
.8
20
1.5
96.0%
2.1
.8
1.1
100% 1,870
100.0%
3,983
(55)
3,928
(93)
$3,835
46.9%
96.2%
1.9
.8
1.1
100%
$222
80
350
7
3
4
364
666
(6)
660
(13)
$647
54.7%
Delinquencies as a percentage of Private Education
Loans in repayment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4.8%
4.0%
3.8%
Managed Basis Private Education Loan Delinquencies
December 31,
2003
2002
2004
Balance
%
Balance
%
Balance
%
Loans in-school/grace/deferment(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans in forbearance(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans in repayment and percentage of each status:
$ 5,409
500
Loans current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans delinquent 31-60 days(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans delinquent 61-90 days ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans delinquent greater than 90 days ÏÏÏÏÏÏÏÏÏÏ
Total Private Education Loans in repayment ÏÏÏÏÏ
Total Private Education Loans, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loan unamortized discount ÏÏÏÏÏÏ
Total Private Education Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loan allowance for losses ÏÏÏÏÏÏÏ
5,746
208
84
156
6,194
12,103
(306)
11,797
(315)
Private Education Loans, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$11,482
Percentage of Private Education Loans in repayment
51.2%
$3,828
491
$2,393
365
92.8% 4,064
154
3.3
77
1.4
126
2.5
91.9% 3,126
109
3.5
46
1.7
75
2.9
100% 4,421
100.0% 3,356
93.2%
3.3
1.3
2.2
100%
8,740
(176)
8,564
(259)
$8,305
50.6%
6,114
(98)
6,016
(194)
$5,822
54.9%
Delinquencies as a percentage of Private Education
Loans in repayment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7.2%
8.1%
6.8%
(1) Loans for borrowers who still may be attending school or engaging in other permitted educational activities
and are not yet required to make payments on the loans, e.g., residency periods for medical students or a
grace period for bar exam preparation.
(2) Loans for borrowers who have requested extension of grace period during employment transition or who
have temporarily ceased making full payments due to hardship or other factors, consistent with the
established loan program servicing policies and procedures.
(3) The period of delinquency is based on the number of days scheduled payments are contractually past due.
50
The improvement in the percentage of delinquent loans is primarily due to enhanced default eÅorts that
commenced in the second quarter of 2004.
Forbearance Ì Managed Basis Private Education Loans
Private Education Loans are made to parent and student borrowers by our lender partners in accordance
with our underwriting policies. These loans generally supplement federally guaranteed student loans, which are
subject to federal lending caps. Private Education Loans are not guaranteed or insured against any loss of
principal or interest. Traditional student borrowers use the proceeds of these loans to obtain higher education,
which increases the likelihood of obtaining employment at higher income levels than would be available
without the additional education. As a result, the borrowers' repayment capability improves between the time
the loan is made and the time they enter the post-education work force. We generally allow the loan
repayment period on traditional Private Education Loans, except those generated by SLM Financial loans, to
begin six to nine months after the student leaves school. This provides the borrower time to obtain a job to
service his or her debt. For borrowers that need more time or experience other hardships, we permit additional
payment deferments or partial payments (both referred to as forbearances) when we believe additional time
will improve the borrower's ability to repay the loan. Our policy does not grant any reduction in the repayment
obligation (principal or interest) but does allow the borrower to stop or reduce monthly payments for an
agreed period of time. Forbearance is used most heavily immediately after the loan enters repayment. At
December 31, 2004, approximately 90 percent of borrowers currently in forbearance have deferred their loan
repayment less than 24 months. Further, approximately 70 percent have been in repayment less than
24 months. These borrowers are essentially extending their grace period as they transition to the workforce.
Forbearance continues to be a positive collection tool for the Private Education Loans as we believe it can
provide the borrower with suÇcient time to obtain employment and income to support his or her obligation.
We consider the potential impact of forbearance in the determination of the loan loss reserves.
Loans in forbearance status decreased from 10.0 percent of loans in repayment and forbearance status at
December 31, 2003 to 7.5 percent of loans in repayment and forbearance status at December 31, 2004. The
decrease in the percentages of loans in forbearance status is primarily due to enhanced collection and default
prevention eÅorts.
The table below breaks down the Managed Private Education Loan portfolio loans in forbearance by the
cumulative number of months of forbearance the borrower has used as of December 31, 2004, 2003 and 2002
respectively:
2004
December 31,
2003
2002
Forbearance
Balance
% of Total
Forbearance
Balance
% of Total
Forbearance
Balance
% of Total
Cumulative number of months
borrower has used forbearance
Less than 13 months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
13 to 24 monthsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
25 to 36 monthsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
More than 36 months ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$334
117
30
19
$500
66%
24
6
4
100%
$326
119
26
20
$491
67%
24
5
4
100%
$223
88
28
26
$365
61%
24
8
7
100%
51
The tables below show the composition and status of the Managed Private Education Loan portfolio by
number of months aged from the Ñrst date of repayment:
December 31, 2004
Loans in-school/grace/deferment ÏÏÏÏÏÏÏÏÏÏ
Loans in forbearance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans in repayment Ì current ÏÏÏÏÏÏÏÏÏÏÏÏ
Loans in repayment Ì delinquent 31-60 days
Loans in repayment Ì delinquent 61-90 days
Loans in repayment Ì delinquent greater
Months since entering repayment
After
Dec. 31,
2004(1)
25 to 48 More than
48 Months
Months
1 to 24
Months
$ Ì $ Ì
103
1,401
59
26
350
3,228
110
43
$ Ì
47
1,117
39
15
$5,409
Ì
Ì
Ì
Ì
Total
$ 5,409
500
5,746
208
84
than 90 days ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
67
56
33
Ì
156
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$3,798
$1,645
$1,251
$5,409
$12,103
Unamortized discount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Allowance for loan lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Managed Private Education Loans, net
December 31, 2003
Months since entering repayment
After
Dec. 31,
2003(1)
25 to 48 More than
48 Months
Months
1 to 24
Months
Loans in-school/grace/defermentÏÏÏÏÏÏÏÏÏÏÏ
Loans in forbearance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans in repayment Ì current ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans in repayment Ì delinquent 31-60 days
Loans in repayment Ì delinquent 61-90 days
Loans in repayment Ì delinquent greater
$ Ì $ Ì
100
1,074
46
27
342
2,192
75
34
than 90 days ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
48
42
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,691
$1,289
$ Ì
49
798
33
16
36
$932
Unamortized discount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Allowance for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Managed Private Education Loans, net
52
(306)
(315)
$11,482
Total
$3,828
491
4,064
154
77
$3,828
Ì
Ì
Ì
Ì
Ì
126
$3,828
$8,740
(176)
(259)
$8,305
December 31, 2002
Loans in-school/grace/defermentÏÏÏÏÏÏÏÏÏÏÏ
Loans in forbearance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans in repayment Ì current ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans in repayment Ì delinquent 31-60 days
Loans in repayment Ì delinquent 61-90 days
Loans in repayment Ì delinquent greater
Months since entering repayment
After
Dec. 31,
2002(1)
25 to 48 More than
48 Months
Months
1 to 24
Months
$ Ì $ Ì
75
798
23
13
239
1,413
43
15
$ Ì
51
915
43
18
$2,393
Ì
Ì
Ì
Ì
Total
$2,393
365
3,126
109
46
than 90 days ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
17
19
39
Ì
75
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,727
$928
$1,066
$2,393
$6,114
Unamortized discount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Allowance for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Managed Private Education Loans, net
(1) Includes all loans in-school/grace/deferment.
Allowance for FFELP Student Loan Losses
(98)
(194)
$5,822
EÅective for a renewable one-year period beginning on October 19, 2004, Sallie Mae, Inc., which
includes the Company's student loan servicing division (Sallie Mae Servicing), was designated as an
Exceptional Performer by ED in recognition of meeting certain performance standards set by ED in servicing
FFELP loans. As a result of this designation, the Company receives 100 percent reimbursement on default
claims on federally guaranteed student loans that are serviced by Sallie Mae Servicing for a period of at least
270 days before the date of default. We are entitled to receive this beneÑt as long as we remain in compliance
with the required servicing standards, which are assessed on an annual and quarterly basis through compliance
audits and other criteria. The Exceptional Performer Designation also applies to all FFELP loans that we own
but are serviced by other service providers with the Exceptional Performer Designation. At December 31,
2004, approximately 93 percent of our Managed federally insured loans are no longer subject to Risk Sharing.
As a result of this designation, in the third quarter of 2004, we reduced the balance in the on-balance sheet
allowance for loan losses by $33 million and reduced the Managed Risk Sharing allowance for loan losses by
$63 million.
Other Income, Net
The following table summarizes the components of other income, net, for our Lending business segment
for the years ended December 31, 2004, 2003 and 2002.
Years Ended December 31,
2002
2003
2004
Gains on student loan securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Servicing and securitization revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Losses on securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative market value adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 375
561
(49)
849
163
$ 744
667
(10)
(238)
126
$
338
839
(2)
(1,082)
110
Total other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,899
$1,289
$
203
53
Gains on Student Loan Securitizations and Servicing and Securitization Revenue
Gains on sales of student loans to securitizes trusts and servicing and securitization revenue, the ongoing
revenue from securitized loan pools, are discussed in detail in ""LIQUIDITY AND CAPITAL RE-
SOURCES Ì Securitization Activities.''
Losses on Securities, Net
The increase in losses on securities, net, versus the prior years is primarily due to the $27 million
impairment of the leveraged lease portfolio recorded in the third quarter of 2004. The aircraft Ñnancing
business for traditional airlines continues to be adversely aÅected by the slowdown in the commercial aircraft
industry, higher fuel costs and increased competition from new discount carriers. In recognition of these trends
and the deteriorating Ñnancial condition of Delta Airlines in particular, we recorded the leveraged lease
impairment noted above.
At December 31, 2004, we had remaining investments in leveraged and direct Ñnancing leases, net of
impairments, totaling $169 million that are general obligations of two commercial airlines and Federal Express
Corporation. Based on an analysis of the potential losses on certain leveraged leases plus the increase in
incremental tax obligations related to forgiveness of debt obligations and/or the taxable gain on the sale of the
aircraft, our remaining after-tax accounting exposure to the two commercial airlines and Federal Express
Corporation totaled $80 million at December 31, 2004.
Derivative Market Value Adjustment
See ""ALTERNATIVE PERFORMANCE MEASURES Ì Derivative Accounting.''
Other Income
Late fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gains on sales of mortgages and other loan fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004
$ 94
22
47
Total other incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$163
Years Ended
December 31,
2003
$ 65
29
32
$126
2002
$ 56
13
41
$110
When compared to the prior year, other income in 2004 beneÑted from a $29 million increase in late fees
due to higher loan volume and an update in our estimate of uncollected late fees in the second quarter of 2004.
Gains on sales of mortgages and other loan fees decreased by $7 million from 2003 to 2004. The decrease was
primarily due to higher interest rates causing a slowdown in mortgage reÑnancings. Gains on sales of
mortgages and other loan fees increased by $16 million from 2002 to 2003. This increase was due to the
acquisition of Pioneer Mortgage in 2003 and to lower interest rates causing a surge in mortgage reÑnancings.
54
Student Loan Acquisitions
In 2004, 78 percent of our Managed student loan acquisitions (exclusive of loans acquired through
business acquisitions) were originated through our Preferred Channel. The following tables summarize the
components of our student loan acquisition activity for the years ended December 31, 2004, 2003 and 2002.
Preferred Channel ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other commitment clients ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Spot purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidations from third parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisitions from oÅ-balance sheet securitized trusts, primarily
consolidationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisition of Southwest Student Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisition of Student Loan Financing Association ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capitalized interest and deferred origination fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total on-balance sheet student loan acquisitionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidations to SLM Corporation from oÅ-balance sheet
December 31, 2004
Private
FFELP
Total
$12,756
368
1,804
2,609
$3,982
45
4
Ì
$16,738
413
1,808
2,609
5,554
4,776
1,435
1,398
Ì
4
Ì
(2)
5,554
4,780
1,435
1,396
30,700
4,033
34,733
securitized trusts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(5,554)
Ì
(5,554)
Capitalized interest and other Ì oÅ-balance sheet securitized
trustsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
565
172
737
Total Managed student loan acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$25,711
$4,205
$29,916
Preferred Channel ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other commitment clients ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Spot purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidations from third parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisitions from oÅ-balance sheet securitized trusts, primarily
consolidationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capitalized interest and deferred origination fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisition of AMS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total on-balance sheet student loan acquisitionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidations to SLM Corporation from oÅ-balance sheet
December 31, 2003
Private
FFELP
Total
$10,884
344
864
2,158
$2,901
33
2
92
$13,785
377
866
2,250
6,156
1,024
1,246
Ì
16
177
6,156
1,040
1,423
22,676
3,221
25,897
securitized trusts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(6,156)
Capitalized interest and other Ì oÅ-balance sheet securitized
trustsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
842
Ì
79
(6,156)
921
Total Managed student loan acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$17,362
$3,300
$20,662
55
December 31, 2002
Private
FFELP
Total
Preferred Channel ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other commitment clients ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Spot purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidations from third parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisitions from oÅ-balance sheet securitized trusts, primarily
consolidationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capitalized interest and deferred origination fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 9,261
428
924
1,938
4,121
1,073
$2,132
35
7
Ì
$11,393
463
931
1,938
Ì
(4)
4,121
1,069
Total on-balance sheet student loan acquisitionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidations to SLM Corporation from oÅ-balance sheet
17,745
2,170
19,915
securitized trusts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(4,121)
Capitalized interest and other Ì oÅ-balance sheet securitized
trustsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
721
Ì
10
(4,121)
731
Total Managed student loan acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$14,345
$2,180
$16,525
Preferred Channel Originations
In 2004, we originated $18.0 billion in student loan volume through our Preferred Channel, an 18 percent
increase over the $15.2 billion originated in 2003. In 2004, we grew the Sallie Mae brand Preferred Channel
Originations by 34 percent and our own brands now constitute 32 percent of our Preferred Channel
Originations, up from 28 percent in 2003. The pipeline of loans that we currently service and are committed to
purchase was $7.2 billion and $6.6 billion at December 31, 2004 and 2003, respectively. The following tables
further break down our Preferred Channel Originations by type of loan and source.
Years Ended December 31,
2003
2004
2002
Preferred Channel Originations Ì Type of Loan
StaÅord ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PLUS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$11,383
2,303
Total FFELP ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
13,686
4,307
$10,077
1,882
11,959
3,270
$ 8,537
1,482
10,019
2,352
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$17,993
$15,229
$12,371
Preferred Channel Originations Ì Source
Sallie Mae brands ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lender partners ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 5,670
12,323
$ 4,233
10,996
$ 3,082
9,289
$17,993
$15,229
$12,371
56
The following table summarizes the activity in our Managed portfolio of student loans for the years ended
December 31, 2004, 2003 and 2002.
Years Ended December 31,
2003
2004
2002
Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisitions, including capitalized interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repayments, claims, and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs to reserves and securitization trusts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loan sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans consolidated from SLM CorporationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 88,789
29,916
(8,548)
(135)
(479)
(2,105)
$78,124
20,662
(7,517)
(108)
(38)
(2,334)
$71,726
16,525
(7,672)
(96)
Ì
(2,359)
Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$107,438
$88,789
$78,124
Operating Expenses
The following table summarizes the components of operating expenses for our Lending business segment
for the years ended December 31, 2004, 2003 and 2002.
Servicing and acquisition expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of acquired intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss on GSE debt extinguishment and defeasance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004
$205
228
27
221
Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$681
Years Ended
December 31,
2003
$188
221
22
Ì
$431
2002
$146
199
22
Ì
$367
Operating expenses include costs incurred to service our Managed student loan portfolio and acquire
student loans, as well as other general and administrative expenses and the amortization of acquired intangible
assets.
For the year ended 2004, we recognized a $221 million loss related to the repurchase and defeasance of
approximately $3.0 billion of GSE debt in connection with the Wind-Down of the GSE.
2004 versus 2003
Operating expenses for the year ended December 31, 2004 were $681 million versus $431 million in the
prior year. The increase versus the prior year is mainly due to the growth in the number of accounts serviced
and to the general and administrative expenses of our recent acquisitions in the lending segment: Southwest
Student Services Corporation ($5 million) which the Company acquired in October 2004, and a full year of
expenses of AMS ($22 million) acquired in the fourth quarter of 2003.
Student loan servicing expenses as a percentage of the average balance of student loans serviced was
0.15 percent, and 0.16 percent for the years ended December 31, 2004 and 2003, respectively.
2003 versus 2002
The $42 million increase in servicing and acquisition costs for the year ended December 31, 2003 versus
2002 is mainly attributable to an increase in mortgage operating expenses due to the acquisition of Pioneer
Mortgage in the second quarter of 2003 and to increased servicing expenses consistent with the growth in the
business. In addition, in the Ñrst quarter of 2003, we recognized $9 million for servicing adjustments related to
an underbilling error. Student loan servicing expenses as a percentage of the average balance of student loans
serviced was 0.16 percent and 0.20 percent for the years ended December 31, 2003 and 2002, respectively.
57
DEBT MANAGEMENT OPERATIONS (""DMO'') BUSINESS SEGMENT
Through the Ñve operating units that comprise our DMO business segment, we provide a wide range of
accounts receivable and collections services including defaulted student loan portfolio management services,
contingency collections services for student loans and other asset classes, student loan default aversion
services, and accounts receivable management and collection for purchased portfolios of receivables that have
been charged oÅ by their original creditors.
The majority of our revenues are generated through our contingency fee business in which we provide
default management services to guarantor agencies, colleges and universities, ED, and other consumer credit
companies.
In the purchased receivables business, we focus on all types of consumer debt with an emphasis on
charged-oÅ credit card receivables. We purchase these portfolios at a substantial discount to their face value.
We then use both our internal collections operations and external collections eÅorts to maximize the recovery
on these receivables. EÅectively pricing the portfolio is a major success factor in the purchased receivables
business. We conduct a quantitative and qualitative analysis using our proprietary models to appropriately
price each portfolio to yield a return consistent with our earnings hurdles. We account for our investments in
charged-oÅ receivables in accordance with Practice Bulletin 6, ""Amortization of Discounts on Certain
Acquired Loans,'' whereby we establish static pools of relatively homogeneous accounts and initially record
them at cost. We then recognize income each month based on each static pool's eÅective interest rate.
Monthly cash collections are all allocated to revenue and principal reduction based on the estimated internal
rate of return. The static pools are tested monthly for impairment.
Revenues from USA Funds represented 56 percent, 65 percent, and 62 percent, respectively, of total
DMO revenue in 2004, 2003, and 2002. We expect the percentage of revenue generated from services
provided to USA Funds to decrease considerably in 2005 due primarily to the impact of our acquisition of
AFS and the inclusion of the purchased receivables business revenues.
At December 31, 2004, 2003, and 2002, the DMO business segment had total assets of $519 million,
$272 million, and $268 million, respectively.
The following table includes the results of operations for our DMO business segment.
Condensed Statements of Income
Year Ended December 31,
2002
2003
2004
% Increase (Decrease)
2004 vs. 2003
2003 vs. 2002
Fee income and collections revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before income taxes and minority interest in
net earnings of subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before minority interest in net earnings of
subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interest in net earnings of subsidiaries ÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$340
166
$259
131
$186
112
174
63
111
1
$110
128
44
84
Ì
$ 84
74
26
48
Ì
$ 48
31%
27
36
43
32
100
31%
39%
17
73
69
75
Ì
75%
Fee Income and Collections Revenue
Fee income and collections revenue increased $81 million or 31 percent to $340 million for the year
ended December 31, 2004, an $81 million or 31 percent increase over 2003. In 2004, we earned $302 million in
fee income generated by our contingency collections services, a 17 percent increase over 2003. The growth in
our contingency fee business is due primarily to an increase of $26 million or 14 percent in fees earned from
guarantor agencies for both default collection and portfolio management. Our 2004 growth rate was slowed by
the greater emphasis on rehabilitating defaulted FFELP loans versus consolidating them with other lenders.
This strategy ultimately produces higher margins but initially it lengthens the revenue cycle.
58
We earned $38 million of collections revenue from the purchased portfolios of AFS for the period from
September 15, 2004 to December 31, 2004. During this period, AFS acquired charged-oÅ consumer
receivables portfolios with an aggregate face amount of $426 million at a cost of $19 million.
Operating Expenses
The following table summarizes the components of operating expenses for the DMO business segment
for the years ended December 31, 2004, 2003 and 2002.
General and administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of acquired intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004
$161
5
Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$166
Years Ended
December 31,
2003
$128
3
$131
2002
$109
3
$112
General and administrative expenses increased by $33 million, or 26 percent, to $161 million for the year
ended December 31, 2004. A signiÑcant portion of this increase is attributable to the inclusion of AFS
expenses. The increase in DMO contingency fee expenses is consistent with the growth in revenue and
accounts serviced, as a high percentage of DMO expenses are variable contributing to our stable margins. We
continue to make substantial investments in the infrastructure of the DMO business to accommodate current
and future growth and we believe this will provide signiÑcant operating eÇciencies in the future.
CORPORATE AND OTHER BUSINESS SEGMENT
At December 31, 2004, 2003, and 2002, the Corporate and Other business segment had total assets of
$524 million, $447 million, and $509 million, respectively.
The following table includes the results of operations for our Corporate and Other business segment.
Condensed Statements of Income
Year Ended December 31,
2002
2003
2004
% Increase (Decrease)
2004 vs. 2003
2003 vs. 2002
Fee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$120
126
269
Income (loss) before income taxesÏÏÏÏÏÏÏÏÏ
Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(23)
(6)
$128
123
233
18
6
Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(17)
$ 12
$
$106
110
211
5
2
3
(6)%
2
15
(228)
(200)
(242)%
21%
12
10
260
200
300%
Fee and Other Income
The following table summarizes the components of fee and other income for the years ended
December 31, 2004, 2003 and 2002.
Guarantor servicing fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loan servicing fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004
$120
55
71
Total fee and other incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$246
Years Ended
December 31,
2003
$128
58
65
$251
2002
$106
57
53
$216
59
USA Funds represented 85 percent, 86 percent, and 82 percent, respectively, of guarantor servicing fees
and 8 percent, 1 percent, and 14 percent, respectively, of revenues associated with other products and services
for the years ended December 31, 2004, 2003, and 2002.
2004 versus 2003
The $8 million decrease in guarantor servicing fees in 2004 versus the prior year is due to a $13 million
decrease in issuance fees caused by the reduction in the issuance fee from 65 basis points to 40 basis points,
which was partially oÅset by higher account maintenance fees.
The increase in other income in 2004 versus 2003 is primarily due to a $14 million fee received from Bank
One in the third quarter of 2004 in connection with the termination of the marketing services agreement,
$13 million in fees earned on the tuition payment plan business that was acquired in connection with the
November 2003 AMS acquisition, and $9 million in higher marketing servicing fees. Items that aÅected 2003
that did not recur in 2004 were a $42 million gain recognized in the fourth quarter of 2003 for the sale of our
prior headquarters building, partially oÅset by an $18 million deferral in 2003 of previously recognized income
earned for performing information technology enhancements.
2003 versus 2002
The growth in the guarantor servicing business is due to the growth in accounts serviced for our largest
customer, USA Funds. The increase in other income in 2003 was due to a $42 million gain on the sale of our
headquarters building, partially oÅset by a deferral of previously recognized income earned from performing
information technology enhancements.
Operating Expenses
The following table summarizes the components of operating expenses for the Corporate and Other
business segment for the years ended December 31, 2004, 2003 and 2002.
Servicing and acquisition expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of acquired intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004
$ 34
231
4
Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$269
Years Ended
December 31,
2003
$ 36
195
2
$233
2002
$ 44
165
2
$211
Operating expenses include costs incurred to service loans for unrelated third parties and to perform
guarantor servicing on behalf of guarantor agencies, and general and administrative expenses associated with
these businesses. Operating expenses also include unallocated corporate overhead expenses totaling $151 mil-
lion. These costs include centralized headquarters functions such as executive management, accounting and
Ñnance, human resources and marketing. Our corporate overhead also includes a portion of information
technology expenses related to these functions.
2004 versus 2003
The 18 percent increase in general and administrative expenses from 2003 to 2004 is primarily due to the
growth in the business and additional administrative costs related to compliance with the Sarbanes-Oxley Act
of 2002. We also incurred additional expenses related to AMS, acquired in December of 2003, primarily to
manage the tuition payment plan product.
2003 versus 2002
The $30 million increase in general and administrative expenses from 2002 to 2003 is primarily attributed
to a contribution to the Sallie Mae Fund.
60
FEDERAL AND STATE TAXES
The Company is subject to federal and state income taxes, while the GSE was exempt from all state and
local income taxes. Our eÅective tax rate for the years ended December 31, 2004, 2003 and 2002 was
25 percent, 36 percent and 35 percent, respectively. The eÅective tax rate for the period ended December 31,
2004 reÖects the full-year permanent impact of the exclusion of the gains on equity forward contracts
recognized under SFAS No. 150 adopted in the third quarter of 2003.
ALTERNATIVE PERFORMANCE MEASURES
In accordance with the Rules and Regulations of the SEC, we prepare Ñnancial statements in accordance
with GAAP. In addition to evaluating the Company's GAAP-based Ñnancial information, management, credit
rating agencies, lenders and analysts also evaluate the Company on certain non-GAAP performance measures
that we refer to as ""core cash'' measures. While ""core cash'' measures are not a substitute for reported results
under GAAP, we rely on ""core cash'' measures in operating our business because we believe they provide
additional information regarding the operational and performance indicators that are most closely assessed by
management.
Our pro forma ""core cash'' measures are the primary Ñnancial performance measures used by
management to evaluate performance and to allocate resources. Accordingly, Ñnancial information is reported
to management on a ""core cash'' basis by reportable segment. In Note 18 to our consolidated Ñnancial
statements, ""Segment Reporting,'' we provide a consolidated statement of income by reportable segment on a
""core cash'' basis, as these are the measures used regularly by our ""chief operating decision makers.'' Our
""core cash'' measures are used in developing our Ñnancial plans and tracking results, and also in establishing
corporate performance targets and determining incentive compensation. Management believes this informa-
tion provides additional insight into the Ñnancial performance of the Company's core business activities. Our
""core cash'' measures are not deÑned terms within GAAP and may not be comparable to similarly titled
measures reported by other companies. ""Core cash'' measures reÖect only current period adjustments to
GAAP as described below. Accordingly, the Company's ""core cash'' measures presentation does not represent
another comprehensive basis of accounting. A more detailed discussion of the diÅerences between GAAP and
""core cash'' measures follows.
1) Securitization: Under GAAP, certain securitization transactions are accounted for as sales of assets.
Under ""core cash,'' we present all securitization transactions as long-term non-recourse Ñnancings. The
upfront ""gains'' on sale from securitization transactions as well as ongoing ""servicing and securitization
revenue'' presented in accordance with GAAP are excluded from the ""core cash'' measures and replaced by
the interest income, provision for loan losses, and interest expense as they are earned or incurred on the
securitization loans. We also exclude transactions with our oÅ-balance sheet trusts which would be considered
intercompany on a Managed Basis.
The following table summarizes ""core cash'' securitization adjustments for the years ended December 31,
2004, 2003 and 2002.
Years Ended December 31,
2002
2003
2004
""Core cash'' securitization adjustments:
Net interest income on securitized loans, after provisions for losses ÏÏ
Gains on student loan securitizationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Servicing and securitization revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intercompany transactions with oÅ-balance sheet trusts ÏÏÏÏÏÏÏÏÏÏÏÏ
$1,065
(375)
(561)
23
$1,104
(744)
(667)
7
$ 895
(338)
(839)
(9)
Total ""core cash'' securitization adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 152
$ (300)
$(291)
2) Derivative Accounting:
""Core cash'' measures exclude the periodic unrealized gains and losses
caused primarily by the one-sided mark-to-market derivative valuations prescribed by SFAS No. 133 and
recognize the economic eÅect of these hedges, which results in any cash paid or received being recognized
61
ratably as an expense or revenue over the hedged item's life. We also exclude the gain or loss on equity
forward contracts that are required to be accounted for in accordance with SFAS No. 133 as derivatives and
are marked to market through earnings.
SFAS No. 133 requires that changes in the fair value of derivative instruments be recognized currently in
earnings unless speciÑc hedge accounting criteria, as speciÑed by SFAS No. 133, are met. We believe that our
derivatives are eÅective economic hedges, and as such, are a critical element of our interest rate risk
management strategy. However, some of our derivatives, primarily Floor Income Contracts, certain Eurodollar
futures contracts, certain basis swaps and equity forward contracts (discussed in detail below), do not qualify
for ""hedge treatment'' as deÑned by SFAS No. 133, and the stand-alone derivative must be marked-to-market
in the income statement with no consideration for the corresponding change in fair value of the hedged item.
The derivative market value adjustment is primarily caused by interest rate volatility, changing credit spreads
and change in our stock prices during the period and the volume and term of derivatives not receiving hedge
treatment. ""Core cash'' measures exclude the periodic unrealized gains and losses primarily caused by the
one-sided derivative valuations, and recognize the economic eÅect of these hedges, which results in any cash
paid or received being recognized ratably as an expense or revenue over the hedged item's life.
Our Floor Income Contracts are written options which must meet more stringent requirements than other
hedging relationships to achieve hedge eÅectiveness under SFAS No. 133. SpeciÑcally, our Floor Income
Contracts do not qualify for hedge accounting treatment because the paydown of principal of the student loans
underlying the Floor Income embedded in those student loans does not exactly match the change in the
notional amount of our written Floor Income Contracts. Under SFAS No. 133, the upfront payment is
deemed a liability and changes in fair value are recorded through income throughout the life of the contract.
The change in the value of Floor Income Contracts is caused by changing interest rates that cause the amount
of Floor Income earned on the underlying student loans and transferred to the counterparties to vary. This is
economically oÅset by the change in value of the student loan portfolio earning Floor Income but that
oÅsetting change in value is not recognized under SFAS No. 133. We believe the Floor Income Contracts are
economic hedges because they eÅectively Ñx the amount of Floor Income earned over the contract period,
thus eliminating the timing and uncertainty that changes in interest rates can have on Floor Income for that
period. Prior to SFAS No. 133, we accounted for Floor Income Contracts as hedges and amortized the upfront
cash compensation ratably over the lives of the contracts.
Basis swaps are used to convert the Öoating rate debt from one interest rate index to another to better
match the interest rate characteristics of the assets Ñnanced by that debt. We primarily use basis swaps to
change the index of our Ñxed rate and LIBOR-based debt to better match the cash Öows of our student loan
assets that are primarily indexed to a commercial paper, Prime or Treasury bill index. SFAS No. 133 requires
that the change in the cash Öows of the hedge eÅectively oÅset both the change in the cash Öows of the asset
and the change in the cash Öows of the liability. Our basis swaps hedge variable interest rate risk, however they
do not meet this eÅectiveness test because student loans can earn at either a variable or a Ñxed interest rate
depending on market interest rates. We also have basis swaps that do not meet the SFAS No. 133
eÅectiveness test that economically hedge oÅ-balance sheet instruments. As a result, these swaps are recorded
at fair value with subsequent changes in value reÖected in the income statement.
Generally, a decrease in current interest rates and the respective forward interest rate curves results in an
unrealized loss related to our written Floor Income Contracts. We will experience unrealized gains/losses
related to our basis swaps, if the two underlying indices (and related forward curve) do not move in parallel.
Under SFAS No. 150, equity forward contracts that allow a net settlement option either in cash or the
Company's stock are required to be accounted for in accordance with SFAS No. 133 as derivatives. As a
result, we account for our equity forward contracts as derivatives in accordance with SFAS No. 133 and mark
them to market through earnings. They do not qualify as eÅective SFAS No. 133 hedges as a requirement to
achieve hedge accounting is the hedged item must impact net income, and the settlement of these contracts
through the purchase of our own stock does not impact net income.
62
The table below quantiÑes the adjustments for derivative accounting under SFAS No. 133 on our net
income for the years ended December 31, 2004, 2003 and 2002 when compared with the accounting principles
employed in all years prior to the SFAS No. 133 implementation.
Years Ended December 31,
2003
2004
2002
SFAS No. 133 income statement items:
Derivative market value adjustment in other income ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: Realized derivative market value transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (849)
(713)
$ 238
(739)
$1,082
(878)
Unrealized derivative market value adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other pre-SFAS No. 133 accounting adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1,562)
9
(501)
(1)
204
(4)
Total net impact of SFAS No. 133 derivative accounting ÏÏÏÏÏÏÏÏÏ
$(1,553)
$(502)
$ 200
ReclassiÑcation of Realized Derivative Transactions
SFAS No. 133, requires net settlement income/expense on derivatives and realized gains/losses related
to derivative dispositions (collectively referred to as ""realized derivative transactions'') that do not qualify as
hedges under SFAS No. 133 to be recorded in a separate income statement line item below net interest
income. The table below summarizes the realized derivative transactions and where they are reclassiÑed to on
a ""core cash'' basis for the years ended December 31, 2004, 2003 and 2002.
ReclassiÑcation of realized derivative market value adjustments:
Net settlement expense on Floor Income Contracts reclassiÑed to
net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net settlement income/expense on interest rate swaps reclassiÑed to
net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Realized gain/loss on closed Eurodollar futures contracts and
Years Ended December 31,
2002
2003
2004
$(562)
$(603)
$ (540)
(88)
(22)
(84)
terminated derivative contracts reclassiÑed to other income ÏÏÏÏÏÏ
(63)
(114)
Total reclassiÑcations of realized derivative transactions ÏÏÏÏÏÏÏÏÏÏ
Add: Unrealized derivative market value adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(713)
1,562
(739)
501
(254)
(878)
(204)
Derivative market value adjustment as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 849
$(238)
$(1,082)
3) Floor Income: The timing and amount (if any) of Floor Income earned is uncertain and in excess of
expected spreads and, therefore, we exclude such income when it is not economically hedged from ""core cash''
measures. We employ derivatives, primarily Floor Income Contracts and futures, to economically hedge Floor
Income. As discussed above under ""Derivative Accounting,'' these derivatives do not qualify as eÅective
accounting hedges and therefore are marked-to-market through the derivative market value adjustment with
no oÅsetting mark of the economically hedged items. For ""core cash'' measures, we reverse the fair value
adjustments on the Floor Income Contracts and futures economically hedging Floor Income and include the
amortization of net premiums received (net of Eurodollar futures contracts' realized gains or losses) in
63
income. The following table summarizes the Floor Income adjustments for the years ended December 31,
2004, 2003, and 2002.
Years Ended December 31,
2002
2003
2004
""Core cash'' Floor Income adjustments:
Floor Income earned on Managed loans, net of payments on Floor
Income ContractsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(88)
$(292)
$(474)
Amortization of net premiums on Floor Income Contracts and futures
in net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
194
161
Net losses related to closed Eurodollar futures contracts economically
hedging Floor Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Losses on sales of derivatives hedging Floor IncomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
50
Ì
14
94
134
202
46
Total ""core cash'' Floor Income adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$156
$ (23)
$ (92)
4) Other items: We exclude amortization of acquired intangibles.
For the years ended December 31, 2004, 2003 and 2002, the pre-tax eÅect of these non-GAAP
performance measures were as follows:
Years Ended December 31,
2003
2004
2002
Non-GAAP Performance Measures:
Net impact of securitization accountingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net impact of derivative accounting(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net impact of Floor Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of acquired intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
152
(1,553)
156
36
$(300)
(502)
(23)
27
$(291)
200
(92)
27
Total non-GAAP performance measures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(1,209)
$(798)
$(156)
(1) In addition to the derivative accounting adjustment noted here, for the year ended December 31, 2003,
upon the adoption of SFAS No. 150, adjustments also included the reversal of a gain of $130 million which
was reÖected as a ""cumulative eÅect of accounting change'' in the GAAP consolidated statements of
income.
LIQUIDITY AND CAPITAL RESOURCES
Our DMO and Corporate and Other business segments are not capital intensive businesses and as such
only an immaterial amount of debt and equity capital is included in these segments. Therefore, the following
liquidity and capital resource discussion is concentrated on our Lending business segment.
We depend on the debt capital markets to support our business plan. We have developed deep and diverse
funding sources to ensure continued access to funding now that the GSE has been dissolved. Our biggest
funding challenge going forward is to maintain cost eÅective liquidity to fund the growth in the Managed
portfolio of student loans as well as to reÑnance previously securitized loans when borrowers choose to
reÑnance their loans through a Consolidation Loan with the Company. At the same time, we must maintain
earnings spreads and control interest rate risk to preserve earnings growth. Our main source of funding is
student loan securitizations and in 2004, we securitized $33.8 billion in student loans in thirteen transactions
(including the amount funded through our asset-backed commercial paper program transaction) versus
$30.1 billion in sixteen transactions in 2003. Our securitizations backed by FFELP loans are unique securities
in the asset-backed class as they are backed by student loans with an explicit guarantee on 100 percent of
principal and interest. This guarantee is subject to service compliance. As evidenced by the 2003 and 2004
volume, we have built a highly liquid and deep market for student loan securitizations by broadening our
investor base worldwide. Securitizations now comprise 66 percent of our Ñnancing, versus 58 percent at
December 31, 2003.
64
In addition to securitizations, we also signiÑcantly increased and diversiÑed our sources of funds through
the issuance of $15 billion in SLM Corporation term, unsecured debt in 2004. In 2003 and 2004, we
strategically introduced several new SLM Corporation long-term issuances to further diversify our funding
sources and substantially increased our Ñxed income investor base. In total, at December 31, 2004, on-balance
sheet debt, exclusive of on-balance sheet securitizations and on-balance sheet secured indentured trusts,
totaled $33.3 billion versus $20.3 billion at December 31, 2003.
Without the GSE, stand-alone liquidity at SLM Corporation is very important to enable us to eÅectively
fund our student loan acquisitions and operations. Our main sources of liquidity include our $5 billion
unsecured revolving credit facility, cash and short-term investments, a $5 billion revolving asset-backed
commercial paper program and our portfolio of readily securitizable student loans, particularly the government
guaranteed portion of the portfolio.
In addition to liquidity, a major objective when Ñnancing our business is to minimize interest rate risk
through match funding of our assets and liabilities. Generally, on a pooled basis to the extent practicable, we
match the interest rate and reset characteristics of our Managed assets and liabilities. In this process we use
derivative Ñnancial instruments extensively to reduce our interest rate and foreign currency exposure. This
interest rate risk management helps us to achieve a stable student loan spread irrespective of the interest rate
environment. (See also ""RISKS Ì Interest Rate Risk Management'' below.)
The following tables present the ending and average balances and average interest rates of our Managed
borrowings for the years ended December 31, 2004, 2003 and 2002. The average interest rates include
derivatives that are economically hedging the underlying debt, but do not qualify for hedge accounting
treatment under SFAS No. 133. (See ""ALTERNATIVE PERFORMANCE MEASURES Ì ReclassiÑca-
tion of Realized Derivative Transactions.'')
2004 Ending Balance
Years Ended December 31,
2003 Ending Balance
2002 Ending Balance
Short Term Long Term
Total
Managed
Basis
Short Term Long Term
Total
Managed
Basis
Short Term Long Term
Total
Managed
Basis
GSE borrowings
(unsecured) ÏÏÏÏÏÏÏÏÏÏÏ
$ Ì
$
Ì $
Ì $16,678
$ 3,414
$20,092
$23,332
$15,298
$38,630
Non-GSE borrowings
(unsecured) ÏÏÏÏÏÏÏÏÏÏÏ
1,830
31,465
33,295
1,855
18,472
20,327
1,290
5,795
7,085
Indentured trusts (on-
balance sheet) ÏÏÏÏÏÏÏÏÏ
377
6,873
7,250
134
1,362
1,496
Securitizations (on-balance
sheet) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securitizations (oÅ-balance
sheet) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
35,769
35,769
43,814
43,814
Ì
Ì
16,346
16,346
40,606
40,606
5
Ì
Ì
1,149
1,154
Ì
Ì
37,262
37,262
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,207
$117,921
$120,128
$18,667
$80,200
$98,867
$24,627
$59,504
$84,131
2004
Years Ended December 31,
2003
2002
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
GSE borrowings (unsecured) ÏÏÏÏÏÏÏÏÏÏÏÏ
Non-GSE borrowings (unsecured) ÏÏÏÏÏÏÏÏ
Indentured trusts (on-balance sheet) ÏÏÏÏÏÏ
Securitizations (on-balance sheet) ÏÏÏÏÏÏÏÏ
Securitizations (oÅ-balance sheet) ÏÏÏÏÏÏÏÏ
$
9,967
28,241
2,168
28,354
42,606
2.21% $32,847
13,305
2.29
1,221
2.47
6,026
1.79
39,524
2.09
1.80% $44,141
4,223
2.01
1,558
2.68
Ì
1.40
32,385
1.79
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$111,336
2.08% $92,923
1.81% $82,307
2.33%
2.88
2.97
Ì
2.57
2.47%
65
Unsecured On-Balance Sheet Financing Activities
The following table presents the senior unsecured credit ratings on our debt from major rating agencies.
S&P Moody's
Fitch
Short-term unsecured debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A-1
A
Long-term unsecured debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
P-1
A2
F-1°
A°
The table below presents our unsecured on-balance sheet funding by funding source for the years ended
December 31, 2004 and 2003.
Debt Issued
For the Years
Ended December 31,
2003
2004
Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Convertible debentures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retail medium-term notes (EdNotes) ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign currency denominated(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Extendible notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Global notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medium-term notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
272
Ì
509
4,179
2,496
7,629
Ì
$ 8,285
1,980
356
597
1,747
9,844
Ì
Outstanding at
December 31,
2004
2003
$ Ì $ Ì
1,983
357
598
1,747
11,549
4,093
1,988
863
4,780
4,246
18,686
2,732
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$15,085
$22,809
$33,295
$20,327
(1) All foreign currency denominated notes are swapped back to U.S. dollars.
In 2003, we issued approximately $2 billion Contingently Convertible Debentures (""Co-Cos''). The
CoCos are convertible, under certain conditions, into shares of SLM common stock at an initial conversion
price of $65.98. The investors generally can only convert the debentures if the Company's common stock has
appreciated to 130 percent of the conversion price (or $85.77) for a prescribed period, or if we call the
debentures. Per EITF No. 04-8, ""The EÅect of Contingently Convertible Debt on Diluted Earnings per
Share,'' we have included the potential dilutive eÅect of the Company's outstanding Co-Cos in diluted
earnings per share calculations for the years ended December 31, 2004, 2003 and 2002.
Securitization Activities
Securitization Program
Our FFELP StaÅord, Private Education Loan and certain Consolidation Loan securitizations are
structured such that they meet the sale criteria of SFAS No. 140 by using a two-step transaction with a
qualifying special purpose entity (""QSPE'') that legally isolates the transferred assets from the Company,
even in the event of bankruptcy. The holders of the beneÑcial interests issued by the QSPE are not constrained
from pledging or exchanging their interests and we do not maintain eÅective control over the transferred
assets. In all of our oÅ-balance sheet securitizations, we retain the right to receive the cash Öows from the
securitized student loans in excess of cash Öows required to pay interest and principal on the bonds issued by
the trust and servicing and administration fees.
Prior to 2003, all of our securitization structures were oÅ-balance sheet transactions. In certain 2003 and
2004 Consolidation Loan securitization structures, we hold rights that can aÅect the remarketing of the bonds,
such that these trusts did not qualify as QSPEs and as a result were required to be accounted for on-balance
sheet as variable interest entities (""VIEs''). These securitization structures were developed to broaden and
diversify the investor base for Consolidation Loan securitizations by allowing us to issue bonds with non-
amortizing, Ñxed rate and foreign currency denominated tranches. As of December 31, 2004, we had
$31.5 billion of securitized student loans in on-balance sheet securitization trusts. These securitizations are
included as Ñnancings in the table below.
66
In oÅ-balance sheet securitizations that qualify as sales, we recognize a gain on the sale, which is
calculated as the diÅerence between the allocated cost basis of the assets sold and the relative fair value of the
assets received. The carrying value of the student loan portfolio being securitized includes the applicable
accrued interest, unamortized student loan premiums, loan loss reserves and borrower beneÑts reserves. The
fair value of the Residual Interest is determined using a discounted cash Öow methodology using assumptions
discussed in more detail below. We recognize no gain or loss or servicing and securitization revenue associated
with on-balance sheet securitizations.
The following table summarizes our securitization activity for the years ended December 31, 2004, 2003
and 2002. Those securitizations listed as sales are oÅ-balance sheet transactions and those listed as Ñnancings
remain on-balance sheet.
2004
Years Ended December 31,
2003
2002
No. of
Amt
Trans. Securitized Gain
Pre-
Tax Gain No. of
%
Amt
Trans. Securitized Gain
Pre-
Tax Gain No. of
%
Amt
Trans. Securitized Gain
Pre-
Tax Gain
%
FFELP StaÅord loansÏÏÏÏÏÏÏÏÏÏ
4
$10,002
$134
1.3%
Consolidation Loans ÏÏÏÏÏÏÏÏÏÏÏ Ì
Ì
Ì Ì
Private Education LoansÏÏÏÏÏÏÏÏ
Total securitizations Ì sales ÏÏÏÏ
Asset-backed commercial
paper(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidation Loans ÏÏÏÏÏÏÏÏÏÏÏ
Total securitizations Ì Ñnancings
2
6
1
6
7
2,535
241
9.5
12,537
$375
3.0%
4,186
17,124
21,310
Total securitizations ÏÏÏÏÏÏÏÏÏÏÏ
13
$33,847
4
2
3
9
Ì
7
7
16
$ 5,772
$ 73
1.3% 7
$11,033
$101
.9%
4,256
3,503
433
238
10.2
6.8
1
1
1,976
690
194
43
9.8
6.2
13,531
$744
5.5% 9
13,699
$338
2.5%
Ì
16,592
16,592
$30,123
Ì
Ì
Ì
9
Ì
Ì
Ì
$13,699
(1) In the second quarter of 2004, we closed our Ñrst asset-backed commercial paper program. The program is
a revolving 364-day multi-seller conduit that allows us to borrow up to $5 billion through the sale of
student loans subject to annual extensions. We may purchase student loans out of this trust at our
discretion and as a result, the trust does not qualify as a QSPE and is accounted for on-balance sheet as a
VIE.
The increase in the Private Education Loan securitization gain percentage in 2004 is due to the
underlying student loans having higher spreads and the related bonds having a lower funding cost due
primarily to the maturing of the Private Education Loan marketplace. The decrease in the overall gain as a
percentage of loans securitized in 2004 versus 2003 is mainly due to the 2004 Consolidation Loan
securitizations not qualifying for oÅ-balance sheet treatment. OÅ-balance sheet Consolidation Loan securi-
tizations generally have higher gains than FFELP securitizations due to higher Embedded Fixed Rate Floor
Income and longer average lives. The higher gain percentage in 2003 versus 2002 is due to the higher level of
both Consolidation Loan and Private Education Loan securitizations.
In 2004 and 2003, we had record levels of securitization transactions due to funding new student loan
purchases, record levels of loan consolidation and the reÑnancing of GSE debt in connection with the Wind-
Down. In 2005, we expect our securitization activity to decline and correlate with the volume of student loan
purchases.
Long-Term
Liquidity Risk
With the dissolution of the GSE, our long-term funding, credit spread and liquidity exposure to the
corporate and asset-backed capital markets has increased signiÑcantly. A major disruption in the Ñxed income
capital markets that limits our ability to raise funds or signiÑcantly increases the cost of those funds could have
a material impact on our ability to acquire student loans, or on our results of operations. Going forward,
67
securitizations will continue to be the primary source of long-term Ñnancing. Our securitizations are structured
such that we do not provide any level of Ñnancial, credit or liquidity support to any of the trusts. Our exposure
is limited to the recovery of the Retained Interest asset on the balance sheet for oÅ-balance sheet
securitizations. While all of our Retained Interests are subject to some prepayment risk, Retained Interests
from our FFELP StaÅord securitizations have signiÑcant prepayment risk primarily from Consolidation Loans
that could materially impair their value.
Retained Interest in Securitized Receivables
The following table summarizes the fair value of our Retained Interests along with the underlying student
loans that relate to those securitizations that were treated as sales.
As of December 31, 2004
Underlying
Securitized
Loan
Balance
Retained
Interest
Fair Value
As of December 31, 2003
Underlying
Securitized
Loan
Balance
Retained
Interest
Fair Value
FFELP StaÅord loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidation Loans(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,037
585
694
$2,316
$27,444
7,393
6,309
$41,146
$1,023
994
459
$2,476
$26,420
8,076
3,983
$38,479
(1) Includes $399 million and $727 million related to the fair value of the Embedded Floor Income as of
December 31, 2004 and 2003, respectively.
(2) Unrealized gains (pre-tax) included in accumulated other comprehensive income related to the Retained
Interests totaled $445 million and $443 million as of December 31, 2004 and 2003, respectively.
Accounting Estimates' EÅect on the Residual Interest in Securitized Trusts
We updated certain assumptions during 2004 that we use in the valuation of the Residual Interest. The
following are the signiÑcant assumption changes that were made:
FFELP StaÅord loan CPR(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loan CPR(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FFELP expected credit losses (as a % of securitized loan
balance outstanding)(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
As of December 31,
2004
As of December 31,
2003
20% - 2005
15% - 2006
6% - thereafter
3%
20% - 2004
15% - 2005
6% - thereafter
6%
0%
.17%
(1) We increased the FFELP StaÅord loan CPR assumption to account for the record levels of Consolidation
Loan volume over the past three years. Unless there is a legislative change to the Consolidation Loan
program through HEA reauthorization, we believe that high levels of Consolidation Loan activity will
continue.
(2) We decreased the Private Education Loan CPR assumption because these loans are repaying slower than
originally projected, including slower prepayments.
(3) We lowered our assumption of expected FFELP credit losses to zero percent to reÖect the eÅect of the EP
designation on Sallie Mae serviced FFELP loans in the trusts. The EP designation is discussed in more
detail in ""LENDING BUSINESS SEGMENT Ì Student Loans Ì Allowance for FFELP Student
Loan Losses.''
68
Servicing and Securitization Revenue
Servicing and securitization revenue, the ongoing revenue from securitized loan pools accounted for oÅ-
balance sheet as QSPEs, includes the interest earned on the Residual Interest asset and the revenue we
receive for servicing the loans in the securitization trusts. Interest income recognized on the Residual Interest
is based on our anticipated yield determined by estimating future cash Öows each quarter.
The following table summarizes the components of servicing and securitization revenue for the years
ended December 31, 2004, 2003 and 2002.
Years Ended December 31,
2003
2004
2002
Servicing revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securitization revenue, before Embedded Floor Income ÏÏÏÏÏÏÏÏ
$
Servicing and securitization revenue, before Embedded Floor
Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Embedded Floor Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: Floor Income previously recognized in gain calculation ÏÏÏÏ
Net Embedded Floor Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
326
150
476
241
(156)
85
Total servicing and securitization revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
561
$
314
173
487
337
(157)
180
667
$
278
203
481
364
(6)
358
839
$
Average oÅ-balance sheet student loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$40,558
$38,205
$32,280
Average balance of Retained InterestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 2,434
$ 2,615
$ 1,746
Fluctuations in servicing and securitization revenue are generally driven by the amount of and the
diÅerence in the timing of Embedded Floor Income recognition on oÅ-balance sheet student loans, as well as
the impact of Consolidation Loan activity on FFELP StaÅord student loan securitizations. When FFELP
StaÅord loans consolidate, they are a prepayment to the trust and as a result shorten the life of the trust. We
estimate the trust prepayments through consolidation with our CPR assumption. When consolidation activity
is higher than forecasted, the Residual Interest asset can be impaired and the yield used to recognize
subsequent income from the trust is negatively impacted, though we typically retain the value of the asset on-
balance sheet versus in the trust. For the year ended December 31, 2004, we recorded an impairment charge of
$80 million due primarily to (a) FFELP StaÅord loans continuing to consolidate at levels faster than
projected ($47 million) and (b) rising interest rates during the second quarter of 2004, which decreased the
value of the Embedded Floor Income component of our Retained Interest ($33 million). We recorded
impairment charges of $96 million and $40 million in 2003 and 2002, respectively, due primarily to FFELP
StaÅord loans prepaying faster through consolidation than projected. The impairment charges were recorded
as losses and were included as a reduction in securitization revenue.
We receive annual servicing fees of 90 basis points, 50 basis points and 70 basis points of the outstanding
securitized loan balance related to our FFELP StaÅord, Consolidation Loan and Private Education Loan
securitizations, respectively.
CONTRACTUAL CASH OBLIGATIONS
The following table provides a summary of our obligations associated with long-term notes and equity
forward contracts at December 31, 2004. For further discussion of these obligations, see Note 8, ""Long-Term
69
Debt,'' Note 10, ""Derivative Financial Instruments,'' and Note 15, ""Common Stock,'' to the consolidated
Ñnancial statements.
Long-term notes(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity forward contracts(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1 Year
or less
2,473
Ì
2 to 3
Years
22,248
951
4 to 5
Years
11,418
1,205
Over 5
Years
37,968
Ì
Total
74,107
2,156
Total contractual cash obligations ÏÏÏÏÏÏÏÏÏ
$2,473
$23,199
$12,623
$37,968
$76,263
(1) Excludes SFAS No. 133 derivative market value adjustments of $1.8 billion for long-term notes.
(2) Includes FIN No. 46 long-term beneÑcial interests of $35.8 billion of notes issued by consolidated variable
interest entities in conjunction with our on-balance sheet securitization transactions and included in long-
term notes in the consolidated balance sheet.
(3) Our obligation to repurchase shares under equity forward contracts is calculated using the average
purchase prices for outstanding contracts in the year the contracts expire. At or prior to the maturity date
of the agreements, we can purchase shares at the contracted amount plus or minus an early break fee, or
we can settle the contract on a net basis with either cash or shares. If our stock price declines to a certain
level, the third party with whom we entered into the contract can liquidate the position prior to the
maturity date.
OFF-BALANCE SHEET LENDING ARRANGEMENTS
The following table summarizes the commitments associated with student loan purchases and contractual
amounts related to oÅ-balance sheet lending related Ñnancial instruments and guarantees at December 31,
2004.
Student loan purchases(1)(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lines of credit(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Letters of credit(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1 Year
or less
$7,846
150
157
2 to 3
Years
$1,878
34
Ì
4 to 5
Years
$14,120
327
Ì
Over 5
Years
$23,404
377
Ì
Total
$47,248
888
157
$8,153
$1,912
$14,447
$23,781
$48,293
(1) Includes amounts committed at speciÑed dates under forward contracts to purchase student loans and
anticipated future requirements to acquire student loans from lending partners (discussed below)
estimated based on future originations at contractually committed rates.
(2) Expiration of commitments and guarantees reÖect the earlier of call date or maturity date as of
December 31, 2004.
We have forward purchase commitments to acquire student loans from various lenders, including our
largest lending partners, Bank One and JPMorgan Chase. With respect to JPMorgan Chase, we entered into a
joint venture established solely to facilitate our acquisition of student loans originated by JPMorgan Chase.
Under a renewable multi-year agreement, we service and purchase a signiÑcant share of Bank One's volume.
For further discussion of our relationships with JPMorgan Chase and Bank One, see ""BUSINESS Ì
LENDING BUSINESS SEGMENT Ì Sallie Mae's Lending Business'' in Item 1 of this Annual Report.
We have issued lending-related Ñnancial instruments including letters of credit and lines of credit to meet
the Ñnancing needs of our customers. The contractual amount of these Ñnancial instruments represents the
maximum possible credit risk should the counterparty draw down the commitment and the counterparty
subsequently fails to perform according to the terms of our contract. Most of these commitments and
guarantees expire without being drawn. As a result, the total contractual amount of these instruments is not, in
our view, representative of our actual future credit exposure or funding requirements.
70
To the extent that letters of credit and lines of credit are drawn upon, the balance outstanding is
collateralized by student loans. We earn fees associated with the maintenance of these Ñnancial instruments
which totaled $2 million, $7 million and $10 million in 2004, 2003, and 2002, respectively. At December 31,
2004, draws on lines of credit were approximately $227 million, which amount is reÖected in other loans in the
consolidated balance sheet. For additional information, see Note 13, ""Commitments, Contingencies and
Guarantees,'' to the consolidated Ñnancial statements.
RISKS
Overview
Managing risks is an essential part of successfully operating a Ñnancial services company. Our most
prominent risk exposures are operational, market and interest rate, political and regulatory, liquidity, credit,
and Consolidation Loan reÑnancing risk.
Operational Risk
Operational risk can result from regulatory compliance errors, other servicing errors (see further
discussion below), technology failures, breaches of the internal control system, and the risk of fraud or
unauthorized transactions by employees or persons outside the Company. This risk of loss also includes the
potential legal actions that could arise as a result of an operational deÑciency or as a result of noncompliance
with applicable regulatory standards and contractual commitments, adverse business decisions or their
implementation, and customer attrition due to potential negative publicity.
The federal guarantee on our student loans and our designation as an Exceptional Performer by ED is
conditioned on compliance with origination and servicing standards set by ED and guarantor agencies. A
mitigating factor is our ability to cure servicing deÑciencies and historically our losses have been small. Should
we experience a high rate of servicing deÑciencies, the cost of remedial servicing or the eventual losses on the
student loans that are not cured could be material. Our servicing and operating processes are highly dependent
on our information system infrastructure, and we face the risk of business disruption should there be extended
failures of our information systems, any number of which could have a material impact on our business. We
have a number of back-up and recovery plans in the event of systems failures. These plans are tested regularly
and monitored constantly.
We manage operational risk through our risk management and internal control processes, which involve
each business line including independent cost centers, such as servicing, as well as executive management.
The business lines have direct and primary responsibility and accountability for identifying, controlling, and
monitoring operational risk, and each business line manager maintains a system of controls with the objective
of providing proper transaction authorization and execution, proper system operations, safeguarding of assets
from misuse or theft, and ensuring the reliability of Ñnancial and other data. In 2004, we further strengthened
our operational controls by centralizing certain staÅ functions such as accounting, human resources and legal.
While we believe that we have designed eÅective methods to minimize operational risks, our operations
remain vulnerable to natural disasters, human error, technology and communication system breakdowns and
fraud.
Market and Interest Rate Risk
Market risk is the risk of loss from adverse changes in market prices and/or interest rates of our Ñnancial
instruments. Our primary market risk is from changes in interest rates and interest spreads. We have an active
interest rate risk management program that is designed to reduce our exposure to changes in interest rates and
maintain consistent earning spreads in all interest rate environments. We use derivative instruments
extensively to hedge our interest rate exposure, but in our hedging activities is a risk that we are not hedging all
potential interest rate exposures or that the hedges do not perform as designed. We measure interest rate risk
by calculating the variability of net interest income in future periods under various interest rate scenarios using
projected balances for interest earning assets, interest-bearing liabilities and derivatives used to hedge interest
rate risk. Many assumptions are utilized by management to calculate the impact that changes in interest rates
71
may have on net interest income, the more signiÑcant of which are related to student loan volumes and
pricing, the timing of cash Öows from our student loan portfolio, particularly the impact of Floor Income and
the rate of student loan consolidations, basis risk, credit spreads and the maturity of our debt and derivatives.
(See also ""Interest Rate Risk Management.'')
We are also subject to market risk relative to our equity forward contracts that allow us to repurchase our
common stock in the future from a third party at the market price at the time of entering the contract. Should
the market value of our stock fall below certain predetermined levels, the counterparty to the contract has a
right to terminate the contract and settle all or a portion at the original contract price. We are required to mark
our equity forwards to market, so decreases in our stock price could result in material losses.
Political/Regulatory Risk
Because we operate in a federally sponsored loan program, we are subject to political and regulatory risk.
As part of the HEA, the student loan program is periodically amended and must be ""reauthorized'' every six
years. Past changes included reduced loan yields paid to lenders in 1993 and 1998, increased fees paid by
lenders in 1993, decreased level of the government guaranty in 1993 and reduced fees to guarantors and
collectors, among others. The program is scheduled to be reauthorized in 2005 and management expects
reauthorization to be completed no earlier than in the second half of 2005. There can be no assurances that the
reauthorization will not result in changes that may have a materially adverse impact to the Company. See
""OTHER RELATED EVENTS AND INFORMATION Ì Reauthorization and Budget Proposals.''
The Secretary of Education oversees and implements the HEA and periodically issues regulations and
interpretations that may impact our business.
Liquidity Risk (See also ""LIQUIDITY AND CAPITAL RESOURCES Ì Securitization Activities Ì
Long-Term Ì Liquidity Risk'')
Credit Risk
Short-Term
We bear the full risk of borrower and closed school losses experienced in our Private Education Loan
portfolio. These loans are underwritten and priced according to risk, generally determined by a commercially
available consumer credit scoring system, FICOTM. Additionally, for borrowers who do not meet our lending
requirements or who desire more favorable terms, we require credit-worthy co-borrowers. When schools close,
losses may be incurred when student borrowers have not completed their education. We have deÑned
underwriting and collection policies, and ongoing risk monitoring and review processes for all Private
Education Loans. The performance of the Private Education Loan portfolio may be aÅected by the economy,
and a prolonged economic downturn may have an adverse eÅect on its credit performance. Management
believes that it has provided suÇcient allowances to cover the losses that may be experienced in both the
federally guaranteed and Private Education Loan portfolios over the next 2 to 5 years depending on the
portfolio. There is, however, no guarantee that such allowances are suÇcient enough to account for actual
losses. (See ""LENDING BUSINESS SEGMENT Ì Student Loans Ì Activity in the Allowance for
Private Education Loan Losses.'')
We have credit risk exposure to the various counterparties with whom we have entered into derivative
contracts. We review the credit standing of these companies. Our credit policies place limits on the amount of
exposure we may take with any one party and in most cases, require collateral to secure the position. The
credit risk associated with derivatives is measured based on the replacement cost should the counterparties
with contracts in a gain position to the Company fail to perform under the terms of the contract. We also have
credit risk with two commercial airlines related to our portfolio of leveraged leases. (See ""LENDING
BUSINESS SEGMENT Ì Losses on Securities, Net.'')
72
Consolidation Loan ReÑnancing Risk
The consolidation of our loan portfolio can have detrimental eÅects. First, we may lose student loans in
our portfolio that are consolidated with other lenders. In 2003, we experienced a net run-oÅ of $84 million of
student loans from Consolidation Loan activity as more of our FFELP StaÅord student loans were
consolidated with other lenders than were consolidated by us. In 2004, our increased marketing focus on
Consolidation Loans generated a net gain of $504 million, a trend we expect to continue into the future.
Second, Consolidation Loans have lower net yields than the FFELP StaÅord loans they replace. This is
somewhat oÅset by the longer average lives of Consolidation Loans. Third, we must maintain suÇcient, short-
term liquidity to enable us to cost-eÅectively reÑnance previously securitized FFELP StaÅord loans as they
are consolidated back on to our balance sheet.
ED has taken the position that a borrower may consolidate his or her FFELP Consolidation Loan with
the FDLP irrespective of whether that borrower's FFELP holder oÅers a Consolidation Loan with income-
sensitive repayment terms. Based upon an analysis of the applicable law and regulations, we disagree with
ED's interpretations. If ED's interpretations are formally adopted and not successfully challenged, our
Managed portfolio could be subject to further consolidation risk.
Interest Rate Risk Management
Asset and Liability Funding Gap
The tables below present our assets and liabilities (funding) arranged by underlying indices as of
December 31, 2004. In the following GAAP presentation, the funding gap only includes derivatives that
qualify as eÅective SFAS No. 133 hedges (those derivatives which are reÖected in net interest margin, as
opposed to in the derivative market value adjustment). The diÅerence between the asset and the funding is the
funding gap, which represents our exposure to interest rate risk in the form of basis risk and repricing risk,
which is the risk that the diÅerent indices may reset at diÅerent frequencies or may not move in the same
direction or at the same magnitude.
Management analyzes interest rate risk on a Managed basis, which consists of both on-balance sheet and
oÅ-balance sheet assets and liabilities and includes all derivatives that are economically hedging our debt
whether they qualify as eÅective hedges under SFAS No. 133 or not. Accordingly, we are also presenting the
asset and liability funding gap on a Managed basis in the table that follows the GAAP presentation.
73
GAAP Basis
Index
(Dollars in billions)
Frequency of Variable
Resets
Assets
Funding(1)
Funding
Gap
3 month Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3 month Treasury bill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prime ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prime ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prime ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PLUS IndexÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3-month LIBOR ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3-month LIBOR ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1-month LIBOR ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMT/CPI index ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ monthly/quarterly
Non Discreet reset(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non Discreet reset(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed Rate(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
daily
weekly
annual
quarterly
monthly
annual
daily
quarterly
monthly
monthly
daily/weekly
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$46.0
11.3
.9
1.3
2.9
1.9
Ì
2.2
Ì
Ì
Ì
5.9
11.7
$84.1
$ Ì
.3
Ì
Ì
Ì
2.0
Ì
55.3
2.0
1.2
10.1
Ì
13.2
$84.1
$
46.0
11.0
.9
1.3
2.9
(0.1)
Ì
(53.1)
(2.0)
(1.2)
(10.1)
5.9
(1.5)
$ Ì
(1) Includes all derivatives that qualify as hedges under SFAS No. 133.
(2) Consists of asset-backed commercial paper and auction rate securities, which are discount note type
instruments that generally roll over monthly.
(3) Includes restricted and non-restricted cash equivalents and other overnight type instruments.
(4) Includes receivables/payables, other assets (including retained interest), other liabilities and stockholders'
equity.
The funding gaps in the above table are primarily interest rate mismatches in short-term indices between
our assets and liabilities. We address this issue primarily through the use of basis swaps that primarily convert
quarterly 3-month LIBOR to other indices that are more correlated to our asset indices. These basis swaps do
not qualify as eÅective hedges under SFAS No. 133 and as a result are not included in our interest margin and
are therefore excluded from the GAAP presentation.
74
Managed Basis
Index
(Dollars in billions)
Frequency of Variable
Resets
Assets
Funding(5)
Funding Gap
3 month Commercial paper ÏÏÏÏÏÏÏÏÏ
3 month Treasury bill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prime ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prime ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prime ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PLUS Index ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3-month LIBORÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3-month LIBORÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1-month LIBORÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMT/CPI indexÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ monthly/quarterly
Non Discreet reset(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non Discreet reset(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed Rate(8)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
daily
weekly
annual
quarterly
monthly
annual
daily
quarterly
monthly
monthly
daily/weekly
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 64.2
25.7
.9
6.7
2.9
4.7
Ì
1.9
Ì
Ì
Ì
9.1
8.9
$125.0
$ 16.4
22.1
Ì
2.5
1.3
5.0
33.2
21.6
2.0
Ì
10.5
Ì
10.4
$125.0
$47.8
3.6
.9
4.2
1.6
(0.3)
(33.2)
(19.7)
(2.0)
Ì
(10.5)
9.1
(1.5)
$ Ì
(5) Includes all derivatives that management considers economic hedges of interest rate risk and reÖects how
we internally manage our interest rate exposure.
(6) Consists of asset-backed commercial paper and auction rate securities, which are discount note type
instruments that generally roll over monthly.
(7) Includes restricted and non-restricted cash equivalents and other overnight type instruments.
(8) Includes receivables/payables, other assets, other liabilities and stockholders' equity.
To the extent possible we generally fund our assets with debt (in combination with derivatives) that has
the same underlying index (index type and index reset frequency). When it is more economical, we also fund
our assets with debt that has a diÅerent index and/or reset frequency than the asset, but only in instances
where we believe there is a high degree of correlation between the interest rate movement of the two indices.
For example, we use daily reset 3-month LIBOR to fund a large portion of our daily reset 3-month
commercial paper indexed assets. In addition, we use quarterly reset 3-month LIBOR to fund a portion of our
quarterly reset Prime rate indexed Private Education Loans. We also use our monthly Non Discreet reset
funding (asset-backed commercial paper program and auction rate securities) to fund various asset types. In
using diÅerent index types and diÅerent index reset frequencies to fund our assets, we are exposed to interest
rate risk in the form of basis risk and repricing risk, which is the risk that the diÅerent indices that may reset at
diÅerent frequencies will not move in the same direction or at the same magnitude. We believe that this risk is
low as all of these indices are short-term with rate movements that are highly correlated over a long period of
time. We use interest rate swaps and other derivatives to achieve our risk management objectives.
When compared with the GAAP presentation the Managed basis presentation includes all of our oÅ-
balance sheet assets and funding, and also includes basis swaps that primarily convert quarterly 3-month
LIBOR to other indices that are more correlated to our asset indices.
Interest Rate Gap Analysis
In the table below, the Company's variable rate assets and liabilities are categorized by reset date of the
underlying index. Fixed rate assets and liabilities are categorized based on their maturity dates. An interest
rate gap is the diÅerence between volumes of assets and volumes of liabilities maturing or repricing during
75
speciÑc future time intervals. The following gap analysis reÖects rate-sensitive positions at December 31, 2004
and is not necessarily reÖective of positions that existed throughout the period.
Interest Rate Sensitivity Period
3 months
or less
3 months
to
6 months
6 months
to 1 year
1 to
2 years
2 to
5 years
Over
5 years
$ 62,080
$ 2,563
$ 743
$ 519
$
73
$
3
Assets
Student loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Academic facilities Ñnancings and other
loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and investments, including
restricted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
252
6,705
3,041
57
110
103
76
87
207
15
286
302
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
72,078
2,833
1,113
1,122
Liabilities and Stockholders' Equity
Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interest in subsidiaries ÏÏÏÏÏÏÏ
Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities and stockholders' equity
Period gap before adjustments ÏÏÏÏÏÏÏÏ
Adjustments for Derivatives and Other
Financial Instruments
1,319
54,613
1,941
Ì
Ì
57,873
14,205
483
333
Ì
Ì
Ì
816
2,017
405
400
Ì
Ì
Ì
805
308
Ì
815
Ì
Ì
Ì
815
307
22
626
1,227
565
1,887
Ì
6,614
Ì
Ì
Ì
6,614
771
3,661
5,061
Ì
13,140
857
72
3,102
17,171
(4,727)
(12,110)
Interest rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact of securitized student loans ÏÏÏÏ
(8,981)
(3,157)
(6,955)
3,157
(153)
Ì
(292)
Ì
4,028
Ì
12,353
Ì
Total derivatives and other Ñnancial
instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(12,138)
(3,798)
(153)
(292)
4,028
12,353
Period gap ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative gap ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
2,067
$(1,781)
$ 155
$
15
$ (699)
2,067
$
286
$ 441
$ 456
$ (243)
$
$
243
Ì
Ratio of interest-sensitive assets to
interest-sensitive liabilitiesÏÏÏÏÏÏÏÏÏÏ
123.4%
334.6% 112.5% 100.6%
20.0%
10.6%
Ratio of cumulative gap to total assets
2.5%
0.3%
0.5%
0.5%
(0.3)%
Ì%
76
Weighted Average Life
The following table reÖects the weighted average life for our Managed earning assets and liabilities at
December 31, 2004.
(Averages in years)
On-Balance
Sheet
OÅ-Balance
Sheet
Managed
Earning assets
Student loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Academic facilities Ñnancings and other loans ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Borrowings
Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8.7
7.3
1.7
7.9
.7
8.4
8.1
4.4
Ì
Ì
4.4
Ì
4.4
4.4
8.2
7.3
1.7
7.7
.7
6.9
6.8
In the above table, Treasury receipts and variable rate asset-backed securities, although generally liquid
in nature, extend the weighted average remaining term to maturity of cash and investments to 1.7 years. Long-
term debt issuances likely to be called have been categorized according to their call dates rather than their
maturity dates. Long-term debt issuances which are putable by the investor are categorized according to their
put dates rather than their maturity dates.
COMMON STOCK
The following table summarizes our common share repurchases, issuances and equity forward activity for
the years ended December 31, 2004 and 2003.
(Shares in millions)
Common shares repurchased:
Years Ended
December 31,
2004
2003
Open marketÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity forwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑt plans(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total shares repurchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average purchase price per share(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
.5
32.7
1.5
34.7
6.7
20.2
2.4
29.3
$38.03
$31.18
Common shares issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10.7
18.2
Equity forward contracts:
Outstanding at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
New contractsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercises ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Outstanding at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
43.5
32.0
(32.7)
42.8
28.7
35.0
(20.2)
43.5
Authority remaining at end of year to repurchase or enter into equity forwards
35.8
38.4
(1) Includes shares withheld from stock option exercises and vesting of performance stock to satisfy minimum
statutory tax withholding obligations and shares tendered by employees to satisfy option exercise costs.
(2) The average purchase price per share for 2004 is calculated based on the average strike price of all equity
forward contracts including those that were net settled in the cashless transactions discussed below. The
average cash purchase price per share is $22.38 when a zero cash cost is reÖected for those shares acquired
in the cashless transactions.
77
During September 2004 and November 2004, we amended substantially all of our outstanding equity
forward purchase contracts. The strike prices on these contracts were adjusted to the then current market
share prices of the common stock and the total number of shares under contract was reduced from 53.4 million
shares to 46.7 million shares and 49.0 million shares to 42.2 million shares, respectively. In addition, as a result
of these amendments, we received a total of 13.4 million shares that settled in September and November free
and clear in cashless transactions. This reduction of 13.4 million shares covered by the equity forward
contracts is shown on a net basis in the ""exercises'' row of the table above.
As of December 31, 2004, the expiration dates and purchase prices for outstanding equity forward
contracts were as follows:
(Contracts in millions of shares)
Year of maturity
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Outstanding
contracts
Range of
purchase prices
Average
purchase price
8.6
10.3
7.9
16.0
42.8
$39.74 - $50.47
50.47
50.47
50.47
$49.73
50.47
50.47
50.47
$50.32
The closing price of the Company's common stock on December 31, 2004 was $53.39. In October 2004,
the Board of Directors voted to authorize the repurchase of up to an additional 30 million shares of the
Company's common stock, leaving a remaining authority to enter into additional share repurchases and equity
forward contracts for 35.8 million shares.
In September 2003, the Company retired 170 million shares of common stock held in treasury at an
average price of $18.04 per share. This retirement decreased the balance in treasury stock by $3.1 billion, with
corresponding decreases of $34 million in common stock and $3.1 billion in retained earnings.
In May 2003, the Company's shareholders approved an increase in the number of shares of common
stock the Company is authorized to issue from 375 million shares to 1.1 billion shares. Subsequently, the
Board of Directors approved a three-for-one split of the Company's common stock which was eÅected in the
form of a stock dividend on June 20, 2003, for all shareholders of record on June 6, 2003. All share and per
share amounts presented have been retroactively restated for the stock split. Stockholders' equity has been
restated to give retroactive recognition to the stock split for all periods presented by reclassifying from
additional paid-in capital to common stock the par value of the additional shares issued as a result of the stock
split.
STUDENT LOAN MARKETING ASSOCIATION
Privatization Act Ì Completion of the GSE Wind-Down
Under the Privatization Act, the GSE was required to wind down its operations and dissolve on or before
September 30, 2008. On December 29, 2004, we completed the Wind-Down of the GSE by defeasing the
remaining debt obligations of the GSE and dissolving the GSE's federal charter.
SpeciÑcally, the GSE, SLM Corporation and the Federal Reserve Bank of New York, both in its capacity
as trustee and as Ñscal agent for the GSE's remaining obligations, entered into a Master Defeasance
Trust Agreement as of December 29, 2004 that established a special and irrevocable trust, which was fully
collateralized by direct, noncallable obligations of the United States. On December 29, 2004, the United
States Department of the Treasury determined that such obligations were suÇcient, without consideration of
any signiÑcant reinvestment of interest, to pay the principal of and the interest on the GSE's remaining
obligations. The Wind-Down was completed upon the issuance of that determination and the GSE's separate
existence terminated.
78
RECENT DEVELOPMENTS
Proposed Pennsylvania Higher Education Assistance Authority Partnership
On December 14, 2004, the Company submitted a proposal to the board of directors of the Pennsylvania
Higher Education Assistance Authority (""PHEAA'') outlining a partnership between the Company and
PHEAA. Under the proposal, the Company would purchase PHEAA's operations and certain Ñnancial assets
and would enter into a Ñve-year guarantor and loan servicing contract with PHEAA. The Company proposed
consideration in the form of an upfront payment of $500 million and Ñve annual payments of $100 million
each. The oÅer was summarily rejected by the PHEAA Board of Directors in December 2004. Subsequently,
the Appropriations Committee of the Pennsylvania State House of Representatives held hearings to evaluate
the proposal and the student loan marketplace in Pennsylvania. Both PHEAA and Salle Mae testiÑed at the
hearings.
Exceptional Performer Designation
On October 5, 2004, ED formally notiÑed us that Sallie Mae Servicing received the Department's
Exceptional Performer Designation, a classiÑcation awarded to qualiÑed lenders and loan servicers for meeting
certain government standards in administering loans under the FFELP. To qualify as an Exceptional
Performer, lenders and servicers must achieve an overall compliance performance rating of 97 percent or
higher for servicing requirements set by ED on federally guaranteed loans. As a result of the designation,
during a one-year period that commenced on October 19, 2004, the Company will receive 100 percent
reimbursement on default claims on federally guaranteed student loans that were serviced by Sallie Mae
Servicing for a period of at least 270 days prior to the date of default. This one-year period may be extended on
an annual basis so long as the Company maintains a satisfactory overall compliance rating. The initial one-
year period and any extensions are subject to quarterly compliance audits that can result in the revocation of
the designation.
Bank One/JPMorgan Chase Relationships
On July 30, 2004, following the merger of JPMorgan Chase and Bank One, the Company and Bank One
entered into a comprehensive agreement under which, among other things:
‚ we agreed to the termination of our marketing services agreement with Bank One, eÅectively allowing
Bank One to ""in-source'' the marketing of its own education loans;
‚ Bank One paid a $14 million termination fee to the Company;
‚ we extended our ExportSS agreement, through which we purchase certain Bank One-branded FFELP
student loans and certain Private Education Loans, from March 2005 through August 2008;
‚ for a $9 million fee, paid to the Company, Bank One terminated a separate loan purchase agreement
that was entered into with USA Group prior to our July 2000 acquisition of that entity. Following the
termination, (1) we retained the right to purchase FFELP loans originated under this agreement for
the 2004-2005 academic year and all serial loans and (2) all loans that we originate and service on our
servicing platforms on behalf of Bank One will be committed for sale under the ExportSS agreement
after the 2004-2005 academic year.
In 2003, the last full year of the marketing services agreement with Bank One, we earned approximately
$37 million in marketing service fees, of which $22 million was recognized in other income and $15 million
was capitalized as a reduction in loan purchase premiums. In connection with the fees, we incurred and
recognized $15 million in expenses related to these activities. We believe we can oÅset this lost income under
the terminated marketing services agreement, as well as an expected gradual reduction in loan purchase
volume from Bank One, with increased Private Education Loans and FFELP loan originations through our
more proÑtable internal brands.
79
JPMorgan Chase Joint Venture
Our separate joint venture with JPMorgan Chase currently remains in place, although JPMorgan Chase
has rejected our initial oÅer to renew the agreements that support the joint venture and has Ñled a petition in a
Delaware Chancery court seeking to dissolve the joint venture. Under terms of the joint venture, if the
Company and JPMorgan Chase are unable to mutually agree upon the terms of a new loan purchase and
servicing agreement for the Ñve-year period beginning September 2007 by May 31, 2005, then either party
may trigger a ""Dutch Auction'' process. Under that process, the electing party oÅers to purchase the other
party's 50 percent interest or sell its 50 percent interest in the joint venture at a speciÑed price. The non-
electing party then has the right to either sell its interest in the joint venture or purchase the electing party's
interest, in either case at the originally oÅered price. If we are the successful purchaser in a Dutch Auction,
then for a two-year period following the closing:
‚ JPMorgan Chase may not compete with the Company in the marketing, purchasing, servicing or
ownership of education loans (except with respect to the continuation of business activities under the
Bank One name or the name of any other JPMorgan Chase aÇliate),
‚ we may use certain JPMorgan Chase trademarks for a nominal annual fee, and
‚ we acquire all rights to make additional FFELP student loans (serial loans) to customers of the joint
venture who entered into master promissory notes prior to the Dutch Auction.
If JPMorgan Chase is the successful purchaser in a Dutch Auction, then for a two-year period following
the closing:
‚ it may use certain Sallie Mae trademarks for a nominal annual fee,
‚ we would be required to act as origination and servicing agent for JPMorgan Chase at market
rates, and
‚ we would be required to provide JPMorgan Chase with access to certain Sallie Mae products and
services.
If neither party triggers the Dutch Auction process, then the loan purchase agreement (under which the
joint venture sells student loans to Sallie Mae) will expire on August 31, 2007 and the joint venture will expire
in 2026. Absent any negotiated settlement or other income, JPMorgan Chase and Sallie Mae would share
equally in the economics of the joint venture from September 1, 2007 until the expiration of the joint venture.
Through its lawsuit, JPMorgan Chase is seeking to dissolve the joint venture without having to follow the
mutually agreed upon Dutch Auction process. JPMorgan Chase's request with the Chancery court for an
expedited schedule for a Ñnal hearing on the merits has been stayed pending settlement discussions among the
parties. See ""Legal Proceedings'' in Item 3 of this Annual Report.
80
OTHER RELATED EVENTS AND INFORMATION
Reauthorization and Budget Proposals
Congress reauthorizes the HEA every Ñve years. The HEA was originally scheduled to expire on
September 30, 2003, but by its terms was automatically extended to September 30, 2004. Last year, Congress
passed legislation extending the Act to September 30, 2005. We expect that Congress will pass a
reauthorization bill no earlier than the second half of 2005. On February 2, 2005, Rep. John Boehner,
Chairman of the U.S. House of Representatives, Committee on Education and the Workforce, reintroduced
H.R. 507 (which was reintroduced on February 8, 2005 as H.R. 609 to correct a technical drafting error),
legislation to reauthorize the HEA. This proposal is identical to Chairman Boehner's reauthorization proposal
from 2004. Its provisions include:
‚ requiring lenders to return to the federal government Floor Income in excess of 50 basis points per loan;
‚ gradually reducing origination fees to one percent on student loans in both the FFELP and FDLP
programs;
‚ increasing loan limits for Ñrst-year and second-year students from $2,625 to $3,500 and from $3,500 to
$4,500, respectively, without increasing the aggregate undergraduate borrowing limits;
‚ increasing graduate unsubsidized annual borrowing limits from $10,000 to $12,000;
‚ preserving the current variable interest rate formula on StaÅord and Unsubsidized StaÅord loans
beyond July 1, 2006;
‚ changing the current Ñxed consolidation loan interest rates to variable rates;
‚ repealing the single holder rule (under the existing rule, if a borrower has multiple student loans that
are held by a single lender, a new lender cannot make a consolidation loan unless the single holder
declines to oÅer the borrower a consolidation loan or unless the single holder declines to oÅer to the
borrower a consolidation loan with income-sensitive repayment terms);
‚ requiring student loan lenders to report to all national credit bureaus; and
‚ repealing the 9.5 percent SAP rate payable on certain student loans funded with tax exempt bonds.
On February 7, 2005, President Bush released his Administration's proposed budget for Federal Fiscal
Year 2006. The proposed budget contains a number of reauthorization proposals that track H.R. 609,
including loan limit increases, a change to a variable rate formula for borrower interest rates on the StaÅord
and Consolidation loans, partial repeal of the 9.5 percent SAP rates and repeal of the single holder rule.
However, the Administration also proposes to reduce the amount of loan principal and accrued interest
insured against default from 98 to 95 percent for new loans originated after the eÅective date of the legislation.
Industry participants, like Sallie Mae, that have been designated by ED as Exceptional Performers would have
their reinsurance reduced from 100 percent to 97 percent under the proposals, although the Secretary of
Education would have the authority under the proposal to set reinsurance at 98 percent for Exceptional
Performers who meet certain criteria. The Administration's 2006 budget proposal would also impose a 25 basis
point annual loan holder fee on the outstanding balance of non-consolidation loans for loans originated on or
after July 1, 2006. This proposal is intended to oÅset the Floor Income that FFELP lenders may realize in
certain declining interest rate environments. Most signiÑcantly, the Administration proposes to allow
borrowers to reconsolidate on multiple occasions subject to a one percent borrower origination fee on
reconsolidation and increase the current one-time lender fee on new Consolidation Loans from 50 basis points
to one percent.
In addition, the Administration proposes to reduce incrementally through 2010 the amount guaranty
agencies may retain from collections on defaulted loans from 23 percent to 16 percent. The proposed budget
would also reduce, for new loans, the reinsurance provided by ED to guaranty agencies from 95 percent to
92 percent. Finally, the Administration proposes to eliminate the Perkins Loan program.
81
To date, no reauthorization proposals have been introduced in the Senate. Consistent with prior
reauthorizations, we expect that there will be competing proposals in both houses of Congress to reform
federal Ñnancial aid programs, including the FFELP.
While we expect the Administration's budget proposals will undergo signiÑcant review by Congress, it is
unclear whether they will be introduced as part of the upcoming reauthorization or in other legislation. If
certain proposals were adopted, including the 25 basis point fee and the reconsolidation proposals, the
Company's Ñnancial condition and results of operations could be materially adversely aÅected and the
reÑnancing risk in its Managed Consolidation Loan portfolio would increase signiÑcantly.
Legislative Update
Taxpayer-Teacher Protection Act of 2004
On October 30, 2004 President Bush signed the Taxpayer-Teacher Protection Act of 2004 (the
""October 30 Act''), a new law that amends the HEA. The October 30 Act restricts the situations in which
lenders are entitled to a minimum yield of 9.5 percent in connection with loans made from the proceeds of
certain tax-exempt bonds. SpeciÑcally, ED will no longer guarantee a minimum yield of 9.5 percent for a loan
Ñnanced with qualifying tax-exempt bonds if (1) the underlying bond matures, is retired, is defeased or is
refunded or (2) if the loan is reÑnanced with funds obtained from certain bonds or is sold or transferred to
another holder. The October 30 Act, which is eÅective for a 15-month period, is expected to be permanently
extended as part of the reauthorization of the HEA. Management expects that the October 30 Act will have
no impact on the Company's earnings or operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 2 to the consolidated Ñnancial statements, ""SigniÑcant Accounting Policies Ì Recently Issued
Accounting Pronouncements.''
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity Analysis
The eÅect of short-term movements in interest rates on our results of operations and Ñnancial position has
been limited through our interest rate risk management. The following tables summarize the eÅect on earnings
for the years ended December 31, 2004 and 2003 and the eÅect on fair values at December 31, 2004 and 2003,
based upon a sensitivity analysis performed by management assuming a hypothetical increase in market
interest rates of 100 basis points and 300 basis points while funding spreads remain constant. We have chosen
to illustrate the eÅects of a hypothetical increase to interest rates, as an increase gives rise to a larger absolute
value change to the Ñnancial statements.
Year ended December 31, 2004
Interest Rates:
Year ended December 31, 2003
Interest Rates:
Change from
increase of
100 basis
points
$
%
Change from
increase of
300 basis
points
$
%
Change from
increase of
100 basis
points
Change from
increase of
300 basis
points
$
%
$
%
(Dollars in millions, except per share amounts)
EÅect on Earnings
Increase/(decrease) in pre-tax net income before
unrealized derivative market value adjustment ÏÏ
Unrealized derivative market value adjustment ÏÏÏ
$ 31
279
3% $ 138
576
18
14% $(158)
320
37
(7)% $(156)
727
64
(6)%
145
Increase in net income before taxesÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 310
12% $ 714
28% $ 162
6% $ 571
Increase in diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏ
$.424
10% $.975
24% $ .227
5% $ .801
20%
16%
82
(Dollars in millions)
EÅect on Fair Values
Assets
At December 31, 2004
Interest Rates:
Change from
increase of 100
basis points
$
%
Change from
increase of 300
basis points
$
%
Fair
Value
Student loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$67,431
10,285
7,878
$ (315) Ì% $ (636)
(333)
(1)
(1,154)
(8)
(120)
(652)
(1)%
(3)
(15)
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$85,594
$(1,087)
(1)% $(2,123)
(2)%
Liabilities
Interest bearing liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$78,295
2,798
$(1,202)
276
(2)% $(3,356)
1,503
10
Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$81,093
$ (926)
(1)% $(1,853)
(4)%
54
(2)%
At December 31, 2003
Interest Rates:
Change from
increase of 100
basis points
$
%
Change from
increase of 300
basis points
$
%
Fair Value
(Dollars in millions)
EÅect on Fair Values
Assets
Student loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$51,559
9,085
5,531
$ (399)
(112)
(543)
(1)% $ (870)
(309)
(1)
(839)
(10)
(2)%
(3)
(15)
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$66,175
$(1,054)
(2)% $(2,018)
(3)%
Liabilities
Interest bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$58,993
3,437
$(1,458)
610
(2)% $(3,630)
1,979
18
Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$62,430
$ (848)
(1)% $(1,651)
(6)%
58
(3)%
A primary objective in our funding is to minimize our sensitivity to changing interest rates by generally
funding our Öoating rate student loan portfolio with Öoating rate debt. However, as discussed under
""LENDING BUSINESS SEGMENT Ì Student Loans Ì Floor Income,'' in the current low interest rate
environment, we can have a Ñxed versus Öoating mismatch in funding if the student loan earns at the Ñxed
borrower rate and the funding remains Öoating.
During the year ended December 31, 2004 and 2003, certain FFELP student loans were earning Floor
Income and we locked in a portion of that Floor Income through the use of futures and Floor Income
Contracts. The result of these hedging transactions was to convert a portion of the Ñxed rate nature of student
loans to variable rate, and to Ñx the relative spread between the student loan asset rate and the variable rate
liability.
In the above table under the scenario where interest rates increase 100 and 300 basis points, the increase
in pre-tax net income before the unrealized derivative market value adjustment for 2004 is primarily due to the
impact of (i) our oÅ-balance sheet hedged Consolidation Loan securitizations and the related Embedded
Floor Income recognized as part of the gain on sale, which results in no change in the Embedded Floor
83
Income as a result of the increase in rates but does result in a decrease in payments on the written Floor
contracts and (ii) our unhedged on-balance sheet loans not currently having signiÑcant Floor Income due to
the recent increase in interest rates, which results in these loans being more variable rate in nature.
The decrease in pre-tax net income in 2003 before the unrealized derivative market value adjustment
reÖects lower Floor Income on the unhedged portion of our student loan portfolio. Under the scenario where
interest rates increase 300 basis points, the change in pre-tax net income before the unrealized derivative
market value adjustment is not proportional to the change under the scenario where interest rates increase 100
basis points because of the additional spread earned on loans hedged with futures and swaps mentioned above
and the greater proportion of loans earning at a Öoating rate under a 300 basis point increase in rates.
Item 8. Financial Statements and Supplementary Data
Reference is made to the Ñnancial statements listed under the heading ""(a)1.A. Financial Statements'' of
Item 15 hereof, which Ñnancial statements are incorporated by reference in response to this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Nothing to report.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive OÇcer, Executive Vice President,
Finance and Executive Vice President, Accounting and Risk Management, evaluated the eÅectiveness of our
disclosure controls and procedures (as deÑned in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the ""Exchange Act'')) as of December 31, 2004. Based on this
evaluation, our Chief Executive OÇcer, Executive Vice President, Finance and Executive Vice President,
Accounting and Risk Management, concluded that, as of December 31, 2004, our disclosure controls and
procedures were eÅective to ensure that information required to be disclosed by us in the reports that we Ñle or
submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods
speciÑed in the SEC's rules and forms and (b) accumulated and communicated to our management,
including our Chief Executive OÇcer, Executive Vice President, Finance and Executive Vice President,
Accounting and Risk Management, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
No change in our internal control over Ñnancial reporting (as deÑned in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended) occurred during the Ñscal quarter ended
December 31, 2004 that has materially aÅected, or is reasonably likely to materially aÅect, our internal control
over Ñnancial reporting.
Item 9B. Other Information
Nothing to report.
84
PART III.
Item 10. Directors and Executive OÇcers of the Registrant
The information as to the directors and executive oÇcers of the Company set forth under the captions
""PROPOSAL 1 Ì ELECTION OF DIRECTORSÌNominees'' and ""EXECUTIVE COMPENSA-
TION Ì Executive OÇcers'' in the Proxy Statement to be Ñled on Schedule 14A relating to the Company's
Annual Meeting of Stockholders scheduled to be held on May 19, 2005 (the ""Proxy Statement'') is
incorporated into this Annual Report by reference.
Item 11. Executive Compensation
The information set forth under the caption ""EXECUTIVE COMPENSATION'' in the Proxy
Statement is incorporated into this Annual Report by reference.
Item 12. Security Ownership of Certain BeneÑcial Owners and Management and Related Stockholder
Matters
The information set forth in Note 16 to the consolidated Ñnancial statements, ""Stock-Based Compensa-
tion Plans,'' listed under the heading ""(a)1.A. Financial Statements'' of Item 15 hereof and the information
set forth under the captions ""STOCK OWNERSHIP'' and ""GENERAL INFORMATION Ì Principal
Shareholders'' in the Proxy Statement is incorporated into this Report by reference thereto. There are no
arrangements known to the Company, the operation of which may at a subsequent date result in a change in
control of the Company.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption ""CORPORATE GOVERNANCE Ì Certain Relationships
and Related Transactions'' in the Proxy Statement is incorporated into this Annual Report by reference.
Item 14. Principal Accountant Fees and Services
The information set forth under the caption ""PROPOSAL 2 Ì APPOINTMENT OF INDEPEN-
DENT AUDITOR'' in the Proxy Statement is incorporated into this Annual Report by reference.
85
Item 15. Exhibits, Financial Statement Schedules
(a) 1. Financial Statements
PART IV.
A. The following consolidated Ñnancial statements of SLM Corporation and the Report of the
Independent Registered Public Accounting Firm thereon are included in Item 8 above:
Management's Annual Report on Internal Control over Financial Reporting ÏÏÏÏÏÏÏÏÏÏÏÏ
Report of Independent Registered Public Accounting Firm ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Balance Sheets as of December 31, 2004 and 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Income for the years ended December 31, 2004, 2003
F-2
F-3
F-5
and 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
F-6
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 2004, 2003 and 2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003
and 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
F-8
F-9
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the
consolidated Ñnancial statements or notes thereto.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are Ñled or incorporated by reference as part of
this Annual Report.
The Company will furnish at cost a copy of any exhibit Ñled with or incorporated by reference into this
Annual Report. Oral or written requests for copies of any exhibits should be directed to the Corporate
Secretary.
4. Appendices
Appendix A Ì Federal Family Education Loan Program
(b) Exhibits
*2
Agreement and Plan of Reorganization by and among the Student Loan Marketing Association,
SLM Holding Corporation, and Sallie Mae Merger Company
Amended and Restated CertiÑcate of Incorporation of the Registrant
Amended By-Laws of the Registrant
Warrant CertiÑcate No. W-2, dated as of August 7, 1997
Board of Directors Restricted Stock Plan
Board of Directors Stock Option Plan
**3.1
**3.2
**4
*10.1‰‰
*10.2‰‰
*10.3‰‰ Deferred Compensation Plan for Directors
*10.4‰‰
*10.5‰‰
*10.6‰‰
*10.7‰‰
*10.8‰‰
Incentive Performance Plan
Stock Compensation Plan
1993-1998 Stock Option Plan
Supplemental Pension Plan
Supplemental Employees' Thrift & Savings Plan (Sallie Mae 401(K) Supplemental Savings
Plan)
***10.9‰‰ Directors Stock Plan
86
***10.10‰‰ Management Incentive Plan
10.11‰‰ Employee Stock Option Plan
10.12‰‰ Amended and Restated Employees' Stock Purchase Plan
10.13‰‰‰ Employment Agreement between the Registrant and Albert L. Lord, Vice Chairman of the
Board of Directors and Chief Executive OÇcer, dated as of January 1, 2003
10.14‰‰‰ Employment Agreement between the Registrant and Thomas J. Fitzpatrick, President and
Chief Operating OÇcer, dated as of January 1, 2003
10.15(*) Employment Agreement between the Registrant and C.E. Andrews, Executive Vice President,
‚10.16
‚10.17
‚10.18
‚10.19
‰14
*21
‚23
‚31.1
‚31.2
‚31.3
‚32.1
‚32.2
‚32.3
‰99.1
Accounting and Risk Management, dated as of February 24, 2004.
Named Executive OÇcer Compensation
Summary of Non-Employee Director Compensation
Limited Liability Company Agreement of Education First Marketing LLC
Limited Liability Company Agreement of Education First Finance LLC
Code of Business Conduct
Subsidiaries of the Registrant
Consent of PricewaterhouseCoopers LLP
CertiÑcation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
CertiÑcation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
CertiÑcation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
CertiÑcation Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2003
CertiÑcation Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2003
CertiÑcation Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2003
Information on GSE Management and Directors
* Incorporated by reference to the correspondingly numbered exhibits to the Registrant's Registration
Statement on Form S-4, as amended (File No. 333-21217)
** Incorporated by reference to the correspondingly numbered exhibits to the Registrant's Registration on
Form S-1 (File No. 333-38391)
*** Incorporated by reference to the Registrant's DeÑnitive Proxy Statement on Schedule 14A, as Ñled with
the Securities and Exchange Commission on April 10, 1998 (File No. 001-13251)
‰ Filed with the Securities and Exchange Commission with the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2003
‰‰ Management Contract or Compensatory Plan or Arrangement
‰‰‰ Filed with the Securities and Exchange Commission with the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003
(*) Filed with the Securities and Exchange Commission with the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2004
‚ Filed with the Securities and Exchange Commission with this Form 10-K
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
Dated: March 16, 2005
SLM CORPORATION
By:
/s/ ALBERT L. LORD
Albert L. Lord
Chief Executive OÇcer
Pursuant to the requirement of the Securities Exchange Act of 1934, as amended, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Signature
Title
Date
/s/ ALBERT L. LORD
Albert L. Lord
/s/
JOHN F. REMONDI
John F. Remondi
/s/ C.E. ANDREWS
C.E. Andrews
/s/ EDWARD A. FOX
Edward A. Fox
/s/ CHARLES L. DALEY
Charles L. Daley
Chief Executive OÇcer and Director
(Principal Executive OÇcer)
March 16, 2005
Executive Vice President, Finance
(Principal Financial OÇcer)
March 16, 2005
Executive Vice President, Accounting March 16, 2005
and Risk Management
(Principal Accounting OÇcer)
Chairman of the Board of Directors
March 16, 2005
Director
March 16, 2005
/s/ WILLIAM M. DIEFENDERFER, III
Director
March 16, 2005
William M. Diefenderfer, III
/s/ THOMAS J. FITZPATRICK
President and Chief Operating OÇcer March 16, 2005
Thomas J. Fitzpatrick
and Director
/s/ DIANE SUITT GILLELAND
Diane Suitt Gilleland
/s/ EARL A. GOODE
Earl A. Goode
/s/ ANN TORRE GRANT
Ann Torre Grant
Director
March 16, 2005
Director
March 16, 2005
Director
March 16, 2005
88
Signature
/s/ RONALD F. HUNT
Ronald F. Hunt
/s/ BENJAMIN J. LAMBERT, III
Benjamin J. Lambert, III
/s/ BARRY A. MUNITZ
Barry A. Munitz
/s/ A. ALEXANDER PORTER, JR.
A. Alexander Porter, Jr.
/s/ WOLFGANG SCHOELLKOPF
Wolfgang Schoellkopf
/s/ STEVEN L. SHAPIRO
Steven L. Shapiro
/s/ BARRY L. WILLIAMS
Barry L. Williams
Title
Director
Date
March 16, 2005
Director
March 16, 2005
Director
March 16, 2005
Director
March 16, 2005
Director
March 16, 2005
Director
March 16, 2005
Director
March 16, 2005
89
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Management's Annual Report on Internal Control over Financial Reporting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Report of Independent Registered Public Accounting Firm ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Balance Sheets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Changes in Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Cash Flows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Page
F-2
F-3
F-5
F-6
F-7
F-8
F-9
F-1
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Our management is responsible for establishing and maintaining adequate internal control over Ñnancial
reporting (as deÑned in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Under the
supervision and with the participation of our management, including our Chief Executive OÇcer, Executive
Vice President, Finance and Executive Vice President, Accounting and Risk Management, we assessed the
eÅectiveness of our internal control over Ñnancial reporting as of December 31, 2004. In making this
assessment, our management used the criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (""COSO''). Based on our
assessment and those criteria, management concluded that, as of December 31, 2004, our internal control over
Ñnancial reporting is eÅective.
During the year ended December 31, 2004, we acquired a 64 percent interest in AFS Holdings, LLC, the
parent company of Arrow Financial Services, a 100 percent interest in Southwest Student Services
Corporation and a 66 percent interest in Washington Transferee Corp. Total assets of those entities
represented nine percent of consolidated total assets as of December 31, 2004. The total interest income and
revenues of those entities represented three percent of consolidated interest income and debt management fees
and collections revenue for the year ended December 31, 2004. We have excluded those entities from our
assessment of internal control over Ñnancial reporting as of December 31, 2004, and management's conclusion
about the eÅectiveness of our internal control over Ñnancial reporting does not extend to the internal controls
of those entities. Those acquisitions were not, either individually or collectively, signiÑcant (within the
meaning of Rule 11-01(b) of Regulation S-X) to our consolidated Ñnancial statements as of and for the year
ended December 31, 2004. Those acquisitions are described in Note 11 to the consolidated Ñnancial
statements, ""Acquisitions.''
Our management's assessment of the eÅectiveness of the Company's internal control over Ñnancial
reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting Ñrm, as stated in their report which appears below.
Because of its inherent limitations, internal control over Ñnancial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of eÅectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of SLM Corporation:
We have completed an integrated audit of SLM Corporation's 2004 consolidated Ñnancial statements and
of its internal control over Ñnancial reporting as of December 31, 2004 and audits of its 2003 and 2002
consolidated Ñnancial statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated Ñnancial statements
In our opinion, the consolidated Ñnancial statements listed in the index appearing under Item 15 (a) (1),
present fairly, in all material respects, the Ñnancial position of SLM Corporation and its subsidiaries at
December 31, 2004 and 2003, and the results of their operations and their cash Öows for each of the three
years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in
the United States of America. These Ñnancial statements are the responsibility of the Company's manage-
ment. Our responsibility is to express an opinion on these Ñnancial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Ñnancial statements are free of material misstatement. An audit of
Ñnancial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in
the Ñnancial statements, assessing the accounting principles used and signiÑcant estimates made by
management, and evaluating the overall Ñnancial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 2 to the consolidated Ñnancial statements, the Company adopted SFAS No. 150,
""Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,'' and as a
result changed its methodology of accounting for equity forward contracts eÅective June 1, 2003. Additionally,
as discussed in Note 2 to the consolidated Ñnancial statements, the Company adopted EITF Issue No. 04-08,
""The EÅect of Contingently Convertible Debt on Diluted Earnings per Share,'' and as a result changed its
method of calculating diluted earnings per share.
Internal control over Ñnancial reporting
Also, in our opinion, management's assessment, included in the accompanying Management's Annual
Report on Internal Control over Financial Reporting appearing under Item 9A, that the Company maintained
eÅective internal control over Ñnancial reporting as of December 31, 2004 based on criteria established in
Internal Control Ì Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore,
in our opinion, the Company maintained, in all material respects, eÅective internal control over Ñnancial
reporting as of December 31, 2004, based on criteria established in Internal Control Ì Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining eÅective internal control
over Ñnancial reporting and for its assessment of the eÅectiveness of internal control over Ñnancial reporting.
Our responsibility is to express opinions on management's assessment and on the eÅectiveness of the
Company's internal control over Ñnancial reporting based on our audit. We conducted our audit of internal
control over Ñnancial reporting in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether eÅective internal control over Ñnancial reporting was maintained in all material
respects. An audit of internal control over Ñnancial reporting includes obtaining an understanding of internal
control over Ñnancial reporting, evaluating management's assessment, testing and evaluating the design and
operating eÅectiveness of internal control, and performing such other procedures as we consider necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company's internal control over Ñnancial reporting is a process designed to provide reasonable
assurance regarding the reliability of Ñnancial reporting and the preparation of Ñnancial statements for external
F-3
purposes in accordance with generally accepted accounting principles. A company's internal control over
Ñnancial reporting includes those policies and procedures that (i) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reÖect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of Ñnancial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material eÅect on the Ñnancial
statements.
Because of its inherent limitations, internal control over Ñnancial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of eÅectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
As described in Management's Annual Report on Internal Control over Financial Reporting, manage-
ment has excluded AFS Holdings, LLC, Southwest Student Services Corporation, and Washington Trans-
feree Corp. (collectively the ""New Subsidiaries'') from its assessment of internal control over Ñnancial
reporting as of December 31, 2004 because ownership interests in the New Subsidiaries were acquired by the
Company during 2004. We have also excluded the New Subsidiaries from our audit of internal control over
Ñnancial reporting. The Company acquired a 64 percent interest in AFS Holdings, LLC, a 100 percent interest
in Southwest Student Services Corporation, and a 66 percent interest in Washington Transferee Corp. The
New Subsidiaries total assets represent nine percent of consolidated total assets as of December 31, 2004. The
interest income and revenues of the New Subsidiaries represent three percent of consolidated interest income
and debt management fees and collections revenue for the year ended December 31, 2004.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
March 15, 2005
F-4
SLM CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands, except per share amounts)
December 31,
2004
2003
Assets
Federally insured student loans (net of allowance for losses of $7,778 and
$45,993, respectively) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$60,561,439
$45,577,073
Private Education Loans (net of allowance for losses of $171,886 and
$165,716, respectively) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5,419,611
4,470,156
Academic facilities Ñnancings and other loans (net of allowance for losses of
$11,148 and $10,052, respectively) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,047,745
1,030,907
Investments
Trading ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restricted cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained Interest in securitized receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill and acquired intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
155
3,274,123
304,700
3,578,978
3,395,487
2,211,488
2,316,388
1,066,142
4,496,248
166
4,370,347
677,357
5,047,870
1,847,585
1,105,896
2,475,836
592,112
2,463,216
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$84,093,526
$64,610,651
Liabilities
Short-term borrowingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 2,207,095
75,914,573
2,797,921
$18,735,385
39,808,174
3,437,046
Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
80,919,589
61,980,605
Commitments and contingencies
Minority interest in subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' equity
Preferred stock, Series A, par value $.20 per share, 20,000 shares authorized:
3,300 and 3,300 shares issued, respectively, at stated value of $50 per share
Common stock, par value $.20 per share, 1,125,000 shares authorized:
483,266 and 472,643 shares issued, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive income (net of tax of $237,285 and
$229,181, respectively) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' equity before treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock held in treasury at cost: 59,634 and 24,965 shares,
71,633
Ì
165,000
165,000
96,654
1,905,460
440,672
2,521,740
5,129,526
94,529
1,553,240
425,621
941,284
3,179,674
respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,027,222
549,628
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3,102,304
2,630,046
Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$84,093,526
$64,610,651
See accompanying notes to consolidated Ñnancial statements.
F-5
SLM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands, except per share amounts)
Interest income:
Federally insured student loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education LoansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Academic facilities Ñnancings and other loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense:
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: provision for lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income after provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income:
Gains on student loan securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Servicing and securitization revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Losses on securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative market value adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantor servicing fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt management fees and collections revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expenses:
Salaries and beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss on GSE debt extinguishment and defeasance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total operating expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before income taxes, minority interest in net earnings of subsidiaries and cumulative
eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before minority interest in net earnings of subsidiaries and cumulative eÅect of
accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interest in net earnings of subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income attributable to common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic earnings per common share:
Before cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic earnings per common share, after cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏ
Average common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings per common share:
Before cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings per common share, after cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏ
Years Ended December 31,
2004
2003
2002
$2,090,396
335,451
74,289
232,859
2,732,995
$1,813,368
307,477
76,740
150,690
2,348,275
$2,111,463
338,591
96,025
87,889
2,633,968
206,151
1,227,545
1,433,696
1,299,299
111,066
1,188,233
375,384
560,971
(49,358)
849,041
119,934
339,897
288,663
2,484,532
497,170
220,848
397,762
1,115,780
394,109
627,797
1,021,906
1,326,369
147,480
1,178,889
587,725
621,776
1,209,501
1,424,467
116,624
1,307,843
744,289
666,409
(9,932)
(237,815)
128,189
258,544
249,421
1,799,105
337,924
838,609
(1,801)
(1,082,100)
106,172
185,881
220,643
605,328
432,007
Ì
363,018
795,025
376,382
Ì
313,390
689,772
2,556,985
642,689
2,182,969
779,380
1,223,399
431,403
1,914,296
1,026
1,913,270
Ì
1,913,270
11,501
$1,901,769
$
$
$
$
4.36
Ì
4.36
436,133
4.04
Ì
4.04
1,403,589
Ì
1,403,589
129,971
1,533,560
11,501
$1,522,059
$
$
$
$
$
3.08
.29
3.37
452,037
2.91
.27
3.18
482,104
.59
791,996
Ì
791,996
Ì
791,996
11,501
$ 780,495
$
$
$
$
$
1.69
Ì
1.69
462,294
1.64
Ì
1.64
474,520
.28
Average common and common equivalent shares outstandingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
475,787
Dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
.74
See accompanying notes to consolidated Ñnancial statements.
F-6
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SLM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Operating activities
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gains on student loan securitizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss on securities, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss on GSE debt extinguishment and defeasance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized derivative market value adjustment, excluding equity forwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized derivative market value adjustment Ì equity forwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Donation of treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interest, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage loans originatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sales of mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Increase) in restricted cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Increase) decrease in accrued interest receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Increase (decrease) in accrued interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Decrease in Retained Interest in securitized receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Decrease in other assets, goodwill and acquired intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Decrease) increase in other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash (used in) provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investing activities
Years Ended December 31,
2003
2002
2004
$
1,913,270
$
1,533,560
$
791,996
Ì
(375,384)
49,358
220,848
(802,548)
(759,423)
111,066
Ì
(502)
(1,461,979)
1,257,574
(791,176)
(467,745)
162,018
85,767
596,101
(54,461)
(2,230,486)
(317,216)
(129,971)
(744,289)
9,932
Ì
(570,189)
68,233
147,480
40,000
Ì
(1,577,094)
1,565,343
(123,222)
29,130
94,474
96,000
321,799
132,378
(639,996)
893,564
Ì
(337,924)
1,801
Ì
203,904
Ì
116,624
Ì
Ì
(411,692)
343,050
(76,063)
(30,012)
(2,684)
40,000
169,221
(167,578)
(151,353)
640,643
Student loans acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans purchased from securitized trusts (primarily loan consolidations) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Reduction of student loans:
Installment payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Claims and resalesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from securitization of student loans treated as sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sales of student loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Academic facilities Ñnancings and other loans originatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Academic facilities Ñnancings and other loans repayments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sales of available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from maturities of available-for-sale securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of held-to-maturity and other securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sale of held-to-maturity securities and other securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from maturities of held-to-maturity securities and other securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Return of investment from Retained InterestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase of subsidiaries, net of cash acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash (used in) provided by investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(22,673,926)
(5,552,467)
(18,318,703)
(6,156,521)
(15,793,453)
(4,121,395)
5,020,214
798,327
12,475,726
478,402
(403,156)
593,261
3,857,285
645,966
13,482,900
38,362
(380,957)
627,585
(292,943,325)
124,205
293,743,096
(275,412,837)
10,505
274,274,563
(292,330)
Ì
275,567
449,539
(868,404)
(8,775,271)
(304,491)
Ì
279,176
315,610
(113,614)
(7,155,171)
4,104,599
644,899
13,785,833
54,754
(545,522)
1,425,610
(50,109,810)
133,498
50,337,774
(270,201)
786
364,656
62,067
(49,911)
24,184
Financing activities
Short-term borrowings issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term borrowings repaidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term notes issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term notes repaidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Borrowings collateralized by loans in trust ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
GSE debt extinguishmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Premiums on equity forward contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock repurchased ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common dividends paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred dividends paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided by (used in) Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net increase (decrease) in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents at beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
290,974,707
(298,108,496)
14,803,726
(15,826,730)
21,584,931
(1,967,607)
289,965
Ì
(777,293)
(321,313)
(11,501)
10,640,389
1,547,902
1,847,585
3,395,487
$
764,160,787
(772,657,799)
19,233,448
(18,658,436)
16,442,305
Ì
339,296
(17,361)
(917,353)
(266,882)
(11,501)
7,646,504
1,384,897
462,688
1,847,585
$
697,736,546
(698,920,387)
20,388,724
(19,430,003)
Ì
Ì
357,258
(35,415)
(652,052)
(130,759)
(11,501)
(697,589)
(32,762)
495,450
462,688
$
Cash disbursements made for:
Interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Noncash Ñnancing activity:
Transfer of investments to trust to defease GSE debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
$
1,214,249
549,319
1,305,906
$
$
$
930,619
655,796
$
$
1,643,400
555,200
Ì $
Ì
See accompanying notes to consolidated Ñnancial statements.
F-8
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Organization and Business
SLM Corporation (""the Company'') is a holding company that operates through a number of
subsidiaries. The Company was formed 32 years ago as the Student Loan Marketing Association, a federally
chartered government-sponsored enterprise (the ""GSE''), with the goal of furthering access to higher
education by acting as a secondary market for student loans. In 2004, the Company completed the
privatization process that began in 1997 and resulted in the Wind-Down of the GSE. SpeciÑcally, the GSE,
SLM Corporation and the Federal Reserve Bank of New York, both in its capacity as trustee and as Ñscal
agent for the GSE's remaining obligations, entered into a Master Defeasance Trust Agreement as of
December 29, 2004 that established a special and irrevocable trust, which was fully collateralized by direct,
noncallable obligations of the United States. On December 29, 2004, the United States Department of the
Treasury determined that such obligations are suÇcient, without consideration of any reinvestment of interest,
to pay the principal of and the interest on the GSE's remaining obligations. The Wind-Down was completed
upon the issuance of that determination and the GSE's separate existence terminated.
The Company provides funding, delivery and servicing support for education loans in the United States
primarily through its participation in the Federal Family Education Loan Program (""FFELP''). The
Company provides a wide range of Ñnancial services, processing capabilities and information technology to
meet the needs of educational institutions, lenders, students and their families, guarantee agencies and the
U.S. Department of Education (""ED''). The Company's primary business is to originate and hold student
loans. The Company also provides fee-based related products and services and earns fees for student loan and
guarantee servicing, and student loan default management and loan collections.
The Company has expanded its non-GSE business activities and now originates student and consumer
loans for both its own behalf and Preferred Lender List clients on the Company's proprietary origination
platform. The Company has also broadened its fee-based businesses, which include its debt management
services, student loan origination, and student loan and guarantee servicing.
2. SigniÑcant Accounting Policies
Consolidation
The consolidated Ñnancial statements include the accounts of SLM Corporation and its subsidiaries, after
eliminating intercompany accounts and transactions.
Financial Interpretation (""FIN'') No. 46, ""Consolidation of Variable Interest Entities,'' requires
Variable Interest Entities (""VIEs'') to be consolidated by their primary beneÑciaries if they do not eÅectively
disperse risks among parties involved. A VIE exists when either the total equity investment at risk is not
suÇcient to permit the entity to Ñnance its activities by itself, or the equity investors lack one of three
characteristics associated with owning a controlling Ñnancial interest. Those characteristics are the direct or
indirect ability to make decisions about an entity's activities through voting rights or similar rights, the
obligation to absorb the expected losses of an entity if they occur, and the right to receive the expected residual
returns of the entity if they occur.
As further discussed in Note 9, ""Student Loan Securitization,'' the Company does not consolidate any
qualifying special purpose entities (""QSPEs'') created for securitization purposes in accordance with the
Financial Accounting Standard Board's (""FASB'') Statement of Financial Accounting Standard (""SFAS'')
No. 140, ""Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities Ì a
Replacement of SFAS No. 125.'' All of the Company's oÅ-balance sheet securitizations still meet the QSPE
deÑnition and are not consolidated. In addition, the Company's accounting treatment for its on-balance sheet
F-9
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
2. SigniÑcant Accounting Policies (Continued)
Consolidation Loan securitizations are not aÅected by FIN No. 46 as the Company previously concluded that
such transactions should be consolidated.
Use of Estimates
The Company's Ñnancial reporting and accounting policies conform to generally accepted accounting
principles in the United States (""GAAP''). The preparation of Ñnancial statements in conformity with GAAP
requires management to make estimates and assumptions that aÅect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the Ñnancial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could diÅer from those
estimates. Key accounting policies that include signiÑcant judgments and estimates include valuation and
income recognition of the Retained Interest, loan eÅective interest method (premium/borrower beneÑts),
provision for loan losses, and derivative accounting.
The combination of aggressive marketing in the student loan industry and low interest rates has led to
record levels of Consolidation Loan volume, which, in turn, has had a signiÑcant eÅect on a number of
accounting estimates in recent years. The Company expects the Consolidation Loan program to continue to be
an attractive option for borrowers and does not anticipate any changes in the program prior to the
reauthorization of the Higher Education Act (the ""HEA''). Accordingly, during the Company's regular
analysis of its critical accounting estimates, the Company has continually updated the estimates used to
develop the cash Öows and eÅective yield calculations as they relate to the amortization of student loan
premiums and discounts, borrower beneÑts and the valuation and income recognition of the Residual Interest.
Loans
Loans, consisting of federally insured student loans, Private Education Loans, student loan participations,
lines of credit, academic facilities Ñnancings, and other private consumer and mortgage loans are carried at
amortized cost, which includes unamortized premiums and unearned purchase discounts.
Private Education Loans which are not guaranteed by the federal government are charged-oÅ against the
allowance for loan loss at 212 days past due. The Company continues to accrue interest on Private Education
Loans until the charge-oÅ date as well as forbearance periods. When the loan charges oÅ, all accrued interest
is charged oÅ against interest income. FFELP loans are guaranteed as to both principal and interest, and
therefore continue to accrue interest until such time that they are paid by the guarantor.
Student Loan Income
The Company recognizes student loan income as earned, net of amortization of premiums, capitalized
direct origination and acquisition costs, and the accretion of discounts. Additionally, income is recognized
based upon the expected yield of the loan after giving eÅect to prepayments, extensions and to estimates for
borrower utilization of incentives for timely payment (""borrower beneÑts''). The estimates of the eÅect of
borrower beneÑts on student loan yield are based on analyses of historical payment behavior of borrowers who
are eligible for the incentives and the evaluation of the ultimate qualiÑcation rate for these incentives.
Premiums, capitalized direct origination and acquisition costs and discounts received are amortized over the
estimated life of the loan, which includes an estimate of prepayment speeds. The Company periodically
evaluates the assumptions used to estimate its loan life and in instances where there are modiÑcations to the
assumptions, amortization is adjusted on a cumulative basis to reÖect the change since the acquisition of the
loan.
F-10
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
2. SigniÑcant Accounting Policies (Continued)
In addition, the Company pays an annual 105 basis point Consolidation Loan rebate fee on Consolidation
Loans and was also required to pay an annual 30 basis point OÅset Fee unique to the GSE on StaÅord and
PLUS student loans purchased and held on or after August 10, 1993 until the GSE was dissolved on
December 29, 2004. These fees are netted against student loan income.
Allowance for Student Loan Losses
The Company has established an allowance that is an estimate of probable losses in the portfolio at the
balance sheet date. The Company presents student loans net of the allowance on the balance sheet.
In evaluating the adequacy of the allowance for losses on the Private Education Loan portfolio, the
Company considers several factors including: the credit proÑle of the borrower and/or co-borrower, loans in
repayment versus those in a permitted non-paying status, months of repayment, delinquency status, type of
program and trends in defaults in the portfolio based on Company and industry data. (See also Note 4,
""Allowance for Student Loan Losses.'') When calculating the Private Education Loan loss reserve, the
Company divides the portfolio into categories of similar risk characteristics based on loan program type,
underwriting criteria, existence or absence of a co-borrower, repayment begin date and repayment status. The
Company then applies default and collection rate projections to each category.
The Company's loss estimates include losses to be incurred over the loss conÑrmation period, which is
two years for career training loans beginning when the loan is originated and Ñve years for higher education
Private Education Loans beginning when the borrower leaves school, similar to the rules governing FFELP
payment requirements. The Company's collection policies allow for periods of nonpayment for borrowers
experiencing temporary diÇculty meeting payment obligations (typically, very early in the repayment term
when they are starting their careers). This is referred to as forbearance status.
For the federally insured loan portfolios, eÅective for a renewable one-year period beginning on
October 19, 2004, Sallie Mae, Inc.'s loan servicing division, Sallie Mae Servicing, was designated as an
Exceptional Performer (""EP'') by ED in recognition of meeting certain performance standards set by the ED
in servicing FFELP loans. As a result of this designation, the Company receives 100 percent reimbursement
on default claims on federally guaranteed student loans that are serviced by Sallie Mae Servicing for a period
of at least 270 days before the date of default. Prior to being designated as an EP, the Company was subject to
the two percent Risk Sharing on these loans. The Company is entitled to receive this beneÑt as long as it
remains in compliance with the required servicing standards, which are assessed on an annual and quarterly
basis through compliance audits and other criteria. The EP designation also applies to all FFELP loans that
the Company owns but are serviced by other service providers with the EP designation and conversely does not
apply for loans serviced by other service providers without the EP designation. The Company provides no
allowance for loans for which the Company receives 100 percent reimbursement on defaulted claims. At
December 31, 2004, approximately 88 percent of the Company's federally insured loans are no longer subject
to Risk Sharing. For federally insured loans that are only 98 percent guaranteed for principal and interest, the
Company considers trends in student loan claims rejected for payment by guarantors based on periodic
evaluations of its loan portfolios considering past experience, changes to federal student loan programs, current
economic conditions and other relevant factors.
Cash and Cash Equivalents
Cash and cash equivalents includes term federal funds, Eurodollar deposits, money market funds and
bank deposits with original terms to maturity of less than three months.
F-11
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
2. SigniÑcant Accounting Policies (Continued)
Restricted Cash and Investments
Restricted cash includes amounts restricted for on-balance sheet student loan securitizations, other
secured borrowings, as well as cash received from lending institutions pending disbursement for student loans
in connection with servicing student loans. Cash received from lending institutions that is invested pending
disbursement for student loans is restricted and cannot be disbursed for any other purpose. The investments
held must be instruments explicitly guaranteed by the United States government, or instruments collateralized
by securities guaranteed by the United States government. Generally these securities include Treasury bills,
notes and bonds, and reverse repurchase agreements collateralized by these instruments. Restricted cash and
investments also includes cash received from students or parents and owed to schools in connection with the
tuition payment plan program of Academic Management Services Corp. (""AMS''), acquired in the fourth
quarter of 2003.
Investments
Investments are held to provide liquidity and to serve as a source of income. The majority of the
Company's investments are classiÑed as available-for-sale and such securities are carried at market value, with
the temporary changes in market value carried as a separate component of stockholders' equity. The
amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of
discounts. Impairment is evaluated considering several factors including the length of time and extent to
which the market value has been less than cost; the Ñnancial condition and near-term prospects of the issuer;
and the intent and ability to retain the investment in order to allow for an anticipated recovery in market value.
If, based on the analysis, it is determined that the impairment is other than temporary, the investment is
written down to fair value and a loss is recognized through earnings. Securities classiÑed as trading are
accounted for at fair market value with unrealized gains and losses included in investment income. Securities
that the Company has the intent and ability to hold to maturity are classiÑed as held-to-maturity and
accounted for at amortized cost. The Company also insurance-related investments and investments in
leveraged leases, primarily with U.S. commercial airlines, which are accounted for at amortized cost.
Interest Expense
Interest expense is based upon contractual interest rates adjusted for the amortization of debt issuance
costs and premiums and the accretion of discounts. The Company's interest expense may also be adjusted for
net payments/receipts related to interest rate and foreign currency swap agreements and interest rate futures
contracts that qualify as hedges under GAAP. Interest expense also includes the amortization of deferred
gains and losses on closed hedge transactions that qualiÑed as cash Öow hedges.
Securitization Accounting
To meet the sale criteria of SFAS No. 140, the Company's securitizations use a two-step structure with a
QSPE that legally isolates the transferred assets from the Company, even in the event of bankruptcy.
Transactions receiving sale treatment are also structured to ensure that the holders of the beneÑcial interests
issued by the QSPE are not constrained from pledging or exchanging their interests, and that the Company
does not maintain eÅective control over the transferred assets. If these criteria are not met, then the
transaction is accounted for as an on-balance sheet secured borrowing.
F-12
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
2. SigniÑcant Accounting Policies (Continued)
The Company assesses the Ñnancial structure of each securitization to determine whether the trust or
other securitization vehicle meets the sale criteria as deÑned in SFAS No. 140 and accounts for the
transaction accordingly. To be a QSPE, the trust must meet all of the following conditions:
‚ It is demonstrably distinct from the Company and cannot be unilaterally dissolved by the Company
and at least 10 percent of the fair value of its interests is held by independent third parties.
‚ The activities in which the trust can participate are signiÑcantly limited. These activities are entirely
speciÑed up-front in the initial legal documents creating the QSPE.
‚ There are limits to the assets the QSPE can hold; speciÑcally, it can hold only Ñnancial assets
transferred to it that are passive in nature, passive derivative instruments pertaining to the beneÑcial
interests held by independent third parties, servicing rights, temporary investments pending distribution
to security holders, and cash.
‚ It can only dispose of its assets in automatic response to the occurrence of an event speciÑed in the
applicable legal documents and out of the control of the Company.
The Company holds rights that can aÅect the remarketing of speciÑc bonds in certain Consolidation Loan
securitization structures. These remarketing rights are not signiÑcantly limited and therefore these securitiza-
tions did not meet the criteria of being a QSPE and are accounted for on-balance sheet as VIEs.
Retained Interest
The Company securitizes its student loan assets, and for transactions qualifying as sales, retains a
Residual Interest which may include reserve and other cash accounts, and servicing rights (as the Company
retains the servicing responsibilities), all of which are referred to as the Company's Retained Interest in
securitized receivables. The Residual Interest is the right to receive cash Öows from the student loans and
reserve accounts in excess of the amounts needed to pay servicing, derivative costs (if any), other fees, and the
principal and interest on the bonds backed by the student loans. The investors and the securitization trust have
no recourse to the Company's other assets for the failure of the student loans to pay when due.
When the Company receives sale treatment on its FFELP StaÅord, Private Education, and certain of the
Consolidation Loan securitizations, it recognizes the resulting gain on student loan securitizations on the
consolidated statements of income. This gain is based upon the diÅerence between the allocated cost basis of
the assets sold and the relative fair value of the assets received. The primary component in determining the fair
value of the assets received is the calculation of the Residual Interest. The Company estimates the fair value
of the Residual Interest, both initially and each subsequent quarter, based on the present value of future
expected cash Öows using management's best estimates of the following key assumptions Ì credit losses,
prepayment speeds, the forward interest rate curve and discount rates commensurate with the risks involved.
Quoted market prices are not available. The Company accounts for its Residual Interests as an available-for-
sale security. Accordingly, it is reÖected at market value with temporary changes in market value reÖected as a
component of accumulated other comprehensive income in stockholders' equity.
The fair value of the Fixed Rate Embedded Floor Income is a component of the Residual Interest and is
determined both initially at the time of the sale of the student loans and each subsequent quarter. This
estimate is based on an option valuation and a discounted cash Öow calculation that considers the current
borrower rate, SAP spreads and the term for which the loan is eligible to earn Floor Income as well as time
value, forward interest rate curve and volatility factors. Variable Rate Floor Income received is recorded as
earned in securitization income.
F-13
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
2. SigniÑcant Accounting Policies (Continued)
The Company records interest income and periodically evaluates its Residual Interests for other than
temporary impairment in accordance with the Emerging Issues Task Force (""EITF'') Issue No. 99-20
""Recognition of Interest Income and Impairment on Purchased and Retained BeneÑcial Interests in
Securitized Financial Assets.'' Under this guidance, each quarter, the Company estimates the cash Öows to be
received from its Residual Interests which are used prospectively to calculate a yield for income recognition.
In cases where the Company's estimate of future cash Öows results in a decrease in the yield used to recognize
interest income compared to the prior quarter, the Residual Interest is written down to fair value, Ñrst to the
extent of any unrealized gain in accumulated other comprehensive income, then through earnings as an other
than temporary impairment.
The Company also receives income for servicing the loans in its securitization trusts which is recognized
as earned. The Company assesses the amounts received as compensation for these activities at inception and
on an ongoing basis to determine if the amounts received are adequate compensation as deÑned in SFAS
No. 140. To the extent such compensation is determined to be no more or less than adequate compensation,
no servicing asset or obligation is recorded at the time of securitization.
Derivative Accounting
SFAS No. 133
The Company accounts for its derivatives, which include interest rate swaps, cross-currency interest rate
swaps, interest rate futures contracts, interest rate cap contracts, Floor Income Contracts and equity forward
contracts in accordance with SFAS No. 133, ""Accounting for Derivative Instruments and Hedging Activi-
ties,'' which requires that every derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded at fair value on the balance sheet as either an asset or liability. The Company
determines fair value for its derivative contracts using pricing models that consider current market conditions
and the contractual terms of the derivative contract. These factors include interest rates, time value, forward
interest rate curve and volatility factors. Pricing models and their underlying assumptions impact the amount
and timing of unrealized gains and losses recognized, and the use of diÅerent pricing models or assumptions
could produce diÅerent Ñnancial results.
Many of the Company's derivatives, mainly interest rate swaps hedging the fair value of Ñxed rate assets
and liabilities, cross-currency interest rate swaps, and certain Eurodollar futures contracts, qualify as eÅective
hedges under SFAS No. 133. For these derivatives, the relationship between the hedging instrument and the
hedged items (including the hedged risk and method for assessing eÅectiveness), as well as the risk
management objective and strategy for undertaking various hedge transactions at the inception of the hedging
relationship is documented. Each derivative is designated to either a speciÑc asset or liability on the balance
sheet or expected future cash Öows, and designated as either a fair value or a cash Öow hedge. Fair value
hedges are designed to hedge the Company's exposure to changes in fair value of a Ñxed rate or foreign
currency asset or liability (""fair value'' hedge), while cash Öow hedges are designed to hedge the Company's
exposure to variability of either a Öoating rate asset's or liability's cash Öows or expected Ñxed rate debt
issuance (""cash Öow'' hedge). For eÅective fair value hedges, both the hedge and the hedged item (for the
risk being hedged) are marked-to-market with any diÅerence recorded immediately in the income statement.
For cash Öow hedges, the eÅective change in the fair value of the derivative is recorded in other
comprehensive income, net of tax, and recognized in earnings in the same period as the earnings eÅects of the
hedged item. The ineÅective portion of a cash Öow hedge is recorded through earnings. The assessment of the
hedge's eÅectiveness is performed at inception and on an ongoing basis. When it is determined that a
derivative is not currently an eÅective hedge or it will not be one in the future, the Company discontinues the
hedge accounting prospectively and ceases recording changes in the fair value of the hedged item.
F-14
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
2. SigniÑcant Accounting Policies (Continued)
The Company also has a number of derivatives, primarily Floor Income Contracts, certain Eurodollar
futures contracts and certain basis swaps, that the Company believes are eÅective economic hedges but are not
considered eÅective hedges under SFAS No. 133, primarily because they are hedging an oÅ-balance sheet
Ñnancial instrument or, in the case of the Floor Income Contracts, are written options which under SFAS
No. 133 have a more stringent eÅectiveness hurdle to meet. These derivatives are classiÑed as ""trading'' for
GAAP purposes and as a result they are marked-to-market through GAAP earnings with no consideration for
the price Öuctuation of the hedged item.
Net settlement income/expense on derivatives and realized gains/losses related to derivative dispositions
(""realized derivative market value adjustment'') that do not qualify as hedges under SFAS No. 133 are
included in the derivative market value adjustment on the income statement. As a result, the derivative
market value adjustment includes the unrealized changes in the fair value of the Company's derivatives
(except eÅective cash Öow hedges which are recorded in other comprehensive income), the unrealized
changes in fair value of hedged items in qualifying fair value hedges, as well as the realized changes in fair
value related to derivative net settlements and dispositions that do not qualify for hedge accounting.
SFAS No. 150
Under SFAS No. 150, ""Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity,'' equity forward contracts that allow a net settlement option either in cash or the
Company's stock are required to be accounted for in accordance with SFAS No. 133 as derivatives. As a
result, the Company marks the equity forward contracts to market through earnings. In accordance with
SFAS No. 150, equity forward contracts that were entered into prior to June 1, 2003 and outstanding at July 1,
2003, were marked-to-market on July 1, 2003 and resulted in a gain of $130 million, which was reÖected as a
""cumulative eÅect of accounting change'' in the consolidated statements of income.
Debt Management Fees and Collections Revenue
In the purchased receivables business, the Company focuses on various types of consumer debt with an
emphasis on charged-oÅ credit card receivables. The Company accounts for its investments in charged-oÅ
receivables in accordance with Practice Bulletin 6, ""Amortization of Discounts on Certain Acquired Loans,''
whereby the Company establishes static pools of relatively homogeneous accounts and initially records them
at cost. The Company then recognizes income each month based on each static pool's eÅective interest rate.
Monthly cash collections are all allocated to revenue and principal reduction based on the estimated internal
rate of return. The static pools are tested monthly for impairment.
The Company also receives contingency fees for collections on behalf of clients. Revenue is recognized
upon receipt of the customer funds or upon notiÑcation of collection when clients receive borrower payments
directly.
The Company also receives fees from guarantor agencies for default aversion services when a loan is
delinquent and is initially placed with the Company. The Company is obligated to provide such services for the
remaining life of the loan for no additional fee. In the event that the loan defaults, the Company is obligated to
rebate a portion of the fee to the guarantor agency in proportion to the principal and interest outstanding when
F-15
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
2. SigniÑcant Accounting Policies (Continued)
the loan defaults. The Company recognizes fees received, net of actual rebates, over the service period which
is estimated to be rendered over the life of the loan.
Guarantor Servicing Fees
The Company performs services including loan origination and account maintenance services for
guarantor agencies, ED, educational institutions and Ñnancial institutions. The fees associated with these
services are accrued as earned. The Company is party to a guarantor servicing contract with United Student
Aid Funds, Inc. (""USA Funds''), which accounts for 85 percent of the 2004 guarantor servicing.
Software Development Costs
Certain direct development costs associated with internal-use software are capitalized, including external
direct costs of services and payroll costs for employees devoting time to the software projects. These costs are
included in other assets and are amortized over a period not to exceed Ñve years beginning when the asset is
technologically feasible and substantially ready for use. Maintenance costs and research and development
costs relating to software to be sold or leased are expensed as incurred.
During the years ended December 31, 2004, 2003, and 2002, the Company capitalized $18 million,
$17 million, and $23 million, respectively, in costs related to software development, and expensed $99 million,
$95 million, and $70 million, respectively, related to routine maintenance, betterments and amortization. At
December 31, 2004 and 2003, the unamortized balance of capitalized internally developed software included
in other assets was $44 million, $39 million, and $42 million, respectively.
Goodwill and Intangible Assets
The Company accounts for goodwill and other intangibles in accordance with SFAS No. 142, ""Goodwill
and Other Intangible Assets,'' pursuant to which goodwill and intangible assets with indeÑnite lives are not
amortized but must be tested for impairment annually or more frequently if an event indicates that the
asset(s) might be impaired. Intangible assets with Ñnite lives are amortized over their estimated lives. Such
assets are amortized using the straight line method or accelerated method, depending on the asset class, over a
period of up to eighteen years.
Accounting for Stock-Based Compensation
The Company has elected to continue to follow the intrinsic value method of accounting as prescribed by
Accounting Principles Board (""APB'') Opinion No. 25, ""Accounting for Stock Issued to Employees,'' to
account for employee stock options. Under APB No. 25, the Company does not recognize compensation
expense on Ñxed award plans unless the exercise price of its employee stock options is less than the market
price of the underlying stock on the date of grant. The Company grants all of its options at the fair market
value of the underlying stock on the date of grant. Consequently, the Company has not recorded such expense
in the periods presented.
F-16
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
2. SigniÑcant Accounting Policies (Continued)
The fair values for the options granted in the years ended December 31, 2004 and 2003 were estimated at
the date of grant using a Black-Scholes option pricing model, with the following weighted average
assumptions:
Years Ended December 31,
2003
2004
2002
Risk free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected dividend rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected life of the option (in years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3.56%
2.47%
2.59%
16.27% 25.31% 31.32%
1.14%
1.28%
1.66%
3 years
3 years
3 years
The following table summarizes pro forma disclosures for the years ended December 31, 2004, 2003 and
2002, as if the Company had accounted for employee and Board of Directors stock options granted subsequent
to December 31, 1994 under the fair market value method as set forth in SFAS No. 123. The option value is
amortized over an assumed vesting period of three years or to the actual date of vesting, whichever comes Ñrst.
Net income attributable to common stockÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax eÅectsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Years Ended December 31,
2003
2004
2002
$1,901,769
$1,522,059
$ 780,495
(41,885)
(85,503)
(104,081)
Pro forma net income attributable to common stock ÏÏÏÏ
$1,859,884
$1,436,556
$ 676,414
Basic earnings per common share, after cumulative
eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pro forma basic earnings per common share, after
cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings per common share, after cumulative
eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pro forma diluted earnings per common share, after
cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
$
$
4.36
4.26
4.04
3.96
$
$
$
$
3.37
3.18
3.18
3.00
$
$
$
$
1.69
1.46
1.64
1.43
Income Taxes
Income taxes are recorded in accordance with SFAS No. 109, ""Accounting for Income Taxes.'' The asset
and liability approach underlying SFAS No. 109 requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary diÅerences between the carrying amounts and tax basis
of the Company's assets and liabilities. To the extent tax laws change, deferred tax assets and liabilities are
adjusted in the period that the tax change is enacted.
""Income tax expense'' includes (i) deferred tax expense, which represents the net change in the deferred
tax asset or liability balance during the year plus any change in a valuation allowance, and (ii) current tax
expense, which represents the amount of tax currently payable to or receivable from a tax authority plus
amounts accrued for expected tax deÑciencies (including both tax and interest).
F-17
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
2. SigniÑcant Accounting Policies (Continued)
In accordance with SFAS No. 5, ""Accounting for Contingencies,'' the Company records a reserve for
expected controversies with the Internal Revenue Service and various state taxing authorities when it is
deemed that deÑciencies arising from such controversies are probable and reasonably estimable. This reserve
includes both tax and interest on these deÑciencies.
Minority Interest in Subsidiaries
Minority interest in subsidiaries represents interest held in AFS Holdings, LLC and the Washington
Transferee Corporation of approximately 36 percent and 34 percent, respectively, at December 31, 2004.
Earnings per Common Share
The Company computes earnings per common share (""EPS'') in accordance with SFAS No. 128,
""Earnings per Share.'' Basic earnings per common share (""Basic EPS'') are calculated using the weighted
average number of shares of common stock outstanding during each period. Diluted earnings per common
share (""Diluted EPS'') reÖect the potential dilutive eÅect of: (i) additional common shares that are issuable
upon exercise of outstanding stock options, deferred compensation, restricted stock units, and the outstanding
commitment to issue shares under the Employee Stock Purchase Plan, determined by the treasury stock
method, (ii) the assumed conversion of convertible notes, determined by the ""if-converted'' method (see
""EÅect of Contingently Convertible Debt on Diluted Earnings per Share'' below) and (iii) equity forwards,
determined by the reverse treasury stock method. See Note 15, ""Common Stock,'' for further discussion.
ReclassiÑcations
Certain reclassiÑcations have been made to the balances as of and for the years ended December 31, 2003
and 2002, to be consistent with classiÑcations adopted for 2004.
Recently Issued Accounting Pronouncements
Share-Based Payment
On December 16, 2004, FASB issued SFAS No. 123(R), ""Share-Based Payment,'' which is a revision of
SFAS No. 123, ""Accounting for Stock-Based Compensation.'' Generally, the approach in SFAS No. 123(R)
is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the income statement
based on their fair values. Pro forma disclosure is no longer an alternative. The new standard will be eÅective
for public entities (excluding small business issuers) in the Ñrst interim or annual reporting period beginning
after June 15, 2005, irrespective of the entity's Ñscal year. Early adoption is permitted in periods in which
Ñnancial statements have not yet been issued. SFAS No. 123(R) allows for two transition alternatives for
public companies: (a) modiÑed-prospective transition or (b) modiÑed-retrospective transition. We are still
evaluating both methods, but have tentatively decided to apply the modiÑed-retrospective transition alterna-
tive for all periods presented and will recognize compensation cost in the amounts previously reported in the
pro forma footnote disclosure under the provisions of SFAS No. 123(R). Had we adopted SFAS No. 123 in
2004, our diluted earnings per share would have been $0.08 lower and the eÅect going forward should have a
similar eÅect on diluted earnings per share.
EÅect of Contingently Convertible Debt on Diluted Earnings per Share
In December 2004, the Company adopted the EITF Issue No. 04-8, ""The EÅect of Contingently
Convertible Debt on Diluted Earnings per Share,'' which addresses the timing of the inclusion of the dilutive
F-18
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
2. SigniÑcant Accounting Policies (Continued)
eÅect of contingently convertible debt instruments (""Co-Cos'') in diluted earnings per share. Co-Cos are
generally convertible into the common shares of the issuer after the common stock share price exceeds a
predetermined threshold for a speciÑed time period, generally referred to as the market price trigger. EITF
No. 04-8 requires the shares underlying the Co-Cos be included in diluted earnings per share computations
regardless of whether the market price trigger or the conversion price has been met using the ""if-converted''
accounting method. EITF No. 04-8 is eÅective for reporting periods ending after December 15, 2004 with
retroactive restatement to all required reporting periods. As a result, the diluted earnings per common share
amounts have been retroactively restated for all prior periods presented to give eÅect to the application of
EITF No. 04-8 as it relates to the Company's $2 billion Co-Cos issued in May 2003. The eÅect of the
adoption of EITF No. 04-8 was to decrease diluted earnings per common share, as discussed in Note 15,
""Common Stock.''
Accounting for Certain Loans or Debt Securities Acquired in a Transfer
In December 2003, the Accounting Standards Executive Committee of the American Institute of
CertiÑed Public Accountants issued Statement of Position (""SOP'') No. 03-3, ""Accounting for Certain
Loans or Debt Securities Acquired in a Transfer.'' SOP No. 03-3 applies to acquired loans and debt securities
where there has been evidence of deterioration in credit quality at the date of purchase and for which it is
probable that the investor will not be able to collect all contractually required payments. It addresses the
accounting for diÅerences between the contractual cash Öows of acquired loans and the cash Öows expected to
be collected from an investor's initial investment in loans acquired in a transfer if those diÅerences are
attributable, at least in part, to credit quality.
SOP No. 03-3 requires purchased loans and debt securities within its scope to be initially recorded at fair
value and prohibits the recording of a valuation allowance at the date of purchase. It limits the yield that may
be accreted as interest income on such loans to the excess of an investor's estimate of undiscounted expected
principal, interest and other cash Öows from the loan over the investor's initial investment in the loan.
Subsequent increases in estimated future cash Öows to be collected would be recognized prospectively in
interest income through a yield adjustment over the remaining life of the loan. Decreases in estimated future
cash Öows to be collected would be recognized as an impairment expense. SOP No. 03-3 primarily applies
prospectively to loans acquired in Ñscal years beginning after December 15, 2004. The Company is currently
evaluating the eÅect of the adoption of SOP No. 03-3 on its consolidated Ñnancial statements.
3. Student Loans
The FFELP is subject to comprehensive reauthorization every Ñve years and to frequent statutory and
regulatory changes. The most recent reauthorization was the Higher Education Amendments of 1998.
There are three principal categories of FFELP loans: StaÅord loans, PLUS loans, and Consolidation
Loans. Generally, StaÅord and PLUS loans have repayment periods of between Ñve and ten years.
Consolidation Loans have repayment periods of twelve to thirty years. FFELP loans obligate the borrower to
pay interest at a stated Ñxed rate or an annually reset variable rate that has a cap. The interest rates are either
Ñxed to term or reset annually on July 1 of each year depending on when the loan was originated and the loan
type. The Company earns interest at the greater of the borrower's rate or a Öoating rate. If the Öoating rate
exceeds the borrower rate, ED makes a payment directly to the Company based upon the SAP formula. In low
or certain declining interest rate environments when student loans are earning at the Ñxed borrower rate, while
the interest on the funding for the loans is variable and declining, the Company can earn additional spread
income that it refers to as Floor Income.
F-19
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
3. Student Loans (Continued)
As of December 31, 2004 and 2003, 63 percent of the Company's on-balance sheet student loan portfolio
was in repayment. Most of the Company's loans do not require repayment while the borrower is in-school and
during the grace period immediately upon leaving school. The borrower may also be granted a deferment or
forbearance for a period of time based on need, during which time the borrower is not considered to be in
repayment. Interest continues to accrue on loans in deferment and forbearance.
FFELP loans originated prior to October 1, 1993 are insured for 100 percent of their unpaid balance
against the borrower's default, death, disability or bankruptcy. Insurance on FFELP loans originated on or
after October 1, 1993 is set at 98 percent but can be increased to 100 percent if a servicer qualiÑes for the
Exceptional Performer designation as discussed in ""Allowance for FFELP Student Loan Losses'' in Note 4.
The two percent uninsured portion is referred to as Risk Sharing for holders of these loans. Insurance on
FFELP loans is provided by certain state or non-proÑt guarantee agencies, which are reinsured by the federal
government. At December 31, 2004 and 2003, the Company owned $6.9 billion and $39.8 billion of 98 percent
reinsured FFELP loans, and $51.7 billion and $4.7 billion of 100 percent reinsured loans, respectively. Health
Education Assistance Loans (""HEAL'') are directly insured 100 percent by the federal government.
In addition to federal loan programs, which place statutory limits on per year and total borrowing, the
Company oÅers a variety of Private Education Loans. Private Education Loans for post-secondary education
and loans for career training can be subdivided into two main categories: loans that supplement FFELP
student loans primarily for higher and lifelong learning programs and loans for career training. The Company
bears the full risk of any losses experienced in the non-insured Private Education Loan portfolio, and as a
result these loans are underwritten and priced based upon standardized consumer credit scoring criteria. In
addition, students who do not meet the Company's minimum underwriting standards are required to obtain a
credit-worthy co-borrower. Approximately 48 percent of the Company's Private Education Loans have a co-
borrower.
The estimated weighted average life of student loans in the Company's portfolio was approximately
8.7 years and 9.3 years at December 31, 2004 and 2003, respectively. The following table reÖects the
distribution of the Company's student loan portfolio by program.
December 31,
2004
2003
FFELP Ì StaÅord ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FFELP Ì PLUS/SLS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FFELP Ì Consolidation Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
HEAL(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$15,584,683
2,036,893
40,965,445
5,794,629
991,368
23.8% $15,280,494
2,083,964
3.1
26,459,538
62.7
4,757,442
8.9
1,160,835
1.5
30.7%
4.2
53.2
9.6
2.3
Total student loans, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
65,373,018
100.0% 49,742,273
100.0%
Unamortized premium/discount, net ÏÏÏÏÏÏÏÏÏÏÏÏ
787,696
Allowance for student loan lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(179,664)
66,160,714
516,665
50,258,938
(211,709)
Total student loans, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$65,981,050
$50,047,229
(1) The HEAL program was integrated into the FFELP in 1998, so there are no new originations under that
program.
F-20
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
4. Allowance for Student Loan Losses
The provision for loan losses represents the periodic expense of maintaining an allowance suÇcient to
absorb losses, net of recoveries, inherent in the student loan portfolios. The evaluation of the provisions for
student loan losses is inherently subjective as it requires material estimates that may be susceptible to
signiÑcant changes. The Company believes that the allowance for student loan losses is appropriate to cover
probable losses in the student loan portfolios.
The following table summarizes changes in the allowance for student loan losses for both the Private
Education Loan and federally insured student loan portfolios for the years ended December 31, 2004, 2003,
and 2002.
Balance at beginning of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additions
Years ended December 31,
2003
2004
2002
$ 211,709
$230,684
$251,689
Provisions for student loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
133,123
14,138
142,077
13,106
110,328
10,683
Deductions
Reductions for student loan sales and securitizations ÏÏÏÏÏ
Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Reduction in federal Risk Sharing allowance/provision for
EP designationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(35,887)
(117,441)
(85,579)
(95,445)
(27,427)
(84,648)
(32,709)
6,731
Ì
6,866
Ì
(29,941)
Balance at end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 179,664
$211,709
$230,684
In addition to the provision for student loan losses, provisions for other losses totaled $11 million,
$5 million, and $6 million for the years ended December 31, 2004, 2003, and 2002, respectively.
Allowance for FFELP Student Loan Losses
EÅective for a renewable one-year period beginning on October 19, 2004, Sallie Mae Servicing was
designated as an Exceptional Performer (""EP'') by the ED in recognition of meeting certain performance
standards set by the ED in servicing FFELP loans. As a result of this designation, the Company receives
100 percent reimbursement on default claims on federally guaranteed student loans that are serviced by Sallie
Mae Servicing for a period of at least 270 days before the date of default and will no longer be subject to the
two percent Risk Sharing on these loans. The Company is entitled to receive this beneÑt as long as the
Company remains in compliance with the required servicing standards, which are assessed on an annual and
quarterly basis through compliance audits and other criteria. The 100 percent reimbursement applies to all
FFELP loans that are serviced by the Company as well as default claims on federally guaranteed student loans
that the Company owns but are serviced by other service providers with the EP designation. At December 31,
2004, approximately 88 percent of the Company's on-balance sheet federally insured loans are no longer
subject to Risk Sharing. As a result of this designation, in the third quarter of 2004 the Company has reduced
the balance in the allowance for loan losses by $33 million.
Allowance for Private Education Loan Losses
The allowance for Private Education Loan losses is an estimate of losses in the portfolio at the balance
sheet date that will be charged oÅ in subsequent periods. The Company estimates its losses using historical
F-21
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
4. Allowance for Student Loan Losses (Continued)
data from its Private Education Loan portfolios, extrapolations of FFELP loan loss data, current trends and
relevant industry information. As the Company's Private Education Loan portfolios continue to mature, more
reliance is placed on the Company's own historic Private Education Loan charge-oÅ and recovery data.
Accordingly, during the fourth quarter, the Company revised its expected default assumptions to further align
the allowance estimate with its collection experience and the terms and policies of the individual Private
Education Loan programs. The Company uses this data in internally developed models to estimate the amount
of losses, net of subsequent collections, expected to occur in the Private Education Loan portfolios.
When calculating the Private Education Loan loss reserve, the Company divides the portfolio into
categories of similar risk characteristics based on loan program type, underwriting criteria, existence or
absence of a co-borrower, repayment begin date and repayment status. The Company then applies default and
collection rate projections to each category. The repayment begin date indicates when the borrower is required
to begin repaying their loan. The Company's career training Private Education Loan programs (27 percent of
the Private Education Loan portfolio at December 31, 2004) generally require the borrowers to start repaying
their loan immediately. The Company's higher education Private Education Loan programs (73 percent of the
Private Education Loan portfolio at December 31, 2004) do not require the borrowers to begin repayment
until they have graduated or otherwise left school. Consequently, the loss estimates for these programs are
minimal while the borrower is in school. At December 31, 2004, 48 percent of the principal balance in the
higher education Private Education Loan portfolio relates to borrowers who are still in-school (not required to
make payments). As the current portfolio ages, an increasing percentage of the borrowers will leave school and
be required to begin payments on their loans. The allowance for losses will increase accordingly with the
increasing percentage of borrowers in repayment.
The Company's loss estimates include losses to be incurred over the loss conÑrmation period, which is
two years for career training loans beginning when the loan is originated and Ñve years for higher education
loans beginning when the borrower leaves school. The Company's collection policies allow for periods of
nonpayment for borrowers requesting additional payment grace periods upon leaving school or experiencing
temporary diÇculty meeting payment obligations. This is referred to as forbearance status. At December 31,
2004, 3 percent of the Private Education Loan portfolio was in forbearance status. The loss conÑrmation
period is in alignment with the Company's typical collection cycle and the Company considers these periods of
nonpayment.
Private Education Loan principal and accrued interest is charged oÅ against the allowance at 212 days
delinquency. Private Education Loans continue to accrue interest until they are charged oÅ. Recoveries on
loans charged oÅ are recorded directly to the allowance.
F-22
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
4. Allowance for Student Loan Losses (Continued)
The following table summarizes changes in the allowance for student loan losses for on-balance sheet
Private Education Loans for the years ended December 31, 2004, 2003 and 2002.
Years ended December 31,
2003
2004
2002
Allowance at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 165,716
129,768
372
$180,933
107,408
20,631
$193,435
93,832
(27,020)
Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(110,271)
14,007
Net charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance before securitization of Private Education Loans ÏÏÏ
Reduction for securitization of Private Education Loans ÏÏÏÏ
(96,264)
199,592
(27,706)
(83,001)
11,096
(71,905)
237,067
(71,351)
(75,641)
9,039
(66,602)
193,645
(12,712)
Allowance at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 171,886
$165,716
$180,933
Net charge-oÅs as a percentage of average loans in
repayment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Allowance as a percentage of the ending total loan balance
Allowance as a percentage of the ending loans in repayment
Allowance coverage of net charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average total loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending total loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average loans in repaymentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending loans in repaymentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
$
$
3.57%
3.07%
6.05%
1.79
4,795
5,592
2,697
2,842
$
$
$
$
2.59%
3.57%
6.50%
2.30
5,018
4,636
2,772
2,551
$
$
$
$
2.40%
3.38%
6.05%
2.72
5,059
5,356
2,774
2,992
The Company charges the borrower fees on certain Private Education Loans, both at origination and
when the loan enters repayment. Such fees are deferred and recognized into income as a component of interest
over the estimated average life of the related pool of loans. These fees are charged to compensate for
anticipated loan losses.
F-23
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
4. Allowance for Student Loan Losses (Continued)
Delinquencies
The table below shows the Company's Private Education Loan delinquency trends as of December 31,
2004, 2003 and 2002. Delinquencies have the potential to adversely impact earnings if the account charges oÅ
and results in increased servicing and collection costs.
(Dollars in millions)
Loans in-school/grace/deferment(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans in forbearance(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans in repayment and percentage of each status:
Loans current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans delinquent 31-60 days(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans delinquent 61-90 days ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans delinquent greater than 90 days ÏÏÏÏÏÏÏÏÏÏÏ
2004
December 31,
2003
2002
Balance
%
Balance
%
Balance
%
$2,787
166
2,555
124
56
107
$1,970
236
$2,171
285
89.9% 2,268
115
4.4
62
2.0
106
3.7
88.9% 2,776
102
4.5
43
2.4
71
4.2
92.8%
3.4
1.4
2.4
Total Private Education Loans in repayment ÏÏÏÏÏÏ
2,842
100% 2,551
100.0% 2,992
100%
Total Private Education Loans, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loan unamortized discount ÏÏÏÏÏÏÏ
Total Private Education Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loan allowance for losses ÏÏÏÏÏÏÏÏ
5,795
(203)
5,592
(172)
4,757
(121)
4,636
(166)
Private Education Loans, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$5,420
$4,470
Percentage of Private Education Loans in repayment
49.0%
53.6%
5,448
(92)
5,356
(181)
$5,175
54.9%
Delinquencies as a percentage of Private Education
Loans in repayment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10.1%
11.1%
7.2%
(1) Loans for borrowers who still may be attending school or engaging in other permitted educational activities
and are not yet required to make payments on the loans, e.g., residency periods for medical students or a
grace period for bar exam preparation.
(2) Loans for borrowers who have requested extension of grace period during employment transition or who
have temporarily ceased making full payments due to hardship or other factors, consistent with the
established loan program servicing procedures and policies.
(3) The period of delinquency is based on the number of days scheduled payments are contractually past due.
F-24
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
5.
Investments
A summary of investments and restricted investments as of December 31, 2004 and 2003 follows:
December 31, 2004
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Market
Value
Amortized
Cost
Investments
Trading
U.S. Treasury and other U.S. government agency
obligations:
U.S. Treasury securities (Rabbi Trust)ÏÏÏÏÏÏÏÏÏÏ
Total investment securities tradingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Available-for-sale
U.S. Treasury and other U.S. government agency
obligations:
U.S. Treasury backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
U.S. government-guaranteed securities ÏÏÏÏÏÏÏÏÏÏ
U.S. Treasury securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
U.S. government agencies obligations ÏÏÏÏÏÏÏÏÏÏÏ
State and political subdivisions of the U.S.:
$
$
148
148
$
$
7
7
$ Ì
$ Ì
$
$
155
155
$1,483,102
155,888
103,365
51,446
$388,095
1,709
3
105
$(520)
Ì
(186)
(179)
$1,870,677
157,597
103,182
51,372
Student loan revenue bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
22,655
Other securities:
CertiÑcates of Deposit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
550,300
371,553
139,986
5,530
493
Ì
835
Ì
42
Ì
23,148
Ì
(99)
Ì
Ì
550,300
372,289
139,986
5,572
Total investment securities available-for-sale ÏÏÏÏÏÏÏ
$2,883,825
$391,282
$(984)
$3,274,123
Restricted Investments
Available-for sale
U.S. Treasury and other U.S. government agencies
obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third party repurchase agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guaranteed investment contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 197,373
143,300
85,866
Total available-for-sale restricted investments ÏÏÏÏÏÏ
$ 426,539
Held-to-maturity
Guaranteed investment contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
9,031
2,718
Total held-to-maturity restricted investments ÏÏÏÏÏÏÏ
$
11,749
$
$
$
$
Ì
Ì
Ì
Ì
131
Ì
131
$(755)
Ì
Ì
$ 196,618
143,300
85,866
$(755)
$ 425,784
$ (14)
Ì
$ (14)
$
$
9,148
2,718
11,866
F-25
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
5.
Investments (Continued)
Investments
Trading
U.S. Treasury and other U.S. government agency
obligations:
U.S. Treasury securities (Rabbi Trust)ÏÏÏÏÏÏÏÏÏÏ
Total investment securities tradingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Available-for-sale
U.S. Treasury and other U.S. government agency
obligations:
U.S. Treasury backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
U.S. Treasury securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State and political subdivisions of the U.S.:
December 31, 2003
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Market
Value
Amortized
Cost
$
$
150
150
$
$
16
16
$ Ì
$ Ì
$
$
166
166
$1,189,540
88,442
$505,101
3
$ Ì
(1)
$1,694,641
88,444
Student loan revenue bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
79,282
1,568
(16)
80,834
Other securities:
Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CertiÑcates of Deposit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
730,245
1,115,142
655,300
3,558
2,115
Ì
Ì
82
(14)
Ì
Ì
Ì
732,346
1,115,142
655,300
3,640
Total investment securities available-for-sale ÏÏÏÏÏÏÏ
$3,861,509
$508,869
$ (31)
$4,370,347
Restricted Investments
Available-for sale
U.S. Treasury and other U.S. government agencies
obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third party repurchase agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
64,418
138,600
Total available-for-sale restricted investments ÏÏÏÏÏÏ
$ 203,018
Held-to-maturity
Guaranteed investment contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
14,326
2,833
Total held-to-maturity restricted investments ÏÏÏÏÏÏÏ
$
17,159
$
$
$
$
238
Ì
238
230
Ì
230
$(105)
Ì
$
64,551
138,600
$(105)
$ 203,151
$ (30)
Ì
$ (30)
$
$
14,526
2,833
17,359
As of December 31, 2004 and 2003, $178 million and $220 million of the net unrealized gain (after tax)
related to available-for-sale investments was included in accumulated other comprehensive income. Of the
total available-for-sale securities outstanding as of December 31, 2004, $524 million (fair value) has been
pledged as collateral.
The Company sold available-for-sale securities with a fair value of $124 million, $11 million and
$137 million for the years ended December 31, 2004, 2003 and 2002, respectively. There were no realized
F-26
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
5.
Investments (Continued)
gains or losses on sales in 2004 and 2003. For the year ended December 31, 2002, sales resulted in net realized
gains of $3 million.
In conjunction with the GSE Wind-Down, the Company purchased $1.5 billion of securities which were
placed in the Master Defeasance Trust that settled December 29, 2004. See Note 21, ""Completion of the
GSE Wind-Down,'' for a detailed discussion regarding the completion of the GSE Wind-Down.
As of December 31, 2004, the stated maturities for the investments (including restricted investments) are
shown in the following table:
December 31, 2004
Held-to-
maturity
Available-for-
Sale
Trading
Other
Year of Maturity
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010-2014 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
After 2014 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 1,848
Ì
903
Ì
910
2,718
5,487
$1,104,457
328,515
758,161
520,451
525,963
2,915
459,445
$ Ì $
155
Ì
Ì
Ì
Ì
Ì
2,852
Ì
5,097
Ì
5,690
216,618
74,443
Total (Fair Value) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$11,866
$3,699,907
$155
$304,700
At December 31, 2004 and 2003, the Company also had other investments of $305 million and
$677 million, respectively. These investments included leveraged leases discussed below.
At December 31, 2004 and 2003, the Company had investments in leveraged leases, net of impairments,
totaling $148 million and $175 million, respectively, and direct Ñnancing leases totaling $21 million and
$24 million, respectively, that are general obligations of two commercial airlines and Federal Express
Corporation. The direct Ñnancing leases are carried in other assets on the balance sheet. The aircraft Ñnancing
business for traditional airlines continues to be adversely aÅected by the slowdown in the commercial aircraft
industry, higher fuel costs and increased competition from new discount carriers. In recognition of this trend,
and the deteriorating Ñnancial condition of Delta Airlines, the Company recognized an after-tax charge of
$17 million or $.04 per share in the third quarter of 2004. In 2002, the Company recognized an after-tax
charge of $57 million or $.12 per share to reÖect the impairment of certain aircraft leased to United Airlines.
Based on an analysis of the potential losses on certain leveraged leases plus the increase in incremental tax
obligations related to forgiveness of debt obligations and/or the taxable gain in the sale of the aircraft, the
Company's remaining after-tax exposure to two commercial airlines totaled $80 million at December 31, 2004.
F-27
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
6. Goodwill and Acquired Intangible Assets
Intangible assets include the following:
(Dollars in millions)
Intangible assets subject to amortization:
Customer, services, and lending relationships
Tax exempt bond funding(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Software and technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-compete agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangible assets not subject to amortization:
Average
Amortization Period
12 years
10 years
7 years
2 years
Trade name and trademark ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
IndeÑnite
Total acquired intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
As of December 31 , 2004
Accumulated
Amortization
Net
Gross
$239
64
80
10
393
71
$464
$ (48)
(6)
(39)
(7)
(100)
$191
58
41
3
293
Ì
71
$(100)
$364
(1) In connection with the Company's 2004 acquisition of Southwest Student Services Corporation (see
Note 11, ""Acquisitions''), the Company acquired certain tax exempt bonds that enable the Company to
earn a minimum yield of 9.5 percent on student loans funded by those bonds in indentured trusts. If the
student loan is removed from the trust such that it is no longer funded by the bonds, it ceases earning the
minimum yield of 9.5 percent. A diÅerent student loan can be substituted in the trust and begin earning
the minimum yield of 9.5 percent. This feature remains as long as the bonds are outstanding.
(Dollars in millions)
Intangible assets subject to amortization:
Average
Amortization Period
As of December 31 , 2003
Accumulated
Amortization
Net
Gross
Customer, services, and lending relationships
Software and technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-compete agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
14 years
7 years
2 years
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangible assets not subject to amortization:
Trade name and trademark ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
IndeÑnite
Total acquired intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$174
78
6
258
59
$317
$(32)
(27)
(5)
(64)
$142
51
1
194
Ì
59
$(64)
$253
The Company recorded amortization of $36 million, $27 million, and $27 million for the years ended
December 31, 2004, 2003 and 2002, respectively. The Company will continue to amortize its intangible assets
with deÑnite useful lives over their remaining estimated useful lives. The Company estimates amortization
expense associated with these intangible assets will be $55 million, $47 million, $44 million, $36 million and
$23 million for the years ended December 31, 2005, 2006, 2007, 2008, and 2009, respectively.
F-28
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
6. Goodwill and Acquired Intangible Assets (Continued)
A summary of changes in the Company's goodwill by reportable segment is as follows:
(Dollars in millions)
January 1,
2004
Acquisitions
December 31,
2004
Lending ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt Management Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$191
79
69
$339
$245
118
1
$364
$436
197
70
$703
(Dollars in millions)
January 1,
2003
Acquisitions
December 31,
2003
Lending ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt Management Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$164
63
80
$307
$ 27
16
(11)
$ 32
$191
79
69
$339
In 2004, the Company acquired two student lending companies and one debt management company as
described in detail in Note 11, ""Acquisitions.'' In 2003, the Company acquired one student lending company
and one mortgage company. Accordingly, during 2004 and 2003, the Company recorded goodwill of
$334 million and $28 million, respectively, associated with these acquisitions. During 2004 and 2003, the
Company also Ñnalized the purchase price allocations associated with its 2003 and 2002 acquisitions,
respectively, and adjusted goodwill for certain earn-out payments associated with these prior acquisitions.
7. Short-Term Borrowings
Short-term borrowings have a remaining term to maturity of one year or less. The following tables
summarize outstanding short-term borrowings at December 31, 2004, 2003 and 2002, the weighted average
stated interest rates at the end of each period, and the related average balances and weighted average stated
interest rates during the periods.
December 31, 2004
Year ended
December 31, 2004
Six month Öoating rate notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Öoating rate notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term portion of long-term notesÏÏÏÏÏÏÏ
$
Ending
Balance
Ì
29,256
Ì
Ì
2,177,839
Weighted
Average
Interest
Rate
Ì%
4.96
Ì
Ì
2.83
Average
Balance
$ 1,585,830
373,888
1,687,391
125,224
6,824,097
Total short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 2,207,095
2.86%
$10,596,430
Maximum outstanding at any month end ÏÏÏÏ
$20,177,348
Weighted
Average
Interest
Rate
1.18%
1.22
.96
1.86
3.18
2.44%
F-29
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
7. Short-Term Borrowings (Continued)
December 31, 2003
Year ended
December 31, 2003
Six month Öoating rate notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Öoating rate notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed rate notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term portion of long-term notesÏÏÏÏÏÏÏ
Ending
Balance
$ 2,724,669
215,532
3,376,440
Ì
Ì
12,418,744
Weighted
Average
Interest
Rate
.97%
.95
.96
Ì
Ì
3.27
Average
Balance
$ 2,987,643
841,248
8,338,001
602,527
59,053
12,166,460
Total short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$18,735,385
2.50%
$24,994,932
Maximum outstanding at any month end ÏÏÏÏ
$28,709,732
Weighted
Average
Interest
Rate
1.09%
1.18
1.16
2.34
1.27
2.61
1.89%
Six month Öoating rate notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Öoating rate notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discount notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed rate notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities sold Ì not yet purchased and
repurchase agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term portion of long-term notesÏÏÏÏÏÏÏ
December 31, 2002
Year ended
December 31, 2002
Ending
Balance
$ 2,999,631
2,297,954
7,029,037
1,649,969
234,975
Weighted
Average
Interest
Rate
1.25%
1.18
1.75
2.35
1.38
Average
Balance
$ 3,006,177
2,579,690
10,586,685
1,693,771
136,914
Weighted
Average
Interest
Rate
1.71%
1.70
1.95
2.79
1.75
Ì
11,407,389
Ì
1.90
146,500
12,015,155
1.70
2.25
Total short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$25,618,955
1.74%
$30,164,892
2.07%
Maximum outstanding at any month end ÏÏÏÏ
$33,431,624
To match the interest rate characteristics of short-term notes with the interest rate characteristics of
certain assets, the Company enters into interest rate swaps with independent parties. Under these agreements,
the Company makes periodic payments, generally indexed to the related asset rates, or rates which are highly
correlated to the asset rates, in exchange for periodic payments, which generally match the Company's interest
obligations on Ñxed or variable rate notes (see Note 10, ""Derivative Financial Instruments''). Payments and
receipts on the Company's interest rate swaps are not reÖected in the above tables.
As of December 31, 2004, the Company has $5 billion in revolving credit facilities which provide liquidity
support for general corporate purposes including backup for its commercial paper program. They include a
$1.5 billion 364-day revolving credit facility maturing in October 2005, a $1 billion 5-year revolving credit
facility maturing in October 2007, a $1 billion 5-year revolving credit facility maturing in October 2008, and a
$1.5 billion 5-year revolving credit facility maturing in 2009. The Company has never drawn on these facilities.
Interest on these facilities is based on LIBOR plus a spread that is determined by the amount of the facility
utilized and the Company's credit rating.
F-30
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
8. Long-Term Notes
The following tables summarize outstanding long-term notes at December 31, 2004 and 2003, the
weighted average stated interest rates at the end of the periods, and the related average balances during the
periods.
December 31, 2004
Ending
Balance
Weighted
Average
Interest
Rate
Year ended
December 31,
2004
Average
Balance
Floating rate notes:
U.S. dollar denominated:
Interest bearing, due 2006-2047 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$47,792,701
2.48%
$35,023,181
Non U.S. dollar denominated:
Australian dollarÓdenominated, due 2009 ÏÏÏÏÏÏÏÏÏ
EuroÓdenominated, due 2006-2040ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Singapore dollarÓdenominated, due 2009 ÏÏÏÏÏÏÏÏÏÏ
Sterling-denominated, due 2006-2039 ÏÏÏÏÏÏÏÏÏÏÏÏ
Total Öoating rate notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed rate notes:
U.S. dollar denominated:
164,003
4,339,287
30,000
722,571
53,048,562
Interest bearing, due 2006-2043 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Zero coupon ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
12,614,188
Ì
Non U.S. dollar denominated:
Australian dollar-denominated, due 2009ÏÏÏÏÏÏÏÏÏÏ
Canadian dollar-denominated, due 2009 ÏÏÏÏÏÏÏÏÏÏ
Euro-denominated, due 2006-2039 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Hong Kong dollar-denominated, due 2014 ÏÏÏÏÏÏÏÏ
Japanese yen-denominated, due 2009-2034 ÏÏÏÏÏÏÏÏ
Singapore dollar-denominated, due 2014 ÏÏÏÏÏÏÏÏÏÏ
Sterling-denominated, due 2006-2039 ÏÏÏÏÏÏÏÏÏÏÏÏ
Swiss franc-denominated, due 2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
310,949
167,262
5,728,710
26,563
453,211
66,498
3,319,666
178,964
Total Ñxed rate notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
22,866,011
5.82
2.33
1.58
5.08
2.51
4.67
Ì
5.70
4.32
3.27
4.70
1.63
3.56
4.51
2.37
4.22
102,150
2,321,228
25,492
570,479
38,042,530
12,923,633
204,890
169,779
11,490
4,047,730
22,945
277,526
52,055
2,305,444
75,800
20,091,292
Total long-term notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$75,914,573
3.03%
$58,133,822
F-31
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
8. Long-Term Notes (Continued)
December 31, 2003
Ending
Balance
Weighted
Average
Interest
Rate
Year ended
December 31,
2003
Average
Balance
Floating rate notes:
U.S. dollar denominated:
Interest bearing, due 2005-2047 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$22,129,213
1.37% $13,764,648
Non U.S. dollar denominated:
EuroÓdenominated, due 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
17,836
Total Öoating rate notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed rate notes:
22,147,049
2.36
1.37
1,515
13,766,163
U.S. dollar denominated:
Interest bearing, due 2005-2043 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Zero coupon, due 2014-2022 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
13,018,659
252,889
4.40
11.79
13,222,312
239,343
Non U.S. dollar denominated:
Euro-denominated, due 2005-2033 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sterling-denominated, due 2005-2039 ÏÏÏÏÏÏÏÏÏÏÏÏ
2,474,432
1,915,145
Total Ñxed rate notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
17,661,125
3.47
5.04
4.44
884,227
294,887
14,640,769
Total long-term notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$39,808,174
2.73% $28,406,932
The Company had $37.1 billion and $16.6 billion of long-term debt outstanding as of December 31, 2004
and 2003, respectively, which is on-balance sheet secured securitization trust debt (including asset-backed
commercial paper). The Company also had $6.9 billion and $1.4 billion of long-term debt outstanding as of
December 31, 2004 and 2003, respectively, related to additional secured, limited obligation or non-recourse
borrowings related to several indenture trusts. The face value of the student loans on the balance sheet which
secured this debt was $42 billion and $18 billion as of December 31, 2004 and 2003, respectively.
To match the interest rate and currency characteristics of its long-term notes with the interest rate and
currency characteristics of its assets, the Company enters into interest rate and foreign currency swaps with
independent parties. Under these agreements, the Company makes periodic payments, generally indexed to
the related asset rates, or rates which are highly correlated to the asset rates, in exchange for periodic
payments which generally match the Company's interest and foreign currency obligations on Ñxed or variable
rate borrowings (see Note 10, ""Derivative Financial Instruments''). Payments and receipts on the Company's
interest rate and foreign currency swaps are not reÖected in the tables above. The Company swaps all foreign
currency denominated debt to U.S dollars.
At December 31, 2004, the Company had outstanding long-term notes with call features totaling
$11.2 billion, and had $6.2 billion of outstanding long-term notes that are putable by the investor to the
Company prior to the stated maturity date. As of December 31, 2004, the stated maturities (for putable debt,
F-32
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
8. Long-Term Notes (Continued)
the stated maturity date is the put date) and maturities if accelerated to the call dates for long-term notes are
shown in the following table:
Year of Maturity
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2011-2047 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SFAS No. 133 derivative market value adjustmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2004
Stated
Maturity(1)
Maturity to
Call Date(1)
$ 2,473,164
14,379,879
7,868,128
5,809,912
5,608,599
3,293,810
34,673,959
74,107,451
1,807,122
$ 6,125,964
14,465,026
7,930,189
6,346,391
6,023,644
3,297,332
29,918,905
74,107,451
1,807,122
$75,914,573
$75,914,573
(1) The Company views its on-balance sheet securitization trust debt as long-term and projects its maturities
based on the Company's current estimates regarding loan prepayment speeds. The projected principal
paydowns of $2.5 billion shown in year 2005 relate to the on-balance sheet securitization trust debt.
In May 2003, the Company completed a private oÅering of $2 billion aggregate principal amount of
32-year unsecured senior convertible debentures that are convertible, under certain conditions, into shares of
SLM common stock, at an initial conversion price of $65.98. The investors generally can only convert the
debentures if the Company's stock price has appreciated to 130 percent of the conversion price ($85.77) for a
prescribed period, or the Company calls the debentures. The convertible debentures bear interest at a Öoating
rate equal to three-month LIBOR minus .05 percent, until July 25, 2007, after which, the debentures can pay
additional contingent interest under certain circumstances. Beginning on July 25, 2007, the Company may call
the debentures and the investors may put the debentures, subject to certain conditions.
9. Student Loan Securitization
Securitization Activity
The Company securitizes its student loan assets, and for transactions qualifying as sales, retains a
Residual Interest which may include reserve and other cash accounts, and servicing rights (as the Company
retains the servicing responsibilities), all of which are referred to as the Company's Retained Interest in
securitized receivables. The Residual Interest is the right to receive cash Öows from the student loans and
reserve accounts in excess of the amounts needed to pay servicing, derivative costs (if any), other fees, and the
principal and interest on the bonds backed by the student loans. The investors and the securitization trust have
no recourse to the Company's other assets for the failure of the student loans to pay when due.
Prior to 2003, all of the Company's securitization structures were oÅ-balance sheet transactions. In
certain 2003 and 2004 Consolidation Loan securitization structures, the Company holds rights that can aÅect
the remarketing of the bonds, such that these trusts did not qualify as QSPEs and as a result were required to
be accounted for on-balance sheet as VIEs. These securitization structures were developed to broaden and
diversify the investor base for Consolidation Loan securitizations by allowing the Company to issue bonds with
F-33
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
9. Student Loan Securitization (Continued)
non-amortizing, Ñxed rate and foreign currency denominated tranches. (As of December 31, 2004, the
Company had $31.5 billion of securitized student loans in on-balance sheet securitization trusts.) These
securitizations are included as Ñnancings in the table below.
The following table summarizes the Company's securitization activity for the years ended December 31,
2004, 2003 and 2002. Those securitizations listed as sales are oÅ-balance sheet transactions and those listed as
Ñnancings remain on balance sheet.
December 31, 2004
Years ended
December 31, 2003
December 31, 2002
No. of
Amount Pre-Tax Gain
No. of
Amount Pre-Tax Gain
No. of
Amount Pre-Tax Gain
Transactions Securitized Gain
% Transactions Securitized Gain
% Transactions Securitized Gain
%
FFELP
StaÅord loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidation Loans ÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loans ÏÏÏÏÏÏÏÏÏ
Total securitizations Ì sales ÏÏÏÏÏÏ
Asset-backed commercial paper(1)
Consolidation Loans ÏÏÏÏÏÏÏÏÏÏÏÏ
Total securitizations Ì Ñnancings
4
Ì
2
6
1
6
7
$10,002
$134
1.3%
Ì
2,535
Ì Ì
241
9.5
12,537
$375
3.0%
4,186
17,124
21,310
Total securitizationsÏÏÏÏÏÏÏÏÏÏÏÏÏ
13
$33,847
4
2
3
9
Ì
7
7
16
$ 5,772
$ 73
1.3%
4,256
3,503
433
238
10.2
6.8
13,531
$744
5.5%
Ì
16,592
16,592
$30,123
7
1
1
9
Ì
Ì
Ì
9
$11,033
$101
.9%
1,976
690
194
43
9.8
6.2
13,699
$338
2.5%
Ì
Ì
Ì
$13,699
(1) In the second quarter of 2004 the Company closed its Ñrst asset-backed commercial paper program. The
program is a revolving 364-day multi-seller conduit that allows the Company to borrow up to $5 billion
subject to annual extensions. The Company may purchase loans out of this trust at its discretion and as a
result, the trust does not qualify as a QSPE and is accounted for on-balance sheet as a VIE.
Key economic assumptions used in estimating the fair value of the Residual Interests at the date of
securitization resulting from the student loan securitization sale transactions completed during the years ended
December 31, 2004 and 2003 were as follows:
Prepayment speed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average life (in years) ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected credit losses (% of principal
FFELP
StaÅord
Loans
**
4.2
securitized) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
0.12%
Residual cash Öows discounted at (weighted
average) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
12%
Ì
Ì
Ì
Ì
Years ended December 31,
2004
2003
Consolidation
Loans(1)
Private
Education
Loans
FFELP
StaÅord
Loans
Consolidation
Loans
6%
7.2
9%
4.6
7%
8.0
Private
Education
Loans
6%
6.5
4.72%
0.52%
0.75%
4.03%
12%
12%
6%
12%
(1) No securitizations in the period qualiÑed for sale treatment.
** Securitizations through August 2004 used a CPR of 20 percent for 2004, 15 percent for 2005, and
6 percent thereafter. Securitizations from September 2004 through December 2004 used a CPR of
20 percent for 2004 through 2005, 15 percent for 2006 and 6 percent thereafter.
F-34
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
The following table summarizes cash Öows received from or paid to the oÅ-balance sheet securitization
trusts during the years ended December 31, 2004, 2003 and 2002:
(Dollars in millions)
Years ended December 31,
2003
2004
2002
Net proceeds from new securitizations completed during the
period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$12,476
$13,483
$13,785
Purchases of delinquent Private Education Loans from
securitization trusts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Servicing fees received(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash distributions from trusts related to Residual Interests ÏÏÏÏÏ
(33)
319
844
(6)
298
870
Ì
274
861
(1) The Company receives annual servicing fees of 90 basis points, 50 basis points and 70 basis points of the
outstanding securitized loan balance related to its FFELP StaÅord, Consolidation Loan and Private
Education Loan securitizations, respectively.
F-35
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
Changes in Accounting Estimates AÅecting the Residual Interest in Securitized Loans
The Company updated certain assumptions during 2004 that it uses in the valuation of the Residual
Interest. The following are the signiÑcant assumption changes that were made:
FFELP StaÅord loan CPR(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loan CPR(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FFELP expected credit losses (as a % of securitized loan
balance outstanding)(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
As of December 31,
2004
As of December 31,
2003
20% - 2005
15% - 2006
6% - thereafter
3%
20% - 2004
15% - 2005
6% - thereafter
6%
0%
0.17%
(1) The FFELP StaÅord loan CPR assumption was increased to account for the continued high levels of
Consolidation Loan activity over the past three years. Unless there is a legislative change in HEA
reauthorization, the Company believes that high levels of Consolidation Loan activity will continue.
(2) The Private Education Loan CPR assumption was decreased due to these loans repaying slower than
originally projected, including a slower prepayment.
(3) The Company lowered its assumption of expected FFELP credit losses to zero percent to reÖect the eÅect
of the EP designation on Sallie Mae serviced FFELP loans in the trusts. The EP designation is discussed
in more detail in Note 4, ""Allowance for Student Loan Losses.''
Retained Interest in Securitized Receivables
The following table summarizes the fair value of the Company's Retained Interests along with the
underlying student loans that relate to those securitizations that were treated as sales.
(Dollars in millions)
As of December 31, 2004
Underlying
Securitized
Loan
Balance(3)
Retained
Interest
Fair Value
As of December 31, 2003
Underlying
Securitized
Loan
Balance(3)
Retained
Interest
Fair Value
FFELP StaÅord loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidation LoansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Private Education Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,037
585
694
$2,316
$27,444
7,393
6,309
$41,146
$1,023
994
459
$2,476
$26,420
8,076
3,983
$38,479
(1) Unrealized gains (pre-tax) included in accumulated other comprehensive income related to the Retained
Interests totaled $445 million and $443 million as of December 31, 2004 and 2003, respectively.
(2) Includes $399 million and $727 million related to the fair value of the Embedded Floor Income as of
December 31, 2004 and 2003, respectively.
(3) In addition to student loans in oÅ-balance sheet trusts, the Company had $31.5 billion and $16.1 billion of
securitized student loans outstanding (face amount) as of December 31, 2004 and 2003, respectively, in
on-balance sheet Consolidation Loan securitization trusts.
The Company recorded $80 million, $96 million and $40 million of impairment related to the Retained
Interests for the years ended December 31, 2004, 2003 and 2002, respectively. These impairment charges are
recorded as a loss and are included as a reduction to securitization revenue. The impairment charge for 2004 is
F-36
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
primarily the result of (a) FFELP StaÅord loans continuing to consolidate at levels faster than projected
resulting in $47 million of impairment and (b) rising interest rates during the second quarter 2004 which
decreased the value of the Floor Income component of the Company's Retained Interest resulting in
$33 million of impairment. Impairment for 2003 and 2002 was primarily due to FFELP StaÅord loans
prepaying faster than projected.
The following table reÖects key economic assumptions used in the valuation of the Retained Interest at
December 31, 2004, and the sensitivity of the current fair value of the Retained Interests to adverse changes in
those assumptions. The eÅect of a variation in a particular assumption on the fair value of the Retained
Interest is calculated without changing any other assumption. In reality, changes in one factor may result in
changes in another (for example, increases in market interest rates may result in lower prepayments and
F-37
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
increased credit losses), which might magnify or counteract the sensitivities. These sensitivities are hypotheti-
cal and should be used with caution, as the actual results could be materially diÅerent than these estimates.
Fair value of Residual Interest (millions)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average life (in years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepayment speed assumptions (annual rate) ÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 5% absolute increase ÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 10% absolute increase ÏÏÏÏÏÏÏÏÏÏ
Expected credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 5% absolute increase in
FFELP
Trusts
$ 1,037
3.1
6%-20%(2)
$ (112)
$ (207)
0%(4)
Year ended December 31, 2004
Consolidation Loan
Trusts
Private Education Loan
Trusts
$ 585(5)
8.2
6%
$ (88)
$(158)
$ 694
7.5
3%
$(136)
$(240)
0%(4)
4.54%(3)
default rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ Ì
$ Ì
Impact on fair value of 10% absolute increase in
default rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Residual cash Öows discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 5% absolute increase ÏÏÏÏÏÏÏÏÏÏÏ
Impact on fair value of 10% absolute increase ÏÏÏÏÏÏÏÏÏÏ
$ Ì
12%
$ (100)
$ (183)
$ Ì
9%
$ (84)
$(147)
$(137)
$(274)
12%
$(128)
$(218)
DiÅerence between Asset and Funding underlying
indices(1)
3 month LIBOR forward curve at December 31, 2004
plus contracted spreads
Impact on fair value of 0.25% absolute increase in
funding index compared to Asset indexÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (164)
$ (69)
Impact on fair value of 0.50% absolute increase in
funding index compared to Asset indexÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (335)
$(138)
$
(9)
$ (18)
(1) Student loan assets are primarily indexed to a Treasury bill, commercial paper or a Prime index. Funding
within the trust is primarily indexed to a LIBOR index. Sensitivity analysis increases funding indices as
indicated while keeping asset underlying indices Ñxed.
(2) 20% in 2005, 15% in 2006 and 6% thereafter.
(3) The Company includes expected credit losses when projecting future cash Öows related to the Private
Education Loan securitizations' Residual Interest. In every instance to date, the Company has exercised a
contingent call option and purchased delinquent Private Education Loans at par from the trust prior to
default. Thus, no loss has been sustained by any of the trusts or the related Residual Interests. When the
Company purchases delinquent Private Education Loans from the trust, the Company records a loss for
the diÅerence between the par value paid and the loan's fair value at the time of purchase. The Company
recorded losses of $27 million and $1 million for the years ended December 31, 2004 and 2003,
respectively, related to this activity.
(4) As previously discussed in Note 4, ""Allowance for Student Loan Losses,'' the FFELP trusts do not
experience credit losses because of the Company's EP designation. As a result, there is no change in fair
value related to credit losses. An increase in FFELP default rates will increase prepayment speeds and
these eÅects are depicted above in the prepayment speed assumption sensitivity.
(5) Certain consolidation trusts have $1.9 billion of non-U.S. dollar (Euro denominated) bonds outstanding.
To convert these non-U.S. dollar denominated bonds into U.S. dollar liabilities, the trusts have entered
into foreign-currency swaps with highly-rated counterparties. These swaps are in a $477 million gain
position (in the aggregate) as a result of the decline in the exchange rates between the U.S. dollar and the
Euro. This unrealized market value gain is not a part of the fair value of the Residual Interest in the table
F-38
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
above. The Company's corporate derivatives contain provisions that typically require collateral to be posted
on a regular basis for changes in market values. In contrast, the derivatives that the trusts have entered into
do not require the swap counterparties to post collateral to the respective trust for changes in market value.
Collateral is only required in the event the trust's swap counterparty's credit rating has been withdrawn or
has been downgraded below a certain level. If the swap counterparty does not post the required collateral
or is downgraded further, the counterparty must Ñnd a suitable replacement counterparty or provide the
trust with a letter of credit or a guaranty from an entity that has the required credit ratings. Ultimately, the
Company's exposure related to a swap counterparty failing to make its payments is limited to the fair value
of the related trust's Residual Interest which was $451 million as of December 31, 2004.
10. Derivative Financial Instruments
Risk Management Strategy
The Company maintains an overall interest rate risk management strategy that incorporates the use of
derivative instruments to minimize the economic eÅect of interest rate changes. The Company's goal is to
manage interest rate sensitivity by modifying the repricing or maturity and index characteristics of certain
balance sheet assets and liabilities (including the Residual Interest from oÅ-balance sheet securitizations) so
that the net interest margin is not, on a material basis, adversely aÅected by movements in interest rates. As a
result of interest rate Öuctuations, hedged assets and liabilities will appreciate or depreciate in market value.
Income or loss on the derivative instruments that are linked to the hedged assets and liabilities will generally
oÅset the eÅect of this unrealized appreciation or depreciation. The Company views this strategy as a prudent
management of interest rate sensitivity. In addition, the Company utilizes derivative contracts to minimize the
economic impact of changes in foreign currency exchange rates on certain debt obligations that are
denominated in foreign currencies. As foreign currency exchange rates Öuctuate, these liabilities will
appreciate and depreciate in value. These Öuctuations are oÅset by changes in the value of the cross-currency
interest rate swaps executed to hedge these instruments. Management believes certain derivative transactions
entered into as hedges, primarily Floor Income Contracts, equity forward contracts, and certain basis swaps
and Eurodollar futures contracts, are economically eÅective; however, those transactions may not qualify for
hedge accounting under SFAS No. 133 (as discussed below) and thus may adversely impact earnings.
By using derivative instruments, the Company is exposed to both market and credit risk. Market risk is
the chance of Ñnancial loss resulting from changes in interest rates, foreign exchange rates and/or stock prices.
Credit risk is the risk that a counterparty will not perform its obligations under a contract. With respect to
derivative contracts, credit risk can be measured as the fair value gain in a derivative. When the fair value of a
derivative contract is positive, this generally indicates that the counterparty owes the Company. When the fair
value of a derivative contract is negative, the Company owes the counterparty and, therefore, it has no credit
risk. The Company minimizes the credit risk in derivative instruments by entering into transactions with
highly rated counterparties that are reviewed periodically by the Company's credit department. The Company
also maintains a policy of requiring that all derivative contracts be governed by an International Swaps and
Derivative Association Master Agreement. Depending on the nature of the derivative transaction, bilateral
collateral arrangements may be required as well. When the Company has more than one outstanding
derivative transaction with a counterparty, and there exists legally enforceable netting provisions with the
counterparty (i.e. a legal right to oÅset receivable and payable derivative contracts), the ""net'' mark-to-
market exposure represents the netting of the positive and negative exposures with the same counterparty.
When there is a net negative exposure, the Company considers its exposure to the counterparty to be zero. At
December 31, 2004 and 2003, such net positive exposure (derivative gain positions to the Company less
collateral which has been posted by counterparties to the Company) related to corporate derivatives was
$67 million and $59 million, respectively.
F-39
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
10. Derivative Financial Instruments (Continued)
The Company's on-balance sheet securitization trusts have $8.9 billion of Euro and British Pound
Sterling denominated bonds outstanding as of December 31, 2004. To convert these non-U.S. dollar
denominated bonds into U.S. dollar liabilities, the trusts have entered into foreign-currency swaps with highly-
rated counterparties. As of December 31, 2004, these swaps are in a $1.4 billion gain position, on an aggregate
basis, as a result of the decline in the exchange rates between the U.S. dollar and the Euro and between the
U.S. dollar and the British Pound Sterling. As previously discussed, the Company's corporate derivatives
contain provisions which require collateral to be posted on a regular basis for changes in market values. These
trusts' derivatives are structured such that the swap counterparties are not required to post collateral to the
respective trust for changes in market value. The trust's swap counterparties are only required to post collateral
if their credit rating has been withdrawn or has been downgraded below a certain level. If the swap
counterparty does not post the required collateral or is downgraded further, the counterparty must Ñnd a
suitable replacement counterparty or provide the trust with a letter of credit or a guaranty from an entity that
has the required credit ratings. As of December 31, 2004, no collateral has been posted by the counterparties
as there has been no decline in the credit rating of any counterparty which would have required that
counterparty to post collateral. Ultimately, the Company's exposure related to a swap counterparty failing to
make its required payments is limited to the trust assets (primarily student loans and cash) which collateralize
the outstanding bonds in the trust. Because the bonds outstanding generally are at parity with the assets that
collateralize the bonds, management believes that even in periods of great stress in the foreign currency
markets, the likelihood of a material loss is remote.
SFAS No. 133
Derivative instruments that are used as part of the Company's interest rate and foreign currency risk
management strategy include interest rate swaps, basis swaps, cross-currency interest rate swaps, interest rate
futures contracts, and interest rate Öoor and cap contracts with indices that relate to the pricing of speciÑc
balance sheet assets and liabilities including the Residual Interests from oÅ-balance sheet securitizations. On
January 1, 2001, the Company adopted SFAS No. 133 which requires that every derivative instrument,
including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. As more fully described below, if certain criteria are met,
derivative instruments are classiÑed and accounted for by the Company as either fair value or cash Öow
hedges. If these criteria are not met, the derivative Ñnancial instruments are accounted for as trading.
Fair Value Hedges
Fair value hedges are generally used by the Company to hedge the exposure to changes in fair value of a
recognized Ñxed rate asset or liability. The Company enters into interest rate swaps to convert Ñxed rate assets
into variable rate assets and Ñxed rate debt into variable rate debt. The Company also enters into cross-
currency interest rate swaps to convert foreign currency denominated Ñxed and Öoating debt to U.S. dollar
denominated variable debt. For fair value hedges, the Company generally considers all components of the
derivative's gain and/or loss when assessing hedge eÅectiveness and generally hedges either changes in fair
value due to interest rates or the total change in fair value.
Cash Flow Hedges
Cash Öow hedges are used by the Company to hedge the exposure to variability in cash Öows for a
forecasted debt issuance and for mismatches between the underlying indices of assets and liabilities. This
strategy is used primarily to minimize the exposure to volatility from future changes in interest rates and the
spread between diÅerent indices. Gains and losses on the eÅective portion of a qualifying hedge are
F-40
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
10. Derivative Financial Instruments (Continued)
accumulated in other comprehensive income and ineÅectiveness is recorded immediately to earnings. In the
case of a forecasted debt issuance, gains and losses are reclassiÑed to earnings over the period which the stated
hedged transaction impacts earnings. If the stated transaction is deemed probable not to occur, gains and
losses are reclassiÑed immediately to earnings. In assessing hedge eÅectiveness, all components of each
derivative's gains or losses are included in the assessment. The Company generally hedges exposure to changes
in cash Öows due to changes in interest rates or total changes in cash Öow.
Trading Activities
When instruments do not qualify as hedges under SFAS No. 133, they are accounted for as trading. The
Company sells interest rate Öoors to hedge the Embedded Floor Income options in student loan assets. These
relationships do not satisfy hedging qualiÑcations under SFAS No. 133, but are considered economic hedges
for risk management purposes. The Company uses this strategy to minimize its exposure to changes in interest
rates.
The Company also uses basis swaps to minimize earnings variability caused by having diÅerent reset
characteristics on the Company's interest-earning assets and interest-bearing liabilities. These swaps usually
possess a term of up to ten years with a pay rate indexed to 91-day Treasury bill, 3-month commercial paper,
52-week Treasury bill, LIBOR, Prime, or 1-year constant maturity Treasury rates. The speciÑc terms and
notional amounts of the swaps are determined based on management's review of its asset/liability structure, its
assessment of future interest rate relationships, and on other factors such as short-term strategic initiatives.
These swaps typically do not qualify as hedges and are accounted for as trading.
In addition, the Company enters into equity forward contracts. These contracts are viewed as economic
hedges but do no qualify as hedges under SFAS No. 133. (See Note 15, ""Common Stock,'' for a further
discussion of equity forward contracts.) The Company utilizes the strategy to minimize exposure to
Öuctuations in the Company's stock price and to better manage the cost of its share repurchases. The
Company's equity forward contracts provide for physical, net share or net cash settlement options. In addition,
the Company may be required to unwind portions or all of a contract if the price of the Company's common
stock falls below a certain percentage of the strike price (usually between 50 percent to 65 percent) or if the
Company's credit rating falls below a pre-determined level.
F-41
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
10. Derivative Financial Instruments (Continued)
Summary of Derivative Financial Statement Impact
The following tables summarize the fair values and notional amounts or number of contracts of all
derivative instruments at December 31, 2004 and 2003, and their impact on other comprehensive income and
earnings for the years ended December 31, 2004, 2003 and 2002. At December 31, 2004 and 2003,
$524 million and $158 million (fair value), respectively, of available-for-sale investment securities and
$222 million and $31 million, respectively, of cash were pledged as collateral against these derivative
instruments.
Cash Flow
Fair Value
Trading
Total
2004
2003
2004
2003
2004
2003
2004
2003
December 31,
Fair Values
(Dollars in millions)
Interest rate swaps ÏÏÏÏÏÏÏÏÏÏ
$ 25
Floor/Cap contractsÏÏÏÏÏÏÏÏÏ Ì
Futures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì
Equity forwards ÏÏÏÏÏÏÏÏÏÏÏÏ Ì
Cross-currency interest rate
$ (4)
Ì
(76)
Ì
$ (176)
Ì
Ì
Ì
$(182)
Ì
Ì
Ì
swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì
Ì
1,839
281
$ (84)
(625)
(2)
139
Ì
$ (133)
(1,168)
(40)
48
$ (235)
(625)
(2)
139
$ (319)
(1,168)
(116)
48
Ì
1,839
281
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 25
$(80)
$1,663
$
99
$ (572)
$(1,293)
$1,116
$(1,274)
Notional Values
(Dollars in billions)
Interest rate swaps ÏÏÏÏÏÏÏÏÏÏ
$5.8
Floor/Cap contractsÏÏÏÏÏÏÏÏÏ Ì
Futures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.0
Cross-currency interest rate
swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì
Other(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì
$ 1.6
Ì
8.2
Ì
Ì
$ 13.4
Ì
Ì
$ 16.8
Ì
Ì
$ 85.9
41.7
6.5
$
13.7
Ì
4.1
Ì
Ì
2.0
74.2
34.1
23.1
Ì
2.0
$105.1
41.7
7.5
13.7
2.0
$
92.6
34.1
31.3
4.1
2.0
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$6.8
$ 9.8
$ 27.1
$ 20.9
$136.1
$ 133.4
$170.0
$ 164.1
Contracts
(Shares in millions)
Equity forwards ÏÏÏÏÏÏÏÏÏÏÏÏ Ì
Ì
Ì
Ì
42.8
43.5
42.8
43.5
(1) ""Other'' consists of an embedded derivative bifurcated from the convertible debenture issuance that relates
primarily to certain contingent interest and conversion features of the debt. The embedded derivative has
had zero fair value since inception. (See Note 8, ""Long-Term Notes.'')
F-42
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
10. Derivative Financial Instruments (Continued)
(Dollars in millions)
2004
2003
2002
2004
2003
2002
2004
2003
2002
2004
Cash Flow
Fair Value
Trading
Years Ended December 31,
Total
2003
2002
Changes to accumulated
other comprehensive
income, net of tax
Hedge ineÅectiveness
reclassiÑed to earnings ÏÏ $
9
$ (1)
$
1
$ Ì $Ì
$Ì
$ Ì $ Ì $ Ì
$
9
$
(1) $
1
Change in fair value to cash
Öow hedgesÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of eÅective
hedges and transition
adjustment(1) ÏÏÏÏÏÏÏÏÏÏ
Discontinued hedges ÏÏÏÏÏÏ
22
(12)
(82)
Ì Ì
Ì
Ì
Ì
26
1
15
5
9
31
Ì Ì
Ì Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
1
Ì
22
(12)
(82)
26
1
15
5
10
31
Change in accumulated
other comprehensive
income, netÏÏÏÏÏÏÏÏÏÏÏÏ $ 58
$
7
$(41)
$ Ì $Ì
$Ì
$ Ì $ Ì $
1
$
58
$
7
$
(40)
Earnings Summary
Amortization of closed
futures contracts'
gains/losses in interest
expense(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏ $(40) $(24)
Amortization of transition
adjustment ÏÏÏÏÏÏÏÏÏÏÏÏ Ì
Ì
Recognition of hedge losses
related to GSE Wind-
DownÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative market value
adjustment Ì Realized(3)
Derivative market value
Ì
Ì
$(16)
$ Ì $Ì
$Ì
$ Ì $ Ì $ Ì
$ (40) $ (24) $
(16)
Ì Ì
Ì
Ì
Ì
(1)
Ì
Ì
(1)
(10) Ì
Ì Ì
(4)
(7)
(47)
Ì Ì
Ì
Ì
Ì
Ì
Ì
(10)
Ì
Ì
(709)
(732)
(831)
(713)
(739)
(878)
adjustment Ì
Unrealized(4) ÏÏÏÏÏÏÏÏÏÏ Ì
1(5)
(1)(5)
(15)
(1)(5)
1(5)
1,577
501
(204)
1,562
501
(204)
Total earnings impact ÏÏÏÏÏ $(54) $(30)
$(64)
$(15) $(1)
$ 1
$ 868
$(231) $(1,036)
$ 799
$(262) $(1,099)
(1) The Company expects to amortize $25 million of after-tax net losses from accumulated other comprehen-
sive income to earnings during the next 12 months related to closed futures contracts that were hedging the
forecasted issuance of debt instruments that are outstanding as of December 31, 2004.
(2) For futures contracts that qualify as SFAS No. 133 hedges where the hedged transaction occurs.
(3) Includes net settlement income/expense related to trading derivatives and realized gains and losses related
to derivative dispositions.
(4) In addition to the unrealized derivative market value adjustment, the Company recorded a $130 million
cumulative eÅect of accounting change for equity forward contracts in accordance with the transition
provisions of SFAS No. 150 in 2003. Explanation of the transition can be found in Note 2, ""SigniÑcant
Accounting Policies''.
(5) The change in fair value of cash Öow and fair value hedges represents amounts related to ineÅectiveness.
F-43
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
11. Acquisitions
During 2004, the Company acquired two student lending businesses which oÅer similar or complemen-
tary services to services oÅered by the Company, and one debt management company that expands the
Company's product oÅerings and industry reach in the debt management business. In 2003, the Company
acquired one student lending and one mortgage company. The Company accounted for these transactions
under the purchase method of accounting as deÑned in SFAS No. 141.
AFS Holdings, LLC
On September 16, 2004, the Company acquired a 64 percent controlling interest in AFS Holdings, LLC
and its principal subsidiaries Arrow Financial Services LLC and Arrow Funding LLC (collectively, ""AFS''),
for a purchase price of approximately $165 million including cash consideration and certain acquisition costs.
AFS is a full-service, accounts receivable management company that purchases charged-oÅ debt, conducts
contingency collection work and performs third-party receivables servicing across a number of consumer asset
classes. Under the terms of the agreement, the Company has the option to purchase the remaining interest in
AFS over a three-year period.
This acquisition expands the Company's existing Debt Management Operations (""DMO'') business
segment. The results of operations of AFS have been included in the Company's consolidated Ñnancial
statements since the acquisition date and are reÖected within the DMO segment's Ñnancial results as
discussed further in Note 18, ""Segment Reporting.'' The acquisition and AFS's pro forma results of operations
prior to the acquisition date were deemed immaterial to the Company's consolidated Ñnancial statements.
The acquisition was accounted for under the purchase method of accounting as deÑned in SFAS No. 141.
The Company allocated the purchase price to the fair values of the acquired tangible assets, liabilities and
identiÑable intangible assets as of the acquisition date as determined by an independent appraiser. The
purchase price allocation resulted in an excess purchase price over the fair value of net assets acquired, or
goodwill, of approximately $111 million. The remaining fair value of AFS's assets and liabilities was primarily
allocated to purchased loan portfolios and other identiÑable assets.
Goodwill resulting from this transaction reÖects the beneÑts the Company expects to derive from AFS's
experienced management team, existing servicing platform and several new asset classes in a new line of
business. It also reÖects the beneÑts from the combined operations of AFS and SLM Corporation's existing
DMO business segment. Goodwill will be reviewed for impairment in accordance with SFAS No. 142, as
discussed further in Note 2, ""SigniÑcant Accounting Policies.''
IdentiÑable intangible assets includes AFS's trade name, an indeÑnite life intangible asset, with a fair
value of approximately $11 million as of the acquisition date and deÑnite life intangible assets with aggregate
fair values of approximately $20 million as of the acquisition date, $15 million of which is attributed to
customer relationships.
Southwest Student Services Corporation
On October 15, 2004, the Company purchased all of the outstanding stock of Southwest Student Services
Corporation (""Southwest'') from the Helios Education Foundation for total consideration of approximately
$533 million including cash of $525 million and restricted stock of $8 million, the exercise of which is
contingent on the combined company's achievement of speciÑed loan origination volumes. Southwest provides
for the origination, funding, acquisition and servicing of education loans. Southwest provides student loans and
related services nationally with a primary focus on colleges and universities in Arizona and Florida. The
transaction includes Southwest's existing student loan portfolio, its Arizona-based loan origination and
servicing center and its sales and marketing operations.
F-44
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
11. Acquisitions (Continued)
The results of operations of Southwest have been included in the consolidated Ñnancial statements since
the acquisition date and are included in the Ñnancial results of the Company's Lending segment as described
more fully in Note 18, ""Segment Reporting.'' The acquisition and Southwest's pro forma results of operations
prior to the acquisition date were deemed immaterial to the Company's consolidated Ñnancial statements.
The acquisition was accounted for under the purchase method of accounting as deÑned in SFAS No. 141.
The Company allocated the purchase price to the fair values of the acquired tangible assets, liabilities and
identiÑable intangible assets as of the acquisition date as determined by an independent appraiser with the
exception of assets associated with Southwest's student loan portfolio, the values of which were determined
based on valuation models that the Company uses to value its student loan portfolios. The purchase price
allocation resulted in an excess purchase price over the fair value of net assets acquired, or goodwill, of
approximately $220 million. The fair value of Southwest's assets and liabilities at the date of acquisition is
presented below:
(Dollars in millions)
Student loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
GoodwillÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net assets acquiredÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$5,019
134
220
85
91
(77)
(4,829)
(110)
$ 533
Goodwill resulting from this transaction reÖects the beneÑts the Company expects to derive from the
combined operations of Southwest and the Company's existing Lending business segment. Goodwill will be
reviewed for impairment in accordance with SFAS No. 142, as discussed further in Note 2, ""SigniÑcant
Accounting Policies.''
IdentiÑable intangible assets include primarily deÑnite life intangible assets with aggregate fair values of
approximately $85 million, $64 million of which represents additional value that is created by certain tax
exempt bonds that enable Southwest to earn an interest rate in excess of the federally mandated benchmark
interest rate on student loans funded by these bonds. This asset will be amortized over a 10 year period based
on the term of the underlying bonds.
The purchase price allocation of Southwest's assets and liabilities is preliminary, but the Company does
not anticipate any material diÅerences between this preliminary allocation and the Ñnal allocation, which will
be completed by the end of the Ñrst quarter.
Education Assistance Foundation and Student Loan Finance Association
On December 13, 2004, the Company closed the Ñrst step in a two step purchase of the secondary market
and related businesses of Education Assistance Foundation (""EAF'') and its aÇliate, Student Loan Finance
Association (""SLFA'') and its subsidiaries for a purchase price of approximately $435 million.
The Ñrst step of the transaction included SLFA's $1.8 billion student loan portfolio (and the related
funding). In addition, as a part of this transaction, the Company entered into a full service guarantor servicing
F-45
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
11. Acquisitions (Continued)
contract with EAF's aÇliate, Northwest Education Association (""NELA''), a guarantee agency for FFELP
student loans that serves the PaciÑc Northwest. In a related transaction, NELA became an aÇliate of USA
Funds, the Company's largest guarantor servicing client. The Company plans to acquire the remaining assets
and liabilities in the second step of the transaction which is expected to close in 2005.
The results of operations of Washington Transferee Corporation (""WTC''), an indirect subsidiary of
SFLA have been included in the Company's consolidated Ñnancial statements since the acquisition date and
are reÖected within the Ñnancial results of the Company's Lending business segment as discussed further in
Note 18, ""Segment Reporting.'' The acquisition and the acquired business' pro forma results of operations
prior to the acquisition date were deemed immaterial to the Company's consolidated Ñnancial statements. The
December 31, 2004 balance sheet reÖects a preliminary purchase price allocation based on an estimate of the
fair values of the assets acquired, that resulted in goodwill of approximately $3 million. The Company is in the
process of Ñnalizing its valuation of the acquired assets and has engaged an independent appraiser to assist in
the valuation, where appropriate. The Company does not anticipate any signiÑcant diÅerences between its
preliminary purchase price allocation and the Ñnal allocation.
Academic Management Services Corporation
On November 17, 2003, the Company purchased all of the outstanding stock of Academic Management
Services Corporation (""AMS'') for a purchase price of approximately $77 million including cash considera-
tion and certain acquisition costs. AMS originates student loans and provides tuition payment plans services.
The results of operations of AMS have been included in the Company's consolidated Ñnancial statements
since the acquisition date and are reÖected within the Company's Lending segment results as discussed further
in Note 18, ""Segment Reporting.'' The acquisition and AMS's proforma results of operations prior to the
acquisition date were deemed immaterial to the Company's consolidated Ñnancial statements.
The acquisition was accounted for under the purchase method of accounting as deÑned in SFAS No. 141.
The Company Ñnalized its purchase price allocation in 2004 allocating the purchase price to the fair values of
the acquired tangible assets, liabilities and identiÑable intangible assets as of the acquisition date as
determined by an independent appraiser. The Ñnal purchase price allocation resulted in an excess purchase
price over the fair value of net assets acquired, or goodwill, of approximately $38 million. Goodwill will be
reviewed for impairment in accordance with SFAS No. 142 as discussed further in Note 2, ""SigniÑcant
Accounting Policies.''
12. Fair Values of Financial Instruments
SFAS No. 107, ""Disclosures about Fair Value of Financial Instruments,'' requires estimation of the fair
values of Ñnancial instruments. The following is a summary of the assumptions and methods used to estimate
those values.
Student Loans
Fair value is determined by a combination of analyzing amounts that the Company has paid recently to
acquire similar loans in the secondary market, and an analysis of the Floor Contract element.
F-46
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
12. Fair Values of Financial Instruments (Continued)
Academic Facilities Financings and Other Loans
The fair values of lines of credit, academic facilities Ñnancings and other loans were determined through
standard bond pricing formulas using current market interest rates and credit spreads and quotes from third
parties.
Cash and Investments (Including ""Restricted'')
For investments with remaining maturities of three months or less, carrying value approximated fair
value. Investments in U.S. Treasury securities were valued at market quotations. All other investments were
valued through standard bond pricing formulas using current market interest rates and credit spreads.
Short-term Borrowings and Long-term Notes
For borrowings with remaining maturities of three months or less, carrying value approximated fair value.
The fair value of all other Ñnancial liabilities was determined through standard bond pricing formulas using
current market interest rates and credit spreads and quotes from third parties.
Derivative Financial Instruments
The fair values of derivative Ñnancial instruments were determined by a combination of pricing through
standard bond pricing formulas using current market interest rates and credit spreads, and obtaining fair values
from third parties.
F-47
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
12. Fair Values of Financial Instruments (Continued)
The following table summarizes the fair values of the Company's Ñnancial assets and liabilities, including
derivative Ñnancial instruments.
(Dollars in millions)
Earning assets
Student loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Academic facilities Ñnancings and
other loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2004
Carrying
Value
DiÅerence
Fair
Value
December 31, 2003
Carrying
Value
DiÅerence
Fair
Value
$67,431
$65,981
$1,450
$51,559
$50,047
$1,512
1,099
9,186
1,048
9,186
51
Ì
1,084
8,001
1,031
8,001
53
Ì
Total earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
77,716
76,215
1,501
60,644
59,079
1,565
Interest bearing liabilities
Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,210
76,085
Total interest bearing liabilities ÏÏÏÏÏ
78,295
2,207
75,915
78,122
(3)
(170)
(173)
18,793
40,200
58,993
18,735
39,808
58,543
(58)
(392)
(450)
Derivative Ñnancial instruments
Floor Income/Cap Contracts ÏÏÏÏÏÏÏ
Interest rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cross currency interest rate swaps ÏÏÏ
Equity forwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Futures contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(625)
(235)
1,839
139
(2)
(625)
(235)
1,839
139
(2)
(1,168)
(319)
281
48
(116)
(1,168)
(319)
281
48
(116)
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Excess of fair value over carrying
value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,328
$1,115
13. Commitments, Contingencies and Guarantees
Bank One/JPMorgan Chase Relationships
The Company has committed to purchase student loans from various lenders including its largest lending
partners, Bank One and JPMorgan Chase. During 2004, the Company acquired an aggregate $6.9 billion of
student loans from Bank One and JPMorgan Chase, which represents 38 percent of the student loans it
originated through its Preferred Channel.
On July 30, 2004, following the merger of JPMorgan Chase and Bank One, the Company and Bank One
entered into a comprehensive agreement under which, among other things:
‚ the Company agreed to the termination of its marketing services agreement with Bank One, eÅectively
allowing Bank One to ""in-source'' the marketing of its own education loans;
‚ Bank One paid a $14 million termination fee to the Company;
‚ the Company extended its ExportSS agreement, through which the Company purchases certain Bank
One-branded FFELP student loans and certain Private Education Loans, from March 2005 through
August 2008; and
F-48
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
13. Commitments, Contingencies and Guarantees (Continued)
‚ for a $9 million fee paid to the Company, Bank One terminated a separate loan purchase agreement
that was entered into with USA Group prior to the Company's July 2000 acquisition of that entity.
Following the termination, (1) the Company retained the right to purchase FFELP loans originated
under this agreement for the 2004-2005 academic year and all serial loans and (2) all loans that the
Company originates and services on the Company's servicing platforms on behalf of Bank One will be
committed for sale under the ExportSS agreement after the 2004-2005 academic year.
In 2003, the last full year of the marketing services agreement with Bank One, the Company earned
approximately $37 million in marketing service fees, of which $22 million was recognized in other income and
$15 million was capitalized as a reduction in loan purchase premiums. In connection with the fees, the
Company incurred and recognized $15 million in expenses.
JPMorgan Chase Joint Venture
The Company's separate joint venture with JPMorgan Chase currently remains in place, although
JPMorgan Chase has rejected the Company's oÅer to renew the agreements that support the joint venture and
has Ñled a petition in a Delaware Chancery court seeking to dissolve the joint venture. See ""Contingencies''
below. Under terms of the joint venture, if the Company and JPMorgan Chase are unable to mutually agree
upon the terms of a new loan purchase and servicing agreement for the Ñve-year period beginning September
2007 by May 31, 2005, then either party may trigger a ""Dutch Auction'' process. Under that process, the
electing party oÅers to purchase the other party's 50 percent interest or sell its 50 percent interest in the joint
venture at a speciÑed price. The non-electing party then has the right to either sell its interest in the joint
venture or purchase the electing party's interest, in either case at the originally oÅered price. If the Company
is the successful purchaser in a Dutch Auction, then for a two-year period following the closing:
‚ JPMorgan Chase may not compete with the Company in the marketing, purchasing, servicing or
ownership of education loans (except with respect to the continuation of business activities under the
Bank One name or the name of any other JPMorgan Chase aÇliate),
‚ the Company may use certain JPMorgan Chase trademarks for a nominal annual fee, and
‚ the Company acquires all rights to make additional FFELP student loans (serial loans) to customers of
the joint venture who entered into master promissory notes prior to the Dutch Auction.
If JPMorgan Chase is the successful purchaser in a Dutch Auction, then for a two-year period following
the closing:
‚ it may use certain Sallie Mae trademarks for a nominal annual fee,
‚ the Company would be required to act as origination and servicing agent for JPMorgan Chase at
market rates, and
‚ the Company would be required to provide JPMorgan Chase with access to certain Sallie Mae
products and services.
If neither party triggers the Dutch Auction process, then the loan purchase agreement (under which the
joint venture sells student loans to Sallie Mae) will expire on August 31, 2007 and the joint venture will expire
in 2026. Absent any negotiated settlement or other income, JPMorgan Chase and Sallie Mae would share
equally in the economics of the joint venture from September 1, 2007 until the expiration of the joint venture.
Through its lawsuit, JPMorgan Chase is seeking to dissolve the joint venture without having to follow the
mutually agreed upon Dutch Auction process. A JPMorgan Chase request with the Chancery court for an
F-49
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
13. Commitments, Contingencies and Guarantees (Continued)
expedited schedule for a Ñnal hearing on the merits has been stayed pending settlement discussions among the
parties. See ""Contingencies.''
The Company has issued lending-related Ñnancial instruments including letters of credit and lines of
credit to meet the Ñnancing needs of its customers. Letters of credit support the issuance of state student loan
revenue bonds. They represent unconditional guarantees of the Company to repay holders of the bonds in the
event of a default. In the event that letters of credit are drawn upon, such loans are collateralized by the
student loans underlying the bonds. The initial liability recognition and measurement provisions of Financial
Accounting Standards Board Interpretation (""FIN'') No. 45, ""Guarantor's Accounting and Disclosure
Requirements for Guarantees Including Indirect Guarantees of the Indebtedness of Others, an Interpretation
of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34,'' are eÅective for such
guarantees issued or modiÑed after December 31, 2003. During 2004, there were no new letters of credit
issued or modiÑcations to existing letters of credit. Accordingly, the Company's Ñnancial statements do not
include a liability for the estimated fair value of these guarantees.
The Company oÅers a line of credit to certain Ñnancial institutions and other institutions in the higher
education community for the purpose of buying or originating student loans. In the event that a line of credit is
drawn upon, the loan is collateralized by underlying student loans. The contractual amount of these Ñnancial
instruments represents the maximum possible credit risk should the counterparty draw down the commitment,
and the counterparty subsequently fails to perform according to the terms of its contract with the Company.
Commitments outstanding are summarized below:
Student loan purchase commitments(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lines of credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Letters of credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$47,247,669
887,790
157,674
$37,230,275
905,255
1,566,652
$48,293,133
$39,702,182
December 31,
2004
2003
The following schedule summarizes expirations of commitments to the earlier of call date or maturity
date outstanding at December 31, 2004.
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Student Loan
Purchases(1)(2)
$ 7,845,606
1,877,965
14,120,323
23,403,775
Lines of
Credit
$150,000
34,101
327,317
376,372
Letters of
Credit
$157,674
Ì
Ì
Ì
Total
$ 8,153,280
1,912,066
14,447,640
23,780,147
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$47,247,669
$887,790
$157,674
$48,293,133
(1) Includes amounts committed at speciÑed dates under forward contracts to purchase student loans and
estimated future requirements to acquire student loans from lending partners estimated based on expected
future volumes at contractually committed rates.
(2) These commitments are not accounted for as derivatives under SFAS No. 133 as they do not meet the
deÑnition of a derivative due to the lack of a Ñxed and determinable purchase amount.
F-50
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
13. Commitments, Contingencies and Guarantees (Continued)
Contingencies
On February 17, 2005, JPMorgan Chase, through its aÇliates, petitioners TCB Education First
Marketing Corporation and Chase Education Holdings, Inc., Ñled a petition in the Delaware Chancery Court
for New Castle County seeking to dissolve the limited liability companies that comprise the Company's joint
venture with JPMorgan Chase. Those limited liability companies, Chase Education First LLC and Education
First Finance LLC, and Sallie Mae, Inc., a wholly owned subsidiary of SLM Corporation, were named as
respondents in the petition. JPMorgan Chase's central claim in the petition is that a change in the Company's
business model from a secondary market into an originator of student loans has undermined the business of
the joint venture, which is to market JPMorgan Chase-branded student loans. The Company believes that this
claim is untenable since it began originating loans approximately four years before the parties comprehensively
renegotiated and amended the joint venture eÅective as July 16, 2002. JPMorgan Chase also claims that the
Dutch Auction dissolution provision, which was a negotiated provision in the joint venture agreements, is an
inadequate remedy. On February 22, 2005, the petitioners Ñled a request with the Chancery court seeking an
expedited schedule for a Ñnal hearing on the merits. That request has been stayed pending settlement
discussions among the parties.
The Company and various aÇliates were defendants in a lawsuit brought by College Loan Corporation
(""CLC'') in the United States District Court for the Eastern District of Virginia alleging various breach of
contract and common law tort claims in connection with CLC's consolidation loan activities. The Complaint
sought compensatory damages of at least $60 million. On June 25, 2003, the jury returned a verdict in favor of
the Company on all counts. CLC subsequently Ñled an appeal. On January 31, 2005, the United States Court
of Appeals for the Fourth Circuit overturned the jury verdict on the grounds that the trial judge's pretrial
rulings improperly limited CLC's proof at trial and remanded the case to the District Court for further
proceedings. The Court of Appeals decision did not address the merits of the case. The Company Ñled a
petition for rehearing or alternatively a rehearing en banc, which the Fourth Circuit denied. The Company
intends to defend this case on the merits at the District Court. PlaintiÅs are seeking punitive damages in
addition to the compensatory damages.
The Company was named as a defendant in a putative class action lawsuit brought by three Wisconsin
residents on December 20, 2001 in the Superior Court for the District of Columbia. The lawsuit sought to
bring a nationwide class action on behalf of all borrowers who allegedly paid ""undisclosed improper and
excessive'' late fees over the past three years. The plaintiÅs sought damages of one thousand Ñve hundred
dollars per violation plus punitive damages and claimed that the class consisted of two million borrowers. In
addition, the plaintiÅs alleged that the Company charged excessive interest by capitalizing interest quarterly in
violation of the promissory note. On February 27, 2003, the Superior Court granted the Company's motion to
dismiss the complaint in its entirety. On March 4, 2004, the District of Columbia Court of Appeals aÇrmed
the Superior Court's decision granting our motion to dismiss the complaint, but granted plaintiÅs leave to re-
plead the Ñrst count, which alleged violations of the D.C. Consumer Protection Procedures Act. On
September 15, 2004, the plaintiÅs Ñled an amended class action complaint. On October 15, 2004, the
Company Ñled a motion to dismiss the amended complaint with the Superior Court for failure to state a claim
and non-compliance with the Court of Appeals' ruling. On December 27, 2004, the Superior Court granted
the Company's motion to dismiss the plaintiÅs' amended compliant. PlaintiÅs have appealed the Superior
Court's December 27, 2004 dismissal order to the Court of Appeals. The Company believes that it will prevail
on the merits of this case if it becomes necessary to further litigate this matter.
In July 2003, a borrower in California Ñled a class action complaint against the Company and certain of
its aÇliates in state court in San Francisco in connection with a monthly payment amortization error
discovered by the company in the fourth quarter of 2002. The complaint asserts claims under the California
F-51
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
13. Commitments, Contingencies and Guarantees (Continued)
Business and Professions Code and other California statutory provisions. The complaint further seeks certain
injunctive relief and restitution. On May 14, 2004, the court issued an order dismissing two of the three counts
of the complaint. The case is currently in the discovery phase. While management is conÑdent of a favorable
outcome in this case, management believes that even an adverse ruling will not have a materially adverse
eÅect on the Company's Ñnancial conditions or results of operations.
The Company continues to cooperate with the SEC concerning an informal investigation that the SEC
initiated on January 14, 2004. Although there are currently no data requests outstanding and the SEC has not
sought to interview any additional witnesses, discussions with the SEC are ongoing. The investigation concerns
certain 2003 year-end accounting entries made by employees of one of the Company's debt collection agency
subsidiaries. The Company's Audit Committee engaged outside counsel to investigate the matter and
management conducted its own investigation. These investigations by the Audit Committee and management
have been completed and the amounts in question were less than $100,000.
The Company is also subject to various claims, lawsuits and other actions that arise in the normal course
of business. Most of these matters are claims by borrowers disputing the manner in which their loans have
been processed or the accuracy of the Company's reports to credit bureaus. In addition, the collections
subsidiaries in the Company's debt management operation group are occasionally named in individual plaintiÅ
or class action lawsuits in which the plaintiÅs allege that the Company has violated a federal or state law in the
process of collecting their account. Management believes that these claims, lawsuits and other actions will not
have a material adverse eÅect on its business, Ñnancial condition or results of operations.
14. Preferred Stock
At December 31, 2004, the Company had 3.3 million shares of 6.97 percent Cumulative Redeemable
Preferred Stock, Series A outstanding. The shares do not have any maturity date but can be redeemed at the
Company's option, beginning November 16, 2009, at the redemption price of $50 plus accrued and unpaid
dividends up to the redemption date. The shares have no preemptive or conversion rights.
Dividends on the shares of the Series A Preferred Stock are not mandatory. Holders of the Series A
Preferred Stock will be entitled to receive cumulative, quarterly cash dividends at the annual rate of $3.485 per
share, when, as, and if declared by the Board of Directors of the Company. For each of the years ended
December 31, 2004, 2003 and 2002, dividends paid on Series A Preferred Stock reduced net income by
$11.5 million.
15. Common Stock
The Company's shareholders have authorized the issuance of 1.1 billion shares of common stock (par
value of $.20). At December 31, 2004, 424 million shares were issued and outstanding and 111 million shares
were unissued but encumbered for outstanding convertible debt and outstanding options and remaining
authority for stock-based compensation plans. The convertible debt oÅering and stock-based compensation
plans are described in Note 8, ""Long-Term Notes,'' and Note 16, ""Stock-Based Compensation Plans,''
respectively. The Company has also encumbered 325.0 million shares out of those authorized for potential
issuances for net share settlement of equity forward contracts.
In September 2003, the Company retired 170 million shares of common stock held in treasury at an
average price of $18.04 per share. This retirement decreased the balance in treasury stock by $3.1 billion, with
corresponding decreases of $34 million in common stock and $3.1 billion in retained earnings.
F-52
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
15. Common Stock (Continued)
In May 2003, the Company's shareholders approved an increase in the number of shares of common
stock the Company is authorized to issue from 375 million shares to 1.1 billion shares. Subsequently, the
Board of Directors approved a three-for-one split of the Company's common stock which was eÅected in the
form of a stock dividend on June 20, 2003, for all shareholders of record on June 6, 2003. All share and per
share amounts presented have been retroactively restated for the stock split. Stockholders' equity has been
restated to give retroactive recognition to the stock split for all periods presented by reclassifying from
additional paid-in capital to common stock the par value of the additional shares issued as a result of the stock
split.
Common Stock Repurchase Program and Equity Forward Contracts
The Company regularly repurchases its common stock through both open market purchases and
settlement of equity forward contracts. At December 31, 2004, the Company had outstanding equity forward
contracts to purchase 42.8 million shares of its common stock at prices ranging from $39.74 to $50.47 per
share.
The equity forward contracts permit the counterparty to terminate a portion of the contracts prior to their
maturity date if the price of the Company's common stock falls below pre-determined levels as deÑned by the
contract as the ""initial trigger price.'' The counterparty can continue to terminate portions of the contract if
the stock price continues to reach lower pre-determined levels, until the price hits the ""Ñnal trigger price'' and
the entire contract is terminated. For equity forward contracts in eÅect as of December 31, 2004, the initial
trigger price ranges from approximately $19.87 to $32.81 and the Ñnal trigger price ranges from $19.87 to
$27.76.
In addition, some of the Company's equity forward contracts enable the counterparty to terminate all
outstanding equity forward contracts if the unsecured and unsubordinated long-term debt rating of the
Company falls to or below BBB- for S&P or Baa3 for Moody's. This provision or one substantially the same is
contained in the contracts of nine of the Company's twelve equity forward counterparties with outstanding
positions.
The Company has negotiated with each of its equity forward counterparties a limit on the total number of
shares that can be required to be delivered to that counterparty in net share settlement of the transactions. As
of December 31, 2004 and 2003, the aggregate maximum number of shares that the Company could be
required to deliver was 325.0 million and 389.2 million, respectively.
During September 2004 and November 2004, the Company amended substantially all of its outstanding
equity forward purchase contracts. The strike prices on these contracts were adjusted to the then current
market share prices of the common stock and the total number of shares under contract was reduced from
53.4 million shares to 46.7 million shares and 49.0 million shares to 42.2 million shares, respectively. As a
result of these amendments, the Company received a total of 13.4 million shares that settled in September and
November free and clear in cashless transactions. This reduction of 13.4 million shares covered by the equity
forward contracts is shown on a net basis in the ""exercises'' row of the table below.
F-53
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
15. Common Stock (Continued)
The following table summarizes the Company's common share repurchase, issuance and equity forward
activity for the years ended December 31, 2004 and 2003.
(Shares in millions)
Common shares repurchased:
Open marketÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity forwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑt plans(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total shares repurchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Years Ended
December 31,
2004
2003
.5
32.7
1.5
34.7
6.7
20.2
2.4
29.3
Average purchase price per share(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$38.03
$31.18
Common shares issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10.7
18.2
Equity forward contracts:
Outstanding at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
New contractsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercises ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Outstanding at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Authority remaining at end of year to repurchase or enter into equity forwards
43.5
32.0
(32.7)
42.8
35.8
28.7
35.0
(20.2)
43.5
38.4
(1) Includes shares withheld from stock option exercises and vesting of performance stock to satisfy minimum
statutory tax withholding obligations and shares tendered by employees to satisfy option exercise costs.
(2) The average purchase price per share for 2004 is calculated based on the average strike price of all equity
forward contracts including those that were net settled in the cashless transactions discussed above. The
average cash purchase price per share is $22.38 when a zero cash cost is reÖected for those shares acquired
in the cashless transactions.
As of December 31, 2004, the expiration dates and range and average purchase prices for outstanding
equity forward contracts were as follows:
Year of maturity
(Contracts in millions of shares)
Outstanding
Contracts
Range of
purchase prices
Average
purchase Price
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8.6
10.3
7.9
16.0
42.8
$39.74 Ì $50.47
50.47
50.47
50.47
$49.73
50.47
50.47
50.47
$50.32
The closing price of the Company's common stock on December 31, 2004 was $53.39. In 2004, the Board
of Directors increased the common share repurchase authority including equity forward contracts by
30 million shares.
F-54
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
15. Common Stock (Continued)
Earnings per Share
Basic earnings per common share (""basic EPS'') is calculated using the weighted average number of
shares of common stock outstanding during each period. Diluted earnings per common share (""diluted EPS'')
reÖect the potential dilutive eÅect of (i) additional common shares that are issuable upon exercise of
outstanding stock options, deferred compensation, restricted stock units, and the outstanding commitment to
issue shares under the Employee Stock Purchase Plan (""ESPP''), determined by the treasury stock method,
(ii) the assumed conversion of convertible debentures, determined by the ""if-converted'' method, and
(iii) equity forwards, determined by the reverse treasury stock method. Diluted EPS for the years ended
December 31, 2003 and 2002 also includes the dilutive eÅect of stock warrants, which were exercised in June
2003.
At December 31, 2004, the Company had $2 billion contingently convertible debentures (""Co-Cos'')
outstanding that are convertible, under certain conditions, into shares of SLM common stock at an initial
conversion price of $65.98. The investors generally can only convert the debentures if the Company's common
stock has appreciated to 130 percent of the conversion price ($85.77) for a prescribed period, or the Company
calls the debentures. Per EITF No. 04-8, diluted EPS for all periods presented includes the potential dilutive
eÅect of the Company's outstanding Co-Cos for the years ended December 31, 2004, 2003 and 2002. (See
Note 2, ""SigniÑcant Accounting Policies Ì Recently Proposed Accounting Pronouncements.'')
The reconciliation of the numerators and denominators of the basic and diluted EPS calculations was as
follows for the years ended December 31, 2004, 2003 and 2002:
December 31,
2004
Years Ended
December 31,
2003
December 31,
2002
Numerator:
Net income attributable to common stock ÏÏÏÏÏÏÏÏÏÏÏ
Adjusted for debt expense of Co-Cos, net of taxes ÏÏÏÏ
$1,901,769
21,405
$1,522,059
11,005
$780,495
Ì
Net income attributable to common stock, adjusted ÏÏÏ
$1,923,174
$1,533,064
$780,495
Denominator:
Weighted-average shares used to compute basic EPSÏÏ
EÅect of dilutive securities:
Dilutive eÅect of stock options, deferred
compensation, restricted stock units, ESPP, and
equity forwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dilutive eÅect of Co-Cos ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dilutive potential common shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
436,133
452,037
462,294
9,342
30,312
39,654
11,298
18,769
30,067
12,226
Ì
12,226
Weighted-average shares used to compute diluted EPS
475,787
482,104
474,520
F-55
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
15. Common Stock (Continued)
Net earnings per share
Basic EPSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dilutive eÅect of stock options, deferred
compensation, restricted stock units, ESPP, and
equity forwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dilutive eÅect of Co-Cos ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31,
2004
Years Ended
December 31,
2003
December 31,
2002
$
4.36
$
3.37
$
1.69
(.09)
(.23)
(.08)
(.11)
(.05)
Ì
Diluted EPS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
4.04
$
3.18
$
1.64
16. Stock-Based Compensation Plans
On May 13, 2004, the Company's shareholders approved the SLM Corporation Incentive Plan (the
""Incentive Plan''), which provides, in part, for awards to employees of equity-based compensation. Sharehold-
ers approved a total of 15 million shares to be issued from this plan. Upon shareholders' approval of the
Incentive Plan, the Company discontinued the non-shareholder approved Employee Stock Option Plan (the
""ESOP'') and, but for one exception below, the Management Incentive Plan (the ""MIP''). Shares available
for future issuance under the ESOP and MIP were canceled; however, terms of outstanding grants remain
unchanged. Commitments made to certain option holders to receive replacement options under the MIP
continue to be honored.
Grants to employees made in 2004 prior to May 13, 2004, were made under the MIP and the ESOP.
Grants made on and after May 13, 2004 were made under the Incentive Plan.
Awards under the Incentive Plan may be in the form of stock, stock options, performance stock, restricted
stock and/or stock units. Awards under the MIP were made in the form of stock, stock options, performance
stock and/or stock units. Awards under the ESOP were in the form of stock, stock options and/or
performance stock. Under all three plans, the maximum term for stock options is 10 years and the exercise
price must be equal to or greater than the market price of SLM common stock on the date of grant. The
Incentive Plan expires in May 2009.
All three plans provide that the vesting of stock options and stock awards are established at the time the
awards are made by the Compensation Committee authorized to make the awards. With the exception of
stock options granted to Messrs. Lord and Fitzpatrick under the terms of their employment agreements, stock
options granted to oÇcers and management employees under the plans vest upon the Company's common
stock price reaching a closing price equal to or greater than 20 percent above the fair market value of the
common stock on the date of grant for Ñve days, but no earlier than 12 months from the grant date. In any
event, all options vest upon the eighth anniversary of their grant date (Ñfth anniversary for options granted in
2000 and 2001).
Stock options were granted to Messrs. Lord and Fitzpatrick in 2002 and 2003. These options vest in one-
third increments when the Company's stock price is 25 percent, 33 percent and 50 percent above the fair
market value of the common stock on the date of grant for Ñve consecutive trading days, but no earlier than
June 1, 2005 for options granted in 2002 and June 1, 2006 for options granted in 2003 and in any case by
January 1, 2010 for options granted in 2002 and January 1, 2011 for options granted in 2003. These options
have met their price vesting targets.
F-56
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
16. Stock-Based Compensation Plans (Continued)
Options granted to rank-and-Ñle employees are time-vested with the grants in 2002, 2003 and 2004
vesting one-half in 18 months from their grant date and the second one-half vesting 36 months from their
grant date. All previously granted options to rank-and-Ñle employees were vested by December 31, 2004.
Performance stock granted under the MIP and the Incentive Plan must vest over a minimum of a
12-month performance period. Performance criteria may include the achievement of any of several Ñnancial
and business goals, such as earnings per share, loan volume, market share, overhead or other expense
reduction, or net income. Restricted stock may be granted under the Incentive Plan and may vest no sooner
than three years from grant date or may vest ratably over three years.
Employees may purchase shares of the Company's common stock under the ESPP at the end of a
24-month period at a price equal to the share price at the beginning of the 24-month period, less 15 percent,
up to a maximum purchase price of $10,000 plus accrued interest.
In 2000, the Company established a replacement option program to assist executive oÇcers in meeting
their share ownership targets. Under the replacement program, oÇcers and Board members have been eligible
to receive new options upon their exercise of vested options in an amount equal to the number of shares
needed to pay the exercise price for the original option. Replacement options carry an exercise price equal to
the fair market value of the Company's common stock on the date of their grant and vest one year from the
grant date. The term of replacement options equals the remaining term of the underlying options. The options
granted to Messrs. Lord and Fitzpatrick in 2003 are not eligible for replacement options. Further, the
Company's Compensation Committee determined that, with the exception of newly hired or promoted
oÇcers, options granted to other oÇcers in 2003 and 2004 would not be eligible for replacement options.
The following table summarizes the employee stock option activity for the years ended December 31,
2004, 2003 and 2002. The weighted average fair value of options granted during the year is based on a Black-
Scholes option pricing model.
2004
Years Ended December 31,
2003
2002
Options
Average
Price
Options
Average
Price
Options
Average
Price
Outstanding at beginning of
year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Direct options granted ÏÏÏÏÏÏ
Replacement options granted
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Canceled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
42,400,231
6,204,181
633,210
(9,231,460)
(1,257,844)
$28.93
41.11
43.03
26.51
36.27
43,828,155
10,009,627
1,184,374
(10,833,755)
(1,788,170)
$26.03
36.18
37.70
24.50
31.02
34,318,266
24,134,718
1,806,270
(14,316,297)
(2,114,802)
$20.25
29.49
31.21
18.62
26.24
Outstanding at end of yearÏÏÏ
38,748,318
$31.45
42,400,231
$28.93
43,828,155
$26.03
Exercisable at end of year ÏÏÏ
19,805,143
$27.71
20,445,682
$24.51
15,222,849
$20.08
Weighted-average fair value
per share of options granted
during the year ÏÏÏÏÏÏÏÏÏÏ
$ 5.14
$ 6.95
$ 7.35
F-57
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
16. Stock-Based Compensation Plans (Continued)
The following table summarizes the number, average exercise prices (which ranged from $10.13 per
share to $52.77 per share) and average remaining contractual life of the employee stock options outstanding at
December 31, 2004.
Exercise Prices
Options
Under $25 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$25-$35 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above $35 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5,107,346
17,985,282
15,655,690
Average
Price
$18.38
29.11
38.40
Average Remaining
Contractual Life
5.5 Yrs.
7.1
8.8
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
38,748,318
$31.45
7.6 Yrs.
SLM Corporation grants stock-based compensation to non-employee directors of the Company under the
Directors Stock Plan. Awards under the Directors Stock Plan may be in the form of stock options and/or
stock. The maximum term for stock options is 10 years and the exercise price must be equal to or greater than
the market price of the Company's common stock on the date of grant. The Directors Stock Plan is a
shareholder-approved plan. The plan was Ñrst approved by shareholders on May 21, 1998, and most recently
approved by shareholders on May 18, 2000. The plan expires on May 21, 2008. Shareholders approved a total
of 10.5 million shares to be issued from this plan.
The vesting of stock options is established at the time the Board makes the awards. Stock options granted
in January 2002, 2003, and 2004 to Directors are subject to the following vesting schedule: all options vest
upon the Company's common stock price reaching a closing price equal to or greater than 20 percent above
the fair market value of the common stock on the date of grant for Ñve days or the Director's election to the
Board, whichever occurs later. In any event, all options vest upon the Ñfth anniversary of their grant date.
The following table summarizes the Board of Directors stock option activity for the years ended
December 31, 2004, 2003 and 2002.
Outstanding at beginning of year
Direct options granted ÏÏÏÏÏÏÏÏÏ
Replacement options grantedÏÏÏÏ
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Canceled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004
Options
3,962,055
255,545
37,527
(611,038)
Ì
Average
Price
$24.75
37.87
42.43
23.00
Ì
Years Ended December 31,
2003
Options
4,412,310
350,625
235,882
(1,036,762)
Ì
Average
Price
$22.65
35.20
39.42
22.69
Ì
2002
Options
4,686,645
885,000
513,087
(1,612,422)
(60,000)
Average
Price
$18.86
28.67
31.30
17.49
28.67
Outstanding at end of yearÏÏÏÏÏÏ
3,644,089
$26.14
3,962,055
$24.75
4,412,310
$22.65
Exercisable at end of year ÏÏÏÏÏÏ
3,606,562
$25.97
3,375,548
$22.63
3,899,223
$21.51
Weighted-average fair value per
share of options granted during
the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 4.62
$ 8.93
$ 7.03
At December 31, 2004, the outstanding Board of Directors options had a weighted-average remaining
contractual life of 6.4 years.
F-58
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
16. Stock-Based Compensation Plans (Continued)
The following table summarizes information as of December 31, 2004, relating to equity compensation
plans of the Company pursuant to which grants of options, restricted stock, restricted stock units or other
rights to acquire shares may be granted from time to time.
(a)
Number of
securities to be
issued upon exercise
of outstanding
options and rights
Weighted average
exercise price
of outstanding
options and rights
Average
remaining life
(years) of
options outstanding
Number of
securities remaining
available for future
issuance under equity
compensation
plans(1)
Types of
awards
issuable(2)
Plan Category
Equity compensation plans
approved by security holders:
Directors Stock Plan ÏÏÏÏÏÏÏÏ
3,518,089
$26.80
SLM Corporation
Incentive Plan(3) ÏÏÏÏÏÏÏÏÏÏ
Expired Plans(4) ÏÏÏÏÏÏÏÏÏÏÏÏ
3,511,500
21,167,476
43.28
31.01
6.62
9.73
7.43
2,368,057
NQ,ST
11,130,921
Ì
NQ,ISO
RES,RSU
NQ,ISO
RES,RSU
Total approved by security
holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
28,197,065
32.01
7.61
13,498,978
Equity compensation plans not
approved by security holders:
Employee Stock Purchase
Plan(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expired Plan(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
14,195,342
Total not approved by security
holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
14,195,342
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
42,392,407
Ì
28.98
28.98
$30.99
Ì
7.27
7.27
7.50
2,509,029
Ì
NQ,RES
2,509,029
16,008,007
(1) Excludes securities included in column (a) and excludes shares that may be issued under the replacement
option program.
(2) NQ (Non-QualiÑed Stock Option), ISO (Incentive Stock Option), RES (Restricted/Performance
Stock), RSU (Restricted Stock Unit), ST (Stock Grant).
(3) The SLM Corporation Incentive Plan is subject to an aggregate limit of 2,000,000 shares that may be
issued as Restricted Stock or Restricted Stock Units. As of December 31, 2004, 1,645,581 shares are
remaining from this authority.
(4) Expired plans for which unexercised options remain outstanding include the 1993-1998 Stock Option Plan,
Management Incentive Plan and Board of Directors Stock Option Plan.
(5) Number of shares available for issuance under the ESPP.
(6) Expired plan for which unexercised options remain outstanding includes the Employee Stock Option Plan.
17. BeneÑt Plans
Pension Plans
EÅective July 1, 2004, the Company's qualiÑed and supplemental pension plans (the ""Pension Plans'')
were frozen with respect to new entrants and participants with less than Ñve years of service. No further
F-59
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
17. BeneÑt Plans (Continued)
beneÑts will accrue with respect to such participants under the Pension Plans, other than interest accruals on
cash balance accounts. These participants were fully vested as of June 30, 2004. As a result of the Pension
Plans' freeze, pension plan liabilities were reduced by $6.3 million on July 1, 2004. The resulting decrease to
the annual expense, after the application of SFAS No. 88, ""Employers Accounting for Settlements and
Curtailments of DeÑned BeneÑt Pension Plans and for Termination BeneÑts,'' was a net curtailment gain of
$4.5 million, reÖecting both the decrease in liabilities as well as reductions to the unrecognized prior service
cost and unrecognized gain/loss. Over the next Ñve years, the Pension Plans will be frozen with respect to
additional participants based on years of service. Employees as of June 30, 2004 who have Ñve to nine years of
service will continue to accrue beneÑts under the Pension Plans until June 30, 2006, while employees as of
June 30, 2004 who have ten or more years of service will continue to accrue beneÑts under the Pension Plans
through June 30, 2009. Former USA Group employees who participated in the Pension Plans and had fewer
than Ñve years of service will continue to accrue beneÑts until December 31, 2005. Management believes that
the net beneÑt from these changes in Pension Plans will mitigate projected increases in health plan costs. In
response to this change in the Company's pension beneÑts, the Company increased the employer contribution
in its deÑned contribution plan.
For those participants continuing to accrue beneÑts under the Pension Plans, beneÑts are credited using a
cash balance formula. Under the formula, each participant has an account, for record keeping purposes only,
to which credits are allocated each payroll period based on a percentage of the participant's compensation for
the current pay period. The applicable percentage is determined by the participant's number of years of service
with the Company. If an individual participated in the Company's prior pension plan as of September 30, 1999
and met certain age and service criteria, the participant (""grandfathered participant'') will receive the greater
of the beneÑts calculated under the prior plan, which uses a Ñnal average pay plan method, or the current plan
under the cash balance formula.
The Company's supplemental pension plan assures that designated participants receive the full amount of
beneÑts to which they would have been entitled under the pension plan but for limits on compensation and
beneÑt levels imposed by the Internal Revenue Code. For grandfathered participants, the amount of
compensation considered for the prior supplemental pension plan is the sum of the individual's salary and
annual bonus, up to 35 percent of the prior year's salary. For all participants in the supplemental cash balance
plan (eÅective October 1, 1999), the amount of compensation is the sum of salary and annual bonus. As
stated above, the supplemental pension plan has been frozen for new participants and is being phased out for
current participants. The nonqualiÑed pension plan was the only pension plan with an accumulated beneÑt
obligation in excess of plan assets. There are no plan assets in the nonqualiÑed plan due to the nature of the
plan.
F-60
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
17. BeneÑt Plans (Continued)
QualiÑed and NonqualiÑed Plans
The following tables provide a reconciliation of the changes in the qualiÑed and nonqualiÑed plan beneÑt
obligations and fair value of assets for the years ending December 31, 2004 and 2003, respectively, and a
statement of the funded status as of December 31 of both years based on a December 31 measurement date.
December 31,
2004
2003
Change in BeneÑt Obligation
Projected beneÑt obligation at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Curtailment gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$184,019
10,862
11,237
Ì
14,279
(6,310)
(11,735)
$158,711
11,103
10,349
Ì
12,480
Ì
(8,624)
BeneÑt obligation at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$202,352
$184,019
Change in Plan Assets
Fair value of plan assets at beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Employer contribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Administrative paymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$184,495
26,856
Ì
1,745
(11,735)
(1,545)
$147,189
35,895
Ì
11,217
(8,624)
(1,182)
Fair value of plan assets at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$199,816
$184,495
Funded Status
Funded status at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized net actuarial gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized prior service cost and transition asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (2,536)
(20,780)
186
$
476
(25,140)
325
Accrued pension costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(23,130)
$(24,339)
F-61
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
17. BeneÑt Plans (Continued)
December 31,
2004
2003
Amounts recognized in the statement of Ñnancial position consist of:
Prepaid beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued beneÑt liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangible assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Ì $
Ì
(25,091)
356
1,605
(27,550)
1,213
1,998
Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(23,130)
$(24,339)
Additional year-end information for plans with accumulated beneÑt
obligations in excess of plan assets:
Projected beneÑt obligationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fair value of plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 19,643
19,500
Ì
$ 22,323
19,200
Ì
The accumulated beneÑt obligations of the qualiÑed and nonqualiÑed deÑned beneÑt plans were
$198 million and $171 million at December 31, 2004 and 2003, respectively. There are no plan assets in the
nonqualiÑed plans due to the nature of the plans; the corporate assets used to pay these beneÑts are included
above in employer contributions.
Components of Net Periodic Pension Cost
Net periodic pension cost included the following components:
Years Ended December 31,
2003
2004
2002
Service cost Ì beneÑts earned during the period ÏÏÏÏÏÏÏÏÏÏÏ
Interest cost on project beneÑt obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Curtailment gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net amortization and deferral ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 10,862
11,237
(15,674)
(4,506)
(1,384)
$ 11,103
10,349
(12,833)
Ì
(658)
$ 10,041
9,542
(16,003)
Ì
(3,007)
Net periodic pension cost (beneÑt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
535
$
7,961
$
573
Assumptions
The weighted average assumptions used to determine the projected accumulated beneÑt obligations are
as follows:
Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rate of compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.75%
8.50%
4.00%
6.25%
8.50%
4.00%
December 31,
2004
2003
F-62
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
17. BeneÑt Plans (Continued)
The weighted average assumptions used to determine the net periodic pension cost are as follows:
December 31,
2004
2003
Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rate of compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.25%
8.50%
4.00%
6.75%
8.50%
4.00%
To develop the expected long-term rate of return on assets assumption for the portfolio, the Company
considered the expected return for each asset class in proportion with the target asset allocation, selecting
8.50 percent for the expected return on plan assets.
Plan Assets
The weighted average asset allocations at December 31, 2004 and 2003, by asset category, are as follows:
Plan Assets
December 31,
2003
2004
Asset Category
Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed income securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
69% 75%
10
21
12
13
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
100% 100%
Investment Policy and Strategy
The principle objectives of the asset allocation policy are to maximize return while preserving principal
during a declining phase of the market cycle and to maintain cash reserves suÇcient to assure timely payment
of beneÑt obligations. The target asset allocation is 75 percent in equity securities and 25 percent in Ñxed
income securities and cash equivalents. A maximum of 85 percent of the plan's assets can be invested in
equity securities with the balance in Ñxed income securities and cash equivalents. Each equity fund manager
follows a value oriented investment strategy. In 2004, the equity allocation was further diversiÑed to include
approximately 15 percent in small and mid-cap securities. The equity fund manager may carry cash positions
between equity transactions. Currently, 15 percent of the total cash position is held with equity fund managers
and can be invested at any time as determined by the equity manager. The remaining cash position is being
held for beneÑt payments and to complete the review of appropriate asset-liability management as a result of
the July 2004 beneÑt plan changes.
Cash Flows
The Company did not contribute to its qualiÑed pension plan in 2004 and does not expect to contribute in
2005. There are no plan assets in the nonqualiÑed plans due to the nature of the plans, and beneÑts are paid
from corporate assets when due to the participant. It is estimated that approximately $1 million will be paid in
2005 for these beneÑts.
F-63
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
17. BeneÑt Plans (Continued)
Estimated Future BeneÑt Payments
The following qualiÑed and nonqualiÑed plan beneÑt payments, which reÖect future service as appropri-
ate, are expected to be paid:
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010 Ó 2014 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$14,156
14,770
15,399
16,490
16,414
82,309
F-64
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
17. BeneÑt Plans (Continued)
401(k) Plans
The Company's 401(k) Savings Plan (""the Plan'') is a deÑned contribution plan that is intended to
qualify under section 401(k) of the Internal Revenue Code. The Plan covers substantially all employees of the
Company. Participating employees as of July 1, 2004 may contribute up to 25 percent of eligible compensa-
tion; prior to that date the maximum deferral was 10 percent of eligible compensation. Up to 6 percent of
these contributions are matched 100 percent by the Company after one year of service. EÅective July 1, 2004,
in conjunction with the deÑned beneÑt plan change, certain eligible employees began receiving a 2 percent
core employer contribution in the Plan. As additional employees phase out of the Pension Plans, they will
begin receiving the 2 percent core employer contribution.
In 2002, the Company acquired Pioneer Credit Recovery, Inc. (""PCR'') and General Revenue
Corporation (""GRC''). The PCR plan design remained unchanged during 2004. The PCR plan permits
contributions up to 20 percent of eligible compensation and matches $.25 for each $1.00 up to the Ñrst
8 percent after one year of service. The GRC plan permits contributions up to 15 percent of eligible
compensation and was amended eÅective January 1, 2004 to provide a biweekly employer matching
contribution in place of the annual discretionary match to eligible employees. In addition, the match formula
was changed to provide 50 percent up to the Ñrst 6 percent of contributions. In July, 2004 the GRC plan was
renamed the Debt Management Operations (""DMO'') plan for eligible employees of GRC and other DMO
employees. It is a safe harbor plan in which eligible employees can contribute up to 25 percent of eligible
compensation. The DMO plan has a match formula of up to 100 percent on the Ñrst 3 percent and 50 percent
on the next 2 percent of contributions. EÅective January 1, 2005, participants of the PCR plan became part of
the DMO plan.
The Company also maintains a non-qualiÑed plan to ensure that designated participants receive the full
amount of beneÑts to which they would have been entitled under the 401(k) Plan except for limits on
compensation imposed by the Internal Revenue Code.
Total expenses related to the 401(k) plans were $19 million, $17 million and $14 million in 2004, 2003
and 2002, respectively. This included discretionary shared success contributions by the Company of
$6 million, $5 million and $6 million in 2004, 2003 and 2002, respectively. As a result of the July 2004 beneÑt
plan changes this discretionary employer contribution is no longer anticipated.
18. Segment Reporting
The Company has two primary operating segments as deÑned in SFAS No. 131, ""Disclosures about
Segments of an Enterprise and Related Information'' Ì the Lending and DMO operating segments. In 2004,
the Lending and DMO operating segments met the quantitative thresholds for reportable segments identiÑed
in SFAS No. 131. Accordingly, the results of operations of the Company's Lending and DMO operating
segments are presented below. The Company has smaller operating segments including the Guarantor
Servicing and Student Loan Servicing operating segments as well as certain other products and services
provided to colleges and universities which do not meet the quantitative thresholds for reportable segments
identiÑed in SFAS No. 131. Therefore, the results of operations for these operating segments and the revenues
and expenses associated with these other products and services are combined with corporate overhead and
other corporate activities within the Corporate and Other reportable segment.
The management reporting process measures the performance of the Company's operating segments
based on the management structure of the Company as well as the methodology used by management to
evaluate performance and allocate resources. Management, including the Company's two ""chief operating
decision makers,'' evaluates the performance of the Company's operating segments based on their proÑtability.
F-65
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
18. Segment Reporting (Continued)
As discussed further below, management measures the proÑtability of the Company's operating segments
based on certain ""core cash'' measures. Accordingly, information regarding the Company's reportable
operating segments is provided based on these ""core cash'' measures. Unlike Ñnancial accounting, there is no
comprehensive, authoritative guidance for management reporting. The management reporting process mea-
sures the performance of the operating segments based on the management structure of the Company and is
not necessarily comparable with similar information for any other Ñnancial institution. The Company's
operating segments are deÑned by the products and services they oÅer or the type of customer they serve and
they reÖect the manner in which Ñnancial information is currently evaluated by management. Intersegment
revenues and expenses are netted within the appropriate Ñnancial statement line items consistent with the
income statement presentation provided to management. Changes in management structure or allocation
methodologies and procedures may result in changes in reported segment Ñnancial information.
The Company's principal operations are located in the United States, and its results of operations and
long-lived assets in geographic regions outside of the United States are not signiÑcant. In the Lending
segment, no individual customer accounted for more than 10 percent of its total revenue during the years
ended December 31, 2004, 2003 and 2002. USA Funds is the Company's largest customer in both the DMO
and Corporate and Other reportable segments. During the years ended December 31, 2004, 2003 and 2002, it
accounted for 53 percent, 55 percent and 58 percent, respectively, of the aggregate revenues generated by the
Company's DMO and Corporate and Other reportable segments. No other customers accounted for more
than 10 percent of total revenues in those segments for the years mentioned.
Lending
In the Company's Lending operating segment, the Company originates and acquires both federally
guaranteed student loans, which are administered by ED in the FFELP, and Private Education Loans, which
are not federally guaranteed. Private Education Loans are primarily used by borrowers to supplement FFELP
loans to meet the rising cost of education. The Company owns and manages student loans for over seven
million borrowers totaling $107.4 billion at December 31, 2004, of which $96.0 billion or 89 percent are
federally insured. In addition to education lending, the Company also originates mortgage and consumer loans
with the intent of selling the majority of such loans. In 2004, the Company originated $1.5 billion in mortgage
and consumer loans and its mortgage and consumer loan portfolio totaled $449 million at December 31, 2004,
of which $167 million pertains to mortgages in the held for sale portfolio.
In addition to its federally insured FFELP products, the Company originates and acquires Private
Education Loans which consist of two general types: (1) those that are designed to bridge the gap between the
cost of higher education and the amount Ñnanced through either capped federally insured loans or the
borrowers' resources, and (2) those that are used to meet the needs of students in alternative learning
programs such as career training, distance learning and lifelong learning programs. Most higher education
Private Education Loans are made in conjunction with a FFELP StaÅord loan and as such are marketed
through the same channel as FFELP loans by the same sales force. Unlike FFELP loans, Private Education
Loans are subject to the full credit risk of the borrower. The Company manages this additional risk through
industry tested loan underwriting standards and a combination of higher interest rates and loan origination fees
that compensate the Company for the higher risk. The majority of the Company's Private Education Loans
are made in conjunction with a FFELP StaÅord loan and, as a result, are marketed through the same
marketing channels.
F-66
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
18. Segment Reporting (Continued)
DMO
The Company provides a wide range of accounts receivable and collection services through Ñve operating
units that comprise its DMO operating segment. These services include defaulted student loan portfolio
management services, contingency collections services for student loans and other asset classes, student loan
default aversion services, and accounts receivable management and collection for purchased portfolios of
receivables that have been charged oÅ by their original creditors. The Company's DMO operating segment
primarily serves the student loan marketplace through a broad array of default management services on a
contingency fee or other pay for performance basis to six FFELP guarantors and for campus based programs.
In addition to collecting on its own purchased receivables, the DMO operating segment provides
receivable management and collection services for large federal agencies, credit card clients and other holders
of consumer debt. As described in more detail in Note 11, ""Acquisitions,'' in September of 2004, the
Company acquired AFS, a full-service accounts receivable management company that purchases charged-oÅ
debt, conducts contingency collection work and performs third-party receivables servicing across a number of
consumer asset classes.
Corporate and Other
The Company's Corporate and Other business segment includes the aggregate activity of its smaller
operating segments including its Guarantor Servicing and Loan Servicing operating segments, other products
and services as well as corporate overhead.
In the Guarantor Servicing operating segment, the Company provides a full complement of administra-
tive services to FFELP guarantors including guarantee issuance, accounting maintenance, and guarantee
fulÑllment. In the Loan Servicing operating segment, the Company provides a full complement of activities
required to service student loans on behalf of lenders who are unrelated to the Company. Such servicing
activities generally commence once a loan has been fully disbursed and include sending out payment coupons
to borrowers, processing borrower payments, originating and disbursing consolidation loans on behalf of the
lender, and other administrative activities required by ED. The Company's other products and services include
comprehensive Ñnancing and loan delivery solutions that it provides to college Ñnancial aid oÇces and students
to streamline the Ñnancial aid process. Corporate overhead includes all of the typical headquarter functions
such as executive management, accounting and Ñnance, human resources and marketing. Corporate overhead
also includes a portion of information technology expenses that relate to the above functions.
Financial Highlights
The tables below include the condensed operating results for each of the Company's reportable segments.
Management, including the ""chief operating decision makers,'' evaluate the Company on certain non-GAAP
performance measures that the Company refers to as ""core cash'' measures. While ""core cash'' measures are
not a substitute for reported results under GAAP, the Company relies on ""core cash'' measures in operating its
business because it believes these ""core cash'' measures provide additional information regarding the
operational and performance indicators that are most closely assessed by management.
""Core cash'' measures are the primary Ñnancial performance measures used by management to develop
the Company's Ñnancial plans, track results, and establish corporate performance targets and incentive
compensation. Management believes this information provides additional insight into the Ñnancial perform-
ance of the core business activities of its business segments. Accordingly, the tables presented below reÖect
""core cash'' operating measures reviewed and utilized by management to manage the business. Reconcilia-
F-67
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
18. Segment Reporting (Continued)
tions to the Company's consolidated operating results in accordance with GAAP are also included in the
tables below.
Segment Results and Reconciliations to GAAP
(Dollars in millions)
Lending
DMO
Corporate
and Other
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less provision for loan losses ÏÏÏÏÏÏÏÏÏÏÏ
$1,822
114
$ Ì
Ì
$ Ì
Ì
Total
Core Cash
Measures
$1,822
114
Adjustments
$ (523)
(3)
Year Ended December 31, 2004
Net interest income after provision for
losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fee income and collections revenue ÏÏÏÏÏÏ
Other income, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interest in net earnings of
1,708
Ì
134
654
423
Ì
340
Ì
161
63
Ì
120
126
265
(6)
1,708
460
260
1,080
480
(520)
Ì
1,765
36
162
Total
GAAP
$1,299
111
1,188
460
2,025
1,116
642
subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
1
Ì
1
Ì
1
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 765
$115
$(13)
$ 867
$1,047
$1,914
Year Ended December 31, 2003
(Dollars in millions)
Lending
DMO
Corporate
and Other
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less provision for loan losses ÏÏÏÏÏÏÏÏÏÏÏ
$1,652
130
Net interest income after provision for
losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fee income and collections revenue ÏÏÏÏÏÏ
Other income, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of accounting change ÏÏ
$1,522
Ì
121
409
409
Ì
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 825
$ Ì
Ì
$ Ì
259
Ì
128
44
Ì
$ 87
$ Ì
Ì
$ Ì
128
123
231
6
Ì
$ 14
Total
Core Cash
Measures
$1,652
130
$1,522
387
244
768
459
Ì
$ 926
Adjustments
$ (326)
17
$ (343)
Ì
1,168
27
320
130
$ 608
Total
GAAP
$1,326
147
$1,179
387
1,412
795
779
130
$1,534
(1) Income taxes are based on a percentage of net income before tax for the individual reportable segments.
F-68
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
18. Segment Reporting (Continued)
Year Ended December 31, 2002
(Dollars in millions)
Lending
DMO
Corporate
and Other
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less provision for loan losses ÏÏÏÏÏÏÏÏÏÏÏ
$1,359
131
Net interest income after provision for
losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fee income and collections revenue ÏÏÏÏÏÏ
Other income, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,228
Ì
100
345
349
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 634
$ Ì
Ì
$ Ì
186
Ì
109
26
$ 51
$ Ì
Ì
$ Ì
106
110
209
2
$
5
Total
Core Cash
Measures
$1,359
131
$1,228
292
210
663
377
$ 690
Adjustments
$ 66
(14)
$ 80
Ì
103
27
54
$102
Total
GAAP
$1,425
117
$1,308
292
313
690
431
$ 792
(1) Income taxes are based on a percentage of net income before tax for the individual reportable segments.
F-69
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
18. Segment Reporting (Continued)
The adjustments required to reconcile from the Company's ""core cash'' measures to its GAAP results of
operations relate to diÅering treatments for securitization transactions, derivatives, Öoor income related to the
Company's student loans, and certain other items that management does not consider in evaluating the
Company's operating results. The following table reÖects aggregate adjustments associated with these areas
for the years ended December 31, 2004, 2003, and 2002.
Years Ended December 31,
2002
2003
2004
Net impact of securitization accounting(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net impact of derivative accounting(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net impact of Floor Income(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of acquired intangibles(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net tax eÅect(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of accounting change(6)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (152)
1,553
(156)
(36)
(162)
Ì
$ 300
502
23
(27)
(320)
130
$ 291
(200)
92
(27)
(54)
Ì
Total adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,047
$ 608
$ 102
(1) Securitization: Under GAAP, certain securitization transactions are accounted for as sales of assets. Under
""core cash,'' the Company presents all securitization transactions as long-term non-recourse Ñnancings.
The upfront ""gains'' on sale from securitization transactions as well as ongoing ""servicing and securitiza-
tion revenue'' presented in accordance with GAAP are excluded from the ""core cash'' measures and
replaced by the interest income, provision for loan losses, and interest expense as they are earned or
incurred on the securitization loans. The Company also excludes transactions with its oÅ-balance sheet
trusts which would be considered intercompany on a Managed Basis.
(2) Derivative accounting: ""Core cash'' measures exclude the periodic unrealized gains and losses caused by
the one-sided mark-to-market derivative valuations prescribed by SFAS No. 133 and recognize the
economic eÅect of these hedges, which results in any cash paid or received being recognized ratably as an
expense or revenue over the hedged item's life. The Company also excludes the gain or loss on equity
forward contracts that are required to be accounted for in accordance with SFAS No. 133 as derivatives
and are marked to market through earnings.
(3) Floor income: The timing and amount (if any) of Floor Income earned is uncertain and in excess of
expected spreads and, therefore, the Company excludes such income when it is not economically hedged
from ""core cash'' measures. The Company employs derivatives, primarily Floor Income Contracts and
futures, to economically hedge Floor Income. These derivatives do not qualify as eÅective accounting
hedges and therefore are marked-to-market through the derivative market value adjustment. For ""core
cash'' measures, the Company reverses the fair value adjustments on the Floor Income Contracts and
futures economically hedging Floor Income and includes the amortization of net premiums received (net
of Eurodollar futures contracts' realized gains or losses) in income.
(4) Other items: The Company excludes amortization of acquired intangibles.
(5) Such tax eÅect is based upon the Company's ""core cash'' eÅective tax rate for the year. The net tax eÅect
results primarily from the exclusion of the permanent income tax impact of the equity forward contracts.
(6) For the year ended December 31, 2003, upon the adoption of SFAS No. 150, the Company also excluded a
gain of $130 million which was reÖected as a ""cumulative eÅect of accounting change'' in the consolidated
statements of income.
F-70
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
19.
Income Taxes
Reconciliations of the statutory U.S. federal income tax rates to the Company's eÅective tax rate follow:
Years Ended
December 31,
2003
2004
2002
Statutory rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity forward contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax exempt interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance Proceeds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State tax, net of federal beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
35.0% 35.0% 35.0%
1.1
(10.4)
(.3)
(.1)
(.2)
(.2)
.3
.5
(.4)
(.4)
.2
.7
Ì
(.6)
(.5)
.6
(.7)
1.5
EÅective tax rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
25.1% 35.7% 35.3%
Income tax expense for the years ended December 31, 2004, 2003, and 2002 consists of:
2004
December 31,
2003
2002
Current provision:
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total current provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred provision/(beneÑt):
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$375,496
7,982
$684,065
27,400
$ 567,483
11,280
383,478
711,465
578,763
248,776
10,435
87,086
(19,171)
(146,848)
(512)
Total deferred provision/(beneÑt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
259,211
67,915
(147,360)
Provision for income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$642,689
$779,380
$ 431,403
F-71
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
19.
Income Taxes (Continued)
At December 31, 2004 and 2003, the tax eÅect of temporary diÅerences that give rise to deferred tax
assets and liabilities include the following:
December 31,
2004
2003
Deferred tax assets:
Loan origination servicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Student loan reservesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
In-substance defeasance transactionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expenses not currently deductible ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Partnership income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Warrants issuance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized investment gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 22,835
136,421
24,117
56,904
10,238
33,624
57,081
28,866
66,064
$ 65,156
89,336
27,885
51,531
36,346
34,383
65,498
209,038
63,466
Total deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
436,150
642,639
Deferred tax liabilities:
Leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securitization transactionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Depreciation/amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional tax deductible expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
206,559
98,174
88,525
62,006
6,985
233,236
121,888
28,602
14,445
20,934
Total deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
462,249
419,105
Net deferred tax assets/(liabilities)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(26,099)
$223,534
Included in deferred tax assets is the tax eÅect of unrealized gains or losses recorded directly to
accumulated other comprehensive income.
Also included in the other deferred tax assets is a valuation allowance of $1,831 that has been established
against the Company's state deferred tax assets since the Company has determined that the beneÑt of certain
tax assets may not be realized in the future. The ultimate realization of the deferred tax assets is dependent
upon the generation of future taxable income during the period in which the temporary diÅerences become
deductible. Management primarily considers the scheduled reversals of deferred tax liabilities and the history
of positive taxable income in making this determination.
As of December 31, 2004, the Company has state net operating loss carryforwards of $7,537 which begin
to expire in 2005.
In 2004, the Company and the IRS reached an agreement with respect to the one outstanding issue
associated with the review of the Company's 1994 and 1995 income tax returns. In addition, during 2004, the
Company and the IRS reached an agreement with regard to all but one issue associated with the review of the
Company's 1996 through 1999 income tax returns. The one unresolved issue from the 1996 through 1999
review has been appealed through the IRS' administrative appeals process. The IRS has also commenced its
examination of the Company's 2000 through 2002 income tax returns.
F-72
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
20. Quarterly Financial Information (unaudited)
2004
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 321,715
39,818
$332,607
28,344
$312,943
10,930
$332,034
31,974
Net interest income after provision for lossesÏÏÏÏÏÏÏÏÏÏÏ
Derivative market value adjustmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interest in net earnings of subsidiaries ÏÏÏÏÏÏÏÏÏ
281,897
(116,743)
424,466
208,877
89,278
Ì
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
291,465
2,886
304,263
386,147
483,354
206,051
352,787
Ì
614,926
2,864
302,013
73,000
392,463
313,762
97,136
Ì
356,578
2,875
300,060
506,637
335,208
387,090
103,488
1,026
650,301
2,876
Net income attributable to common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 288,579
$612,062
$353,703
$647,425
Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
.65
.61
$
$
1.39
1.29
$
$
.81
.76
$
$
1.52
1.40
2003
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 346,218
42,545
$ 354,168
36,449
$333,473
41,695
$292,510
26,791
Net interest income after provision for lossesÏÏÏÏÏÏÏÏÏÏ
Derivative market value adjustmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
303,673
(119,063)
636,975
178,344
226,692
Ì
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
416,549
2,875
317,719
(205,295)
646,248
184,662
201,316
Ì
372,694
2,875
291,778
91,041
351,709
180,097
204,514
129,971
479,888
2,875
265,719
(4,498)
401,988
251,922
146,858
Ì
264,429
2,876
Net income attributable to common stock ÏÏÏÏÏÏÏÏÏÏÏÏ
$ 413,674
$ 369,819
$477,013
$261,553
Basic earnings per common share, after cumulative
eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings per common share, after cumulative
eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
.91
.88
$
$
.82
.78
$
$
1.06
.98
$
$
.58
.54
F-73
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Dollars in thousands, except per share amounts)
20. Quarterly Financial Information (unaudited) (Continued)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2002
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$392,101
20,237
$ 394,401
27,550
$ 342,884
34,771
$ 295,081
34,066
Net interest income after provision for lossesÏÏÏÏÏÏÏÏÏ
Derivative market value adjustmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
371,864
18,603
430,845
166,801
232,167
422,344
2,875
366,851
(406,005)
402,751
167,942
69,654
126,001
2,875
308,113
(536,929)
297,406
174,309
(43,340)
(62,379)
2,875
261,015
(157,769)
556,426
180,720
172,922
306,030
2,876
Net income (loss) attributable to common stock ÏÏÏÏÏ
$419,469
$ 123,126
$ (65,254)
$ 303,154
Basic earnings (loss) per common shareÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings (loss) per common share ÏÏÏÏÏÏÏÏÏÏÏ
$
$
.90
.88
$
$
.27
.26
$
$
(.14)
(.14)
$
$
.66
.64
21. Completion of the GSE Wind-Down
Under the Privatization Act, the GSE was required to wind down its operations and dissolve on or before
September 30, 2008. On December 29, 2004, the Company completed the Wind-Down of the GSE by
defeasing the remaining debt obligations of the GSE and dissolving the GSE's federal charter.
SpeciÑcally, the GSE, the Company and the Federal Reserve Bank of New York, both in its capacity as
trustee and as Ñscal agent for the GSE's remaining obligations, entered into a Master Defeasance
Trust Agreement as of December 29, 2004 that established a special and irrevocable trust, which was fully
collateralized by direct, noncallable obligations of the United States. The defeasance trust structure was
speciÑcally setup to qualify as a QSPE under SFAS No. 140 and meet the criteria of a debt extinguishment
under SFAS No. 140, as the Company is no longer the primary obligor of the defeased obligations. As a result,
the defeasance trust is oÅ-balance sheet. On December 29, 2004, the United States Department of the
Treasury determined that such obligations were suÇcient, without consideration of any signiÑcant reinvest-
ment of interest, to pay the principal of and the interest on the GSE's remaining obligations. The Wind-Down
was completed upon the issuance of that determination and the GSE's separate existence terminated.
For the year ended December 31, 2004, the Company recognized a $221 million loss related to the
repurchase and defeasance of $3.0 billion of GSE debt.
F-74
(This page has been left blank intentionally.)
F-75
APPENDIX A
FEDERAL FAMILY EDUCATION LOAN PROGRAM
General
The Federal Family Education Loan Program, known as FFELP, under Title IV of the Higher Education
Act, provides for loans to students who are enrolled in eligible institutions, or to parents of dependent students,
to Ñnance their educational costs. As further described below, payment of principal and interest on the student
loans is guaranteed by a state or not-for-proÑt guarantee agency against:
‚ default of the borrower;
‚ the death, bankruptcy or permanent, total disability of the borrower;
‚ closing of the borrower's school prior to the end of the academic period;
‚ false certiÑcation by the borrower's school of his eligibility for the loan; and
‚ an unpaid school refund.
Subject to conditions, a program of federal reinsurance under the Higher Education Act entitles
guarantee agencies to reimbursement from the Department of Education for between 75 percent and 100
percent of the amount of each guarantee payment. In addition to the guarantee, the holder of student loans is
entitled to receive interest subsidy payments and special allowance payments from the U.S. Department of
Education on eligible student loans. Special allowance payments raise the yield to student loan lenders when
the statutory borrower interest rate is below an indexed market value.
Four types of FFELP student loans are currently authorized under the Higher Education Act:
‚ Subsidized Federal StaÅord Loans to students who demonstrate requisite Ñnancial need;
‚ Unsubsidized Federal StaÅord Loans to students who either do not demonstrate Ñnancial need or
require additional loans to supplement their Subsidized StaÅord Loans;
‚ Federal PLUS Loans to parents of dependent students whose estimated costs of attending school
exceed other available Ñnancial aid; and
‚ Consolidation Loans, which consolidate into a single loan a borrower's obligations under various
federally authorized student loan programs.
Before July 1, 1994, the Higher Education Act also authorized loans called ""Supplemental Loans to
Students'' or ""SLS Loans'' to independent students and, under some circumstances, dependent undergraduate
students, to supplement their Subsidized StaÅord Loans. The SLS program was replaced by the Unsubsidized
StaÅord Loan program.
This appendix describes or summarizes the material provisions of Title IV of the Higher Education Act,
the FFELP and related statutes and regulations. It, however, is not complete and is qualiÑed in its entirety by
reference to each actual statute and regulation. Both the Higher Education Act and the related regulations
have been the subject of extensive amendments over the years. The Company cannot predict whether future
amendments or modiÑcations might materially change any of the programs described in this appendix or the
statutes and regulations that implement them.
Legislative Matters
The FFELP is subject to comprehensive reauthorization at least every 5 years and to frequent statutory
and regulatory changes. The most recent reauthorization was the Higher Education Amendments of 1998.
Since the 1998 reauthorization, the Higher Education Act has been amended by the Ticket to Work and
Work Incentives Improvement Act of 1999, by Public Law 106-554 (December 21, 2000), the Consolidated
Appropriations Act of 2001, by Public Law 107-139, (February 8, 2002) by Public Law 108-98 (October 10,
2003), and by Public Law 108-409 (October 30, 2004).
A-1
In 1993 Congress created the William D. Ford Federal Direct Loan Program (""FDLP'') under which
StaÅord, PLUS and Consolidation Loans are funded directly by the U.S. Department of Treasury. The school
determines whether it will participate in the FFELP or FDLP.
The 1998 reauthorization extended the principal provisions of the FFELP and the FDLP to October 1,
2004. This legislation, as modiÑed by the 1999 act, lowered both the borrower interest rate on StaÅord Loans
to a formula based on the 91-day Treasury bill rate plus 2.3 percent (1.7 percent during in-school, grace and
deferment periods) and the lender's rate after special allowance payments to the 91-day Treasury bill rate plus
2.8 percent (2.2 percent during in-school, grace and deferment periods) for loans originated on or after
October 1, 1998. The borrower interest rate on PLUS loans originated during this period is equal to the 91-day
Treasury bill rate plus 3.1 percent.
The 1999 and 2001 acts changed the Ñnancial index on which special allowance payments are computed
on new loans from the 91-day Treasury bill rate to the three-month commercial paper rate (Ñnancial) for
FFELP loans disbursed on or after January 1, 2000. For these FFELP loans, the special allowance payments
to lenders are based upon the three-month commercial paper (Ñnancial) rate plus 2.34 percent (1.74 percent
during in-school, grace and deferment periods) for StaÅord Loans and 2.64 percent for PLUS and
Consolidation Loans. The 1999 act did not change the rate that the borrower pays on FFELP loans.
The 2000 act changed the Ñnancial index on which the interest rate for some borrowers of SLS and
PLUS loans are computed. The index was changed from the 1-year Treasury bill rate to the weekly average
one-year constant maturity Treasury yield. The 2002 act changed the interest rate paid by borrowers beginning
in Ñscal year 2006 to a Ñxed rate of 6.8 percent for StaÅord loans and 7.9 percent for PLUS loans.
The 1998 reauthorization and P.L. 107-139 set the borrower interest rates on FFELP and Federal Direct
Consolidation Loans for borrowers whose applications are received before July 1, 2003 at a Ñxed rate equal to
the lesser of the weighted average of the interest rates of the loans consolidated, adjusted up to the nearest
one-eighth of one percent, and 8.25 percent. The 1998 legislation, as modiÑed by the 1999 and 2002 acts, sets
the special allowance payment rate for FFELP loans at the three-month commercial paper rate plus 2.64
percent for loans disbursed on or after January 1, 2000. Lenders of FFELP Consolidation Loans pay a rebate
fee of 1.05 percent per annum to the U.S. Department of Education. All other guaranty fees may be passed on
to the borrower.
The 2004 act increased the teacher loan forgiveness level for certain StaÅord loan borrowers, and
modiÑed the special allowance calculation for loans made with proceeds of tax-exempt obligations.
Eligible Lenders, Students and Educational Institutions
Lenders eligible to make loans under the FFELP generally include banks, savings and loan associations,
credit unions, pension funds and, under some conditions, schools and guarantors. A student loan may be made
to, or on behalf of, a ""qualiÑed student.'' A ""qualiÑed student'' is an individual who
‚ is a United States citizen, national or permanent resident;
‚ has been accepted for enrollment or is enrolled and maintaining satisfactory academic progress at a
participating educational institution; and
‚ is carrying at least one-half of the normal full-time academic workload for the course of study the
student is pursuing.
A student qualiÑes for a subsidized StaÅord loan if his family meets the Ñnancial need requirements for
the particular loan program. Only PLUS loan borrowers have to meet credit standards.
Eligible schools include institutions of higher education, including proprietary institutions, meeting the
standards provided in the Higher Education Act. For a school to participate in the program, the Department of
Education must approve its eligibility under standards established by regulation.
A-2
Financial Need Analysis
Subject to program limits and conditions, student loans generally are made in amounts suÇcient to cover
the student's estimated costs of attending school, including tuition and fees, books, supplies, room and board,
transportation and miscellaneous personal expenses as determined by the institution. Each StaÅord Loan
applicant (and parents in the case of a dependent child) must undergo a Ñnancial need analysis. This requires
the applicant (and parents in the case of a dependent child) to submit Ñnancial data to a federal processor.
The federal processor evaluates the parents' and student's Ñnancial condition under federal guidelines and
calculates the amount that the student and the family are expected to contribute towards the student's cost of
education. After receiving information on the family contribution, the institution then subtracts the family
contribution from the student's estimated costs of attending to determine the student's need for Ñnancial aid.
Some of this need may be met by grants, scholarships, institutional loans and work assistance. A student's
""unmet need'' is further reduced by the amount of StaÅord Loans for which the borrower is eligible.
Special Allowance Payments
The Higher Education Act provides for quarterly special allowance payments to be made by the
Department of Education to holders of student loans to the extent necessary to ensure that they receive at least
speciÑed market interest rates of return. The rates for special allowance payments depend on formulas that
vary according to the type of loan, the date the loan was made and the type of funds, tax-exempt or taxable,
used to Ñnance the loan. The Department makes a special allowance payment for each calendar quarter.
The special allowance payment equals the average unpaid principal balance, including interest which has
been capitalized, of all eligible loans held by a holder during the quarterly period multiplied by the special
allowance percentage.
For student loans disbursed before January 1, 2000, the special allowance percentage is computed by:
(1) determining the average of the bond equivalent rates of 91-day Treasury bills auctioned for that
quarter;
(2) subtracting the applicable borrower interest rate;
(3) adding the applicable special allowance margin described in the table below; and
(4) dividing the resultant percentage by 4.
If the result is negative, the special allowance payment is zero.
Date of First Disbursement
Special Allowance Margin
Before 10/17/86 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
From 10/17/86 through 09/30/92 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
From 10/01/92 through 06/30/95 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
From 07/01/95 through 06/30/98 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
From 07/01/98 through 12/31/99 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3.50%
3.25%
3.10%
2.50% for StaÅord Loans that are in In-School,
Grace or Deferment
3.10% for StaÅord Loans that are in Repayment
and all other loans
2.20% for StaÅord Loans that are in In-School,
Grace or Deferment
2.80% for StaÅord Loans that are in Repayment
3.10% for PLUS, SLS and Consolidation loans
A-3
For student loans disbursed after January 1, 2000, the special allowance percentage is computed by:
(1) determining the average of the bond equivalent rates of 3-month commercial paper (Ñnancial) rates
quoted for that quarter;
(2) subtracting the applicable borrower interest rate;
(3) adding the applicable special allowance margin described in the table below; and
(4) dividing the resultant percentage by 4.
If the result is negative, the special allowance payment is zero.
Date of First Disbursement
Special Allowance Margin
From 01/01/00 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.74% for StaÅord Loans that are in In-School,
Grace or Deferment
2.34% for StaÅord Loans that are in Repayment
2.64% for PLUS and Consolidation loans
Special allowance payments are available on variable rate PLUS Loans and SLS Loans only if the
variable rate, which is reset annually, exceeds the applicable maximum borrower rate. The variable rate is
based on the weekly average one-year constant maturity Treasury yield for loans made before July 1, 1998 and
based on the 91-day Treasury bill for loans made on or after July 1, 1998. The maximum borrower rate for
these loans is between 9 percent and 12 percent.
StaÅord Loan Program
For StaÅord Loans, the Higher Education Act provides for:
‚ federal reinsurance of StaÅord Loans made by eligible lenders to qualiÑed students;
‚ federal interest subsidy payments on Subsidized StaÅord Loans paid by the Department of Education
to holders of the loans in lieu of the borrowers' making interest payments during in-school, grace and
deferment periods; and
‚ special allowance payments representing an additional subsidy paid by the Department to the holders
of eligible StaÅord Loans.
We refer to all three types of assistance as ""federal assistance.''
A-4
Interest. The borrower's interest rate on a StaÅord Loan can be Ñxed or variable. Variable rates are reset
annually each July 1 based on the bond equivalent rate of 91-day Treasury bills auctioned at the Ñnal auction
held before the preceding June 1. StaÅord Loan interest rates are presented below.
Trigger Date
Borrower Rate
Maximum Borrower Rate
Interest Rate Margin
Before 01/01/81 ÏÏÏÏÏÏ
From 01/01/81 through
09/12/83 ÏÏÏÏÏÏÏÏÏÏ
From 09/13/83 through
06/30/88 ÏÏÏÏÏÏÏÏÏÏ
From 07/01/88 through
09/30/92 ÏÏÏÏÏÏÏÏÏÏ
7%
9%
8%
7%
9%
8%
N/A
N/A
N/A
8% for 48 months;
thereafter, 91-day Treasury
° Interest Rate Margin
8% for 48 months, then
10%
3.25% for loans made before
7/23/92 and for loans made on
or before 10/1/92 to new
student borrowers; 3.10% for
loans made after 7/23/92 and
before 7/1/94 to borrowers with
outstanding FFELP loans
3.10%
3.10%
2.50% (In-School, Grace or
Deferment); 3.10%
(Repayment)
1.70% (In-School, Grace or
Deferment); 2.30%
(Repayment)
N/A
From 10/01/92 through
06/30/94 ÏÏÏÏÏÏÏÏÏÏ
From 07/01/94 through
06/30/95 ÏÏÏÏÏÏÏÏÏÏ
From 07/01/95 through
06/30/98 ÏÏÏÏÏÏÏÏÏÏ
91-day Treasury ° Interest
Rate Margin
91-day Treasury ° Interest
Rate Margin
91-day Treasury ° Interest
Rate Margin
From 07/01/98 through
06/30/06 ÏÏÏÏÏÏÏÏÏÏ
91-day Treasury ° Interest
Rate Margin
From 07/01/06ÏÏÏÏÏÏÏ
6.8%
9%
8.25%
8.25%
8.25%
6.8%
The trigger date for StaÅord Loans made before October 1, 1992 is the Ñrst day of the enrollment period
for which the borrower's Ñrst StaÅord Loan is made. The trigger date for StaÅord Loans made on or after
October 1, 1992 is the date of the disbursement of the borrower's StaÅord Loan.
Interest Subsidy Payments. The Department of Education is responsible for paying interest on
Subsidized StaÅord Loans:
‚ while the borrower is a qualiÑed student,
‚ during the grace period, and
‚ during prescribed deferral periods.
The Department of Education makes quarterly interest subsidy payments to the owner of a Subsidized
StaÅord Loan in an amount equal to the interest that accrues on the unpaid balance of that loan before
repayment begins or during any deferral periods. The Higher Education Act provides that the owner of an
eligible Subsidized StaÅord Loan has a contractual right against the United States to receive interest subsidy
and special allowance payments. However, receipt of interest subsidy and special allowance payments is
conditioned on compliance with the requirements of the Higher Education Act.
Lenders generally receive interest subsidy and special allowance payments within 45 days to 60 days after
submitting the applicable data for any given calendar quarter to the Department of Education. However, there
can be no assurance that payments will, in fact, be received from the Department within that period.
If the loan is not held by an eligible lender in accordance with the requirements of the Higher Education
Act and the applicable guarantee agreement, the loan may lose its federal assistance.
A-5
Loan Limits. The Higher Education Act generally requires that lenders disburse student loans in at
least two equal disbursements. The Act limits the amount a student can borrow in any academic year. The
following chart shows current and historic loan limits.
Borrower's Academic Level Base Amount Subsidized
and Unsubsidized On or After 10/1/93
Undergraduate (per year):
1st year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2nd year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3rd year and aboveÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Graduate (per year) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Aggregate Limit:
Undergraduate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Graduate (including undergraduate) ÏÏÏÏÏÏÏ
For the purposes of the table above:
Subsidized
On or After
1/1/87
All Students
Subsidized and
Unsubsidized On
or After 10/1/93
Additional
Unsubsidized
Only On or
After 7/1/94
Maximum Annual
Total Amount
Independent Students
$ 2,625
$ 2,625
$ 4,000
$ 7,500
$17,250
$54,750
$ 2,625
$ 3,500
$ 5,500
$ 8,500
$23,000
$65,500
$ 4,000
$ 4,000
$ 5,000
$10,000
$23,000
$73,000
6,625
$
$
7,500
$ 10,500
$ 18,500
$ 46,000
$138,500
‚ The loan limits include both FFELP and FDLP loans.
‚ The amounts in the second column represent the combined maximum loan amount per year for
Subsidized and Unsubsidized StaÅord Loans. Accordingly, the maximum amount that a student may
borrow under an Unsubsidized StaÅord Loan is the diÅerence between the combined maximum loan
amount and the amount the student received in the form of a Subsidized StaÅord Loan.
Independent undergraduate students, graduate students and professional students may borrow the
additional amounts shown in the next to last column in the chart above. Dependent undergraduate students
may also receive these additional loan amounts if their parents are unable to provide the family contribution
amount and it is unlikely that they will qualify for a PLUS Loan.
‚ Students attending certain medical schools are eligible for higher annual and aggregate loan limits.
‚ The annual loan limits are sometimes reduced when the student is enrolled in a program of less than
one academic year or has less than a full academic year remaining in his program.
Repayment. Repayment of a StaÅord Loan begins 6 months after the student ceases to be enrolled at
least half time. In general, each loan must be scheduled for repayment over a period of not more than 10 years
after repayment begins. New borrowers on or after October 7, 1998 who accumulate outstanding loans under
the FFELP totaling more than $30,000 are entitled to extend repayment for up to 25 years, subject to
minimum repayment amounts and Consolidation loan borrowers may be scheduled for repayment up to
30 years depending on the borrower's indebtedness. The Higher Education Act currently requires minimum
annual payments of $600, unless the borrower and the lender agree to lower payments, except that negative
amortization is not allowed. The Act and related regulations require lenders to oÅer the choice of a standard,
graduated, income-sensitive and extended repayment schedule, if applicable, to all borrowers entering
repayment.
Grace Periods, Deferral Periods and Forbearance Periods. After the borrower stops pursuing at least a
half-time course of study, he must begin to repay principal of a StaÅord Loan following the grace period.
However, no principal repayments need be made, subject to some conditions, during deferment and
forbearance periods.
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For borrowers whose Ñrst loans are disbursed on or after July 1, 1993, repayment of principal may be
deferred while the borrower returns to school at least half-time. Additional deferrals are available, when the
borrower is:
‚ enrolled in an approved graduate fellowship program or rehabilitation program; or
‚ seeking, but unable to Ñnd, full-time employment (subject to a maximum deferment of 3 years); or
‚ having an economic hardship, as deÑned in the Act (subject to a maximum deferment of 3 years).
The Higher Education Act also permits, and in some cases requires, ""forbearance'' periods from loan
collection in some circumstances. Interest that accrues during forbearance is never subsidized. Interest that
accrues during deferment periods may be subsidized.
PLUS and SLS Loan Programs
The Higher Education Act authorizes PLUS Loans to be made to parents of eligible dependent students
and previously authorized SLS Loans to be made to the categories of students now served by the
Unsubsidized StaÅord Loan program. Only parents who have no adverse credit history or who are able to
secure an endorser without an adverse credit history are eligible for PLUS Loans. The basic provisions
applicable to PLUS and SLS Loans are similar to those of StaÅord Loans for federal insurance and
reinsurance. However, interest subsidy payments are not available under the PLUS and SLS programs and, in
some instances, special allowance payments are more restricted.
Loan Limits. PLUS and SLS Loans disbursed before July 1, 1993 were limited to $4,000 per academic
year with a maximum aggregate amount of $20,000.
The annual and aggregate amounts of PLUS Loans Ñrst disbursed on or after July 1, 1993 are limited
only to the diÅerence between the cost of the student's education and other Ñnancial aid received, including
scholarship, grants and other student loans.
Interest. The interest rate for a PLUS or SLS Loan depends on the date of disbursement and period of
enrollment. The interest rates for PLUS Loans and SLS Loans are presented in the following chart. Until
July 1, 2001, the 1-year index was the bond equivalent rate of 52-week Treasury bills auctioned at the Ñnal
auction held prior to each June 1. Beginning July 1, 2001, the 1-year index is the weekly average 1-year
constant maturity Treasury yield determined the preceding June 26.
Trigger Date
Borrower Rate
Maximum
Borrower Rate
Interest
Rate Margin
Before 10/01/81ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9%
From 10/01/81 through 10/30/82ÏÏÏ 14%
From 11/01/82 through 06/30/87ÏÏÏ 12%
From 07/01/87 through 09/30/92ÏÏÏ 1-year Index ° Interest Rate Margin
From 10/01/92 through 06/30/94ÏÏÏ 1-year Index ° Interest Rate Margin
From 07/01/94 through 06/30/98ÏÏÏ 1-year Index ° Interest Rate Margin
From 6/30/98 through 06/30/06ÏÏÏÏ
From 07/01/06ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
N/A
9%
N/A
14%
N/A
12%
12%
3.25%
PLUS 10%, SLS 11% 3.10%
3.10%
9%
3.10%
91-day Treasury ° Interest Rate Margin 9%
N/A
7.9%
7.9%
For PLUS and SLS Loans made before October 1, 1992, the trigger date is the Ñrst day of the enrollment
period for which the loan was made. For PLUS and SLS Loans made on or after October 1, 1992, the trigger
date is the date of the disbursement of the loan.
A holder of a PLUS or SLS Loan is eligible to receive special allowance payments during any quarter if:
‚ the borrower rate is set at the maximum borrower rate and
‚ the sum of the average of the bond equivalent rates of 3-month Treasury bills auctioned during that
quarter and the applicable interest rate margin exceeds the maximum borrower rate.
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Repayment, Deferments. Borrowers begin to repay principal of their PLUS and SLS Loans no later
than 60 days after the Ñnal disbursement. Deferment and forbearance provisions, maximum loan repayment
periods and minimum payment amounts for PLUS and SLS Loans are the same as those for StaÅord Loans.
Consolidation Loan Program
The Higher Education Act also authorizes a program under which borrowers may consolidate one or
more of their student loans into a single Consolidation Loan that is insured and reinsured on a basis similar to
StaÅord and PLUS Loans. Consolidation Loans are made in an amount suÇcient to pay outstanding principal,
unpaid interest, late charges and collection costs on all federally reinsured student loans incurred under the
FFELP that the borrower selects for consolidation, as well as loans made under various other federal student
loan programs and loans made by diÅerent lenders. Under this program, a lender may make a Consolidation
Loan to an eligible borrower who requests it so long as the lender holds all the outstanding FFELP loans of the
borrower (known as the ""Single Holder Price''); or the borrower has multiple FFELP loan holders or his
holder does not oÅer Consolidation Loans. In general, a borrower's eligibility to consolidate FFELP student
loans ends upon receipt of a Consolidation Loan. Under certain circumstances, a FFELP borrower may obtain
a Consolidation Loan under the FDLP.
Consolidation Loans made on or after July 1, 1994 have no minimum loan amount, although
Consolidation Loans for less than $7,500 do not enjoy an extended repayment period. Applications for
Consolidation Loans received on or after January 1, 1993 but before July 1, 1994 were available only to
borrowers who had aggregate outstanding student loan balances of at least $7,500. For applications received
before January 1, 1993, Consolidation Loans were available only to borrowers who had aggregate outstanding
student loan balances of at least $5,000.
To obtain a Consolidation Loan, the borrower must be either in repayment status or in a grace period
before repayment begins. In addition, for applications received before January 1, 1993, the borrower must not
have been delinquent by more than 90 days on any student loan payment. Married couples who agree to be
jointly and severally liable will be treated as one borrower for purposes of loan consolidation eligibility.
Consolidation Loans bear interest at a Ñxed rate equal to the greater of the weighted average of the
interest rates on the unpaid principal balances of the consolidated loans and 9 percent for loans originated
before July 1, 1994. For Consolidation Loans made on or after July 1, 1994 and for which applications were
received before November 13, 1997, the weighted average interest rate is rounded up to the nearest whole
percent. Consolidation Loans made on or after July 1, 1994 for which applications were received on or after
November 13, 1997 through September 30, 1998 bear interest at the annual variable rate applicable to
StaÅord Loans subject to a cap of 8.25 percent. Consolidation Loans for which the application is received on
or after October 1, 1998 bear interest at a Ñxed rate equal to the weighted average interest rate of the loans
being consolidated rounded up to the nearest one-eighth of one percent, subject to a cap of 8.25 percent.
Interest on Consolidation Loans accrues and, for applications received before January 1, 1993, is paid
without interest subsidy by the Department. For Consolidation Loans for which applications were received
between January 1 and August 10, 1993, all interest of the borrower is paid during deferral periods.
Consolidation Loans for which applications were received on or after August 10, 1993 are only subsidized if all
of the underlying loans being consolidated were Subsidized StaÅord Loans. In the case of Consolidation Loans
made on or after November 13, 1997, the portion of a Consolidation Loan that is comprised of Subsidized
FFELP Loans and Subsidized FDLP Loans retains subsidy beneÑts during deferral periods.
No insurance premium is charged to a borrower or a lender in connection with a Consolidation Loan.
However, lenders must pay a monthly rebate fee to the Department at an annualized rate of 1.05 percent on
principal and interest on Consolidation Loans for loans disbursed on or after October 1, 1993, and at an
annualized rate of 0.62 percent for Consolidation Loan applications received between October 1, 1998 and
January 31, 1999. The rate for special allowance payments for Consolidation Loans is determined in the same
manner as for other FFELP loans.
A-8
A borrower must begin to repay his Consolidation Loan within 60 days after his consolidated loans have
been discharged. For applications received on or after January 1, 1993, repayment schedule options include
graduated or income-sensitive repayment plans, and loans are repaid over periods determined by the sum of
the Consolidation Loan and the amount of the borrower's other eligible student loans outstanding. The lender
may, at its option, include graduated and income-sensitive repayment plans in connection with student loans
for which the applications were received before that date. The maximum maturity schedule is 30 years for
indebtedness of $60,000 or more.
Guarantee Agencies under the FFELP
Under the FFELP, guarantee agencies guarantee (or insure) loans made by eligible lending institutions.
Student loans are guaranteed as to 100 percent of principal and accrued interest against death or discharge.
Guarantee agencies also guarantee lenders against default. For loans that were made before October 1, 1993,
lenders are insured for 100 percent of the principal and unpaid accrued interest. Since October 1, 1993, lenders
are insured for 98 percent of principal and all unpaid accrued interest or 100 percent of principal and all
unpaid accrued interest if it receives an Exceptional Performance designation by the Department of
Education.
The Department of Education reinsures guarantors for amounts paid to lenders on loans that are
discharged or defaulted. The reimbursement on discharged loans is for 100 percent of the amount paid to the
holder. The reimbursement rate for defaulted loans decreases as a guarantor's default rate increases. The Ñrst
trigger for a lower reinsurance rate is when the amount of defaulted loan reimbursements exceeds 5 percent of
the amount of all loans guaranteed by the agency in repayment status at the beginning of the federal Ñscal
year. The second trigger is when the amount of defaults exceeds 9 percent of the loans in repayment.
Guarantee agency reinsurance rates are presented in the table below.
Claims Paid Date
Maximum
9% Trigger
5% Trigger
Before October 1, 1993ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
October 1, 1993 Ì September 30, 1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
On or after October 1, 1998ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
100%
98%
95%
90%
88%
85%
80%
78%
75%
After the Department reimburses a guarantor for a default claim, the guarantor attempts to collect the
loan from the borrower. However, the Department requires that the defaulted guaranteed loans be assigned to
it when the guarantor is not successful. A guarantor also refers defaulted guaranteed loans to the Department
to ""oÅset'' any federal income tax refunds or other federal reimbursement which may be due the borrowers.
Some states have similar oÅset programs.
To be eligible for federal reinsurance, guaranteed loans must meet the requirements of the Higher
Education Act and regulations issued under the Act. Generally, these regulations require that lenders
determine whether the applicant is an eligible borrower attending an eligible institution, explain to borrowers
their responsibilities under the loan, ensure that the promissory notes evidencing the loan are executed by the
borrower; and disburse the loan proceeds as required. After the loan is made, the lender must establish
repayment terms with the borrower, properly administer deferrals and forbearances, credit the borrower for
payments made, and report the loan's status to credit reporting agencies. If a borrower becomes delinquent in
repaying a loan, a lender must perform collection procedures that vary depending upon the length of time a
loan is delinquent. The collection procedures consist of telephone calls, demand letters, skiptracing procedures
and requesting assistance from the guarantor.
A lender may submit a default claim to the guarantor after a student loan has been delinquent for at least
270 days. The guarantor must review and pay the claim within 90 days after the lender Ñled it. The guarantor
will pay the lender interest accrued on the loan for up to 450 days after delinquency. The guarantor must Ñle a
reimbursement claim with the Department within 45 days after the guarantor paid the lender for the default
claim. Following payment of claims, the guarantor endeavors to collect the loan. Guarantors also must meet
statutory and regulatory requirements for collecting loans.
A-9
Student Loan Discharges
FFELP loans are not generally dischargeable in bankruptcy. Under the United States Bankruptcy Code,
before a student loan may be discharged, the borrower must demonstrate that repaying it would cause the
borrower or his family undue hardship. When a FFELP borrower Ñles for bankruptcy, collection of the loan is
suspended during the time of the proceeding. If the borrower Ñles under the ""wage earner'' provisions of the
Bankruptcy Code or Ñles a petition for discharge on the ground of undue hardship, then the lender transfers
the loan to the guarantee agency which then participates in the bankruptcy proceeding. When the proceeding
is complete, unless there was a Ñnding of undue hardship, the loan is transferred back to the lender and
collection resumes.
Student loans are discharged if the borrower becomes totally and permanently disabled. A physician must
certify eligibility for discharge.
If a school closes while a student is enrolled, or within 90 days after the student withdrew, loans made for
that enrollment period are discharged. If a school falsely certiÑes that a borrower is eligible for the loan, the
loan may be discharged. And if a school fails to make a refund to which a student is entitled, the loan is
discharged to the extent of the unpaid refund.
Rehabilitation of Defaulted Loans
The Department of Education is authorized to enter into agreements with the guarantor under which the
guarantor may sell defaulted loans that are eligible for rehabilitation to an eligible lender. For a loan to be
eligible for rehabilitation, the guarantor must have received reasonable and aÅordable payments for
12 months, then the borrower may request that the loan be rehabilitated. Because monthly payments are
usually greater after rehabilitation, not all borrowers opt for rehabilitation. Upon rehabilitation, a borrower is
again eligible for all the beneÑts under the Higher Education Act for which he or she is not eligible as a
default, such as new federal aid, and the negative credit record is expunged. No student loan may be
rehabilitated more than once.
Guarantor Funding
In addition to providing the primary guarantee on FFELP loans, guarantee agencies are charged with
responsibility for maintaining records on all loans on which they have issued a guarantee (""account
maintenance''), assisting lenders to prevent default by delinquent borrowers (""default aversion''), post-default
loan administration and collections and program awareness and oversight. These activities are funded by
revenues from the following statutorily prescribed sources plus earnings on investments.
Source
Basis
Insurance Premium ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Up to 1% of the principal amount guaranteed,
Loan Processing and Issuance Fee ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Account Maintenance Fee ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Default Aversion Fee ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Collection Retention ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
withheld from the proceeds of each loan
disbursement.
.4% of the principal amount guaranteed in each
Ñscal year, paid by the Department of Education.
.10% of the original principal amount of loans
outstanding, paid by the Department of Education.
1% of the outstanding amount of loans submitted
by a lender for default aversion assistance, minus
1% of the unpaid principal and interest paid on
default claims, which is, paid once per loan by
transfers out of the Student Loan Reserve Fund.
23% of the amount collected on loans on which
reinsurance has been paid (18.5% collected for a
defaulted loan that is purchased by a lender for
rehabilitation or consolidation), withheld from gross
receipts.
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The Act requires guaranty agencies to establish two funds: a Student Loan Reserve Fund and an Agency
Operating Fund. The Student Loan Reserve Fund contains the reinsurance payments received from the
Department, Insurance Premiums and the complement of the reinsurance on recoveries. The fund is federal
property and its assets may only be used to pay insurance claims and to pay Default Aversion Fees. Recoveries
on defaulted loans are deposited into the Agency Operating Fund. The Agency Operating Fund is the
guarantor's property and is not subject to as strict limitations on its use.
If the Department of Education determines that a guarantor is unable to meet its insurance obligations,
the holders of loans guaranteed by that guarantor may submit claims directly to the Department and the
Department is required to pay the full guarantee payments due, in accordance with guarantee claim processing
standards no more stringent than those applied by the terminated guarantor. However, the Department's
obligation to pay guarantee claims directly in this fashion is contingent upon its making the determination
referred to above.
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A-12