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 fiscal year ended December 31, 2018
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file numbers 001-36228
Navient Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
123 Justison Street, Wilmington, Delaware 19801
(Address of Principal Executive Offices)
46-4054283
(I.R.S. Employer
Identification No.)
(302) 283-8000
(Telephone Number)
Securities registered pursuant to Section 12(b) of the Act
Title of Each Class
Common stock, par value $.01 per share
6% Senior Notes due December 15, 2043
Name of Exchange on which Listed
The NASDAQ Global Select Market
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No
☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed 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 file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers 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 definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
Emerging growth company
☒
☐
☐
Accelerated filer
Smaller reporting company
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 29, 2018 was $3.4 billion (based on closing
sale price of $13.03 per share as reported for the NASDAQ Global Select Market).
As of January 31, 2019, there were 244,507,321 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement (the “2019 Proxy Statement”) relating to the Registrant’s 2019 Annual Meeting of Stockholders, currently
scheduled to be held on May 23, 2019, are incorporated by reference into Part III of this Annual Report on Form 10-K.
NAVIENT CORPORATION
TABLE OF CONTENTS
Page
Number
Forward-Looking and Cautionary Statements .................................................................................................................................
1
Available Information .......................................................................................................................................................................
2
PART I
Item 1.
Business ..................................................................................................................................................................
3
Item 1A.
Risk Factors.............................................................................................................................................................
11
Item 1B.
Unresolved Staff Comments....................................................................................................................................
24
Item 2.
Properties ................................................................................................................................................................
25
Item 3.
Legal Proceedings ...................................................................................................................................................
25
Item 4.
Mine Safety Disclosures ..........................................................................................................................................
27
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
28
Purchases of Equity Securities ...........................................................................................................................
Item 6.
Selected Financial Data...........................................................................................................................................
30
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ...................................
31
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk...................................................................................
83
Item 8.
Financial Statements and Supplementary Data ......................................................................................................
87
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................................
87
Item 9A.
Controls and Procedures .........................................................................................................................................
87
Item 9B.
Other Information.....................................................................................................................................................
87
PART III
Item 10.
Directors, Executive Officers and Corporate Governance.......................................................................................
88
Item 11.
Executive Compensation .........................................................................................................................................
88
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.................................................................................................................................................
88
Item 13.
Certain Relationships and Related Transactions, and Director Independence .......................................................
88
Item 14.
Principal Accounting Fees and Services .................................................................................................................
88
PART IV
Item 15.
Exhibits, Financial Statement Schedules ...............................................................................................................
89
Item 16.
Form 10-K Summary ...............................................................................................................................................
89
Appendix A – Description of Federal Family Education Loan Program...........................................................................................
A-1
Glossary ..........................................................................................................................................................................................
G-1
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This Annual Report on Form 10-K contains “forward-looking” statements and other information that is based on
management’s current expectations as of the date of this report. Statements that are not historical facts, including
statements about our beliefs, opinions, or expectations and statements that assume or are dependent upon future
events, are forward-looking statements and often contain words such as “expect,” “anticipate,” “intend,” “plan,”
“believe,” “seek,” “see,” “will,” “would,” “may,” “could,” “should,” “goals,” or “target.” Such statements are based on
management's expectations as of the date of this filing and involve many risks and uncertainties that could cause our
actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and
uncertainties include those described throughout this report and particularly in “Risk Factors”. Given these risks and
uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are
urged to carefully review and consider the various disclosures made in this Form 10-K and in other documents we file
from time to time with the SEC that disclose risks and uncertainties that may affect our business.
The preparation of our consolidated financial statements also requires management to make certain estimates
and assumptions including estimates and assumptions about future events. These estimates or assumptions may
prove to be incorrect and actual results could differ materially. All forward-looking statements contained in this report
are qualified by these cautionary statements and are made only as of the date of this report. We do not undertake
any obligation to update or revise these forward-looking statements except as required by law.
Definitions for certain capitalized terms used but not otherwise defined in this Annual Report on Form 10-K can
be found in the “Glossary” at the end of this report.
Through this discussion and analysis, we intend to provide the reader with some narrative context for how our
management views our consolidated financial statements, additional context within which to assess our operating
results, and information on the quality and variability of our earnings, liquidity and cash flows.
1
AVAILABLE INFORMATION
Our website address is www.navient.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-
Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the Securities and Exchange
Commission (the “SEC”). We are subject to the informational requirements of the Exchange Act and file or furnish
reports, proxy statements and other information with the SEC. Copies of these reports, as well as any amendments to
these reports, are available free of charge through our website at
www.navient.com/about/investors/stockholderinfo/secfilings, as soon as reasonably practicable after they are
electronically filed with, or furnished to, the SEC. The public may also read and copy any materials filed by the
Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC
20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-
800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC at www.sec.gov.
In addition, copies of our Board Governance Guidelines, Code of Business Conduct (which includes the code
of ethics applicable to our Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) and
the governing charters for each committee of our Board of Directors are available free of charge on our website at
www.navient.com/about/investors/corp_governance, as well as in print to any stockholder upon request. We intend to
disclose any amendments to or waivers from our Code of Business Conduct (to the extent applicable to our Principal
Executive Officer or Principal Financial Officer) by posting such information on our website.
Information contained or referenced on the foregoing websites is not incorporated by reference into and does
not form a part of this Annual Report on Form 10-K. Further, the Company’s references to the URLs for these
websites are intended to be inactive textual references only.
2
Item 1. Business
Overview
PART I.
Navient is a leading provider of education loan management and business processing solutions for education,
healthcare, and government clients at the federal, state, and local levels. We help our clients and millions of
Americans achieve financial success through services and support. Headquartered in Wilmington, Delaware, Navient
also employs team members in western New York, northeastern Pennsylvania, Indiana, Tennessee, Texas, Virginia,
Wisconsin, California and other locations.
With a focus on data-driven insights, service, compliance and innovative support, Navient:
•
owns $94.5 billion of education loans;
•
•
•
•
•
•
•
•
originates Private Education Loans;
services and performs asset recovery activities on its own portfolio of education loans, as well as education
loans owned by other institutions including the United States Department of Education (“ED”); and
provides revenue cycle management and business processing services to federal, state and municipal
clients, public authorities and healthcare organizations.
As of December 31, 2018, Navient’s principal assets consisted of:
$72.3 billion in FFELP Loans, with a 0.83 percent Core Earnings segment net interest margin and a
weighted average life of 7 years;
$22.2 billion in Private Education Loans, with a 3.24 percent Core Earnings segment net interest margin
and a weighted average life of 5 years;
a leading loan origination business that assists borrowers in refinancing their education loan debt, which
produced $2.8 billion of Private Education Refinance Loan originations in 2018;
a leading education loan servicing business that services loans for approximately 12 million ED, FFELP
and Private Education Loan customers (including cosigners), including 5.9 million customer accounts
serviced under Navient’s contract with ED; and
a leading business processing solutions suite through which we provide services for over 600 clients in the
non-education related government and healthcare sectors.
We operate our business in three primary segments: Federal Education Loans, Consumer Lending and Business
Processing. A fourth segment, Other, includes unallocated expenses of shared services and our corporate liquidity
portfolio.
3
Strengths and Opportunities
Navient’s competitive advantages distinguish it from its competitors, including:
High Quality Asset Base Generating Significant and Predictable Cash Flows
At December 31, 2018, Navient’s $94.5 billion education loan portfolio was 80 percent funded to term and is
expected to produce predictable cash flows over the remaining life of the portfolio. Our $72.3 billion FFELP portfolio
bears a maximum 3 percent loss exposure under the terms of the federal guaranty. Our $22.2 billion Private
Education Loan portfolio is 56 percent cosigned, bearing the full credit risk of the borrower and any cosigner.
Navient expects to generate approximately $24 billion of cash flows from its FFELP Loan and Private
Education Loan portfolios (net of secured financing obligations) over the next 20 years.
Strong Capital Return
As a result of our significant cash flow and capital generation, Navient expects to return excess capital to
stockholders through dividends and share repurchases, while maintaining our Tangible Net Asset (“TNA”) ratio
between 1.23x and 1.25x. We repurchased 17.4 million shares of common stock (7 percent of shares outstanding) for
$220 million and 29.6 million shares of common stock (10 percent of shares outstanding) for $440 million in 2018 and
2017, respectively. At December 31, 2018, there was $440 million remaining in share repurchase authorization. Since
April 2014, Navient has repurchased $2.8 billion in common shares, which has reduced common shares outstanding
by over 40 percent.
Navient has paid a quarterly dividend of $0.16 per share of common stock since 2015. In 2018 and 2017,
Navient paid $166 million and $176 million, respectively, in dividends.
($’s in millions)
Capital Returned (1) .......................................................................................................................................................................................................
Tangible Net Asset Ratio (2) ..........................................................................................................................................................................................
Q3
2018
2018
$ 42 $ 42 $ 137 $ 165 $ 386
N/A
1.23x
Q4
2018
Q1
2018
Q2
2018
1.21x
1.23x
1.25x
(1)
(2)
“Capital Returned” is defined as share repurchases and dividends paid.
“Tangible Net Asset Ratio” is a non-GAAP financial measure. For an explanation and reconciliation of our non-GAAP financial measures, see Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures.”
4
Growth in Consumer Lending Businesses
In the Consumer Lending segment, we see meaningful value opportunities in originating Private Education
Loans to financially responsible consumers. We are pursuing opportunities in the Private Education Loan market to
generate attractive long-term risk adjusted returns.
($’s in millions)
Loan originations per quarter ........................................................................................................................................................................................
Q1
2018
$ 500
Q2
2018
$ 629 $ 903 $ 769 $2,801
Q3
2018
Q4
2018
2018
Growth in Business Processing
Navient has leveraged our large-scale operating platforms, superior data-driven strategies, operating efficiency,
and regulatory compliance and risk management infrastructure to expand to new areas such as tolling and
healthcare. Navient provides business processing services to over 600 clients, generating total revenue of $267
million in 2018, up 26 percent. Navient’s inventory of non-education related contingent asset recovery receivables
was $14.4 billion as of December 31, 2018.
Efficient and Large-Scale Operating Platforms
We service over $300 billion in education loans for approximately 12 million customers. These loans are owned
by Navient and third parties, including for ED. We have demonstrated scalable infrastructure with capacity to manage
large volumes of complex transactions with continued efficiency improvements.
5
Superior Performance
Navient has demonstrated superior default prevention performance. Federal loans serviced by Navient
achieved a Cohort Default Rate (“CDR”) 35 percent better than our peers, as calculated from the most recent CDR
released by ED in September 2018. We are consistently a top performer in our asset recovery business and deliver
superior service to our public and private sector clients. We continually leverage data-driven insights and customer
service to identify new ways to add value to our clients.
(1)
Source: "Official Cohort Default Rates for Schools – Federal Student Aid,” 9/24/18; Navient data. The 2015 Cohort Default Rate analyzes data
from the group of borrowers who entered repayment between October 1, 2014, and September 30, 2015, and who defaulted in a three-year
window by Fall of 2018. To isolate the difference in defaults between Navient borrowers and others, the difference is calculated by removing
Navient’s market share from the overall national cohort default rate; the resulting CDR for non-Navient serviced borrowers is 11.6%.
Customer Service and Compliance Commitment
Navient fosters a robust compliance culture driven by a “customer first” approach. We invest in rigorous training
programs, quality assurance, reviews and audits, complaint tracking and analysis, and customer research to enhance
our compliance and customer service.
Navient’s Approach to Helping Education Loan Borrowers Achieve Success
We help our customers navigate the path to financial success through proactive outreach and innovative, data-
driven approaches.
Leveraging four decades of expertise: We apply data-driven strategies that draw from our more than 40
years of experience. Our strategists employ risk modeling to identify struggling borrowers and deploy resources
where needed. By tailoring our approach to borrowers’ unique situations — e.g., recent graduates, students re-
entering school, those experiencing hardships or those with student debt but no degree — we help ensure leading
outcomes. Nine times out of 10, when we reach federal loan customers who have missed payments, we identify a
solution to help them avoid default.
Getting borrowers into the right payment plans: We help customers understand the wide range of federal
loan repayment options so they can make informed choices about the plans that align with their financial
circumstances and goals. We promote awareness of federal repayment plan options, including Income-Driven
Repayment (“IDR”), through more than 150 million communications annually, including mail, email, phone calls,
videos and text messages. As a result, we continue to lead in enrolling customers in affordable repayment plans:
more than half of student loan balances serviced by Navient for the government were enrolled in an IDR plan
(excluding loan types ineligible for the plans). We also help borrowers understand that options lengthening their
repayment term may increase the total cost of their loans, while reminding them that they may pay extra or switch
repayment plans at any time.
Leading the industry: Navient is a leader in recommending policy reforms that would enhance the student
loan program. For example, we have recommended improving financial literacy before borrowing, simplifying federal
loan repayment options and encouraging college completion — reforms that we believe would make a meaningful
difference for millions of Americans.
6
In 2009, we pioneered the creation of a loan modification program to help Private Education Loan borrowers
needing additional assistance. As of December 31, 2018, $1.8 billion of our Private Education Loans were enrolled in
this interest rate reduction program, helping customers through more affordable monthly payments while making
progress in repaying their principal loan balance.
We continually make enhancements designed to help our customers, drawing from a variety of inputs including
customer surveys, research panels, analysis of customer inquiries and complaint data, and regulator commentary.
Our Office of the Customer Advocate, established in 1997, offers escalated assistance to customers. We are
committed to working with customers and appreciate customer comments, which, combined with our own customer
communication channels, help us improve the ways we assist our customers.
We also continue to offer free resources to help customers and the general public build knowledge on personal
finance topics, including articles, videos and online tools. We also conduct a national research study, Money Under
35, that measures the financial health of Americans ages 22 to 35.
Navient was the first student loan servicer to launch a dedicated military benefits customer service team,
website (Navient.com/military), and toll-free number. Navient’s military benefits team supports service members and
their families to access the benefits designed for them, including interest rate benefits, deferment and other options.
Business Segments
We have three primary reportable operating segments: Federal Education Loans; Consumer Lending; and
Business Processing.
Federal Education Loans Segment
In this segment, Navient holds and acquires FFELP Loans and performs servicing and asset recovery services
on its own loan portfolio, federal education loans owned by ED and other institutions. Although FFELP Loans are no
longer originated, we continue to pursue acquisitions of FFELP Loan portfolios as well as servicing and asset
recovery services contracts. These acquisitions leverage our servicing scale and generate incremental earnings and
cash flow. In this segment, we generate revenue primarily through net interest income on the FFELP Loan portfolio
(after provision for loan losses), as well as servicing and asset recovery services revenue. This segment is expected
to generate significant amounts of earnings and cash flow over the remaining life of the portfolio.
Navient’s portfolio of FFELP Loans as of December 31, 2018 was $72.3 billion. We expect this portfolio to have
an amortization period in excess of 20 years, with a 7-year remaining weighted average life. Navient’s goal is to
maximize the amount and optimize the timing of the cash flows generated by its FFELP Loan portfolio. During the
year ended 2018, Navient acquired $761 million of FFELP Loans compared to $5.7 billion in 2017 and $3.6 billion in
2016.
FFELP Loans are insured or guaranteed by state or not-for-profit agencies and are protected by contractual
rights to recovery from the United States pursuant to guaranty agreements among ED and these agencies. These
guaranty agreements generally cover at least 97 percent of a FFELP Loan’s principal and accrued interest for loans
that default.
As a result of the long-term funding strategy used for our FFELP Loan portfolio and the guarantees provided on
these loans, the portfolio generates consistent and predictable cash flows. As of December 31, 2018, approximately
87 percent of the FFELP Loans held by Navient were funded to term with non-recourse, long-term securitization debt.
In April 2016, ED began the solicitation process for its new servicing platform and service providers. In the
latest step, ED issued in February 2018, Phase 1 of a new RFP entitled the Solicitation for the Next Generation
Financial Services Environment which is intended to centralize student loan servicing on a single platform. The
Company and its partners submitted a comprehensive bid in April 2018 following which the Company’s partners were
among the vendors named as eligible to participate in Phase II. In October 2018, various entities protested the
procurement at the GAO and the U.S. Court of Federal Claims. As part of that bid protest process, in January 2019,
ED cancelled the components C, D, E and F of the RFP and simultaneously issued new solicitations. The Company
is currently evaluating the new proposal and when and how to most advantageously respond. The Company cannot
predict the timing and nature of the next steps for this RFP nor its impact on the current ED servicing contract. The
current contract with ED expires in June 2019.
Navient provides asset recovery services on defaulted education loans to ED. ED collections contracts have
been subject to numerous bid protests and court orders. Presently, we are operating under a contract awarded to our
subsidiary, Pioneer Credit Recovery, Inc. (“Pioneer”), in April 2017. According to its original term the contract expires
in April 2019. Following its expiration, ED would have the right to recall any accounts placed with Pioneer under the
contract which were not in a payment plan or other satisfactory arrangement. The Company has not received any
communication from ED concerning its plans after that date and cannot predict the timing or nature of ED’s next steps
with respect to this contract.
7
Consumer Lending Segment
In this segment, Navient holds, originates and acquires consumer loans and performs servicing activities on its
own education loan portfolio. Originations and acquisitions leverage our servicing scale and generate incremental
earnings and cash flow. In this segment, we generate revenue primarily through net interest income on the Private
Education Loan portfolio (after provision for loan losses). This segment is expected to generate significant amounts of
earnings and cash flow over the remaining life of the portfolio.
Our refinancing loan products leverage our 40 years of experience. We have seen that borrowers who
graduate gain the benefit of their investment in education with higher levels of employment, higher incomes and
stronger financial health. Our loan products are focused on helping consumers refinance their education loans at the
lower rates they have earned. We believe our product offerings, digital marketing strategies and origination platform
provide a unique competitive advantage. At December 31, 2018, Navient held $3.2 billion of Private Education
Refinance Loans, having originated $2.8 billion in 2018.
Navient’s total portfolio of Private Education Loans as of December 31, 2018 was $22.2 billion. We expect this
portfolio to have an amortization period in excess of 20 years, with a 5-year remaining weighted average life.
Navient’s goal is to maximize the amount and optimize the timing of the cash flows generated by its Private Education
Loan portfolio. Our Private Education Loans bear the full credit risk of the borrower and any cosigner. Navient
believes the credit risk of the Private Education Loans it owns is well managed through the rigorous underwriting
practices and risk-based pricing applied when the loans were originated, the continued high levels of qualified
cosigners, our internal servicing and risk mitigation practices, and our careful use of forbearance and loan
modification programs. Navient believes that these elements and practices reduce the risk of payment interruptions
and defaults on its Private Education Loan portfolio. As of December 31, 2018, approximately 57 percent of the
Private Education Loans held by Navient were funded to term with non-recourse, long-term securitization debt.
Business Processing Segment
In this segment, Navient performs revenue cycle management and business processing services for over 600
non-education related government and healthcare clients. Our integrated solutions technology and superior data
driven approach allows state governments, agencies, court systems, municipalities, and toll authorities (Government
Services) to reduce their operating expenses while maximizing revenue opportunities. Healthcare services include
revenue cycle outsourcing, accounts receivable management, extended business office support and consulting
engagements. We offer customizable solutions for our clients that include non-profit/religious-affiliated hospital
systems, teaching hospitals, urban medical centers, for-profit healthcare systems, critical access hospitals, children’s
hospitals and large physician groups.
Other Segment
This segment primarily consists of our corporate liquidity portfolio and the repurchase of debt, unallocated
expenses of shared services, restructuring/other reorganization expenses, and the deferred tax asset remeasurement
loss recognized due to the enactment of the “Tax Cuts and Jobs Act” (“TCJA”) in the fourth quarter of 2017.
Unallocated expenses of shared services are comprised of costs primarily related to certain executive
management, the board of directors, accounting, finance, legal, human resources, compliance and risk management,
regulatory-related costs, stock-based compensation expense, and information technology costs related to
infrastructure and operations. Regulatory-related costs include actual settlement amounts as well as third-party
professional fees we incur in connection with regulatory matters.
Employees
At December 31, 2018, we had approximately 6,500 employees. None of our employees are covered by
collective bargaining agreements.
Supervision and Regulation
The Dodd-Frank Act
The Dodd-Frank Act was adopted to reform and strengthen regulation and supervision of the U.S. financial
services industry. The Dodd-Frank Act contains comprehensive provisions that govern the practices and oversight of
financial institutions (including large non-bank financial institutions) and other participants in the financial markets. It
imposed additional regulations, requirements and oversight on almost every aspect of the U.S. financial services
industry, including increased capital and liquidity requirements, limits on leverage and enhanced supervisory
authority. Some of these provisions apply to Navient and its various businesses and securitization vehicles.
8
The Consumer Financial Protection Act established the Consumer Financial Protection Bureau (“CFPB”), which
has authority to write regulations under federal consumer financial protection laws and to directly or indirectly enforce
those laws and examine financial institutions for compliance. The CFPB is authorized to impose fines and provide
consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints,
request data and promote the availability of financial services to underserved consumers and communities. It also
has authority to prevent unfair, deceptive or abusive practices. Since its creation, the CFPB has been active in its
supervision, examination and enforcement of financial services companies. In January 2017, the CFPB filed a lawsuit
against Navient alleging several unfair, deceptive or abusive practices, and other violations of consumer protection
statutes. Additional information on the CFPB lawsuit is included in Item 3. “Legal Proceedings” in this Form 10-K.
The Dodd-Frank Act also authorizes state officials to enforce regulations issued by the CFPB and to enforce
the Dodd-Frank Act’s general prohibition against unfair, deceptive and abusive practices. The Attorneys General of
the State of Illinois, the State of Washington, the Commonwealth of Pennsylvania, the State of California and the
State of Mississippi have also filed lawsuits against Navient and some of its subsidiaries containing similar alleged
violations of consumer protection laws as those alleged in the CFPB lawsuit as well as several additional areas. We
refer to the Illinois, Washington, Pennsylvania, California and Mississippi Attorneys General collectively as the “State
Attorneys General.” Additional information on the State Attorneys General lawsuits is included in Item 3. “Legal
Proceedings” in this Form 10-K.
Regulatory Outlook
A number of prominent themes appear to be emerging from these actions:
• Even if the CFPB takes a less active role in enforcement, the number and configuration of regulators,
particularly the State Attorneys General and various state legislators, is likely to change which may add to
the complexity, cost and unpredictability of timing for resolution of particular regulatory issues.
• The regulatory, compliance and risk control structures of financial institutions subject to enforcement actions
by state and federal regulators are frequently cited, regardless of whether past practices have been
changed, and enforcement orders have often included detailed demands for increased compliance, audit
and board supervision, as well as the use of third-party consultants or monitors to recommend further
changes or monitor remediation efforts.
• Issues first identified with respect to one consumer product class or distribution channel are sometimes
applied to other product classes or channels.
Navient is subject to oversight from several regulatory entities. We expect that the regulators overseeing our
businesses will continue to be active and that consumer protection regulations, standards, supervision, examination
and enforcement practices will continue to evolve in both detail and scope. This evolution has added and may
continue to significantly add to Navient’s compliance, servicing and operating costs. We have invested in compliance
through multiple steps including realignment of Navient’s compliance management system to a servicing, collections
and business services business model; dedicated compliance resources for certain topics (such as the
Servicemembers Civil Relief Act (“SCRA”); the Telephone Consumer Protection Act (“TCPA”); unfair, deceptive, or
abusive acts and practices (“UDAAP”); and third-party vendor management) to focus on consumer expectations;
formation of business support operations to enhance risk, control and compliance functions in each business area;
additional regulatory training for front-line employees to ensure obligations are understood and followed during
interactions with customers, as well as additional regulatory training for our board of directors to enhance their ability
to oversee the Company’s risk framework and compliance as it and the regulatory environment changes; and
expanded oversight and analysis of complaint trends to identify and remediate, if necessary, areas of potential
consumer harm.
Despite these increased activities, our current operations and compliance processes may not satisfy evolving
regulatory standards. Past practices or products may continue to be the focus of examinations, inquiries or lawsuits.
As described in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Risk Management,” Navient has implemented a coordinated, formal enterprise risk management
system aimed at reducing business and regulatory risks.
Listed below are some of the most significant recent and pending regulatory changes that have the potential to
affect Navient.
9
Education Loan Servicing and Consumer Lending. The CFPB has been active in the education loan industry
and undertook a number of initiatives in recent years relative to the private education loan market and education loan
servicing. In addition, several states have enacted various state servicing and licensing requirements in 2017 and
2018, including Illinois, Washington, California and Connecticut. We anticipate that these state activities will continue.
It is possible that more states will propose or pass similar or different requirements on either holders of education
loans or their servicers. Depending on the nature of these laws or rules, they may impose additional or different
requirements than Navient faces at the federal level.
Debt Collection Supervision. The CFPB also maintains supervisory authority over larger consumer debt
collectors. The CFPB recently updated its regulatory agenda making the likelihood and timing of any new debt
collection regulation uncertain. The issuance of the CFPB’s rules does not preempt the various and varied levels of
state consumer and collection regulations to which the activities of Navient’s subsidiaries are currently subject.
Navient also utilizes third-party debt collectors to collect defaulted and charged-off education loans and will continue
to be responsible for oversight of their procedures and controls.
Oversight of Derivatives. The Dodd-Frank Act created a comprehensive new regulatory framework for
derivatives transactions, to be implemented by the Commodity Futures Trading Commission (“CFTC”), other
prudential regulators and the SEC. This framework, among other things, subjects certain swap participants to new
capital and margin requirements, recordkeeping and business conduct standards and imposes registration and
regulation of swap dealers and major swap participants. The scope of potential exemptions continues to be defined
through agency rulemakings. Even where Navient or a securitization trust sponsored by Navient qualifies for an
exemption, many of its derivatives counterparties are subject to capital, margin and business conduct requirements
and therefore Navient’s business may be impacted. Where Navient or the securitization trusts it sponsors do not
qualify for an exemption, Navient or an existing or future securitization trust sponsored by Navient may be unable to
enter into new swaps to hedge interest rate or currency risk or the costs associated with such swaps may increase.
With respect to existing securitization trusts, an inability to amend, novate or otherwise materially modify existing
swap contracts could result in a downgrade of its outstanding asset-backed securities. As a result, Navient’s
business, ability to access the capital markets for financing and costs may be impacted by these regulations.
Other Significant Sources of Regulation
Many aspects of Navient’s businesses are subject to other federal and state regulation and administrative
oversight. Some of the most significant of these are described below.
Higher Education Act. Navient is subject to the HEA and its education loan operations are periodically reviewed
by ED and Guarantors. As a servicer of federal education loans, Navient is subject to ED regulations regarding
financial responsibility and administrative capability that govern all third-party servicers of insured education loans. In
connection with its servicing operations on behalf of Guarantor clients, Navient must comply with ED regulations that
govern Guarantor activities as well as agreements for reimbursement between ED and our Guarantor clients.
The Higher Education Act Reauthorization Bill (H.R. 4508 “Prosper Act”) is currently under consideration by the
House of Representatives. The HEA is the primary law that authorizes federal student aid programs for higher
education. While the HEA is required to be reviewed and "reauthorized" by Congress every five years, Congress has
not reauthorized the HEA since 2008, choosing to temporarily extend the Act each year since 2013. In its current
form, the Prosper Act proposes, among other changes, eliminating Stafford and Plus loans for first-time borrowers
and replacing these options with a new Federal ONE Loan. The new ONE Loans would only be eligible for two
repayment plans, a standard 10-year loan repayment plan of 120 equal payments and a single income-based plan.
While some of the provisions of the Prosper Act may ultimately prove beneficial to our customers and to investors, we
cannot provide any assurances that the Act, if passed, will not be significantly modified from its current form.
Federal Financial Institutions Examination Council. As a third-party service provider to financial institutions,
Navient is also subject to periodic examination by the Federal Financial Institutions Examination Council (“FFIEC”).
FFIEC is a formal interagency body of the U.S. government empowered to prescribe uniform principles, standards,
and report forms for the federal examination of financial institutions by the Federal Reserve Banks (the “FRB”), the
Federal Deposit Insurance Corporation (the “FDIC”), the National Credit Union Administration, the Office of the
Comptroller of the Currency and the CFPB and to make recommendations to promote uniformity in the supervision of
financial institutions.
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Consumer Protection and Privacy. Navient’s education loan servicing business is subject to federal and state
consumer protection, privacy and related laws and regulations and is subject to examination by the CFPB. Some of
the more significant federal laws and regulations include:
• various laws governing unfair, deceptive or abusive acts or practices;
• the Truth-In-Lending Act and Regulation Z, which governs disclosures of credit terms to consumer
borrowers;
• the Fair Credit Reporting Act and Regulation V, which governs the use and provision of information to
consumer reporting agencies;
• the Equal Credit Opportunity Act and Regulation B, which prohibit discrimination on the basis of race, creed
or other prohibited factors in extending credit;
• the SCRA, which applies to all debts incurred prior to commencement of active military service (including
education loans) and limits the amount of interest, including certain fees or charges that are related to the
obligation or liability; and
• the TCPA, which governs communication methods that may be used to contact customers.
Navient’s business processing services businesses are subject to federal and state consumer protection,
privacy and related laws and regulations. Some of the more significant federal statutes are the Fair Debt Collection
Practices Act and additional provisions of the acts listed above, as well as the HEA and the various laws and
regulations that govern government contractors. These activities are also subject to state laws and regulations similar
to the federal laws and regulations listed above.
Item 1A. Risk Factors
Navient employs an enterprise risk management philosophy and framework which seeks to identify the most
significant risks impacting our business and provides a process for evaluating and quantifying such risks. Our
Enterprise Risk and Compliance Committee monitors approved risk limits and thresholds to ensure our businesses
are operating within approved risk parameters. Our Risk Appetite Framework segments Navient’s risk across nine
risk domains: (1) credit; (2) market; (3) funding and liquidity; (4) compliance; (5) legal; (6) operational; (7)
reputational/political; (8) governance; and (9) strategy. The risk factors enumerated in this section are presented in a
manner that is consistent with our overall risk framework.
Based on current conditions, we believe that the following list identifies the most significant risk factors that
could affect our financial condition, results of operations or cash flows. These risks and risk domains are not the only
risks facing our Company. Additional risks not currently known to us or that we currently deem to be immaterial also
may materially adversely affect our business, financial conditions or results of operations in future periods or are not
identified because they are common to all businesses. In addition, our reaction to material future developments as
well as our competitors’ and regulators’ reactions to these developments may affect our future results.
CREDIT RISK.
Economic conditions and the creditworthiness of third parties could have a material adverse effect on
Navient’s business, results of operations, financial condition and stock price.
Our success is largely dependent upon the expected future creditworthiness of our customers, especially with
respect to our education loans. Our research consistently indicates that borrower unemployment rates and the failure
of in-school borrowers to graduate or otherwise complete their education are two of the most significant
macroeconomic factors that increase loan delinquencies and defaults. Additionally, modifications to the original
repayment terms in the form of loan forbearance, deferment, grace periods and the use of payment modification
programs, including income-based repayment programs can individually and cumulatively impact the performance of
the Company’s loan portfolios. Modifications to private loans may lower the potential return on investment and may
have the related effect of delaying defaults which would otherwise have become apparent in the performance of our
portfolios. Therefore, deterioration in the economy could adversely affect the credit quality of our borrowers, resulting
in an increased occurrence of defaults and/or requiring more frequent use of these loan modification tools. Higher
credit-related losses and weaker credit quality could negatively affect Navient’s business, financial condition and
results of operations and limit its funding options, including Navient’s access to the capital markets.
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Defaults on education loans held by Navient, particularly Private Education Loans, could adversely affect
Navient’s earnings.
FFELP Loans are insured or guaranteed by state or not-for-profit agencies and are also protected by
contractual rights to recovery from the United States pursuant to guaranty agreements among ED and these
agencies. These guarantees generally cover at least 97 percent of a FFELP Loan’s principal and accrued interest
upon default and, in limited circumstances, 100 percent of the loan’s principal and accrued interest upon default.
Navient is exposed to credit risk on the non-guaranteed portion of the FFELP Loans in its portfolio. Under certain
circumstances, if we fail to service FFELP Loans in compliance with HEA we may jeopardize the insurance,
guarantees and federal support we receive on these loans. A small percentage of our FFELP Loan portfolio has
become permanently uninsured as a result of these regulations and we anticipate this will continue to a limited extent
in the future. Under such circumstances, Navient bears the full credit exposure on such previously insured loans.
Navient bears the full credit exposure on the loans in its Consumer Lending portfolio. Navient believes that
delinquencies are an important indicator of the potential future credit performance for Private Education Loans.
Navient’s delinquencies as a percentage of Private Education Loans in repayment were 5.9 percent at December 31,
2018. For a complete discussion of Navient’s loan delinquencies, see Item 7. “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Financial Condition – Private Education Loan Portfolio
Performance.”
The evaluation of Navient’s allowance for loan losses is inherently subjective and it requires estimates that may
be subject to significant changes. Additionally, GAAP accounting rules can require us to determine allowances for
loan losses differently based upon the manner in which we acquired the applicable loan assets. For additional
information on our allowance for loan losses, please refer to Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —Critical Accounting Policies and Estimates —Allowance for Loan
Losses.” Future defaults could be higher than anticipated due to a variety of factors outside of Navient’s control, such
as downturns in the economy, regulatory or operational changes and other unforeseen future trends. According to
Company-sponsored independent research, young adults who stopped attending college before earning a degree or
certificate are among those most likely to have trouble making payments. Losses on Private Education Loans are
also impacted by various risk characteristics that may be specific to individual loans. Loan status (in-school, grace,
forbearance, repayment and delinquency), loan seasoning (number of months in which a payment has been made by
a customer), underwriting criteria (e.g., credit scores), existence of a cosigner are all factors that can impact the
likelihood of default. The type of school may also play a significant role in loan performance. Additionally, general
economic and employment conditions, including employment rates for recent college graduates can have a
significant impact on loan delinquency and default rates. If actual loan performance is worse than currently estimated,
it could materially affect Navient’s estimate of the allowance for loan losses and the related provision for loan losses
in Navient’s statements of income and as a result adversely affect Navient’s results of operations.
The FASB has recently issued an accounting standard update that will result in a significant change in how
we recognize credit losses.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2016-13, “Financial Instruments — Credit Losses,” which replaces the current “incurred loss” model for
recognizing credit losses with an “expected loss” model referred to as the Current Expected Credit Loss (“CECL”)
model. Under the CECL model, we will be required to measure and recognize an allowance for loan losses that
estimates remaining expected credit losses for financial assets held at the reporting date. This will result in us
presenting certain financial assets carried at amortized cost, such as our loans held for investment, at the net amount
expected to be collected. The measurement of expected credit losses is to be based on information about past
events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the
collectability of the reported amount. This measurement will take place at the time the financial asset is first added to
the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under
current GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the
adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require
us to significantly increase our allowance, which would reduce shareholders’ equity and capital. Moreover, the CECL
model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase
our level of allowance for loan losses, such increase could adversely affect our business, financial condition and
results of operations.
The new CECL standard will become effective for us on January 1, 2020. We are currently evaluating the
impact the CECL model will have on our allowance for loan losses. We will recognize a one-time cumulative-effect
adjustment to our allowance for loan losses as of January 1, 2020 through shareholders’ equity. We have not yet
determined the magnitude of the one-time cumulative adjustment upon adoption or the overall impact the new
standard will have on our financial condition or results of operations post-adoption.
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Our Consumer Lending segment exposes us to credit underwriting risks based upon the credit model we use
to forecast loss rates. If we are unable to effectively forecast loss rates, it can materially adversely affect our
operating results.
In the fourth quarter of 2017, we acquired Earnest, a leading financial technology and education finance
company. Earnest is now one of the leading providers of education refinance loans. In 2019, we intend to re-enter the
“in-school” lending market through Earnest. Navient underwrites new Private Education Loans within our Consumer
Lending segment based upon our analysis of extensive credit criteria. Criteria reviewed in underwriting Consumer
Loans may include any or all of the following: (i) verified employment or offer of employment, income and assets,
which are generally verified through connected accounts; (ii) career experience, stability of employment, and
specialization; (iii) qualifying credit history, taking into account credit score; (iv) debt to income ratio; (v) demonstrated
ability to pay through free cash flow calculations; (vi) attendance at or graduation from an eligible post-secondary
school; (vii) savings; and (viii) individual data points gathered from accounts connected in the application process,
such as late fees, overdraft fees, and credit card interest. We define free cash flow generally as after-tax monthly
income of a borrower minus the sum of rent or mortgage payments, student loan payments and any other fixed
expenses of such borrower.
We do not rely on any single factor in making our underwriting decisions. Each of the above factors are
reviewed and weighted depending on the individual borrower’s or co-borrower’s circumstances at the time the
underwriting decision is made. If our underwriting process does not effectively forecast our losses, our operating
results may be materially adversely affected.
MARKET, FUNDING & LIQUIDITY RISK.
Navient’s business is affected by the cost and availability of funding in the capital markets.
The capital markets have from time to time experienced periods of significant volatility. This volatility can
dramatically and adversely affect financing costs when compared to historical norms or make funding unavailable at
any costs. Additional factors that could make financing more expensive or unavailable to Navient include, but are not
limited to, financial losses, events that have an adverse impact on Navient’s reputation, changes in the activities of
Navient’s business partners, events that have an adverse impact on the financial services industry generally,
counterparty availability, negative credit rating actions with respect to Navient, asset-backed securities sponsored by
Navient or the U.S. federal government, changes affecting Navient’s assets, the ability of existing or future Navient-
sponsored securitization trusts to hedge interest rate and currency risk, corporate and regulatory actions, absolute
and comparative interest rate changes, general economic conditions and the legal, regulatory and tax environments
governing funding transactions, including existing or future securitization and derivatives transactions. If financing is
difficult, expensive or unavailable, Navient’s results of operations, cash flow or financial condition could be materially
and adversely affected.
The transition away from the LIBOR reference rate to an alternate reference rate may create uncertainty in
the capital markets and may negatively impact the value of existing LIBOR based financial instruments.
The London Interbank Offered Rate, or LIBOR, serves as a global benchmark for determining interest rates on
commercial and consumer loans, bonds, derivatives and numerous other financial instruments. LIBOR is the
reference rate for most of the Company’s student loans, consumer loans, bonds, ABS, other financing facilities, and
derivatives. On July 27, 2017, the Chief Executive Officer of the United Kingdom Financial Conduct Authority (the
“FCA”) announced that by the end of 2021, LIBOR would no longer be sustained through the FCA’s efforts to compel
banks’ participation in setting the benchmark. The FCA’s intention is that after 2021, it will no longer be necessary for
the FCA to ask, or to require, banks to submit contributions to LIBOR. The FCA does not intend to sustain LIBOR
using its influence or legal powers beyond that date. It is possible that the ICE Benchmark Administration Limited
(the “IBA”), which took over administration of LIBOR on February 1, 2014, may be willing and able to produce LIBOR
reference rates after 2021. However, at this time, we are unable to predict if LIBOR reference rates will stop being
available or when that may occur. We are also unable to predict whether or when an alternative reference rate will
become a standard global benchmark and suitable replacement for LIBOR. We are therefore unable to predict what
the replacement reference rate or rates will be for our existing financial instruments that are currently indexed to
LIBOR, the extent to which our assets, liabilities and derivatives will transition to the same replacement reference
rate, or the timing of a transition. Many of our existing assets and financial instruments do not include provisions
clearly specifying a method for transitioning from LIBOR to an alternative benchmark rate, and it is not yet known how
courts or regulators will view the transition away from LIBOR to an alternative benchmark rate. As a result, it is
difficult to predict the impact that a cessation of LIBOR would have on the value and performance of our existing
assets, liabilities or derivatives. Because a majority of our historical transactions involve financial instruments that
reference LIBOR, these uncertainties regarding the possible cessation of LIBOR or their resolution could have a
material adverse impact on our funding costs, net interest margin, loan and other asset values, asset-liability
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management strategies, and other aspects of our business and financial results, as well as on our borrowers,
investors and counterparties.
Higher or lower than expected prepayments of loans could change the expected net interest income the
Company receives as the holder of the Residual Interests of securitization trusts holding education loans or
cause the bonds issued by a securitization trust to be paid at a different speed than originally anticipated.
These factors could materially alter our net interest margin or the value of our Residual Interests.
The rate at which borrowers prepay their loans can have a material impact on our net interest margin and the
value of our Residual Interests. Prepayment rates and levels are subject to a variety of economic, social, competitive
and other factors, including changes in interest rates, availability of alternative financings, regulatory changes
affecting the education loan market and the general economy. FFELP Loans and Private Education Loans may be
voluntarily prepaid without penalty by the borrower or consolidated with the borrower’s other education loans or non-
education loans through refinancing.
FFELP Loans may also be repaid after default by the Guarantors of FFELP Loans. Conversely, borrowers
might not choose to prepay their education loans, or the terms of the education loans may be extended as a result of
grace periods, deferment periods, income-driven repayment plans or other repayment terms or monthly payment
amount modifications agreed to by the servicer, for example. FFELP Loan borrowers may be eligible for various
existing income-based repayment programs under which borrowers can qualify for reduced or zero monthly payment
or even debt forgiveness after a certain number of years of repayment.
Future initiatives by ED or by Congress to encourage or force consolidation, create additional income-based
repayment or debt forgiveness programs or establish other policies and programs could also affect prepayments on
education loans. Additionally, additional entrants and the efforts of our competitors in the student loan refinancing
market may increase borrower prepayments. These companies specialize in consolidating and refinancing student
loans and may have certain advantages including lower cost structures, fewer regulatory constraints and the ability to
be highly selective in choosing borrowers who are eligible to refinance. We acquired Earnest in 2017 to participate in
this refinancing market and to appeal to “digitally native” borrowers with higher incomes, high credit scores or other
favorable credit determinants. We cannot be certain that our acquisition of Earnest or similar acquisitions will reduce
the rate at which borrowers prepay their loans.
While we anticipate some variability in prepayment levels, extraordinary or extended increases or decreases in
prepayment rates could materially affect our liquidity, interest income, net interest margin and the value of our
Residual Interests. Additionally, a prolonged introduction of significant amounts of subsidized funding into the Private
Education Loan market at below market interest rates — whether from Federal or private sources —could increase
the prepayment rates of our existing Private Education Loans and have a material adverse effect on our business,
results of operations and cash flows. When, as a result of unanticipated prepayment levels, education loans within a
securitization trust amortize faster than originally contracted, the trust’s pool balance may decline at a rate faster than
the prepayment rate assumed when the trust’s bonds were originally issued. If the trust’s pool balance declines faster
than originally anticipated, in most of our securitization structures, the bonds issued by that trust will also be repaid
faster than originally anticipated. In such cases, the Company’s net interest income may decrease and the value of
any retained Residual Interest in the trust may similarly decline.
Conversely, when education loans within a securitization trust amortize more slowly than originally contracted,
the trust’s pool balance may decline more slowly than the prepayment rate assumed when the trust’s bonds were
originally issued, and the bonds may be repaid more slowly than originally anticipated. In these cases, the Company’s
net interest income increases and the value of any retained Residual Interest in the trust may increase. In addition, if
the prepayment rate is especially slow and certain rights of the sellers or the servicer are not exercised or are
insufficient or other action is not taken to counter the slower prepayment rate, the trust’s bonds may not be repaid by
their legal final maturity date(s), which could result in an event of default under the underlying securitization
agreements. Beginning in 2016, Moody’s and Fitch took final ratings actions on our non-recourse FFELP ABS
sponsored by our affiliates due to concerns that trust cash flows may not be sufficient to pay all bonds by the legal
final maturity date. For a discussion of the rating agencies actions and the Company’s efforts to mitigate the “legal
final maturity” risk, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources — Funding and Liquidity Risk Management.”
Finally, rating agencies may place bonds on watch or change their ratings on (or their ratings methodology for)
the bonds issued by a securitization trust, possibly raising or lowering their ratings, based upon these prepayment
rates and their perception of the risk posed by those rates to the timing of the trust cash flows. Placing bonds on
watch, changing ratings negatively, proposing or making changes to ratings methodology could: (i) affect our liquidity;
(ii) impede our access to the securitization markets; (iii) require changes to our securitization structures; (iv) impact
our net interest margins; and/or (v) raise or lower the value of our Residual Interests of our future securitization
transactions.
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High or increasing interest rate environments may cause Navient’s Floor Income to decline, which may
adversely affect its earnings.
FFELP Loans disbursed before April 1, 2006 generally earn interest at the higher of either the borrower rate,
which is fixed over a period of time, or a floating rate based on a Special Allowance Payment or SAP formula set by
ED. Navient has generally financed its FFELP Loans with floating rate debt whose interest is matched closely to the
floating nature of the applicable SAP formula. Historically, these loans have been indexed to either the Treasury bill,
commercial paper or one-month LIBOR rates. If a decline in interest rates causes the borrower rate to exceed the
SAP formula rate, Navient will continue to earn interest on the loan at the fixed borrower rate while the floating rate
interest on Navient debt will continue to decline. The additional spread earned between the fixed borrower rate and
the SAP formula rate is referred to as “Floor Income.” The replacement of LIBOR as a benchmark rate may have a
further detrimental impact on our LIBOR-indexed debt if rates suddenly rise as new market borrowing activity
transfers to other benchmark rates. Depending on the type of FFELP Loan and when it was originated, the borrower
rate is either fixed to term or is reset to a market rate on July 1 of each year. For loans where the borrower rate is
fixed to term, Navient may earn Floor Income for an extended period of time; for those loans where the borrower
interest rate is reset annually on July 1, Navient may earn Floor Income to the next reset date. In accordance with
legislation enacted in 2006, holders of FFELP Loans are required to rebate Floor Income to ED for all FFELP Loans
disbursed on or after April 1, 2006.
Floor Income can be volatile as rates on the underlying education loans move up and down. Subject to
prevailing market conditions, Navient generally hedges this risk by using derivatives in an effort to lock in a portion of
our Floor Income over the term of the contract. A rise in interest rates will reduce the amount of Floor Income
received on the FFELP Loans not presently hedged with derivatives, which will compress Navient’s net interest
margins. Additionally, net interest margins can be negatively impacted by unusual variances between one-month and
three-month LIBOR.
Navient’s credit ratings are important to our liquidity. A reduction in our credit ratings could adversely affect
our liquidity, increase our borrowing costs or limit our access to the capital markets.
As of December 31, 2018, Moody’s, S&P and Fitch rated our long-term unsecured debt below investment
grade. In addition, the capital markets for sub-investment grade companies are not as liquid as those involving
investment grade entities. These factors have resulted in a higher cost of funds for the Company and have caused
our senior unsecured debt to trade with greater volatility.
Our unsecured debt totaled $11.5 billion at December 31, 2018. We utilize the unsecured debt markets to help
fund our business and refinance outstanding debt. The amount, type and cost of its funding directly affects the cost of
operating its business and growing its assets and is dependent upon outside factors, including its credit rating from
rating agencies. There can be no assurance that the Company’s credit ratings will not be reduced further. A reduction
in the credit ratings of the Company’s senior unsecured debt could adversely affect Navient’s liquidity, increase its
borrowing costs, limit its access to the capital markets and place incremental pressure on its net interest income.
Adverse market conditions or an inability to effectively manage our liquidity risk could negatively impact
Navient’s ability to meet its liquidity and funding needs, which could materially and adversely impact its
results of operations, cash flow or financial condition.
Navient must effectively manage its liquidity risk. Navient requires liquidity to meet cash requirements such as
day-to-day operating expenses, required payments of principal and interest on borrowings, and distributions to
stockholders. As of December 31, 2018, a total of $2.9 billion of our unsecured debt will mature before the end of
2020. We expect to fund our ongoing liquidity needs, including the repayment of $0.8 billion of senior unsecured
notes that mature in 2019, primarily through our current cash, investments and unencumbered FFELP Loan portfolio,
the predictable operating cash flows provided by operating activities ($1.1 billion in the year ended December 31,
2018), the repayment of principal on unencumbered education loan assets, and the distribution of
overcollateralization from our securitization trusts. We may also draw down on our secured FFELP Loan and Private
Education Loan facilities, issue term ABS, enter into additional repurchase facilities called “Private Education Loan
ABS Repurchase Facilities” to finance the Residual Interests in existing Private Education Loan ABS trusts or issue
additional unsecured debt. Navient may maintain too much liquidity, which can be costly, or may be too illiquid, which
could result in financial distress during times of financial stress or capital market disruptions.
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The interest rate characteristics of Navient’s earning assets do not always match the interest rate
characteristics of its funding arrangements, which may have a negative impact on our net interest income
and net income.
Net interest income will be the primary source of cash flow generated by Navient’s portfolios of FFELP Loans
and Private Education Loans. At the present, interest earned on FFELP Loans and Private Education Loans is
primarily indexed to one-month LIBOR and either one-month LIBOR or the one-month Prime rate, respectively, but
Navient’s debt is primarily indexed to rates other than one-month LIBOR and Prime.
The different interest rate characteristics of Navient’s loan portfolios and the liabilities funding these loan
portfolios result in basis risk and repricing risk. It is not economically feasible to hedge all of Navient’s exposure to
such risks. While the asset and hedge indices are short-term with rate movements that are typically highly correlated,
there can be no assurance that the historically high correlation will not be disrupted by capital market dislocations or
other factors not within our control. For example, during the second half of 2016, Navient experienced widening
spreads between one-month and three-month LIBOR and the cost of hedging this variance was prohibitive. We
cannot provide any assurance that such a situation will not reoccur which will reduce our net interest margins and net
income. In these circumstances, Navient’s earnings could be materially adversely affected.
Navient’s use of derivatives to manage interest rate and foreign currency sensitivity exposes it to credit and
market risk that could have a material adverse effect on our earnings and liquidity.
Navient strives to maintain an overall strategy that uses derivatives to minimize the economic effect of interest
rate and/or foreign currency changes. However, developing an effective strategy for dealing with these movements is
complex, and no strategy can completely avoid the risks associated with these fluctuations. For example, our
education loan portfolio is subject to prepayment risk that could result in being under- or over-hedged, which could
result in material losses. In addition, our use of derivatives in our risk management activities could expose us to mark-
to-market losses if interest rates or foreign currencies move in a materially different way than was expected when we
entered into the related derivative contracts. As a result, there can be no assurance that hedging activities using
derivatives will effectively manage our interest rate or foreign currency sensitivity, have the desired beneficial impact
on our results of operations or financial condition or not adversely impact our liquidity and earnings.
Navient’s use of derivatives also exposes us to market risk and credit risk. Market risk is the chance of financial
loss resulting from changes in interest rates, foreign exchange rates and market liquidity. For example, during 2016,
Navient’s net interest margin was negatively impacted by unusually wide variances between one-month and three-
month LIBOR. Our Floor Income Contracts and some of the basis swaps we use to manage earnings variability
caused by different reset characteristics on interest-earning assets and interest-bearing liabilities do not qualify for
hedge accounting treatment. Therefore, the change in fair value, called the “mark-to-market,” of these derivative
instruments is included in our statement of income without a corresponding mark-to-market of the economically
hedged item. A decline in the fair value of these derivatives could have a material adverse effect on Navient’s
reported earnings.
Credit risk is the risk that a counterparty will not perform its obligations under a contract. Credit risk is limited to
the loss of the fair value gain in a derivative that the counterparty or clearinghouse owes or will owe in the future to
Navient. If a counterparty or clearinghouse fails to perform its obligations, Navient could, depending on the type of
counterparty arrangement, experience a loss of liquidity or an economic loss. In addition, Navient might not be able to
cost effectively replace the derivative position depending on the type of derivative and the current economic
environment.
Navient’s securitization trusts, which we consolidate on our balance sheet, had $4.5 billion of Euro and British
Pound Sterling denominated bonds outstanding as of December 31, 2018. 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. A failure by a swap counterparty to perform its obligations could, if the swap has a positive fair value
to Navient, materially and adversely affect Navient’s earnings.
REGULATORY, COMPLIANCE & LEGAL RISK.
Navient’s businesses are subject to a wide variety of laws, rules, regulations and government policies that
may change in significant ways and changes to such laws and regulations or changes in existing regulatory
guidance or their interpretation or enforcement could materially adversely impact Navient’s business and
results of operations.
Our businesses are subject to regulation under a wide variety of U.S. federal and state and non-U.S. laws,
rules, regulations and policies. There can be no assurance that these laws, rules, regulations and policies will not be
changed in ways that will require us to modify our business models or objectives or in ways that affect our returns on
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investment by restricting existing activities or services, change how our companies operate or the characteristics of
our assets, subjecting them to escalating costs or prohibiting them outright.
In particular, the CFPB has authority with respect to Navient’s loan servicing business. It has authority to write
regulations under federal consumer financial protection laws and to directly or indirectly enforce those laws and
examine Navient for compliance. The CFPB also has examination and enforcement authority with respect to various
federal consumer financial laws for some providers of consumer financial products and services, including Navient.
New rules if implemented, could have a material effect on our loan servicing, Consumer lending or asset recovery
business and may result in significant capital expenditures to develop systems that enable us to comply with the new
regulations.
The CFPB is authorized to impose monetary penalties, collect fines and provide consumer restitution in the
event of violations, engage in consumer financial education, track consumer complaints, request data and promote
the availability of financial services to underserved consumers and communities. The CFPB has authority to prevent
unfair, deceptive or abusive acts or practices and to ensure that all consumers have access to fair, transparent and
competitive markets for consumer financial products and services. The review of products and practices to prevent
unfair, deceptive or abusive conduct will be a continuing focus of the CFPB. The ultimate impact of this heightened
scrutiny is uncertain, but it has resulted in, and could continue to result in, changes to pricing, practices, products and
procedures. It has also resulted in increased costs related to regulatory oversight, supervision and examination,
additional remediation efforts and possible penalties.
In addition, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations implemented
under Title X of the Dodd-Frank Act, the Dodd-Frank Act empowers State Attorneys General and state regulators to
bring civil actions to remedy violations of state law. If the CFPB or one or more State Attorneys General or state
regulators believe that Navient has violated any of the applicable laws or regulations, they could exercise their
enforcement powers in ways that could have a material adverse effect on Navient or its business. Since the CFPB
filed its action against the Company in January of 2017, the Attorneys General of Illinois, Washington, Pennsylvania,
Mississippi and California have filed separate actions alleging various violations of state and federal consumer
protection laws.
Loans serviced under the FFELP are subject to the HEA and related laws, rules, regulations and policies.
Navient’s servicing operations are designed and monitored to comply with the HEA, related regulations and program
guidance; however, ED could determine that Navient is not in compliance for a variety of reasons, including that it
misinterpreted ED guidance or incorrectly applied the HEA and its related laws, rules, regulations and policies.
Failure to comply could result in fines, the loss of the insurance and related federal guarantees on affected FFELP
Loans, expenses required to cure servicing deficiencies, suspension or termination of its right to participate as a
FFELP servicer, negative publicity and potential legal claims. The imposition of significant fines, the loss of the
insurance and related federal guarantees on a material number of FFELP Loans, the incurrence of additional
expenses and/or the loss of its ability to participate as a FFELP servicer could individually or in the aggregate have a
material, negative impact on Navient’s business, financial condition or results of operations. From time to time,
legislation is also considered that could affect the treatment of our loan assets in bankruptcy.
In addition to CFPB oversight, Navient’s businesses are also subject to regulation and oversight by various
state and federal agencies, particularly in the area of consumer protection, and is subject to numerous state and
federal laws and regulations. Several states have passed or proposed student loan servicing rules or legislation and
several other have imposed license requirements. Imposition of new laws, rules or regulations or the failure to comply
with these laws and regulations may result in significant costs, including litigation costs, and/or business sanctions
including but not limited to termination or non-renewal of contracts.
Expanded regulatory and governmental oversight of Navient’s businesses will increase its costs and risks.
Navient is now, and may be subject in the future, to inquiries and audits from state and federal regulators as
well as litigation from private plaintiffs. In recent years, Navient has entered into consent orders and other
settlements. Navient has paid fines and penalties or provided monetary and other relief in connection with some of
these actions and settlements. We have also enhanced our procedures and controls, expanded the risk and control
functions within each line of business, invested in technology and hired additional risk, control and compliance
personnel.
If Navient fails to successfully address the requirements of any settlements to which it is currently subject, or
more generally fails to effectively enhance its risk and control procedures and processes to meet the heightened
expectations of its regulators and other government agencies, it could be required to enter into further orders and
settlements, pay additional fines, penalties or judgments, or accept material regulatory restrictions on its businesses,
which could adversely affect its operations and, in turn, its financial results.
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Navient expects heightened regulatory scrutiny and governmental investigations and enforcement actions to
continue for it and for the financial services industry as a whole. Such actions can have significant consequences for
a financial institution such as Navient, including loss of customers and business and the inability to operate certain
businesses.
Due to the uncertainty engendered by these new regulations, guidance and actions, coupled with the likelihood
of additional changes or additions to the local, state and federal statutes, regulations and practices applicable to its
business, Navient is not able to estimate the ultimate impact of changes in law on its financial results, business
operations or strategies. Navient believes that the cost of responding to and complying with these evolving laws and
regulations, as well as any guidance from enforcement actions, will continue to increase, as will the risk of penalties
and fines from any enforcement actions that may be imposed on its businesses. Navient’s profitability, results of
operations, financial condition, cash flows or future business prospects could be materially and adversely affected as
a result.
Navient’s framework for managing risks may not be effective in mitigating the risk of loss.
Navient’s enterprise risk management framework seeks to mitigate risk and appropriately balance risk and
returns. Navient has established processes and procedures intended to identify, measure, monitor, control and report
the types of risk to which it is subject. Navient seeks to monitor and control risk exposure through a framework of
policies, procedures, limits and reporting requirements. Management of risks in some cases depends upon the use of
analytical and forecasting models. If the models that Navient uses to mitigate these risks are inadequate, it may incur
increased losses. In addition, there may be risks that exist, or that develop in the future, that Navient has not
appropriately anticipated, identified or mitigated. If Navient’s risk management framework does not effectively identify
or mitigate risks, Navient could suffer unexpected losses, and its results of operations, cash flow or financial condition
could be materially adversely affected.
We are subject to various legal proceedings and some of these legal proceedings or other contingencies
may materially adversely affect our business, financial condition or results from operations.
We are subject to a variety of legal proceedings in virtually every part of our businesses including the legal
proceedings described in the Legal Proceedings section of this Annual Report. While we believe we have adopted
appropriate legal and risk management and compliance programs, the diverse nature of our operations, including
operations of business we have recently acquired, means that legal and compliance risks will continue to exist and
additional legal proceedings and other contingencies, the outcome of which cannot be predicted with certainty, will
arise from time to time. Some of these legal proceedings or other contingencies may materially adversely affect our
business, financial condition or results from operations.
Incorrect estimates and assumptions by management in connection with the preparation of Navient’s
consolidated financial statements could adversely affect Navient’s reported assets, liabilities, income,
revenue or expenses.
The preparation of Navient’s consolidated financial statements requires management to make critical
accounting estimates and assumptions that affect the reported amounts of assets, liabilities, income, revenue or
expenses during the reporting periods. Incorrect estimates and assumptions by management could adversely affect
Navient’s reported amounts of assets, liabilities, income, revenue and expenses during the reporting periods. If
Navient makes incorrect assumptions or estimates, it may under or overstate reported financial results, which could
materially and adversely affect its business, financial condition and results of operations.
OPERATIONAL RISKS.
If Navient does not effectively and continually align its cost structure with its business operations, its results
of operations and financial condition could be materially adversely affected.
Navient continually needs to align our cost structure with our business operations. The ability to properly size
our cost structure is dependent upon a number of variables, including our ability to successfully execute on our
business plans and growth initiatives and future legislative or regulatory changes. If we undertake cost reductions
based on our business plan, those reductions could be too dramatic and could cause disruptions in our business,
reductions in the quality of the services we provide or cause us to fail to comply with applicable regulatory standards.
Alternatively, Navient may fail to implement, or be unable to achieve, necessary cost savings commensurate with our
business and prospects. In either case, Navient’s business, results of operations and financial condition could be
adversely affected.
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A failure of the operating systems or infrastructure of Navient could disrupt its business, cause significant
losses, result in regulatory action or damage its reputation.
A failure of Navient’s operating systems or infrastructure could disrupt our business. Navient’s business is
dependent on its ability to process and monitor large numbers of daily transactions in compliance with contractual,
legal and regulatory standards and its own product specifications, both currently and in the future. In May 2018, we
reached a strategic agreement with First Data to become the primary provider of technology solutions for servicing
Navient’s federal education loans in addition to the technology role they already played with respect to private
education loans. We however still maintain the technology solutions for our other lines of business as well as our
customer interactive infrastructure. As Navient’s processing demands and loan portfolios change, both in volume and
in terms and conditions, Navient’s ability to develop and maintain its operating systems and infrastructure may
become increasingly challenging. There is no assurance that Navient has adequately or efficiently developed,
maintained, acquired or scaled such systems and infrastructure or will do so in the future.
The servicing, financial, accounting, data processing and other operating systems and facilities that support
Navient’s business may fail to operate properly or become disabled as a result of events that are beyond Navient’s
control, adversely affecting our ability to timely process transactions. Any such failure could adversely affect Navient’s
ability to service its clients and result in financial loss or liability to its clients, disrupt its business, and result in
regulatory action or cause reputational damage.
Despite the plans and facilities Navient has in place, our ability to conduct business may be adversely affected
by a disruption in the infrastructure that supports our business. This may include a disruption involving electrical,
communications, Internet, transportation or other services used by Navient or third parties with which it conducts
business. Notwithstanding efforts to maintain business continuity, a disruptive event impacting Navient’s processing
locations could adversely affect its business, financial condition and results of operations.
Navient depends on secure information technology, and a breach of its information technology systems
could result in significant losses, disclosure of confidential customer information and reputational damage,
which would adversely affect Navient’s business.
Navient’s operations rely on the secure processing, storage and transmission of personal, confidential and
other information in its computer systems and networks. Although Navient takes protective measures it deems
reasonable and appropriate, its computer systems, software and networks may be vulnerable to unauthorized
access, computer viruses, malicious attacks and other events that could have a security impact beyond Navient’s
control. These technologies, systems and networks, and those of third parties, may become the target of cyber-
attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse,
loss or destruction of Navient’s or its customers’ confidential, proprietary and other information, or otherwise disrupt
Navient’s business operations or those of its customers or other third parties. Information security risks for institutions
that handle large numbers of financial transactions on a daily basis such as Navient have generally increased in
recent years, in part because of the proliferation of new technologies, the use of the Internet and telecommunications
technologies to conduct financial transactions, and the increased sophistication and activities of organized crime,
hackers, terrorists, activists and other external parties.
If one or more of such events occur, personal, confidential and other information processed and stored in, and
transmitted through, Navient’s computer systems and networks could be jeopardized or could cause interruptions or
malfunctions in Navient’s operations that could result in significant losses or reputational damage. Navient routinely
transmits and receives personal, confidential and proprietary information, some of it through third parties. Navient
maintains secure transmission capability and works to ensure that third parties follow similar procedures.
Nevertheless, an interception, misuse or mishandling of personal, confidential or proprietary information being sent to
or received from a customer or third party could result in legal liability, regulatory action and reputational harm. In the
event personal, confidential or other information is jeopardized, intercepted, misused or mishandled, Navient may
need to expend significant additional resources to modify its protective measures or to investigate and remediate
vulnerabilities or other exposures, and it may be subject to fines, penalties, litigation and settlement costs and
financial losses that may either not be insured against or not be fully covered through insurance. If one or more of
such events occur, Navient’s business, financial condition or results of operations could be significantly and adversely
affected.
Navient depends on third parties for a wide array of services, systems and information technology
applications, and a breach or violation of law by one of these third parties could disrupt Navient’s business
or provide its competitors with an opportunity to enhance their position at Navient’s expense.
Navient depends on third parties for a wide array of services, systems and information technology applications.
Third-party vendors are significantly involved in many aspects of Navient’s software and systems development,
servicing systems, the timely transmission of information across its data communication network, and for other
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telecommunications, processing, remittance and technology-related services in connection with Navient’s servicing or
payment services businesses. In addition to technology applications, Navient also utilizes various third-party debt
collectors in the collection of defaulted Private Education Loans and in other areas. If a service provider fails to
provide the services required or expected, or fails to meet applicable contractual or regulatory requirements such as
service levels or compliance with applicable laws, the failure could negatively impact Navient’s business by adversely
affecting its ability to process customers’ transactions in a timely and accurate manner, otherwise hampering
Navient’s ability to serve its customers, or subjecting Navient to litigation and regulatory risk for matters as diverse as
poor vendor oversight or improper release or protection of personal information. Such a failure could also adversely
affect the perception of the reliability of Navient’s networks and services and the quality of its brands, which could
materially adversely affect Navient’s business and results of operations.
Navient’s work with government clients exposes it to additional risks inherent in the government contracting
environment.
Navient’s clients include federal, state and local governmental entities. This work carries various risks inherent
in the government contracting process. These risks include, but are not limited to, the following:
•
•
•
Government contractors are sometimes affected by the political or budgetary processes of the United
States government. Sometimes the political process leads to government shutdown of all parts of the
federal government. This can lead to temporary work stoppages or payment delays.
Government entities in the United States often reserve the right to audit contract costs and conduct
inquiries and investigations of business practices. These entities also conduct reviews and investigations
and make inquiries regarding systems, including systems of third parties, used in connection with the
performance of the contracts. Negative findings from audits, investigations or inquiries could affect the
contractor’s future revenues and profitability by preventing them, by operation of law or in practice, (i) from
receiving new government contracts for some period of time or (ii) from being paid at the rate they believe
is warranted.
If improper or illegal activities are found in the course of government audits or investigations, the contractor
may become subject to various civil and criminal penalties, including those under the civil U.S. False
Claims Act. Additionally, Navient may be subject to administrative sanctions, which may include
termination or non-renewal of contracts, forfeiture of profits, suspension of payments, fines and
suspensions or debarment from doing business with other agencies of that government. Due to the
inherent limitations of internal controls, it may not be possible to detect or prevent all improper or illegal
activities.
The occurrences or conditions described above could affect not only Navient’s business with the particular
government entities involved, but also its business or potential future business with other entities of the same or other
governmental bodies or with commercial clients, and could have a material adverse effect on its business or its
results of operations.
If Navient is unable to attract and retain professionals with strong leadership skills, its business, results of
operations and financial condition may be materially adversely affected.
Navient’s success is dependent, in large part, on its ability to attract and retain personnel with the knowledge
and skills to lead its business. Experienced personnel in its industry are in high demand, and competition for talent is
very high. Navient must hire, retain and motivate appropriate numbers of talented people with diverse skills in order to
serve its clients, respond quickly to rapid and ongoing technology, industry and macroeconomic developments, and
grow and manage its business. As our business evolves, Navient must also hire and retain an increasing number of
professionals with different skills and professional expectations than those of the professionals it has historically hired
and retained. If Navient is unable to successfully integrate, motivate and retain these professionals, its ability to
continue to secure work in those industries and for its services and solutions may suffer.
Our business could be negatively impacted as a result of stockholder activism, including a proxy contest or
an unsolicited takeover proposal.
Navient has been and may continue to be the subject of actions taken by activist stockholders. For instance, on
February 18, 2019, Navient’s board of directors rejected a non-binding, highly conditional expression of interest by
Canyon Capital Advisors LLC (together with certain of its affiliates, “Canyon”) and Platinum Equity Advisors, LLC to
acquire all of the outstanding shares of the Company at $12.50 per share in cash. On February 21, 2019, Canyon,
which on that date reported beneficial ownership of over 10% of our outstanding common stock, delivered a notice to
Navient indicating Canyon’s intent to nominate four director candidates to stand for election as directors at our 2019
annual meeting of stockholders.
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While we strive to maintain constructive, ongoing communications with all of our stockholders, and welcome
their views and opinions with the goal of enhancing value for all stockholders, we may be subject to actions or
proposals from activist stockholders or others that may not align with our business strategies or the interests of our
other stockholders. Responding to such actions may be costly and time-consuming, disrupt Navient’s business and
operations, or divert the attention of Navient’s board of directors, management, and employees from the pursuit of
Navient’s business strategies. Such activities could interfere with our ability to execute our strategic plan.
Even if we are successful in a proxy contest or in defending against any unsolicited takeover attempt, Navient’s
business could be adversely affected by any such proxy contest or unsolicited takeover attempt because:
•
responding to proxy contests and other actions by activist stockholders can be costly (resulting in significant
professional fees and proxy solicitation expenses) and time-consuming, disrupting operations and diverting
the attention of our board of directors, management and employees;
• perceived uncertainties as to future direction may result in the loss of potential acquisitions, collaborations or
other strategic opportunities, and may make it more difficult to attract and retain qualified personnel and
business partners;
•
•
if individuals are elected or appointed to Navient’s board of directors with a specific agenda, it may
adversely affect our ability to effectively and timely implement our strategic plan and create additional value
for our stockholders; and
if individuals are elected or appointed to our board of directors who do not agree with our strategic plan, the
ability of our board of directors to function effectively could be adversely affected, which could in turn
adversely affect our business, operating results and financial condition.
Uncertainties related to, or the results of, such actions could cause Navient’s stock price to experience periods
of volatility. The occurrence of any of the foregoing events could materially adversely affect Navient’s business.
We cannot predict, and no assurances can be given, as to the outcome or timing of any matters relating to the
foregoing actions by stockholders or the ultimate impact on our business, liquidity, financial condition or results of
operations, and any of these matters or any further actions by this or other stockholders may impact and result in
volatility or stagnation of the price of our stock.
REPUTATIONAL/POLITICAL RISK.
Federal funding constraints and spending policy changes triggered by associated federal spending
deadlines and ongoing lawmaker and regulatory efforts to change the student lending sector may result in
disruption of federal payments for services Navient provides to the government, which could materially and
adversely affect Navient’s business strategy or future business prospects.
Navient receives payments from the federal government on its FFELP Loan portfolio and for other services it
provides, including servicing loans under the Direct Student Loan Program (“DSLP”), providing default aversion and
contingency collections to ED, and providing performance-based services to the IRS to support its national recovery
program. Payments for these services may be affected by various factors, including the following:
• The Budget Act: The Budget Act enacted on December 26, 2013, Direct Loan Servicing eliminated funding
for the Direct Loan servicing performed by not-for-profit servicers. The Budget Act also requires that all
servicing funding be provided through the annual appropriations process which is subject to certain
limitations. Although the payments for Navient’s DSLP servicing contract are already funded from annual
appropriations, the requirement to fund all servicing from the limited appropriated funding could have an
effect on our future business in ways the Company cannot predict at this time.
• Other Higher Education Legislation: As Congress and the current Administration consider the
reauthorization of the Higher Education Act, they may consider legislation that would reduce the payments
to Guarantors or change the consolidation program in a way that would incentivize education loan borrowers
to refinance their existing education loans, both private and federal. Such reforms could reduce Navient’s
cash flows from servicing and interest income as well as its net interest margin.
ED has also announced its intention to replace the current servicing contracts with various third parties
including Navient’s Direct Loan servicing contract. ED has attempted several procurement RFPs for these services.
Currently, it is impossible to predict what changes, if any, will result.
It is possible that the administration and Congress in the future could engage in a prolonged debate linking the
federal deficit, debt ceiling and other budget issues. If U.S. lawmakers in the future fail to reach agreement on these
issues, the federal government could stop or delay payment on its obligations, including those on services Navient
provides. Further, legislation to address the federal deficit and spending could impose proposals that would adversely
21
affect FFELP and DSLP-related servicing businesses. A protracted reduction, suspension or cancellation of the
demand for the services Navient provides, or proposed changes to the terms or pricing of services provided under
existing contracts with the federal government, including its contract with ED, could have a material adverse effect on
Navient’s revenues, cash flows, profitability and business outlook, and, as a result, could materially adversely affect
its business, financial condition and results of operations. Navient cannot predict how or what programs or policies
will be impacted by any actions that the Administration, Congress or the federal government may take.
Reputational Risk and Social Factors May Impact Our Results and Damage Our Brand.
Negative public opinion or damage to our brand could occur as a result of actual or alleged conduct in any
number of activities or circumstances, including lending practices, regulatory compliance, security breaches
(including the use and protection of customer information), corporate governance, and sales and marketing, and from
actions taken by regulators or other persons in response to such conduct. Such conduct could fall short of our
customers’ and the public’s heightened expectations of companies of our size with rigorous data, privacy and
compliance practices, and could further harm our reputation. In addition, third parties with whom we have important
relationships may take actions over which we have limited control that could negatively impact perceptions about us
or the financial services industry. The proliferation of social media may increase the likelihood that negative public
opinion from any of the events discussed above will impact our reputation and business.
RISKS ASSOCIATED WITH OUR SPIN-OFF.
In connection with the Spin-Off from SLM BankCo, Navient, SLM Corporation and SLM BankCo entered into
various agreements.
The separation and distribution agreement between Navient, SLM Corporation and SLM BankCo provides for,
among other things, indemnification obligations designed to make Navient financially responsible for substantially all
liabilities that may exist whether incurred prior to or after the Spin-Off, relating to the business activities of SLM
Corporation prior to the Spin-Off, other than those arising out of the consumer banking business and expressly
assumed by SLM BankCo in the separation and distribution agreement. If Navient is required to indemnify SLM
BankCo under the circumstances set forth in the separation and distribution agreement, Navient may be subject to
substantial liabilities including liabilities that are accrued, contingent or otherwise and regardless of whether the
liabilities were known or unknown at the time of the Spin-Off. SLM BankCo is party to various claims, litigation and
legal, regulatory and other proceedings resulting from ordinary business activities relating to its current and former
operations. Previous business activities of SLM BankCo, including originations and acquisitions of various classes of
consumer loans outside of Sallie Mae Bank, may also result in liability due to future laws, rules, interpretations or
court decisions which purport to have retroactive effect, and such liability could be significant. SLM BankCo may also
be subject to liabilities related to past activities of acquired businesses. It is inherently difficult, and in some cases
impossible, to estimate the probable losses associated with contingent and unknown liabilities of this nature, but
future losses may be substantial and may be borne by Navient in accordance with the terms of the separation and
distribution agreement.
GOVERNANCE RISK.
Certain provisions of Delaware law and Navient’s amended and restated certificate of incorporation and
amended and restated by-laws may prevent or delay an acquisition of Navient, which could decrease the
trading price of Navient’s common stock.
Certain provisions of Delaware law and of Navient’s amended and restated certificate of incorporation and
second amended and restated by-laws are intended to deter coercive takeover practices and inadequate takeover
bids by, among other things, encouraging prospective acquirers to negotiate directly with Navient’s board of directors
rather than to attempt a hostile takeover. These provisions include, among others:
•
•
•
•
•
limitations on the ability of Navient’s stockholders to call a special meeting such that stockholder-requested
special meetings will only be called upon the request of the holders of at least one-third of Navient’s capital
stock issued and outstanding and entitled to vote at an election of directors;
rules regarding how stockholders may present proposals or nominate directors for election at stockholder
meetings;
the right of Navient’s board of directors to issue one or more series of preferred stock without stockholder
approval;
the inability of Navient’s stockholders to fill vacancies on Navient’s board of directors;
the requirement that the affirmative vote of the holders of at least 75 percent in voting power of Navient’s
stock entitled to vote thereon is required for stockholders to amend Navient’s amended and restated by-
laws; and
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•
the inability of Navient stockholders to cumulate their votes in the election of directors.
In addition, Navient’s amended and restated certificate of incorporation makes it subject to Section 203 of the
Delaware General Corporation Law. Section 203 generally provides that, with limited exceptions, persons who
acquire, or are affiliated with a person that acquires, 15 percent or more of the outstanding voting stock of a Delaware
corporation shall not engage in any business combination with that corporation, including by merger,
consolidation or acquisitions of additional shares, for a three-year period following the time at which that person or its
affiliates becomes the holder of 15 percent or more of the corporation’s outstanding voting stock. Being subject to
Section 203 could cause a delay in or completely prevent a change of control that stockholders may favor.
Navient believes these provisions protect its stockholders from coercive or otherwise unfair takeover tactics by
requiring potential acquirers to negotiate with Navient’s board of directors and by providing our board of directors with
more time to assess any acquisition proposal. These provisions are not intended to make the Company immune from
takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders
and could delay or prevent an acquisition that Navient’s board of directors determines is not in the best interests of
Navient and Navient’s stockholders.
Stockholders’ percentage ownership in Navient may be diluted in the future.
In the future, stockholders’ percentage ownership in Navient may be diluted as a result of equity issuances for
acquisitions, capital market transactions or otherwise, including future equity awards that Navient may grant to its
directors, officers and employees. Such awards will have a dilutive effect on Navient’s earnings per share, which
could adversely affect the market price of shares of Navient common stock.
In addition, Navient’s amended and restated certificate of incorporation authorizes Navient to issue, without the
approval of Navient’s stockholders, one or more series of preferred stock. Navient’s board of directors generally may
determine the rights of preferred stockholders including their powers, preferences and relative, participating, optional
and other special rights, including preferences over Navient’s common stock with respect to dividends and
distributions. If Navient’s board were to approve the issuance of preferred stock in the future, the terms of one or
more series of such preferred stock could dilute the voting power or reduce the value of Navient’s common stock. For
example, Navient could grant the holders of preferred stock the right to elect some number of Navient’s directors in all
circumstances or upon the happening of specified events, or the right to veto specified transactions. Similarly, it could
grant the preferred stockholders certain repurchase or redemption rights or liquidation preferences that could affect
the value of the common stock.
Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive
forum for certain litigation that may be initiated by our shareholders, which could limit our shareholders’
ability to obtain a favorable judicial forum for disputes with us.
Our certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the sole and
exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of
breach of a fiduciary duty owed to us or our shareholders by any of our directors, officers, employees or agents,
(iii) any action asserting a claim against us arising under the General Corporation Law of the State of Delaware
(“DGCL”) or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine. By becoming
a shareholder in our company, holders of our common stock will be deemed to have notice of and have consented to
the provisions of our amended and restated certificate of incorporation related to choice of forum. The choice of forum
provision in our amended and restated certificate of incorporation may limit our shareholders’ ability to obtain a
favorable judicial forum for disputes with us.
STRATEGIC RISK.
Acquisitions or strategic investments that Navient pursues may not be successful and could harm its
business and financial condition.
Navient’s growth strategy has included making opportunistic acquisitions of, or material investments in, loan
portfolios and complementary businesses and products. The Company recently announced it intends to enter the in-
school lending market in 2019.
All acquisitions of companies, operations or loan portfolios involve financial risks as well as operational risks.
There may be additional risks if Navient enters into a line of business in which it has limited experience or which
operates in a legal, regulatory or competitive environment with which Navient is not familiar. The expected benefits of
acquisitions and investments also may not be realized for various reasons, including the loss of key personnel,
customers or vendors. If Navient fails to integrate or realize the expected benefits of its acquisitions or investments, it
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may lose the return on these acquisitions or investments or incur additional transaction costs, and its business and
financial condition may be harmed as a result.
Navient’s businesses operate in competitive environments and could lose market share and revenues if
competitors compete more aggressively or effectively.
Navient competes with for-profit and not-for-profit servicing, asset recovery and business processing
businesses, many with strong records of performance. Navient competes based on effectiveness and customer
service metrics. To the extent its competitors compete aggressively or more effectively than Navient, Navient could
lose market share to them or Navient’s service offerings may not prove to be profitable. Our business and financial
condition may be harmed as a result.
Legislation passed by Congress in 2010 ended new loan originations under the FFELP program and no new
FFELP Loans are being originated, and, as a result, net income on Navient’s existing FFELP Loan portfolio is
anticipated to decline over time. Navient may not be able to develop revenue streams to fully replace the
declining revenue from FFELP Loans.
In 2010, Congress passed legislation ending the origination of education loans under the FFELP program.
Since then, all federal education loans have been originated through the DSLP of the ED. While the 2010 law did not
alter or affect the terms and conditions of existing FFELP Loans, it significantly impacted the education loan industry.
As a result of this legislation, net income on Navient’s FFELP Loan portfolio is anticipated to decline over time as
those existing FFELP Loans are paid down, refinanced or repaid after default.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
The following table lists the principal facilities owned by us as of December 31, 2018:
Location
Fishers, IN(1)
Function
Loan Servicing and Data Center
Wilkes-Barre, PA Loan Servicing Center
Muncie, IN
Big Flats, NY
Processing Center
GRC and Pioneer Credit Recovery —
Processing Center
Business Segment(s)
Federal Education Loans; Consumer Lending;
Other
Approximate
Square Feet
450,000
Federal Education Loans; Consumer Lending
Business Processing
Federal Education Loans; Business Processing
133,000
75,400
60,000
Arcade, NY
Perry, NY
Pioneer Credit Recovery — Processing Center
Pioneer Credit Recovery — Processing Center
Federal Education Loans; Business Processing
Federal Education Loans; Business Processing
46,000
45,000
The following table lists the principal facilities leased by us as of December 31, 2018:
Location
Hendersonville, TN Xtend Healthcare — Revenue Cycle Management
Reston, VA(2)
Administrative Offices
Function
Newark, DE
Operations Center and Administrative Offices
Austin, TX
Mason, OH
Wilmington, DE
Gila MSB — Business Processing
GRC Headquarters and Processing Center
Headquarters
San Francisco, CA Earnest — Loan Originations
Milwaukee, WI
Moorestown, NJ
Guaynabo, PR
Salt Lake City, UT Earnest — Loan Originations
Duncan Solutions — Business Processing
Pioneer Credit Recovery —Processing Center
Gila MSB Puerto Rico — Business Processing
Business Segment(s)
Business Processing; Other
Federal Education Loans; Consumer Lending;
Business Processing; Other
Federal Education Loans; Consumer Lending;
Business Processing; Other
Business Processing; Other
Business Processing
Federal Education Loans; Consumer Lending;
Business Processing; Other
Consumer Lending; Other
Business Processing; Other
Federal Education Loans; Business Processing
Business Processing; Other
Consumer Lending; Other
Approximate
Square Feet
92,000
90,000
86,000
55,000
54,000
46,000
36,000
31,000
30,000
21,000
14,000
(1)
(2)
Includes some temporary space sublet to First Data in 2018; approximately 38,000 square feet will be sublet to First Data beginning in
April 2019.
Includes approximately 32,000 square feet sublet to Sallie Mae Bank.
None of the facilities that we own is encumbered by a mortgage. We believe that our headquarters, loan
servicing centers, data center and other business processing centers are generally adequate to meet our long-term
needs and business goals. Our headquarters is currently in leased space at 123 Justison Street, Wilmington,
Delaware, 19801.
Item 3. Legal Proceedings
We and our subsidiaries and affiliates are subject to various claims, lawsuits and other actions that arise in the
normal course of business. We believe that these claims, lawsuits and other actions will not, individually or in the
aggregate, have a material adverse effect on our business, financial condition or results of operations, except as
otherwise disclosed. Most of these matters are claims including individual and class action lawsuits against our
servicing or business processing subsidiaries alleging the violation of state or federal laws in connection with
servicing or collection activities on their education loans and other debts.
In the ordinary course of our business, the Company and our subsidiaries and affiliates receive information and
document requests and investigative demands from State Attorneys General, U.S. Attorneys, legislative committees,
individual members of Congress and administrative agencies. These requests may be informational or regulatory in
nature and may relate to our business practices, the industries in which we operate, or companies with whom we
conduct business. Generally, our practice has been and continues to be to cooperate with these bodies and to be
responsive to any such requests.
The number of these inquiries and the volume of related information demands continue to increase and
therefore continue to increase the time, costs and resources we must dedicate to timely respond to these requests
and may, depending on their outcome, result in payments of restitution, fines and penalties.
Certain Cases
During the first quarter of 2016, Navient Corporation, certain Navient officers and directors, and the
underwriters of certain Navient securities offerings were sued in three putative securities class action lawsuits filed on
behalf of certain investors in Navient stock or Navient unsecured debt. These three cases, which were filed in the
25
U.S. District Court for the District of Delaware, were consolidated by the District Court, with Lord Abbett Funds
appointed as Lead Plaintiff. The caption of the consolidated case is Lord Abbett Affiliated Fund, Inc., et al. v. Navient
Corporation, et al. The plaintiffs filed their amended and consolidated complaint in September 2016. In September
2017, the Court granted the Navient defendants’ motion and dismissed the complaint in its entirety with leave to
amend. The plaintiffs filed a second amended complaint with the court in November 2017 and the Navient defendants
filed a motion to dismiss the second amended complaint in January 2018. In January 2019, the Court granted-in-part
and denied-in-part the Navient defendants’ motion to dismiss. The Navient defendants deny the allegations and
intend to vigorously defend against the allegation in this lawsuit. Additionally, two putative class actions have been
filed in the U.S. District Court for the District of New Jersey captioned Eli Pope v. Navient Corporation, John F.
Remondi, Somsak Chivavibul and Christian Lown, and Melvin Gross v. Navient Corporation, John F. Remondi,
Somsak Chivavibul and Christian M. Lown, both of which allege violations of the federal securities laws under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. These cases were consolidated by the Court in
February 2018, the plaintiffs filed a consolidated amended complaint in April 2018 and the Company filed a motion to
dismiss in June 2018. The Company has denied the allegations and intends to vigorously defend itself.
The Company has been named as defendant in a number of putative class action cases alleging violations of
various state and federal consumer protection laws including the Telephone Consumer Protection Act (“TCPA”), the
Consumer Financial Protection Act of 2010 (“CFPA”), the Fair Credit Reporting Act (“FCRA”), the Fair Debt Collection
Practices Act (“FDCPA”) and various other state consumer protection laws. The Company has also been named as a
defendant in putative class actions alleging violations of various state and federal consumer protection laws related to
borrowers and the Public Service Loan Forgiveness program. The Company denies the allegations and intends to
vigorously defend against the allegations.
In January 2017, the Consumer Financial Protection Bureau (the “CFPB”) and Attorneys General for the State
of Illinois and the State of Washington initiated civil actions naming Navient Corporation and several of its
subsidiaries as defendants alleging violations of certain Federal and State consumer protection statutes, including the
CFPA, FCRA, FDCPA and various state consumer protection laws. In October 2017, the Attorney General for the
Commonwealth of Pennsylvania initiated a civil action against Navient Corporation and Navient Solutions, LLC
(“Solutions”), containing similar alleged violations of the CFPA and the Pennsylvania Unfair Trade Practices and
Consumer Protection Law. Additionally, the Attorneys General for the States of California and Mississippi recently
initiated similar actions against the Company and certain subsidiaries alleging violations of various state and federal
consumer protection laws. In addition to these matters, a number of lawsuits have been filed by nongovernmental
parties or, in the future, may be filed by additional governmental or nongovernmental parties seeking damages or
other remedies related to similar issues raised by the CFPB and the State Attorneys General. As the Company has
previously stated, we believe the suits improperly seek to impose penalties on Navient based on new, unannounced
servicing standards applied retroactively only against one servicer, and that the allegations are false. We therefore
have denied these allegations and intend to vigorously defend against the allegations in each of these cases. For
additional information on these civil actions, please refer to section entitled “Regulatory Matters” below.
At this point in time, the Company is unable to anticipate the timing of a resolution or the impact that these legal
proceedings may have on the Company’s consolidated financial position, liquidity, results of operation or cash flows.
As a result, it is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be
payable in connection with these matters and reserves have not been established. It is possible that an adverse
ruling or rulings may have a material adverse impact on the Company.
Regulatory Matters
In addition, Navient and its subsidiaries are subject to examination or regulation by the SEC, CFPB, FFIEC,
ED and various state agencies as part of its ordinary course of business. Items or matters similar to or different from
those described above may arise during the course of those examinations. We also routinely receive inquiries or
requests from various regulatory entities or bodies or government agencies concerning our business or our assets.
Generally, the Company endeavors to cooperate with each such inquiry or request.
As previously disclosed, the Company and various of its subsidiaries have been subject to the following
investigations and inquiries:
•
•
In December 2013, Navient received Civil Investigative Demands (“CIDs”) issued by the Illinois Attorney
General, the Washington Attorney General and multiple other State Attorneys General. According to the
CIDs, the investigations were initiated to ascertain whether any practices declared to be unlawful under the
Consumer Fraud and Deceptive Business Practices Act have occurred or are about to occur. The Company
subsequently received separate but similar CIDs or subpoenas from the Attorneys General for the District of
Columbia, Kansas, Oregon, Colorado, New Jersey and New York. We may receive additional CIDs or
subpoenas from these or other Attorneys General with respect to similar or different matters.
In April 2014, Solutions received a CID from the CFPB as part of the CFPB’s separate investigation
regarding allegations relating to Navient’s disclosures and assessment of late fees and other matters.
Navient has received a series of supplemental CIDs on these matters. In August 2015, Solutions received a
letter from the CFPB notifying Solutions that, in accordance with the CFPB’s discretionary Notice and
Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of Enforcement was considering
26
recommending that the CFPB take legal action against Solutions. The NORA letter related to a previously
disclosed investigation into Solutions’ disclosures and assessment of late fees and other matters and states
that, in connection with any action, the CFPB may seek restitution, civil monetary penalties and corrective
action against Solutions. The Company responded to the NORA letter in September 2015.
In November 2014, Pioneer received a CID from the CFPB as part of an investigation regarding Pioneer’s
activities relating to rehabilitation loans and collection of defaulted student debt.
In December 2014, Solutions received a subpoena from the New York Department of Financial Services
(the “NY DFS”) as part of the NY DFS’s inquiry with regard to whether persons or entities have engaged in
fraud or misconduct with respect to a financial product or service under New York Financial Services Law or
other laws.
•
•
In January 2017, the CFPB initiated a civil action naming Navient Corporation and several of its subsidiaries as
defendants alleging violations of Federal and State consumer protection statutes, including the DFPA, FCRA, FDCPA
and various state consumer protection laws. The CFPB, Washington Attorney General and Illinois Attorney General
lawsuits relate to matters which were covered under the CIDs or the NORA letter discussed above. In addition,
various State Attorneys General have filed suits alleging violations of various state and federal consumer protection
laws covering matters similar to those covered by the CIDs or the NORA letter. As stated above, we have denied
these allegations and intend to vigorously defend against the allegations in each of these cases.
Under the terms of the Separation and Distribution Agreement between the Company and SLM BankCo,
Navient has agreed to indemnify SLM BankCo for all claims, actions, damages, losses or expenses that may arise
from the conduct of activities of pre-Spin-Off SLM BankCo occurring prior to the Spin-Off other than those specifically
excluded in the Separation and Distribution Agreement. As a result, subject to the terms, conditions and limitations
set forth in the Separation and Distribution Agreement, Navient has agreed to indemnify and hold harmless Sallie
Mae and its subsidiaries, including Sallie Mae Bank from liabilities arising out of the regulatory matters and CFPB and
State Attorneys General lawsuits mentioned above. Navient has asserted various claims for indemnification against
Sallie Mae and Sallie Mae Bank for such specifically excluded items arising out of the CFPB and the State Attorneys
General lawsuits if and to the extent any indemnified liabilities exist now or in the future. Navient has no additional
reserves related to indemnification matters with SLM BankCo as of December 31, 2018.
OIG Audit
The Office of the Inspector General (the “OIG”) of ED commenced an audit regarding Special Allowance
Payments (“SAP”) on September 10, 2007. In September 2013, we received the final audit determination of Federal
Student Aid (the “Final Audit Determination”) on the final audit report issued by the OIG in August 2009 related to this
audit. The Final Audit Determination concurred with the final audit report issued by the OIG and instructed us to make
adjustments to our government billing to reflect the policy determination. In August 2016, we filed our notice of appeal
to the Administrative Actions and Appeals Service Group of ED. A hearing was held in April 2017 and a ruling has not
yet been issued. We continue to believe that our SAP billing practices were proper, considering then-existing ED
guidance and lack of applicable regulations. The Company established a reserve for this matter in 2014 and does not
believe, at this time, that an adverse ruling would have a material effect on the Company as a whole.
Item 4. Mine Safety Disclosures
N/A
27
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock is listed and traded on the NASDAQ under the symbol NAVI. As of January 31, 2019,
there were 244,507,321 shares of our common stock outstanding and 320 holders of record.
The following table presents the high and low sales prices for Navient’s common stock for each quarter within
the two most recent fiscal years.
2018
1st Quarter (Jan 1 — Mar 31, 2018)
2nd Quarter (May 1 — Jun 30, 2018)
3rd Quarter (Jul 1 — Sep 30, 2018)
4th Quarter (Oct 1 — Dec 31, 2018)
2017
1st Quarter (Jan 1 — Mar 31, 2017)
2nd Quarter (May 1 — Jun 30, 2017)
3rd Quarter (Jul 1 — Sep 30, 2017)
4th Quarter (Oct 1 — Dec 31, 2017)
Sales Price
High
Low
$
$
14.87 $
15.03
14.48
13.91
17.05 $
16.97
16.93
15.10
12.60
12.38
12.91
8.23
13.67
13.36
13.09
11.48
We paid quarterly cash dividends on our common stock of $0.16 per share for each quarter of 2017 and 2018.
Issuer Purchases of Equity Securities
The following table provides information relating to our purchases of shares of our common stock in the three
months ended December 31, 2018.
Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans
or
Programs(2)
Approximate
Dollar
Value
of Shares
that
May Yet Be
Purchased
Under
Publicly
Announced
Plans or
Programs(2)
Total
Number
of Shares
Purchased(1)
Average
Price
Paid per
Share
2.8 $
5.6
2.3
10.7 $
12.51
11.94
10.67
11.81
2.8 $
5.5 $
2.3 $
10.6
520
460
440
(In millions, except per share data)
Period:
Oct 1 – Oct 31, 2018
Nov 1 – Nov 30, 2018
Dec 1 – Dec 31, 2018
Total fourth quarter
(1)
(2)
The total number of shares purchased includes: (i) shares purchased under the stock repurchase program discussed below and (ii) shares of
our common stock tendered to us to satisfy the exercise price in connection with cashless exercise of stock options, and tax withholding
obligations in connection with exercise of stock options and vesting of restricted stock and restricted stock units.
In September 2018, our board of directors authorized us to purchase up to $500 million of shares of our common stock.
28
Stock Performance
The following performance graph compares the monthly dollar change in our cumulative total shareholder
return on our common stock to that of the S&P 400 Financials and the S&P Midcap 400 Index following the Spin-
Off on April 30, 2014. The graph assumes a base investment of $100 at May 1, 2014 and reinvestment of dividends
through December 31, 2018.
Cumulative Total Stockholder Return since Spin-Off
Company/Index
Navient Corporation
S&P 400 Financials
S&P Midcap 400 Index
Source: Bloomberg Total Return Analysis
12/31/14
12/31/15
12/31/16
12/31/17
$
130.4 $
110.8
108.0
72.1 $
116.5
105.6
108.3 $
151.2
127.5
92.0 $
172.2
148.2
12/31/18
64.0
144.7
131.8
29
Item 6. Selected Financial Data.
Selected Financial Data 2014-2018
(Dollars in millions, except per share amounts)
The following table sets forth our selected financial and other operating information prepared in accordance
with GAAP. The selected financial data in the table is derived from our consolidated financial statements. The data
should be read in conjunction with the consolidated financial statements, related notes, and Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
Operating Data:
Net interest income
Net income:
Continuing operations, net of tax
Discontinued operations, net of tax
Net income (loss)(1)
Basic earnings (loss) per common share:
Continuing operations
Discontinued operations
Total(1)
Diluted earnings (loss) per common share:
Continuing operations
Discontinued operations
Total(1)
Dividends per common share
Return on common stockholders’ equity
Net interest margin
Return on assets
Dividend payout ratio
Average equity/average assets
Balance Sheet Data:
Education loans, net
Total assets
Total borrowings
Total Navient Corporation stockholders’ equity
Book value per common share
$
$
$
$
$
$
$
$
2018
2017
2016
2015
2014
1,240
$
1,412
$
1,705
$
2,221
$
2,667
395
—
395
1.52
—
1.52
$
$
$
$
$
1.49
—
$
1.49
.64
$
11%
1.17
.37
43
3.34
$
$
$
$
$
$
$
8%
292
—
292
1.06
—
1.06
1.04
—
1.04
.64
1.24
.26
62
3.04
681
—
681
2.15
—
2.15
$
$
$
$
$
2.12
—
$
2.12
.64
$
18%
1.38
.55
30
2.90
983
1
984
2.62
—
2.62
$
$
$
$
$
2.58
—
$
2.58
.64
$
25%
1.64
.73
25
2.82
1,137
—
1,137
2.71
—
2.71
2.66
—
2.66
.60
26%
1.89
.80
23
3.12
$ 94,498
104,176
98,941
3,519
14.22
$ 105,122
114,991
109,783
3,454
13.13
$ 111,070
121,136
114,702
3,699
12.72
$ 122,796
134,046
127,403
3,909
11.22
$ 134,241
146,299
139,529
4,144
10.32
(1)
Results include $208 million reduction to our deferred tax asset (“DTA Remeasurement Loss”) recorded in 2017 due to the “Tax Cuts and Jobs
Act” (“TCJA”). See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Financial Measures
– Income Tax Expense” for further discussion.
30
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis
also contains forward-looking statements and should also be read in conjunction with the disclosures and
information contained in “Forward-Looking and Cautionary Statements” and Item 1A. “Risk Factors” in this
Annual Report on Form 10-K.
Through this discussion and analysis, we intend to provide the reader with some narrative context for how our
management views our consolidated financial statements, additional context within which to assess our operating
results, and information on the quality and variability of our earnings, liquidity and cash flows.
Selected Historical Financial Information and Ratios
(In millions, except per share data)
GAAP Basis
Net income(1)
Diluted earnings per common share(1)
Weighted average shares used to compute diluted earnings per share
Net interest margin, Federal Education Loans segment
Net interest margin, Consumer Lending segment
Return on assets
Ending FFELP Loans, net
Ending Private Education Loans, net
Ending total education loans, net
Average FFELP Loans
Average Private Education Loans
Average total education loans
Core Earnings Basis(2)
Net income(1)
Diluted earnings per common share(1)
Adjusted diluted earnings per common share(3)
Weighted average shares used to compute diluted earnings per share
Net interest margin, Federal Education Loans segment
Net interest margin, Consumer Lending segment
Return on assets
Ending FFELP Loans, net
Ending Private Education Loans, net
Ending total education loans, net
Average FFELP Loans
Average Private Education Loans
Average total education loans
$
$
$
$
$
$
$
$
$
$
$
$
$
Years Ended December 31,
2017
2016
2018
$
$
395
1.49
264
.73%
3.32%
.37%
$
72,253
22,245
94,498
76,971
23,281
100,252
$
$
$
$
$
$
519
1.96
2.09
264
.83%
3.24%
.49%
$
72,253
22,245
94,498
76,971
23,281
100,252
$
$
$
$
$
292
1.04
281
.81%
3.38%
.26%
$
81,703
23,419
105,122
84,989
23,762
108,751
$
$
$
$
$
$
251
.89
1.79
281
.79%
3.33%
.22%
$
81,703
23,419
105,122
84,989
23,762
108,751
$
$
$
681
2.12
322
.98%
3.36%
.55%
87,730
23,340
111,070
92,497
25,361
117,858
587
1.82
1.86
322
.86%
3.41%
.48%
87,730
23,340
111,070
92,497
25,361
117,858
(1)
(2)
(3)
Results include a $208 million and $224 million DTA Remeasurement Loss in 2017 on a GAAP and Core Earnings basis, respectively, in
connection with the enactment of the TCJA in December 2017. See “Key Financial Measures – Income Tax Expense” for further
discussion.
Core Earnings are non-GAAP financial measures. For an explanation and reconciliation of Core Earnings, see the section titled “Non-
GAAP Financial Measures – Core Earnings.”
Adjusted diluted Core Earnings per share excludes (1) $42 million, $43 million and $17 million of restructuring and regulatory-related
expenses in 2018, 2017 and 2016, respectively, and (2) the $224 million DTA Remeasurement Loss in 2017.
31
Overview
The following discussion and analysis presents a review of our business and operations as of and for the year
ended December 31, 2018. We monitor and assess our ongoing operations and results based on the following four
reportable operating segments: Federal Education Loans, Consumer Lending, Business Processing and Other.
Federal Education Loans Segment
In this segment, Navient holds and acquires FFELP Loans and performs servicing and asset recovery services
on its own loan portfolio, federal education loans owned by ED and other institutions. Although FFELP Loans are
no longer originated, we continue to pursue acquisitions of FFELP Loan portfolios as well as servicing and asset
recovery services contracts. These acquisitions leverage our servicing scale and generate incremental earnings and
cash flow. In this segment, we generate revenue primarily through net interest income on the FFELP Loan portfolio
(after provision for loan losses) as well as servicing and asset recovery services revenue. This segment is expected to
generate significant amounts of earnings and cash flow over the remaining life of the portfolio.
Consumer Lending Segment
In this segment, Navient holds, originates and acquires consumer loans and performs servicing activities on its
own education loan portfolio. Originations and acquisitions leverage our servicing scale and generate incremental
earnings and cash flow. In this segment, we generate revenue primarily through net interest income on the Private
Education Loan portfolio (after provision for loan losses). This segment is expected to generate significant amounts
of earnings and cash flow over the remaining life of the portfolio.
Business Processing Segment
In this segment, Navient performs revenue cycle management and business processing services for over 600
non-education related government and healthcare clients. Our integrated solutions technology and superior data
driven approach allows state governments, agencies, court systems, municipalities, and toll authorities (Government
Services) to reduce their operating expenses while maximizing revenue opportunities. Healthcare services include
revenue cycle outsourcing, accounts receivable management, extended business office support and consulting
engagements. We offer customizable solutions for our clients that include non-profit/religious-affiliated hospital
systems, teaching hospitals, urban medical centers, for-profit healthcare systems, critical access hospitals, children’s
hospitals and large physician groups.
Other
This segment primarily consists of our corporate liquidity portfolio and the repurchase of debt, unallocated
expenses of shared services, restructuring/other reorganization expenses, and the deferred tax asset remeasurement
loss recognized due to the enactment of the TCJA in the fourth quarter of 2017.
Unallocated expenses of shared services are comprised of costs primarily related to certain executive
management, the board of directors, accounting, finance, legal, human resources, compliance and risk management,
regulatory-related costs, stock-based compensation expense, and information technology costs related to
infrastructure and operations. Regulatory-related costs include actual settlement amounts as well as third-party
professional fees we incur in connection with regulatory matters.
Key Financial Measures
Our operating results are primarily driven by net interest income, provisions for loan losses and expenses
incurred in our education loan portfolios; the revenues and expenses generated by our servicing, asset recovery and
business processing businesses; gains and losses on loan sales and debt repurchases; and income tax expense. A
brief summary of our key financial measures is listed below.
Net Interest Income
The most significant portion of our earnings is generated by the spread earned between the interest income we
receive on assets in our education loan portfolios and the interest expense on debt funding these loans. We report
32
these earnings as net interest income. Net interest income in our Federal Education Loans and Consumer Lending
segments are driven by significantly different factors.
Federal Education Loans Segment
Net interest income on the FFELP Loans will be the primary source of net income generated by this segment.
We expect this portfolio to have an amortization period in excess of 20 years with a 7-year remaining weighted
average life. Interest earned on our FFELP Loans is primarily indexed to daily one-month LIBOR and our cost of
funds is primarily indexed to rates other than daily one-month LIBOR, creating the possibility of basis and repricing
risk related to these assets. The Federal Education Loans segment’s Core Earnings net interest margin was
0.83 percent in 2018 compared with 0.79 percent in 2017. At December 31, 2018, 87 percent of our FFELP Loan
portfolio was funded to term with non-recourse, long-term securitization debt. As of December 31, 2018, we had
$72.3 billion of FFELP Loans outstanding, compared with $81.7 billion outstanding at December 31, 2017.
A source of variability in net interest income could be Floor Income we earn on certain FFELP Loans.
Pursuant to the terms of the FFELP, certain FFELP Loans can earn interest at the stated fixed rate of interest as
underlying debt interest rate expense remains variable. We refer to this additional spread income as “Floor Income.”
Floor Income can be volatile since it is dependent on interest rate levels. We frequently hedge this volatility with
derivatives which lock in the value of the Floor Income over the term of the contract.
Consumer Lending Segment
Net interest income on the Private Education Loans will be the primary source of net income generated by this
segment. We expect this portfolio to have an amortization period in excess of 20 years with a 5-year remaining
weighted average life. Interest earned on our Private Education Refinance Loans is generally fixed rate with the
related cost of funds generally fixed rate as well. Interest earned on the remaining Private Education Loans is
generally indexed to either Prime or one-month LIBOR rates and our cost of funds is primarily indexed to one-
month or three-month LIBOR, creating the possibility of basis and repricing risk related to these assets. The
Consumer Lending segment’s Core Earnings net interest margin was 3.24 percent in 2018 compared with
3.33 percent in 2017. At December 31, 2018, 57 percent of our Private Education Loan portfolio was funded to term
with non-recourse, long-term securitization debt. As of December 31, 2018, we had $22.2 billion of Private
Education Loans outstanding, compared with $23.4 billion outstanding at December 31, 2017.
Provisions for Loan Losses
Management estimates and maintains an allowance for loan losses at a level sufficient to cover charge-offs
expected over the next two years, plus an additional allowance to cover life-of-loan expected losses for loans
classified as a troubled debt restructuring (“TDR”). The provision for loan losses increases the related allowance for
loan losses. Generally, the provision for loan losses rises when future charge-offs are expected to increase and falls
when future charge-offs are expected to decline. Our loss exposure and resulting provision for loan losses is
relatively small for FFELP Loans because we generally bear a maximum of 3 percent loss exposure on defaults. We
bear the full credit exposure on our Private Education Loans. Our provision for FFELP Loan losses in our Federal
Education Loans segment was $70 million in 2018 compared with $42 million in 2017. Losses in our Consumer
Lending segment are determined by risk characteristics, such as school type, loan status (in-school, grace,
forbearance, repayment and delinquency), loan seasoning (number of months a payment has been made by a
customer), underwriting criteria (e.g., credit scores), existence of a cosigner and the current economic environment.
Our provision for Private Education Loan losses in our Consumer Lending segment was $299 million in 2018
compared with $382 million in 2017.
Charge-Offs and Delinquencies
When we conclude a loan is uncollectible, the unrecoverable portion of the loan is charged against the
allowance for loan losses in the applicable segment. Charge-off data provides relevant information with respect to
the performance of our loan portfolios. Management focuses on delinquencies as well as the progression of loans
from early to late stage delinquency. The Consumer Lending segment’s charge-offs, excluding the $32 million of
charge-offs on the receivable for partially charged-off loans that occurred as a result of changing the charge-off rate
on defaulted loans from 79 percent to 80.5 percent in third-quarter 2018, decreased to $371 million in 2018, down
$72 million from $443 million in 2017. Delinquencies are a very important indicator of the potential future credit
performance. Private Education Loan delinquencies decreased to $1.3 billion in 2018, down $38 million from 2017.
33
The Federal Education Loans segment’s delinquencies decreased to $6.1 billion in 2018, down $2.5 billion from
2017. Charge-offs increased to $54 million in 2018 compared with $49 million in 2017.
Servicing, Asset Recovery and Business Processing Revenues
We earn servicing revenues from servicing education loans which is primarily driven by the underlying
volume of loans we are servicing on behalf of others. We earn asset recovery revenue primarily related to default
aversion and post-default collection work we perform on education loans and on various receivables on behalf of our
federal, state, court and municipal clients. The fees we recognize are primarily driven by our success in collecting or
rehabilitating defaulted or delinquent loans and receivables. We also earn business processing revenue related to
transaction processing we perform on behalf of our municipal, public authority and healthcare clients. The fees we
recognize are primarily driven by the number of transactions processed.
Other Income / (Loss)
In managing our loan portfolios and funding sources, we periodically engage in sales of loans and the
repurchase of our outstanding debt. In each case, depending on market conditions, we may incur gains or losses
from these transactions that affect our results from operations.
Operating Expenses
The operating expenses reported for our Federal Education Loans, Consumer Lending and Business
Processing segments are those that are directly attributable to the generation of revenues by those segments. We
include unallocated shared services expenses as well as restructuring/other reorganization costs in our Other
segment. Unallocated shared services expenses primarily include executive management, the board of directors,
accounting, finance, legal, human resources, compliance and risk management, regulatory-related costs and stock-
based compensation expense and certain information technology costs related to infrastructure and operations.
Regulatory-related costs include actual settlement amounts as well as third-party professional fees we incur in
connection with regulatory matters.
Income Tax Expense
The TCJA, enacted on December 22, 2017, made significant changes to all aspects of income taxation,
including a reduction to the corporate federal statutory tax rate. GAAP requires the effects of the TCJA to be
recognized in the period the law is enacted, even though the effective date of the law for most provisions is January
1, 2018. The primary impact to us is the reduction to the corporate federal statutory tax rate from 35 percent to 21
percent as of January 1, 2018. This rate reduction required us to remeasure our deferred tax asset at December 31,
2017, at the 21 percent corporate federal statutory tax rate and resulted in a DTA Remeasurement Loss of $208
million for GAAP and $224 million for Core Earnings, which is reflected as incremental income tax expense in
2017. This non-cash remeasurement adjustment is included in the Other segment. Income tax expense in 2018 was
significantly benefitted as our corporate federal statutory tax rate was 21 percent compared to 35 percent in previous
years.
Core Earnings
We report financial results on a GAAP basis and also present certain Core Earnings performance measures.
Our management, equity investors, credit rating agencies and debt capital providers use these Core Earnings
measures to monitor our business performance. Core Earnings is the basis in which we prepare our segment
disclosures as required by GAAP under ASC 280, “Segment Reporting” (see “Note 16 — Segment Reporting”). For
a full explanation of the contents and limitations of Core Earnings, see the section titled “Non-GAAP Financial
Measures — Core Earnings” of this Item 7.
34
2018 Summary of Results
2018 GAAP net income was $395 million ($1.49 diluted earnings per share), versus net income of
$292 million ($1.04 diluted earnings per share) in the prior year. The changes in GAAP net income are impacted by
the same Core Earnings items discussed below, as well as changes in net income attributable to (1) mark-to-market
gains/losses on derivatives and (2) goodwill and acquired intangible asset amortization and impairment. These items
are recognized in GAAP but are not included in Core Earnings results. In 2018, GAAP results included losses of
$90 million from derivative accounting treatment that are excluded from Core Earnings results, compared with gains
of $45 million in the prior year. See “Non-GAAP Financial Measures – Core Earnings” for a complete
reconciliation between GAAP net income and Core Earnings.
Core Earnings for the year were $519 million ($1.96 diluted Core Earnings per share), compared with
$251 million ($0.89 diluted Core Earnings per share) for 2017. Full-year 2018 and 2017 adjusted diluted Core
Earnings per share were $2.09 and $1.79, respectively (excludes restructuring and regulatory-related expenses of
$42 million and $43 million, respectively, and the $224 million DTA Remeasurement Loss recorded in 2017 due to
the TCJA). This increase in adjusted earnings per share was primarily due to a reduction in income tax expense due
to the TCJA.
Highlights of 2018 include:
• closed on a strategic agreement with First Data related to Navient’s student loan technology platform
creating a more effective long-term variable cost structure for the business;
• FFELP Loan delinquency rate at lowest level in over 10 years;
• contingent collections receivables inventory in our Federal Education Loans segment increased $13.3
billion, or 89 percent, from 2017 as a result of new placements;
• originated $2.8 billion of Private Education Refinance Loans;
• Private Education Loan provision declined $83 million;
• business processing fee revenue increased 26 percent to $267 million from 2017;
• contingent collections receivables inventory in our Business Processing segment increased 26 percent to
$14.4 billion from 2017 as a result of new placements;
• repurchased 17.4 million common shares for $220 million;
• authorized $500 million to be utilized in a new share repurchase program, with $440 million repurchase
program outstanding at year-end;
• paid $166 million in common dividends;
• the tangible net asset ratio was 1.25x at December 31, 2018;
• issued $4.0 billion of FFELP asset-backed securities (“ABS”), $3.0 billion of Private Education Loan ABS
and $500 million of unsecured debt; and
• retired $3.0 billion of senior unsecured debt.
35
Results of Operations
We present the results of operations below first on a consolidated basis in accordance with GAAP. Following
our discussion of consolidated earnings results on a GAAP basis, we present our results on a segment basis. We
have four reportable segments: Federal Education Loans, Consumer Lending, Business Processing and Other. These
segments operate in distinct business environments and we manage and evaluate the financial performance of these
segments using non-GAAP financial measures we call Core Earnings (see “Non-GAAP Financial Measures – Core
Earnings” for further discussion).
GAAP Consolidated Statements of Income
(Dollars in millions, except per share amounts)
Interest income
FFELP Loans
Private Education Loans
Other loans
Cash and investments
$
Total interest income
Total interest expense
Net interest income
Less: provisions for loan losses
Net interest income after provisions for loan losses
Other income (loss):
Servicing revenue
Asset recovery and business processing revenue
Other income
Gains on sales of loans and investments
Gains (losses) on debt repurchases
Gains (losses) on derivative and hedging
activities, net
Total other income
Expenses:
Operating expenses
Goodwill and acquired intangible assets
impairment and amortization expense
Restructuring/other reorganization expenses
Total expenses
Income from continuing operations, before income
tax expense
Income tax expense
Net income
Basic earnings per common share
Diluted earnings per common share
Dividends per common share
Years Ended December 31,
2017
2016
2018
Increase (Decrease)
2018 vs. 2017
$
%
2017 vs. 2016
$
%
3,027 $
1,778
6
97
4,908
3,668
1,240
370
870
2,693 $
1,634
13
43
4,383
2,971
1,412
426
986
2,528 $
1,587
9
22
4,146
2,441
1,705
429
1,276
334
144
(7)
54
525
697
(172)
(56)
(116)
12% $
9
(54)
126
12
23
(12)
(13)
(12)
274
430
17
—
19
(38)
702
290
475
9
3
(3)
22
796
304
390
7
—
1
117
819
(16)
(45)
8
(3)
22
(6)
(9)
89
(100)
(733)
(60)
(94)
(273)
(12)
165
47
4
21
237
530
(293)
(3)
(290)
(14)
85
2
3
(4)
(95)
(23)
7%
3
44
95
6
22
(17)
(1)
(23)
(5)
22
29
100
(400)
(81)
(3)
984
966
951
18
2
15
2
47
13
1,044
23
29
1,018
36
—
987
24
(16)
26
104
(55)
3
(13)
29
31
(36)
100
3
528
133
395 $
1.52 $
1.49 $
764
472
292 $
1.06 $
1.04 $
1,108
427
681 $
2.15 $
2.12 $
.64 $
.64 $
.64 $
(236)
(339)
103
.46
.45
—
(31)
(72)
35% $
(344)
45
(389)
43% $ (1.09)
43% $ (1.08)
(31)
11
(57)%
(51)%
(51)%
—% $
—
—%
$
$
$
$
36
Consolidated Earnings Summary — GAAP basis
Year Ended December 31, 2018 Compared with Year Ended December 31, 2017
Net income was $395 million, or $1.49 diluted earnings per common share, compared with net income of
$292 million, or $1.04 diluted earnings per common share, for the year-ago period.
The primary contributors to the increase in net income are as follows:
• Net interest income decreased by $172 million, primarily as a result of the natural paydown of the
education loan portfolio, as well as to a decline in the net interest margin. The decline in the net interest
margin was primarily due to a reduction in floor income on the FFELP Loans due to an increase in
interest rates.
• Provisions for loan losses decreased $56 million as a result of:
○ The provision for Private Education Loan losses declined $83 million from 2017. As a result of the
expiration of the temporary natural disaster forbearances granted at the end of 2017 and beginning
of 2018, loan delinquencies greater than 90-days increased by $17 million and forbearances
decreased by $219 million compared with the year-ago period, all as expected. Charge-offs
decreased by $72 million, excluding the $32 million related to a change in the portion of the loan
amount charged off at default (see “Reportable Segment Earnings Summary – Core Earnings Basis
– Consumer Lending Segment – Private Education Loan Provision for Loan Losses” for further
discussion). Outstanding Private Education Loans decreased $1.2 billion from the year-ago period.
These factors along with the continued improvement in the portfolio’s performance, resulted in the
$83 million decrease in provision.
○ The provision for FFELP Loan losses was $70 million, up $28 million from 2017 due to a higher
temporary charge-off estimate over the second-half of 2018 and first-half of 2019 as a result of an
elevated use of disaster forbearance at the end of 2017 and other factors.
• Asset recovery and business processing revenue decreased $45 million primarily due to the third-quarter
2017 recognition of $47 million of previously deferred asset recovery revenue, net of a reserve, related to
a terminated contract.
• Net gains on debt repurchases increased by $22 million. We repurchased $2.8 billion of debt in 2018
compared to $513 million repurchased in 2017. Debt repurchase activity fluctuates based on market
fundamentals and our liability management strategy. As a result, gains or losses on our debt repurchase
activity may vary in the future periods.
• Net gains on derivative and hedging activities decreased $60 million. The primary factors affecting the
change were interest rate and foreign currency fluctuations, which impact the valuations of our Floor
Income Contracts, basis swaps and foreign currency hedges during each period. Valuations of derivative
instruments fluctuate based upon many factors including changes in interest rates, credit risk, foreign
currency fluctuations and other market factors. As a result, net gains and losses on derivative and hedging
activities may vary significantly in future periods.
• Excluding regulatory-related costs of $29 million and $14 million, respectively, operating expenses were
$955 million and $952 million in 2018 and 2017, respectively. On an adjusted basis, expenses were $103
million lower primarily as a result of ongoing cost-saving initiatives across the Company. To make the
current year’s expense comparable to the year-ago period, adjusted expenses exclude $70 million of
operating cost increase from 2017 to 2018 related to Duncan Solutions (acquired in July 2017) and to
Earnest (acquired in November 2017), a $9 million one-time fee paid in 2018 to convert $3 billion of
Private Education Loans from a third-party servicer to Navient’s servicing platform, $51 million in
connection with the adoption of a new revenue recognition accounting standard on January 1, 2018 (see
below for further discussion), $16 million of costs in connection with the 2018 First Data transition
services agreement and the release of a $40 million contingency reserve in 2018 related to the resolution
of a contingency.
• During 2018 and 2017, the Company incurred $13 million and $29 million, respectively, of
restructuring/other reorganization expenses in connection with an effort to reduce costs and improve
operating efficiency. These charges were due primarily to severance-related costs.
• Acquired intangible asset impairment and amortization expense increased $24 million primarily as a
result of the termination of a Toll Services Contract in the third-quarter 2018 in our government services
reporting unit, which resulted in $16 million of impairment on the related intangible asset.
37
• The effective income tax rate decreased from 62 percent for 2017 to 25 percent for 2018 primarily due to
the TCJA. The TCJA resulted in the corporate federal statutory tax rate decreasing from 35 percent to 21
percent between the periods which also caused a $208 million reduction to our deferred tax asset which is
reflected as incremental tax expense in fourth-quarter 2017.
We repurchased 17.4 million and 29.6 million shares of our common stock during 2018 and 2017,
respectively. As a result, our average outstanding diluted shares decreased by 17 million common shares (or 6
percent) from the year-ago period.
As of January 1, 2018, we adopted Accounting Standard Codification (“ASC”) 606, “Revenue from
Contracts with Customers.” We determined there was no material change in the timing of our recognition of our
asset recovery and business processing revenue or expenses and we did not record a cumulative adjustment as of
January 1, 2018, as a result of the adoption of ASC 606. We recognized $8 million of revenue and $5 million of
expenses in 2018 related to a contract in our Business Processing segment that would not have been recognized
under the prior accounting standard until 2019.
The new guidance does not apply to financial instruments and transfers and servicing that are accounted for
under other GAAP. Accordingly, the new revenue recognition guidance does not have an impact on our recognition
of revenue and costs associated with our loan portfolios, investments, derivatives and servicing contracts. However,
we considered the ASC 606 principal versus agent guidance with respect to certain asset recovery guarantor
servicing contracts pursuant to which we serve in a portfolio management role and use third-party collection
agencies. We determined that we are required under the new accounting standard to reflect the revenue earned and
paid to third-party collection agencies as revenue and operating expense. Under the prior accounting standards, we
netted payments to third-party collection agencies against revenue. We adopted the new accounting standard using
the “cumulative effect transition adjustment” which results in prospectively making this change in 2018. This
change in accounting policy resulted in both asset recovery revenue and operating expense in the Federal Education
Loan segment being $46 million higher in 2018 with no impact on net income.
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
For the year ended December 31, 2017, net income was $292 million, or $1.04 diluted earnings per common
share, compared with net income of $681 million, or $2.12 diluted earnings per common share, for the year ended
December 31, 2016.
The primary contributors to the decrease in net income are as follows:
• Net interest income decreased by $293 million, primarily as a result of the amortization of the education
loan portfolio and a decline in the net interest margin. The decline in net interest margin was primarily
due to higher funding credit spreads, a reduction in floor income due to the increase in interest rates, and
the $28 million cumulative adjustment recorded in 2017 related to an increase in prepayment speed
assumptions used to amortize loan premiums and discounts. The $28 million net cumulative adjustment
was comprised of a $34 million acceleration of premium (expense) in the FFELP Loan portfolio and a
$6 million acceleration of discount (revenue) in the Private Education Loan portfolio.
• Asset recovery and business processing revenue increased $85 million primarily due to the recognition of
$47 million of previously deferred asset recovery revenue, net of a reserve, related to loans for which the
Company performs default aversion services. In connection with providing these services, a fee is
received when a loan is initially placed with us and we provide the services for the remaining life of the
loan for no additional fee. As a result, in accordance with GAAP, the fee was deferred net of estimated
rebates, and recognized as revenue as it was earned over the expected lives of the related loans. In the
third quarter of 2017, the Company was notified that it would no longer perform these services after 2017
due to the termination of the related contract as of December 31, 2017. In accordance with GAAP, we
recognized this previously deferred revenue during the third quarter of 2017 to reflect a shortened period
over which it is expected to be earned. In addition, there was also an increase in non-education related
revenue.
• Net gains on derivative and hedging activities decreased $95 million. The primary factors affecting the
change were interest rate and foreign currency fluctuations, which primarily affected the valuations of our
Floor Income Contracts, basis swaps and foreign currency hedges during each period. Valuations of
derivative instruments fluctuate based upon many factors including changes in interest rates, credit risk,
foreign currency fluctuations and other market factors. As a result, net gains and losses on derivative and
hedging activities may vary significantly in future periods.
38
•
In 2017 and 2016, we recorded regulatory-related costs of $14 million and $17 million, respectively.
Excluding these regulatory-related costs, operating expenses were $952 million, an $18 million increase
from 2016. The increase was primarily due to a $30 million increase in operating costs related to Duncan
Solutions (acquired in July 2017) and to Earnest (acquired in November 2017). This was partially offset
by a $12 million reduction in operating costs primarily as a result of ongoing cost-saving initiatives
across the Company.
• During the fourth quarter of 2017, the Company incurred $29 million of restructuring/other
reorganization expenses in connection with an effort that will reduce costs and improve operating
efficiency. These charges were due primarily to severance-related costs.
• The effective income tax rates for 2017 and 2016 were 62 percent and 39 percent, respectively. The
increase in the effective income tax rate was primarily the result of the $208 million DTA
Remeasurement Loss in connection with the enactment of the TCJA on December 22, 2017. GAAP
requires the effects of the TCJA to be recognized in the period the law is enacted, even though the
effective date of the law for most provisions is January 1, 2018. The primary impact to us was a
reduction to corporate federal statutory tax rate from 35 percent to 21 percent as of January 1, 2018. This
required us to remeasure our DTA at December 31, 2017, at the 21 percent corporate federal statutory tax
rate. This remeasurement resulted in a reduction of the DTA by $208 million for GAAP which is
reflected as incremental income tax expense in 2017.
We repurchased 29.6 million and 59.6 million shares of our common stock during the years ended
December 31, 2017 and 2016, respectively, as part of our common share repurchase programs. As a result, our
average outstanding diluted shares decreased by 41 million common shares (or 13 percent) from the year-ago period.
39
Non-GAAP Financial Measures
In addition to financial results reported on a GAAP basis, Navient also provides certain performance measures
which are non-GAAP financial measures. The following non-GAAP financial measures are presented within this
Form 10-K: (1) Core Earnings, (2) Tangible Net Asset Ratio and (3) EBITDA for the Business Processing segment.
1. Core Earnings
We prepare financial statements and present financial results in accordance with GAAP. However, we also
evaluate our business segments and present financial results on a basis that differs from GAAP. We refer to this
different basis of presentation as Core Earnings. We provide this Core Earnings basis of presentation on a
consolidated basis and for each business segment because this is what we review internally when making
management decisions regarding our performance and how we allocate resources. We also refer to this information
in our presentations with credit rating agencies, lenders and investors. Because our Core Earnings basis of
presentation corresponds to our segment financial presentations, we are required by GAAP to provide Core Earnings
disclosure in the notes to our consolidated financial statements for our business segments.
Core Earnings are not a substitute for reported results under GAAP. We use Core Earnings to manage our
business segments because Core Earnings reflect adjustments to GAAP financial results for two items, discussed
below, that can create significant volatility mostly due to timing factors generally beyond the control of
management. Accordingly, we believe that Core Earnings provide management with a useful basis from which to
better evaluate results from ongoing operations against the business plan or against results from prior periods.
Consequently, we disclose this information because we believe it provides investors with additional information
regarding the operational and performance indicators that are most closely assessed by management. When
compared to GAAP results, the two items we remove to result in our Core Earnings presentations are:
(1) Mark-to-market gains/losses resulting from our use of derivative instruments to hedge our economic
risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment
but result in ineffectiveness; and
(2) The accounting for goodwill and acquired intangible assets.
While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, our
Core Earnings basis of presentation does not. Core Earnings are subject to certain general and specific limitations
that investors should carefully consider. For example, there is no comprehensive, authoritative guidance for
management reporting. Our Core Earnings are not defined terms within GAAP and may not be comparable to
similarly titled measures reported by other companies. Accordingly, our Core Earnings presentation does not
represent a comprehensive basis of accounting. Investors, therefore, may not be able to compare our performance
with that of other financial services companies based upon Core Earnings. Core Earnings results are only meant to
supplement GAAP results by providing additional information regarding the operational and performance indicators
that are most closely used by management, our board of directors, credit rating agencies, lenders and investors to
assess performance.
40
The following tables show Core Earnings for each reportable segment and our business as a whole along with
the adjustments made to the income/expense items to reconcile the amounts to our reported GAAP results as
required by GAAP and reported in “Note 16 — Segment Reporting.”
Year Ended December 31, 2018
Adjustments
Federal
Education
Loans
Consumer
Lending
Business
Processing Other
Reclassi-
fications
Additions/
(Subtractions)
Total
Adjustments(1)
Total
GAAP
Total
Core
Earnings
(Dollars in millions)
Interest income:
Education loans
Other loans
Cash and investments
Total interest income
Total interest expense
Net interest income (loss)
Less: provisions for loan losses
Net interest income (loss) after provisions
for loan losses
Other income (loss):
Servicing revenue
Asset recovery and business processing
revenue
Other income (loss)
Gains on debt repurchases
Total other income (loss)
Expenses:
Direct operating expenses
Unallocated shared services expenses
Operating expenses
Goodwill and acquired intangible asset
impairment and amortization
Restructuring/other reorganization
expenses
Total expenses
Income (loss) before income tax expense
(benefit)
Income tax expense (benefit)(2)
Net income (loss)
$
3,080 $
4
46
3,130
2,467
663
70
1,778 $
2
13
1,793
1,013
780
300
— $ — $
— —
—
38
—
38
— 192
— (154 )
— —
4,858 $
6
97
4,961
3,672
1,289
370
17 $
—
—
17
8
9
—
593
480
— (154 )
919
9
— —
274
—
262
163
24
—
449
298
—
298
12
—
—
—
12
169
—
169
267 —
6
9
15
—
—
267
229 —
— 288
229 288
430
30
9
743
696
288
984
—
—
— —
—
—
298
744
164
580 $
—
169
323
71
252 $
—
13
229 301
38 (440 )
8
(97 )
30 $ (343 ) $
13
997
665
146
519 $
$
—
(22 )
13
(9 )
—
—
—
—
—
—
—
—
— $
(70 ) $
—
—
(70 )
(12 )
(58 )
—
(58 )
—
—
(29 )
(3 )
(32 )
—
—
—
47
—
47
(53 ) $ 4,805
—
6
—
97
(53 ) 4,908
(4 ) 3,668
(49 ) 1,240
—
370
(49 )
870
—
274
—
(51 )
10
(41 )
—
—
—
430
(21 )
19
702
696
288
984
47
47
—
13
47 1,044
(137 )
(13 )
(124 ) $
528
(137 )
(13 )
133
(124 ) $ 395
(1)
Core Earnings” adjustments to GAAP:
(Dollars in millions)
Net interest income (loss) after provisions for loan losses
Total other income (loss)
Goodwill and acquired intangible asset impairment and amortization
Total Core Earnings adjustments to GAAP
Income tax expense (benefit)
Net income (loss)
Year Ended December 31, 2018
Net Impact
of
Acquired
Intangibles
Net Impact
of
Derivative
Accounting
Total
$
$
(49 ) $
(41 )
—
(90 ) $
— $
—
47
(47 )
$
(49 )
(41 )
47
(137 )
(13 )
(124 )
(2)
Income taxes are based on a percentage of net income before tax for the individual reportable segment.
41
Year Ended December 31, 2017
Adjustments
Federal
Education
Loans
Consumer
Lending
Business
Processing Other
Reclassi-
fications
Additions/
(Subtractions)
Total
Adjustments(1)
Total
GAAP
Total
Core
Earnings
(Dollars in millions)
Interest income:
Education loans
Other loans
Cash and investments
Total interest income
Total interest expense
Net interest income (loss)
Less: provisions for loan losses
Net interest income (loss) after provisions
for loan losses
Other income (loss):
Servicing revenue
Asset recovery and business processing
revenue
Other income (loss)
Gains on sales of loans and investments
Losses on debt repurchases
Total other income (loss)
Expenses:
Direct operating expenses
Unallocated shared services expenses
Operating expenses
Goodwill and acquired intangible asset
impairment and amortization
Restructuring/other reorganization
expenses
Total expenses
Income (loss) before income tax expense
(benefit)
Income tax expense (benefit)(2)
Net income (loss)
$
(1)
Core Earnings adjustments to GAAP:
$
2,679 $
13
29
2,721
2,022
699
44
1,634 $
—
5
1,639
825
814
382
— $ — $
— —
—
9
—
9
— 143
— (134 )
— —
4,313 $
13
43
4,369
2,990
1,379
426
69 $
—
—
69
(8 )
77
—
655
432
— (134 )
953
77
— —
290
—
280
263
3
3
—
549
316
—
316
10
—
—
—
—
10
156
—
156
212 —
—
16
— —
—
(3 )
13
212
187 —
— 307
187 307
475
19
3
(3 )
784
659
307
966
—
—
— —
—
—
316
888
321
567 $
—
156
286
103
183 $
—
29
187 336
25 (457 )
58
9
16 $ (515 ) $
29
995
742
491
251 $
—
(77 )
—
—
(77 )
—
—
—
—
—
—
—
—
— $
(55 ) $
—
—
(55 )
(11 )
(44 )
—
(44 )
—
—
89
—
—
89
—
—
—
23
—
23
22
(19 )
41 $
14 $ 4,327
—
13
—
43
14 4,383
(19 ) 2,971
33 1,412
—
426
33
986
—
290
—
12
—
—
12
—
—
—
475
31
3
(3 )
796
659
307
966
23
23
—
29
23 1,018
764
22
472
(19 )
41 $ 292
(Dollars in millions)
Net interest income after provisions for loan losses
Total other income (loss)
Goodwill and acquired intangible asset impairment and amortization
Total Core Earnings adjustments to GAAP
Income tax expense (benefit)
Net income (loss)
Year Ended December 31, 2017
Net Impact
of
Acquired
Intangibles
Net Impact
of
Derivative
Accounting
Total
$
$
33 $
12
—
45 $
— $
—
23
(23 )
$
33
12
23
22
(19 )
41
(2)
Income taxes are based on a percentage of net income before tax for the individual reportable segment with the impact of the DTA Remeasurement
Loss included in the Other segment.
42
(Dollars in millions)
Interest income:
Education loans
Other loans
Cash and investments
Total interest income
Total interest expense
Net interest income (loss)
Less: provisions for loan losses
Net interest income (loss) after provisions
for loan losses
Other income (loss):
Servicing revenue
Asset recovery and business processing
revenue
Other income (loss)
Gains on debt repurchases
Total other income (loss)
Expenses:
Direct operating expenses
Unallocated shared services expenses
Operating expenses
Goodwill and acquired intangible asset
impairment and amortization
Restructuring/other reorganization
expenses
Total expenses
Income (loss) before income tax expense
(benefit)
Income tax expense (benefit)(2)
Net income (loss)
Year Ended December 31, 2016
Adjustments
Federal
Education
Loans
Consumer
Lending
Business
Processing Other
Reclassi-
fications
Additions/
(Subtractions)
Total
Adjustments(1)
Total
GAAP
Total
Core
Earnings
$
2,395 $
9
16
2,420
1,597
823
46
1,587 $
—
2
1,589
704
885
383
— $ — $
— —
—
4
—
4
— 109
— (105 )
— —
3,982 $
9
22
4,013
2,410
1,603
429
247 $
—
—
247
31
216
—
(114 ) $
—
—
(114 )
—
(114 )
—
—
—
133 $ 4,115
9
22
133 4,146
31 2,441
102 1,705
429
—
777
502
— (105 )
1,174
216
(114 )
102 1,276
289
216
—
—
505
366
—
366
15
—
—
—
15
149
—
149
— —
304
—
174 —
14
1
15
—
—
174
149 —
— 287
149 287
390
14
1
709
664
287
951
—
(216 )
—
(216 )
—
—
—
—
—
— —
—
—
—
366
916
338
578 $
—
149
368
137
231 $
— —
149 287
25 (377 )
9 (139 )
16 $ (238 ) $
—
951
932
345
587 $
—
—
—
—
— $
$
—
—
326
—
326
—
—
—
36
—
36
176
82
94 $
—
304
—
110
—
110
—
—
—
390
124
1
819
664
287
951
36
36
— —
987
36
176 1,108
82
427
94 $ 681
(1)
Core Earnings adjustments to GAAP:
(Dollars in millions)
Net interest income after provisions for loan losses
Total other income (loss)
Goodwill and acquired intangible asset impairment and amortization
Total Core Earnings adjustments to GAAP
Income tax expense (benefit)
Net income (loss)
Year Ended December 31, 2016
Net Impact
of
Acquired
Intangibles
Net Impact
of
Derivative
Accounting
Total
$
$
102 $
110
—
212 $
— $
—
36
(36 )
$
102
110
36
176
82
94
(2)
Income taxes are based on a percentage of net income before tax for the individual reportable segment.
43
The following discussion summarizes the differences between Core Earnings and GAAP net income and
details each specific adjustment required to reconcile our Core Earnings segment presentation to our GAAP
earnings.
(Dollars in millions)
Core Earnings net income
Core Earnings adjustments to GAAP:
Net impact of derivative accounting
Net impact of goodwill and acquired intangible assets
Net income tax effect
Total Core Earnings adjustments to GAAP
GAAP net income
Years Ended December 31,
2017
2016
2018
$
519 $
251 $
(90)
(47)
13
(124)
395 $
45
(23)
19
41
292 $
$
587
212
(36)
(82)
94
681
(1) Derivative Accounting: Core Earnings exclude periodic gains and losses that are caused by the mark-
to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP, as well as the
periodic mark-to-market gains and losses that are a result of ineffectiveness recognized related to effective hedges
under GAAP. These gains and losses occur in our Federal Education Loans, Consumer Lending and Other
reportable segments. Under GAAP, for our derivatives that are held to maturity, the mark-to-market gain or loss
over the life of the contract will equal $0 except for Floor Income Contracts, where the mark-to-market gain will
equal the amount for which we sold the contract. In our Core Earnings presentation, we recognize the economic
effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably
as an interest expense or revenue over the hedged item’s life.
The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized
currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria are
met. We believe that our derivatives are effective economic hedges, and as such, are a critical element of our interest
rate and foreign currency risk management strategy. However, some of our derivatives, primarily Floor Income
Contracts and certain basis swaps, do not qualify for hedge accounting treatment and the stand-alone derivative must
be adjusted to fair value in the income statement with no consideration for the corresponding change in fair value of
the hedged item. These gains and losses recorded in “Gains (losses) on derivative and hedging activities, net” are
primarily caused by interest rate and foreign currency exchange rate volatility and changing credit spreads during
the period as well as the volume and term of derivatives not receiving hedge accounting treatment.
Our Floor Income Contracts are written options that must meet more stringent requirements than other
hedging relationships to achieve hedge effectiveness. Specifically, our Floor Income Contracts do not qualify for
hedge accounting treatment because the pay down of principal of the education loans underlying the Floor Income
embedded in those education loans does not exactly match the change in the notional amount of our written Floor
Income Contracts. Additionally, the term, the interest rate index, and the interest rate index reset frequency of the
Floor Income Contract can be different than that of the education loans. Under derivative accounting treatment, the
upfront contractual payment is deemed a liability and changes in fair value are recorded through income throughout
the life of the contract. The change in the fair value of Floor Income Contracts is primarily caused by changing
interest rates that cause the amount of Floor Income paid to the counterparties to vary. This is economically offset
by the change in the amount of Floor Income earned on the underlying education loans but that offsetting change in
fair value is not recognized. We believe the Floor Income Contracts are economic hedges because they effectively
fix 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. Therefore, for purposes of Core Earnings, we
have removed the mark-to-market gains and losses related to these contracts and added back the amortization of the
net contractual premiums received on the Floor Income Contracts. The amortization of the net contractual premiums
received on the Floor Income Contracts for Core Earnings is reflected in education loan interest income. Under
GAAP accounting, the premiums received on the Floor Income Contracts are recorded as revenue in the “gains
(losses) on derivative and hedging activities, net” line item by the end of the contracts’ lives.
44
Basis swaps are used to convert floating rate debt from one floating interest rate index to another to better
match the interest rate characteristics of the assets financed by that debt. We primarily use basis swaps to hedge our
education loan assets that are primarily indexed to LIBOR or Prime. The accounting for derivatives requires that
when using basis swaps, the change in the cash flows of the hedge effectively offset both the change in the cash
flows of the asset and the change in the cash flows of the liability. Our basis swaps hedge variable interest rate risk;
however, they generally do not meet this effectiveness test because the index of the swap does not exactly match the
index of the hedged assets as required for hedge accounting treatment. Additionally, some of our FFELP Loans can
earn at either a variable or a fixed interest rate depending on market interest rates and therefore swaps economically
hedging these FFELP Loans do not meet the criteria for hedge accounting treatment. As a result, under GAAP, these
swaps are recorded at fair value with changes in fair value reflected currently in the income statement.
The table below quantifies the adjustments for derivative accounting between GAAP and Core Earnings net
income.
(Dollars in millions)
Core Earnings derivative adjustments:
Gains (losses) on derivative and hedging activities,
net, included in other income
Plus: Settlements on derivative and hedging
activities, net(1)
Mark-to-market gains (losses) on derivative and
hedging activities, net(2)
Amortization of net premiums on Floor Income
Contracts in net interest income for Core Earnings
Other derivative accounting adjustments(3)
Total net impact of derivative accounting
Years Ended December 31,
2017
2016
2018
$
(38) $
22 $
22
(16)
(70)
(4)
(90) $
77
99
(55)
1
45 $
$
117
216
333
(114)
(7)
212
(1)
(2)
See “Reclassification of Settlements on Derivative and Hedging Activities” below for a detailed breakdown of these components.
“Mark-to-market gains (losses) on derivative and hedging activities, net” is comprised of the following:
(Dollars in millions)
Floor Income Contracts
Basis swaps
Foreign currency hedges
Other
Total mark-to-market gains (losses) on derivative
and hedging activities, net
Years Ended December 31,
2017
2016
2018
$
32 $
28
(82)
6
150 $
(6)
(25)
(20)
297
2
40
(6)
$
(16) $
99 $
333
(3)
Other derivative accounting adjustments consist of adjustments related to: (1) foreign currency denominated debt that is adjusted to spot
foreign exchange rates for GAAP where such adjustments are reversed for Core Earnings and (2) certain terminated derivatives that did
not receive hedge accounting treatment under GAAP but were economic hedges under Core Earnings and, as a result, such gains or losses
are amortized into Core Earnings over the life of the hedged item.
45
Reclassification of Settlements on Derivative and Hedging Activities
Derivative accounting requires net settlement income/expense on derivatives that do not qualify as hedges to
be recorded in a separate income statement line item below net interest income. Under our Core Earnings
presentation, these settlements are reclassified to the income statement line item of the economically hedged item.
For our Core Earnings net interest income, this would primarily include: (a) reclassifying the net settlement amounts
related to our Floor Income Contracts to education loan interest income and (b) reclassifying the net settlement
amounts related to certain of our interest rate swaps to debt interest expense. The table below summarizes these net
settlements on derivative and hedging activities and the associated reclassification on a Core Earnings basis.
(Dollars in millions)
Reclassification of settlements on derivative and
hedging activities:
Net settlement expense on Floor Income Contracts
reclassified to net interest income
Net settlement income (expense) on interest rate swaps
reclassified to net interest income
Net realized gains (losses) on terminated derivative
contracts reclassified to other income
Total reclassifications of settlements on derivative
and hedging activities
Years Ended December 31,
2017
2018
2016
$
(17) $
(69) $
(247)
8
(13)
(8)
—
31
—
$
(22) $
(77) $
(216)
Cumulative Impact of Derivative Accounting under GAAP compared to Core Earnings
As of December 31, 2018, derivative accounting has decreased GAAP equity by approximately $34 million as
a result of cumulative net mark-to-market losses (after tax) recognized under GAAP, but not in Core Earnings. The
following table rolls forward the cumulative impact to GAAP equity due to these after-tax mark-to-market net gains
and losses related to derivative accounting.
(Dollars in millions)
Beginning impact of derivative accounting on GAAP
equity
Net impact of net mark-to-market gains (losses) under
derivative accounting(1)
Ending impact of derivative accounting on GAAP
equity
Years Ended December 31,
2017
2018
2016
$
5 $
(90) $
(281)
(39)
95
$
(34) $
5 $
(1)
Net impact of net mark-to-market gains (losses) under derivative accounting is composed of the following:
191
(90)
212
(78)
Years Ended December 31,
2017
2018
2016
$
(90) $
45 $
12
(5)
39
55
57
$
(39) $
95 $
191
(Dollars in millions)
Total pre-tax net impact of derivative accounting
recognized in net income(a)
Tax and other impacts of derivative accounting
adjustments
Change in mark-to-market gains (losses) on
derivatives, net of tax recognized in other
comprehensive income
Net impact of net mark-to-market gains (losses) under
derivative accounting
(a)
See “Core Earnings derivative adjustments” table above.
46
Hedging Embedded Floor Income
Net Floor premiums received on Floor Income Contracts that have not been amortized into Core Earnings as
of the respective year-ends are presented in the table below. These net premiums will be recognized in Core
Earnings in future periods. As of December 31, 2018, the remaining amortization term of the net floor premiums
was approximately 5 years. Historically, we have sold Floor Income Contracts on a periodic basis and depending
upon market conditions and pricing, we may enter into additional Floor Income Contracts in the future. The balance
of unamortized Floor Income Contracts will increase as we sell new contracts and decline due to the amortization of
existing contracts.
In addition to using Floor Income Contracts, we also use pay-fixed interest rate swaps to hedge the embedded
Floor Income within FFELP Loans. These interest rate swaps qualify as GAAP hedges and are accounted for as cash
flow hedges of variable rate debt. For GAAP, gains and losses on the effective portion of these hedges are recorded
in accumulated other comprehensive income and gains and losses on the ineffective portion are recorded
immediately to earnings. Hedged Floor Income from these cash flow hedges that has not been recognized into Core
Earnings and GAAP as of the respective period-ends is presented in the table below. This hedged Floor Income will
be recognized in Core Earnings and GAAP in future periods and is presented net of tax. As of December 31, 2018,
the remaining hedged period is approximately 6 years. Historically, we have used pay-fixed interest rate swaps on a
periodic basis to hedge embedded Floor Income and depending upon market conditions and pricing, we may enter
into swaps in the future. The balance of unrecognized hedged Floor Income will increase as we enter into new swaps
and decline as revenue is recognized.
(Dollars in millions)
Unamortized net Floor premiums (net of tax)
Unrecognized hedged Floor Income related to
pay fixed interest rate swaps (net of tax)
Total hedged Floor Income, net of tax(2)(3)
2018(1)
December 31,
2017(1)
2016
$
(124) $
(168) $
(147)
(615)
(739) $
(703)
(871) $
(551)
(698)
$
(1)
(2)
(3)
Reflects a 23 percent effective tax rate at December 31, 2018 and 2017 as a result of the TCJA enacted on December 22, 2017. The
2016 period reflects a 37 percent effective tax rate. See “Key Financial Measures – Income Tax Expense” for further discussion.
$(959) million, $(1.1) billion and $(1.1) billion on a pre-tax basis as of December 31, 2018, 2017 and 2016, respectively.
Of the $739 million as of December 31, 2018, approximately $218 million, $190 million and $163 million will be recognized as
part of Core Earnings in 2019, 2020 and 2021, respectively.
3) Goodwill and Acquired Intangible Assets: Our Core Earnings exclude goodwill and intangible asset
impairment and the amortization of acquired intangible assets. The following table summarizes the goodwill and
acquired intangible asset adjustments.
Years Ended December 31,
2017
2016
2018
$
(47) $
(23) $
(36)
(Dollars in millions)
Core Earnings goodwill and acquired intangible
asset adjustments
47
2. Tangible Net Asset Ratio
This ratio measures the amount of assets available to retire the Company’s unsecured debt. Management and
Navient’s equity investors, credit rating agencies and debt capital investors use this ratio to monitor and make
decisions about the appropriate level of unsecured funding. The tangible net asset ratio is calculated as:
(Dollars in billions)
GAAP assets
Less:
Goodwill and acquired intangible assets
Secured debt
Other liabilities, adjustments for the impact of derivative accounting
under GAAP and unamortized net floor premiums
Tangible net assets
Divided by:
Unsecured debt (par)
Tangible net asset ratio
December 31,
2018
December 31,
2017
$
104.2 $
115.0
.8
87.8
1.1
14.5 $
.8
95.8
1.5
16.9
11.6 $
1.25x
14.0
1.20x
$
$
3. Earnings before Interest, Taxes, Depreciation and Amortization Expense (“EBITDA”)
This metric measures the operating performance of the Business Processing segment and is used by
management and equity investors to monitor operating performance and determine the value of those businesses.
EBITDA for the Business Processing segment is calculated as:
(Dollars in millions)
Pre-tax income
Plus:
Depreciation and amortization expense(1)
EBITDA
Divided by:
Total revenue
EBITDA margin
(1)
There is no interest expense in this segment.
Years Ended December 31,
2017
2016
2018
38
$
25
$
6
44
$
3
28
$
25
2
27
$
267
17%
$
212
13%
174
16%
$
$
$
48
Reportable Segment Earnings Summary — Core Earnings Basis
Federal Education Loans Segment
The following table presents Core Earnings results for our Federal Education Loans segment.
(Dollars in millions)
Interest income:
FFELP Loans
Other loans
Cash and investments
Total interest income
Total interest expense
Net interest income
Less: provision for loan losses
Net interest income after provision for
loan losses
Servicing revenue
Asset recovery and business processing
revenue
Other income
Gains on sales of loans and investments
Total other income
Direct operating expenses
Income before income tax expense
Income tax expense
Core Earnings
Highlights of 2018
Years Ended December 31,
2018
2017
2016
% Increase (Decrease)
2017 vs.
2016
2018 vs.
2017
$
3,080 $
4
46
3,130
2,467
663
70
2,679 $
13
29
2,721
2,022
699
44
2,395
9
16
2,420
1,597
823
46
593
262
163
24
—
449
298
744
164
580 $
655
280
263
3
3
549
316
888
321
567 $
777
289
216
—
—
505
366
916
338
578
$
15%
(69)
59
15
22
(5)
59
(9)
(6)
(38)
700
(100)
(18)
(6)
(16)
(49)
2%
12%
44
81
12
27
(15)
(4)
(16)
(3)
22
100
100
9
(14)
(3)
(5)
(2)%
•
•
•
•
•
•
•
•
•
•
Core Earnings of $580 million, an increase from $567 million in 2017.
Net interest income decreased $36 million primarily due to the natural paydown of the portfolio.
Provision for loan losses increased $28 million due to a higher temporary charge-off estimate over the second-
half of 2018 and first-half of 2019 as a result of an elevated use of disaster forbearance at the end of 2017 and
other factors.
Total other income decreased $100 million primarily due to new terms in a previously disclosed modified asset
recovery and portfolio management contract.
On an adjusted basis, expenses were $40 million lower primarily as a result of ongoing cost-saving initiatives.
Adjusted 2018 expenses exclude $46 million due to a new 2018 revenue recognition accounting standard, $16
million of costs in connection with the 2018 First Data transition services agreement and the release of a $40
million contingency reserve in 2018.
Income tax expense was $104 million lower as a result of the TCJA.
The Company acquired $761 million of FFELP Loans in 2018.
At December 31, 2018, Navient held $72.3 billion of FFELP Loans, compared with $81.7 billion of FFELP
Loans at December 31, 2017.
FFELP Loan delinquency rate at lowest level in over 10 years.
Contingent collections receivables inventory increased $13.3 billion (89 percent) from 2017 as a result of new
placements.
49
Core Earnings key performance metrics are as follows:
(Dollars in millions)
Segment net interest margin
FFELP Loans:
FFELP Loan spread
Provision for loan losses
Charge-offs
Charge-off rate
Total delinquency rate
Greater than 90-day delinquency rate
Forbearance rate
(Dollars in billions)
Number of accounts serviced for ED (in
millions)
Total federal loans serviced
Contingent collections receivables inventory
Years Ended December 31,
2017
2016
2018
.83%
.79%
.86%
.90%
$
70
$
54
.09%
10.2%
5.3%
12.3%
.87%
$
42
$
49
.07%
12.7%
6.2%
11.2%
.94%
43
54
.07%
12.2%
6.3%
12.9%
5.9
292
28.3
$
$
6.1
296
15.0
$
$
6.2
293
9.9
$
$
$
$
Segment Net Interest Margin
The following table includes the Core Earnings basis Federal Education Loans segment net interest margin
along with reconciliation to the GAAP basis segment net interest margin.
FFELP Loan yield
Hedged Floor Income
Unhedged Floor Income
Consolidation Loan Rebate Fees
Repayment Borrower Benefits
Premium amortization
FFELP Loan net yield
FFELP Loan cost of funds
FFELP Loan spread
Other interest-earning asset spread impact
Core Earnings basis segment net interest margin(1)
Core Earnings basis segment net interest margin(1)
Adjustment for GAAP accounting treatment(2)
GAAP-basis segment net interest margin(1)
Years Ended December 31,
2017
2016
2018
4.46%
.40
.03
(.69)
(.11)
(.09)
4.00
(3.10)
.90
(.07)
.83%
.83%
(.10)
.73%
3.59%
.38
.08
(.67)
(.11)
(.12)
3.15
(2.28)
.87
(.08)
.79%
.79%
.02
.81%
2.99%
.28
.22
(.65)
(.11)
(.14)
2.59
(1.65)
.94
(.08)
.86%
.86%
.12
.98%
(1)
The average balances of our FFELP Loan Core Earnings basis interest-earning assets for the respective periods are:
(Dollars in millions)
FFELP Loans
Other interest-earning assets
Total FFELP Loan Core Earnings basis interest-
earning assets
Years Ended December 31,
2017
84,989 $
3,376
2018
76,971 $
2,640
2016
92,497
3,595
$
$
79,611 $
88,365 $
96,092
(2)
Represents the reclassification of periodic interest accruals on derivative contracts from net interest income to other income, the reversal of
the amortization of premiums received on Floor Income Contracts, and other derivative accounting adjustments. For further discussion of
these adjustments, see section titled “Non-GAAP Financial Measures — Core Earnings” above.
50
The change in the Core Earnings net interest margin is primarily due to a cumulative adjustment which
reduced net interest income by $34 million, or 4 basis points, in 2017 in connection with an increase in prepayment
speed assumptions used to amortize loan premiums.
The Company acquired $761 million of FFELP Loans in 2018. As of December 31, 2018, our FFELP Loan
portfolio totaled $72.3 billion, comprised of $24.7 billion of FFELP Stafford Loans and $47.6 billion of FFELP
Consolidation Loans. The weighted-average life of these portfolios as of December 31, 2018 was 5 years and 8
years, respectively, assuming a Constant Prepayment Rate (“CPR”) of 7 percent and 4 percent, respectively.
Floor Income
The following table analyzes on a Core Earnings basis the ability of the FFELP Loans in our portfolio to earn
Floor Income after December 31, 2018 and 2017, based on interest rates as of those dates.
(Dollars in billions)
Education loans eligible to earn Floor Income
Less: post-March 31, 2006 disbursed loans required
to rebate Floor Income
Less: economically hedged Floor Income
Education loans eligible to earn Floor Income after
rebates and economically hedged
Education loans earning Floor Income
December 31, 2018 December 31, 2017
81.0
71.6 $
$
(32.7)
(19.9)
19.0 $
1.8 $
(37.2)
(25.0)
18.8
1.0
$
$
The following table presents a projection of the average balance of FFELP Consolidation Loans for which
Fixed Rate Floor Income has been economically hedged with derivatives for the period January 1, 2019 to
December 31, 2024.
(Dollars in billions)
Average balance of FFELP Consolidation Loans
whose Floor Income is economically hedged
2019
2020
2021
2022
2023
2024
$
20.4 $
17.6 $
12.6 $
10.9 $
5.0 $
.8
FFELP Provision for Loan Losses
The provision for FFELP Loan Losses was $70 million in 2018, up $28 million from 2017 due to a higher
temporary charge-off estimate over the second-half of 2018 and first-half of 2019 as a result of an elevated use of
disaster forbearance at the end of 2017 and other factors.
Servicing Revenue
The Company services loans for approximately 5.9 million customer accounts under its ED servicing contract
as of December 31, 2018, compared with 6.1 million and 6.2 million customer accounts serviced as of December 31,
2017 and 2016, respectively. Third-party loan servicing fees in 2018, 2017 and 2016 included $148 million, $150
million and $151 million, respectively, of servicing revenue related to the ED servicing contract.
51
Asset Recovery and Business Processing Revenue
Asset recovery and business processing revenue decreased $100 million in 2018 compared to 2017 primarily
due to new terms in a previously disclosed modified asset recovery and portfolio management contract. In addition,
there was a $47 million decrease related to the deferred revenue recognized in 2017 (discussed in the following
paragraph), which was offset by $46 million of additional asset recovery revenue due to a new 2018 revenue
recognition standard (see “Consolidated Earnings Summary – GAAP Basis” for more detail).
Asset recovery and business processing revenue increased $47 million in 2017 compared to 2016 primarily
due to the recognition of $47 million of previously deferred asset recovery revenue, net of a reserve, related to loans
for which the Company performs default aversion services. In connection with providing these services, a fee is
received when a loan is initially placed with us and we provide the services for the remaining life of the loan for no
additional fee. As a result, in accordance with GAAP, the fee was deferred net of estimated rebates, and recognized
as revenue as it was earned over the expected lives of the related loans. In the third quarter of 2017, the Company
was notified that it would no longer perform these services after 2017 due to the termination of the related contract
as of December 31, 2017. In accordance with GAAP, we recognized this previously deferred revenue during the
third quarter of 2017 to reflect a shortened period over which it is expected to be earned. The remaining increase in
revenue is primarily related to an increase in non-education related revenue, including Duncan Solutions, a
transportation revenue management company serving municipalities and toll authorities, acquired by the Company
in July 2017.
Other Income
Other income increased $21 million from 2017 to 2018 primarily from the sale of technology and transition
services revenue in connection with the strategic agreement we entered into with First Data in the third quarter of
2018.
Operating Expenses
Operating expenses for the Federal Education Loans segment include costs incurred to acquire FFELP Loans
and perform servicing and asset recovery activities on our FFELP Loan portfolio, federal education loans held by
ED and other institutions. On an adjusted basis, expenses were $40 million lower in 2018 compared with 2017
primarily as a result of ongoing cost-saving initiatives. Adjusted 2018 expenses exclude $46 million due to a new
2018 revenue recognition accounting standard, $16 million of costs in connection with the 2018 First Data transition
services agreement and the release of a $40 million contingency reserve in 2018.
Operating expenses were $50 million lower in 2017 compared to 2016. This decrease is primarily the result of
ongoing cost-saving initiatives across the Company.
52
Consumer Lending Segment
The following table presents Core Earnings results for our Consumer Lending segment.
(Dollars in millions)
Interest income:
Private Education Loans
Other Loans
Cash and investments
Interest income
Interest expense
Net interest income
Less: provision for loan losses
Net interest income after provision for
loan losses
Servicing revenue
Direct operating expenses
Income before income tax expense
Income tax expense
Core Earnings
Highlights of 2018
Years Ended December 31,
2018
2017
2016
% Increase (Decrease)
2017 vs.
2016
2018 vs.
2017
$
$
1,778 $
2
13
1,793
1,013
780
300
480
12
169
323
71
252 $
1,634 $
—
5
1,639
825
814
382
432
10
156
286
103
183 $
1,587
—
2
1,589
704
885
383
502
15
149
368
137
231
9%
100
160
9
23
(4)
(21)
11
20
8
13
(31)
38%
3%
—
150
3
17
(8)
—
(14)
(33)
5
(22)
(25)
(21)%
•
•
•
•
•
•
•
Originated $2.8 billion of Private Education Refinance Loans.
Core Earnings of $252 million, an increase from $183 million in 2017.
Net interest income decreased $34 million primarily due to the natural paydown of the portfolio.
Provision for loan losses decreased $83 million. Private Education Loan performance results include:
o Charge-offs decreased by $72 million, excluding the $32 million related to a change in the portion of
the loan amount charged off at default.
o
o
o
Private Education Loan delinquencies greater than 90-days: $614 million, up $17 million from $597
million in 2017.
Private Education Loan delinquencies greater than 30-days: $1.3 billion, down $38 million from 2017.
Private Education Loan forbearances: $676 million, down $219 million from $895 million in 2017.
On an adjusted basis, expenses were $27 million lower primarily as a result of ongoing cost-saving initiatives.
Adjusted 2018 expenses exclude $31 million of operating cost increase from 2017 to 2018 related to Earnest,
which was acquired in November 2017, and a $9 million one-time fee paid in 2018 to convert $3 billion of
Private Education Loans from a third-party servicer to Navient’s servicing platform.
Income tax expense was $45 million lower as a result of the TCJA.
At December 31, 2018, Navient held $22.2 billion of Private Education Loans (of which $3.2 billion were
Refinance Loans), compared with $23.4 billion of Private Education Loans at December 31, 2017.
53
Core Earnings key performance metrics are as follows:
(Dollars in millions)
Segment net interest margin
Private Education Loans (including Refinance
Loans):
Private Education Loan spread
Provision for loan losses
Charge-offs(1)
Charge-off rate(1)
Total delinquency rate
Greater than 90-day delinquency rate
Forbearance rate
Private Education Refinance Loans:
Charge-offs
Greater than 90-day delinquency rate
Average balance of Private Education Refinance
Loans
Ending balance of Private Education Refinance
Loans
Private Education Refinance Loan originations
$
$
$
$
$
$
Years Ended December 31,
2017
2018
2016
3.24%
3.33%
3.41%
3.49%
$
299
371
$
1.7%
5.9%
2.8%
3.0%
3.54%
$
382
443
$
2.0%
5.8%
2.6%
3.8%
$
.2
—%
—
$
—%
1,902
$
121
$
3,212
2,800
$
$
761
233
$
$
3.56%
383
513
2.2%
7.4%
3.6%
3.4%
—
—%
—
—
—
(1)
Excludes the $32 million of charge-offs on the receivable for partially charged-off loans that occurred as a result of changing the
charge-off rate from 79 percent to 80.5 percent in third-quarter 2018.
Segment Net Interest Margin
The following table shows the Core Earnings basis Consumer Lending segment net interest margin along with
reconciliation to the GAAP basis segment net interest margin before provision for loan losses.
Years Ended December 31,
2017
2016
2018
Private Education Loan yield
Private Education Loan cost of funds
Private Education Loan spread
Other interest-earning asset spread impact
Core Earnings basis segment net interest margin(1)
Core Earnings basis segment net interest margin(1)
Adjustment for GAAP accounting treatment(2)
GAAP basis segment net interest margin(1)
7.64%
(4.15)
3.49
(.25)
3.24%
3.24%
.08
3.32%
6.88%
(3.34)
3.54
(.21)
3.33%
3.33%
.05
3.38%
6.26%
(2.70)
3.56
(.15)
3.41%
3.41%
(.05)
3.36%
(1)
The average balances of our Private Education Loan Core Earnings basis interest-earning assets for the respective periods are:
(Dollars in millions)
Private Education Loans
Other interest-earning assets
Total Private Education Loan Core Earnings basis
interest-earning assets
Years Ended December 31,
2017
23,762 $
651
2018
23,281 $
824
2016
25,361
584
$
$
24,105 $
24,413 $
25,945
(2)
Represents the reclassification of periodic interest accruals on derivative contracts from net interest income to other income and
other derivative accounting adjustments. For further discussion of these adjustments, see the section titled “Non-GAAP Financial
Measures – Core Earnings.”
The decrease in net interest margin from prior periods is primarily the impact of the Private Education
Refinance Loans that have been originated in the last year at a lower net interest margin than the legacy Private
Education Loan portfolio as a result of their lower credit risk profile.
54
As of December 31, 2018, our Private Education Loan portfolio totaled $22.2 billion. The weighted-average
life of this portfolio as of December 31, 2018 was 5 years assuming a CPR of 8 percent.
Private Education Loan Provision for Loan Losses
Allowance for Private Education Loan Losses
Our allowance for Private Education Loan losses does not include Purchased Credit Impaired (“PCI”) loans as
those loans are separately reserved for, as needed. No allowance for loan losses has been established for these loans
as of December 31, 2018. Related to the $2.8 billion of Purchased Non-Credit Impaired Loans acquired in 2017 at a
discount, there is no allowance for loan losses established as of December 31, 2018, as the remaining purchased
discount associated with the Private Education Loans of $326 million as of December 31, 2018 remains greater than
the incurred losses. However, in accordance with our policy, there was $16 million and $9 million of both charge-
offs and provision recorded for Purchased Non-Credit Impaired Loans in 2018 and 2017, respectively.
(Dollars in millions)
Allowance at beginning of period
Provision for Private Education Loan losses:
Purchased Non-Credit Impaired Loans, acquired at a discount
Remaining loans
Total provision
Charge-offs:
Net adjustment resulting from the change in the charge-off rate(1)
Net charge-offs remaining(2)
Total charge-offs(2)
Reclassification of interest reserve(3)
Allowance at end of period
Net charge-offs as a percentage of average loans in repayment, excluding
the net adjustment resulting from the change in the charge-off rate
(annualized)(1)
Net adjustment resulting from the change in the charge-off rate as a
percentage of average loans in repayment (annualized)(1)
Allowance coverage of net charge-offs (annualized)
Allowance as a percentage of ending total loans
Allowance as a percentage of ending loans in repayment
Ending total loans(4)
Average loans in repayment
Ending loans in repayment
$
$
$
$
Years Ended December 31,
2017
2016
2018
$
1,297
$
1,351
$
1,471
16
283
299
(32)
(371)
(403)
8
1,201
$
9
373
382
—
(443)
(443)
7
1,297
$
1.7%
2.0%
.1%
3.0
5.0%
5.5%
$
$
$
24,205
22,312
22,037
—%
2.9
5.1%
5.7%
$
$
$
25,640
22,342
22,924
—
383
383
—
(513)
(513)
10
1,351
2.2%
—%
2.6
5.4%
6.1%
25,148
23,275
22,150
(1)
(2)
(3)
(4)
In 2018, the portion of the loan amount charged off at default on our Private Education Loans increased from 79 percent to 80.5 percent. This did
not impact the provision for loan losses in 2018 as previously this had been reserved through the allowance for loan losses. This charge resulted in
a $32 million reduction to the balance of the receivable for partially charged-off loans.
Charge-offs are reported net of expected recoveries. The expected recovery amount is transferred to the receivable for partially charged-off loan
balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was
expected to be collected and any shortfalls in what was actually collected in the period. See “Receivable for Partially Charged-Off Private
Education Loans” for further discussion.
Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period
to the allowance for loan losses when interest is capitalized to a loan’s principal balance.
Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans.
In establishing the allowance for Private Education Loan losses as of December 31, 2018, we considered
several factors with respect to our Private Education Loan portfolio. As a result of the expiration of the temporary
natural disaster forbearances granted at the end of 2017 and beginning of 2018, loan delinquencies greater than 90-
days increased by $17 million and forbearances decreased by $219 million compared with 2017, all as expected.
Charge-offs decreased by $72 million from 2017, excluding the $32 million related to changing the charge-off rate
on defaulted loans from 79 percent to 80.5 percent. Outstanding Private Education Loans decreased $1.2 billion
from 2017. These factors along with the continued improvement in the portfolio’s performance resulted in the $83
million decrease in provision.
55
Operating Expenses
Operating expenses for our Consumer Lending segment include costs incurred to originate, acquire, service
and collect on our consumer loan portfolio. Operating expenses were $169 million, $156 million and $149 million
for the years ended December 31, 2018, 2017 and 2016, respectively. On an adjusted basis, expenses were $27
million lower in 2018 compared to 2017 primarily as a result of ongoing cost-saving initiatives. Adjusted expenses
exclude $31 million of operating cost increase from 2017 to 2018 related to Earnest, which was acquired in
November 2017, and a $9 million one-time fee paid in 2018 to convert $3 billion of Private Education Loans form a
third-party servicer to Navient’s servicing platform.
Operating expenses were $7 million higher in 2017 compared to 2016. This increase is primarily due to an
increase in operating costs related to Earnest which was acquired in November 2017.
Business Processing Segment
The following table presents Core Earnings results for our Business Processing segment.
(Dollars in millions)
Business processing revenue
Direct operating expenses
Income before income tax expense
Income tax expense
Core Earnings
Highlights of 2018
Years Ended December 31,
% Increase (Decrease)
2018
2017
2016
$
$
267 $
229
38
8
30 $
212 $
187
25
9
16 $
174
149
25
9
16
2018 vs.
2017
2017 vs.
2016
26%
22
52
(11)
88%
22%
26
—
—
—%
•
•
•
Core Earnings of $30 million, up $14 million or 88 percent from 2017, primarily the result of the acquisition of
Duncan Solutions in July 2017 and the organic growth of the government and healthcare services businesses.
EBITDA of $44 million, up $16 million or 57 percent from 2017.
Contingent collections receivables inventory increased 26 percent to $14.4 billion from 2017 as a result of new
placements.
Key segment metrics are as follows:
(Dollars in billions)
Revenue from government services
Revenue from healthcare services
Total fee revenue
EBITDA(1)
EBITDA Margin(1)
Contingent collections receivables inventory (in billions)
$
$
$
$
As of December 31,
2017
2016
2018
$
174
93
$
267
$
44
17%
$
14.4
$
134
78
$
212
$
28
13%
$
11.4
106
68
174
27
16%
10.1
(1)
See “Non-GAAP Financial Measures – Earnings before Interest, Taxes, Depreciation and Amortization Expense
(‘EBITDA’)” for an explanation and reconciliation of these metrics.
56
Other Segment
The following table includes Core Earnings results for our Other segment.
(Dollars in millions)
Net interest loss after provision for loan losses
Other income
Gains (losses) on debt repurchases
Total other income
Unallocated shared services expenses:
Unallocated information technology costs
Unallocated corporate costs
Total unallocated shared services expenses
Restructuring/other reorganization expenses
Total expenses
Loss before income tax benefit
Income tax expense (benefit)
Core Earnings (loss)
Years Ended December 31,
% Increase (Decrease)
2018
2017
2016
2018 vs.
2017
2017 vs.
2016
$
$
(154) $
6
9
15
98
190
288
13
301
(440)
(97)
(343) $
(134) $
16
(3)
13
116
191
307
29
336
(457)
58
(515) $
(105)
14
1
15
114
173
287
—
287
(377)
(139)
(238)
15%
(63)
(400)
15
(16)
(1)
(6)
(55)
(10)
(4)
(267)
(33)%
28%
14
(400)
(13)
2
10
7
100
17
21
(142)
116%
Net Interest Loss after Provision for Loan Losses
Net interest loss after provision for loan losses is due to the negative carrying cost of our corporate liquidity
portfolio.
Gains (Losses) on Debt Repurchases
We repurchased $2.8 billion, $513 million and $1.5 billion of unsecured debt in 2018, 2017 and 2016,
respectively. Debt repurchase activity will fluctuate based on market fundamentals and our liability management
strategy.
Unallocated Shared Services Expenses
Unallocated shared services expenses are comprised of costs primarily related to certain executive
management, the board of directors, accounting, finance, legal, human resources, compliance and risk management,
regulatory-related costs, stock-based compensation expense, and information technology costs related to
infrastructure and operations. Regulatory-related costs include actual settlement amounts as well as third-party
professional fees we incur in connection with regulatory matters. On an adjusted basis, expenses were $51 million
lower in 2018 compared to 2017 primarily as a result of ongoing cost-saving initiatives. Adjusted expenses exclude
$29 million and $14 million of regulatory-related costs in 2018 and 2017, respectively, and $17 million of operating
cost increases from 2017 to 2018 related to businesses acquired in 2017 (Duncan Solutions in July 2017 and Earnest
in November 2017).
Expenses were $20 million higher in 2017 compared to 2016 primarily due to an increase in operating costs
related to Duncan (acquired in July 2017) and Earnest (acquired in November 2017).
Restructuring/Other Reorganization Expenses
During 2018, 2017 and 2016, the Company incurred $13 million, $29 million and $0, respectively, of
restructuring/other reorganization expense in connection with an effort to reduce costs and improve operating
efficiency. The charges were due primarily to severance-related costs.
Income Tax Expense
The TCJA, enacted on December 22, 2017, made significant changes to all aspects of income taxation,
including a reduction to the corporate federal statutory tax rate. GAAP requires the effects of the TCJA to be
recognized in the period the law is enacted, even though the effective date of the law for most provisions is January
1, 2018. The primary impact to us is the reduction to the corporate federal statutory tax rate from 35 percent to 21
percent as of January 1, 2018. This rate reduction required us to remeasure our deferred tax asset at December 31,
57
2017, at the 21 percent corporate federal statutory tax rate and resulted in a DTA Remeasurement Loss of $208
million for GAAP and $224 million for Core Earnings, which is reflected as incremental income tax expense in
2017. This non-cash remeasurement adjustment is included in the Other segment. Because the federal corporate
income tax rate was reduced from 35 percent to 21 percent, we have experienced a significant reduction in our
income tax expense for 2018.
Financial Condition
This section provides additional information regarding the changes related to our loan portfolio assets and
related liabilities as well as credit performance indicators related to our loan portfolio.
Average Balance Sheets — GAAP
The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities
and reflects our net interest margin on a consolidated basis.
(Dollars in millions)
Average Assets
FFELP Loans
Private Education Loans
Other loans
Cash and investments
Total interest-earning assets
Non-interest-earning assets
Total assets
Average Liabilities and Equity
Short-term borrowings
Long-term borrowings
Total interest-bearing liabilities
Non-interest-bearing liabilities
Equity
Total liabilities and equity
Net interest margin
2018
Years Ended December 31,
2017
2016
Balance Rate
Balance Rate
Balance Rate
$ 76,971
23,281
75
5,447
105,774
3,601
$109,375
4,833
$
99,195
104,028
1,663
3,684
$109,375
3.93% $ 84,989
7.64
23,762
7.68
1.77
5,159
4.64% 114,040
3,852
$117,892
3.17% $ 92,497
25,361
6.88
130 10.33
.82
5,304
3.84% 123,252
3,962
$127,214
2.73%
6.26
90 10.06
.41
3.36%
3,194
4.61% $
3.47
109,088
3.52% 112,282
2,004
3,606
$117,892
2,092
3.85% $
2.61
118,973
2.65% 121,065
2,433
3,716
$127,214
3.13%
2.00
2.02%
1.17%
1.24%
1.38%
Rate/Volume Analysis — GAAP
The following rate/volume analysis shows the relative contribution of changes in interest rates and asset
volumes.
(Dollars in millions)
2018 vs. 2017
Interest income
Interest expense
Net interest income
2017 vs. 2016
Interest income
Interest expense
Net interest income
Increase
(Decrease)
Change Due To(1)
Rate
Volume
$
$
$
$
525 $
697
(172) $
237 $
530
(293) $
859 $
928
(69) $
562 $
717
(155) $
(334)
(231)
(103)
(325)
(187)
(138)
(1)
Changes in income and expense due to both rate and volume have been allocated in proportion to the relationship of the absolute
dollar amounts of the change in each.
58
Summary of our Education Loan Portfolio
Ending Education Loan Balances, net — GAAP and Core Earnings Basis
(Dollars in millions)
Total education loan portfolio:
In-school(1)
Grace, repayment and other(2)
Total, gross
Unamortized premium/(discount)
Receivable for partially charged-off loans
Allowance for loan losses
Total education loan portfolio
% of total FFELP
% of total
(Dollars in millions)
Total education loan portfolio:
In-school(1)
Grace, repayment and other(2)
Total, gross
Unamortized premium/(discount)
Receivable for partially charged-off loans
Allowance for loan losses
Total education loan portfolio
% of total FFELP
% of total
(Dollars in millions)
Total education loan portfolio:
In-school(1)
Grace, repayment and other(2)
Total, gross
Unamortized premium/(discount)
Receivable for partially charged-off loans
Allowance for loan losses
Total education loan portfolio
% of total FFELP
% of total
December 31, 2018
FFELP
Stafford and
Other
FFELP
Consolidation
Loans
Total
FFELP
Loans
Private
Education
Loans
Total
Portfolio
$
$
$
59
24,249
24,308
377
—
(44)
$
34%
26%
24,641
$
—
47,422
47,422
222
—
(32)
$
66%
50%
47,612
$
59
71,671
71,730
599
—
(76)
$
100%
76%
72,253
$
31
23,500
23,531
(759)
674
(1,201)
$
22,245
90
95,171
95,261
(160)
674
(1,277)
94,498
24%
100%
December 31, 2017
FFELP
Stafford and
Other
FFELP
Consolidation
Loans
Total
FFELP
Loans
Private
Education
Loans
Total
Portfolio
$
$
$
88
27,949
28,037
407
—
(35)
$
35%
27%
28,409
$
—
53,060
53,060
259
—
(25)
$
65%
51%
53,294
$
88
81,009
81,097
666
—
(60)
$
100%
78%
81,703
54
24,826
24,880
(924)
760
(1,297)
23,419
$
142
105,835
105,977
(258)
760
(1,357)
$ 105,122
22%
100%
December 31, 2016
FFELP
Stafford and
Other
FFELP
Consolidation
Loans
Total
FFELP
Loans
Private
Education
Loans
Total
Portfolio
$
$
$
148
31,700
31,848
510
—
(39)
$
37%
29%
32,319
$
—
55,070
55,070
369
—
(28)
$
63%
50%
55,411
$
148
86,770
86,918
879
—
(67)
$
100%
79%
87,730
104
24,229
24,333
(457)
815
(1,351)
23,340
252
$
110,999
111,251
422
815
(1,418)
$ 111,070
21%
100%
(1)
(2)
Loans for customers still attending school and are not yet required to make payments on the loan.
Includes loans in deferment or forbearance.
59
(Dollars in millions)
Total education loan portfolio:
In-school(1)
Grace, repayment and other(2)
Total, gross
Unamortized premium/(discount)
Receivable for partially charged-off loans
Allowance for loan losses
Total education loan portfolio
% of total FFELP
% of total
(Dollars in millions)
Total education loan portfolio:
In-school(1)
Grace, repayment and other(2)
Total, gross
Unamortized premium/(discount)
Receivable for partially charged-off loans
Allowance for loan losses
Total education loan portfolio
% of total FFELP
% of total
December 31, 2015
FFELP
Stafford and
Other
FFELP
Consolidation
Loans
Total
FFELP
Loans
Private
Education
Loans
Total
Portfolio
$
$
$
259
36,016
36,275
627
—
(48)
$
38%
30%
36,854
$
—
59,118
59,118
460
—
(30)
$
62%
48%
59,548
$
259
95,134
95,393
1,087
—
(78)
$
100%
78%
96,402
216
27,299
27,515
(531)
881
(1,471)
26,394
$
475
122,433
122,908
556
881
(1,549)
$ 122,796
22%
100%
December 31, 2014
FFELP
Stafford and
Other
FFELP
Consolidation
Loans
Total
FFELP
Loans
Private
Education
Loans
Total
Portfolio
$
$
$
488
39,882
40,370
677
—
(58)
40,989
$
39%
31%
$
—
62,992
62,992
499
—
(35)
63,456
488
$
102,874
103,362
1,176
—
(93)
$ 104,445
61%
47%
$
100%
78%
436
30,625
31,061
(594)
1,245
(1,916)
29,796
924
$
133,499
134,423
582
1,245
(2,009)
$ 134,241
22%
100%
(1)
(2)
Loans for customers still attending school and are not yet required to make payments on the loan.
Includes loans in deferment or forbearance.
60
Average Education Loan Balances (net of unamortized premium/discount) — GAAP and Core Earnings Basis
(Dollars in millions)
Total
% of FFELP
% of total
(Dollars in millions)
Total
% of FFELP
% of total
(Dollars in millions)
Total
% of FFELP
% of total
Year Ended December 31, 2018
FFELP
Stafford and
Other
FFELP
Consolidation
Loans
Total
FFELP
Loans
Private
Education
Loans
$
26,612
$
35%
27%
50,359
$
65%
50%
76,971
$
100%
77%
Total
Portfolio
$ 100,252
23,281
23%
100%
Year Ended December 31, 2017
FFELP
Stafford and
Other
FFELP
Consolidation
Loans
Total
FFELP
Loans
Private
Education
Loans
$
30,462
$
36%
28%
54,527
$
64%
50%
84,989
$
100%
78%
Total
Portfolio
$ 108,751
23,762
22%
100%
Year Ended December 31, 2016
FFELP
Stafford and
Other
FFELP
Consolidation
Loans
Total
FFELP
Loans
Private
Education
Loans
Total
Portfolio
$ 117,858
25,361
22%
100%
$
34,710
$
38%
29%
57,787
$
62%
49%
92,497
$
100%
78%
61
Education Loan Activity — GAAP and Core Earnings Basis
Year Ended December 31, 2018
(Dollars in millions)
Beginning balance
Acquisitions
Capitalized interest and premium/discount
amortization
Consolidations to third parties
Repayments and other
Ending balance
(Dollars in millions)
Beginning balance
Acquisitions
Capitalized interest and premium/discount
amortization
Consolidations to third parties
Repayments and other
Ending balance
(Dollars in millions)
Beginning balance
Acquisitions
Capitalized interest and premium/discount
amortization
Consolidations to third parties
Repayments and other
Ending balance
FFELP
Stafford and
Other
FFELP
Consolidation
Loans
Total
FFELP
Loans
Private
Education
Loans
$
28,409 $
408
53,294 $
344
81,703 $
752
Total
Portfolio
23,419 $ 105,122
3,652
2,900
871
(1,925)
(3,122)
24,641 $
856
(2,065)
(4,817)
47,612 $
1,727
(3,990)
(7,939)
72,253 $
395
(792)
(3,677)
22,245 $
2,122
(4,782)
(11,616)
94,498
$
Year Ended December 31, 2017
FFELP
Stafford and
Other
FFELP
Consolidation
Loans
Total
FFELP
Loans
Private
Education
Loans
$
32,319 $
1,195
55,411 $
4,358
87,730 $
5,553
Total
Portfolio
23,340 $ 111,070
9,223
3,670
916
(2,561)
(3,460)
28,409 $
968
(2,711)
(4,732)
53,294 $
1,884
(5,272)
(8,192)
81,703 $
2,260
376
(5,964)
(692)
(3,275)
(11,467)
23,419 $ 105,122
$
Year Ended December 31, 2016
FFELP
Stafford and
Other
FFELP
Consolidation
Loans
Total
FFELP
Loans
Private
Education
Loans
$
36,854 $
1,312
59,548 $
2,146
96,402 $
3,458
Total
Portfolio
26,394 $ 122,796
3,683
225
1,006
(2,821)
(4,032)
32,319 $
1,024
(2,412)
(4,895)
55,411 $
2,030
(5,233)
(8,927)
87,730 $
2,448
418
(5,739)
(506)
(12,118)
(3,191)
23,340 $ 111,070
$
62
Education Loan Allowance for Loan Losses Activity — GAAP Basis
(Dollars in millions)
Beginning balance
Less:
Net adjustment resulting
from the change in the
charge-off rate(1)
Net charge-offs
remaining(2)
Total net charge-offs
Plus:
Provision for loan losses
Reclassification of interest
reserve(3)
Ending balance
Percent of total
Troubled debt
restructuring(4)
December 31, 2018
Private
Education
Loans
$
1,297
FFELP
Loans
60
$
Total
Portfolio
$ 1,357
FFELP
Loans
67
$
December 31, 2017
Private
Education
Loans
$
1,351
Total
Portfolio
$ 1,418
FFELP
Loans
78
$
December 31, 2016
Private
Education
Loans
$
1,471
Total
Portfolio
$ 1,549
—
(32)
(32) —
—
—
—
—
—
(54)
(54)
(371)
(403)
(425)
(457)
(49)
(49)
(443)
(443)
(492)
(492)
(54)
(54)
(513)
(513)
(567)
(567)
70
299
369
42
382
424
43
383
426
—
76
$
$
6%
8
1,201
8
$ 1,277
—
$
60
100%
$
4%
7
1,297
7
$ 1,357
—
67
$
100%
$
5%
10
1,351
10
$ 1,418
95%
100%
96%
94%
$ —
$ 10,326
$ 10,326
$ —
$ 10,890
$ 10,890
$ —
$ 11,119
$ 11,119
(Dollars in millions)
Balance at beginning of period
Less:
Net adjustment resulting from the change in the
charge-off rate(1)
Net charge-offs remaining(2)
Total net charge-offs
Loan sales
Distribution of SLM BankCo
Plus:
Provision for loan losses
Reclassification of interest reserve(3)
Ending balance
Percent of total
Troubled debt restructuring(4)
December 31, 2015
Private
Education
Loans
$
1,916
FFELP
Loans
93
$
Total
Portfolio
$ 2,009
FFELP
Loans
119
$
December 31, 2014
Private
Education
Loans
$
2,097
Total
Portfolio
$ 2,216
—
(61)
(61)
—
—
46
—
78
$
5%
(330)
(330)
(659)
(720)
(989) (1,050)
(5)
—
(5)
—
—
(79)
(79)
—
(6)
—
(717)
(717)
—
(69)
—
(796)
(796)
—
(75)
538
11
1,471
584
11
$ 1,549
$
100%
95%
59
—
93
$
5%
588
17
1,916
647
17
$ 2,009
95%
100%
—
$ 10,898
$ 10,898
$
—
$ 10,548
$ 10,548
$
$
(1)
(2)
(3)
(4)
In 2018 and 2015, the portion of the loan amount charged off at default on Private Education Loans increased from 79 percent to 80.5 percent and
from 73 percent to 79 percent, respectively. This did not impact the provision for loan losses as previously this had been reserved through the
allowance for loan losses. This change resulted in a $32 million and $330 million reduction to the balance of the receivable for partially charged-
off loans in 2018 and 2015, respectively.
Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the receivable for
partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the
difference between what was expected to be collected and any shortfalls in what was actually collected in the period. See “Receivable for Partially
Charged-Off Private Education Loans” for further discussion.
Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period
to the allowance for loan losses when interest is capitalized to a loan’s principal balance.
Represents the recorded investment of loans identified as troubled debt restructuring.
63
Education Loan Allowance for Loan Losses Activity — Core Earnings Basis
(Dollars in millions)
Beginning balance
Less:
Net adjustment resulting
from the change in the
charge-off rate(1)
Net charge-offs
remaining(2)
Total net charge-offs
Plus:
Provision for loan losses
Reclassification of interest
reserve(3)
Ending balance
Percent of total
Troubled debt
restructuring(4)
December 31, 2018
Private
Education
Loans
$
1,297
FFELP
Loans
60
$
Total
Portfolio
$ 1,357
FFELP
Loans
67
$
December 31, 2017
Private
Education
Loans
$
1,351
Total
Portfolio
$ 1,418
FFELP
Loans
78
$
December 31, 2016
Private
Education
Loans
$
1,471
Total
Portfolio
$ 1,549
—
(32)
(32) —
—
—
—
—
—
(54)
(54)
(371)
(403)
(425)
(457)
(49)
(49)
(443)
(443)
(492)
(492)
(54)
(54)
(513)
(513)
(567)
(567)
70
299
369
42
382
424
43
383
426
—
76
$
$
6%
8
1,201
8
$ 1,277
—
$
60
100%
$
4%
7
1,297
7
$ 1,357
—
67
$
100%
$
5%
10
1,351
10
$ 1,418
95%
100%
96%
94%
$ —
$ 10,326
$ 10,326
$ —
$ 10,890
$ 10,890
$ —
$ 11,119
$ 11,119
(Dollars in millions)
Balance at beginning of period
Less:
Net adjustment resulting from the change in the
charge-off rate(1)
Net charge-offs remaining(2)
Total net charge-offs
Loan sales
Plus:
Provision for loan losses
Reclassification of interest reserve(3)
Other transactions(5)
Ending balance
Percent of total
Troubled debt restructuring(4)
December 31, 2015
Private
Education
Loans
FFELP
Loans
Total
Portfolio
2,009
December 31, 2014
Private
Education
Loans
FFELP
Loans
$
93
$
1,916
$
$
113
$
2,035
$
Total
Portfolio
2,148
—
(61)
(61)
—
(330)
(659)
(989)
(5)
(330)
(720)
(1,050)
(5)
—
(79)
(79)
—
—
(717)
(717)
—
—
(796)
(796)
—
46
—
—
78
$
5%
538
11
—
1,471
$
95%
584
11
—
1,549
$
100%
59
—
—
93
$
5%
539
17
42
1,916
$
95%
598
17
42
2,009
100%
—
$ 10,898
$ 10,898
$
—
$ 10,548
$ 10,548
$
$
(1)
(2)
(3)
(4)
(5)
In 2018 and 2015, the portion of the loan amount charged off at default on Private Education Loans increased from 79 percent to 80.5 percent and
from 73 percent to 79 percent, respectively. This did not impact the provision for loan losses as previously this had been reserved through the
allowance for loan losses. This change resulted in a $32 million and $330 million reduction to the balance of the receivable for partially charged-
off loans in 2018 and 2015, respectively.
Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the receivable for
partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the
difference between what was expected to be collected and any shortfalls in what was actually collected in the period. See “Receivable for Partially
Charged-Off Private Education Loans” for further discussion.
Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period
to the allowance for loan losses when interest is capitalized to a loan’s principal balance.
Represents the recorded investment of loans identified as troubled debt restructuring.
Relates to loans purchased from Sallie Mae Bank by Navient related entities prior to the Spin-Off. Amount is the related allowance for loan losses
that was transferred in connection with the loans purchased.
64
FFELP Loan Portfolio Performance
FFELP Loan Delinquencies and Forbearance — GAAP and Core Earnings Basis
(Dollars in millions)
Loans in-school/grace/deferment(1)
Loans in forbearance(2)
Loans in repayment and percentage of each status:
Loans current
Loans delinquent 31-60 days(3)
Loans delinquent 61-90 days(3)
Loans delinquent greater than 90 days(3)
Total FFELP Loans in repayment
Total FFELP Loans, gross
FFELP Loan unamortized premium
Total FFELP Loans
FFELP Loan allowance for losses
FFELP Loans, net
Percentage of FFELP Loans in repayment
Delinquencies as a percentage of FFELP Loans in
repayment
FFELP Loans in forbearance as a percentage of
loans in repayment and forbearance
2018
Balance %
$
3,793
8,386
FFELP Loan Delinquencies
December 31,
2017
Balance %
$
4,711
8,533
2016
Balance %
$
5,871
10,490
53,500
1,964
910
3,177
59,551
71,730
599
72,329
(76)
$ 72,253
89.8%
3.4
1.5
5.3
100%
59,264
2,638
1,763
4,188
67,853
81,097
666
81,763
(60)
$ 81,703
87.3%
3.9
2.6
6.2
100%
61,977
2,820
1,325
4,435
70,557
86,918
879
87,797
(67)
$ 87,730
83.0%
10.2%
12.3%
83.7%
12.7%
11.2%
87.8%
4.0
1.9
6.3
100%
81.2%
12.2%
12.9%
(1)
(2)
(3)
Loans for customers who may still be attending school or engaging in other permitted educational activities and are not yet required to make
payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for customers who
have requested and qualify for other permitted program deferments such as military, unemployment, or economic hardships.
Loans for customers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment
or who have temporarily ceased making payments due to hardship or other factors such as disaster relief.
The period of delinquency is based on the number of days scheduled payments are contractually past due.
Allowance for FFELP Loan Losses — GAAP and Core Earnings Basis
Years Ended December 31,
2017
2016
2018
$
60
70
(54)
76
$
.09%
1.4
.11%
.13%
$
$
$
71,730
62,927
59,551
$
67
42
(49)
60
$
.07%
1.2
.07%
.09%
$
$
$
81,097
68,318
67,853
78
43
(54)
67
.07%
1.2
.08%
.09%
86,918
72,714
70,557
(Dollars in millions)
Allowance at beginning of period
Provision for FFELP Loan losses
Charge-offs
Allowance at end of period
Charge-offs as a percentage of average loans in repayment
Allowance coverage of charge-offs
Allowance as a percentage of ending total loans, gross
Allowance as a percentage of ending loans in repayment
Ending total loans, gross
Average loans in repayment
Ending loans in repayment
$
$
$
$
$
65
Private Education Loan Portfolio Performance
Private Education Loan Delinquencies and Forbearance — GAAP and Core Earnings Basis
(Dollars in millions)
Loans in-school/grace/deferment(1)
Loans in forbearance(2)
Loans in repayment and percentage of each status:
Loans current
Loans delinquent 31-60 days(3)
Loans delinquent 61-90 days(3)
Loans delinquent greater than 90 days(3)
Total Private Education Loans in repayment
Total Private Education Loans, gross
Private Education Loan unamortized discount
Total Private Education Loans
Private Education Loan receivable for partially
charged-off loans
Private Education Loan allowance for losses
Private Education Loans, net
Percentage of Private Education Loans in
repayment
Delinquencies as a percentage of Private Education
Loans in repayment
Loans in forbearance as a percentage of loans in
repayment and forbearance
Loans in repayment with more than 12 payments
made
Percentage of Private Education Loans with a
cosigner
2018
Balance %
818
$
676
Private Education Loan Delinquencies
December 31,
2017
Balance %
$
1,061
895
2016
Balance %
$
1,393
790
20,741
415
267
614
22,037
23,531
(759)
22,772
94.1%
1.9
1.2
2.8
100%
21,590
471
266
597
22,924
24,880
(924)
23,956
94.2%
2.0
1.2
2.6
100%
20,506
522
321
801
22,150
24,333
(457)
23,876
92.6%
2.4
1.4
3.6
100%
674
(1,201)
$ 22,245
760
(1,297)
$ 23,419
815
(1,351)
$ 23,340
93.7%
92.1%
91.0%
5.9%
3.0%
84%
56%
5.8%
3.8%
92%
63%
7.4%
3.4%
95%
64%
(1)
(2)
(3)
Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to
make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.
Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making
full payments due to hardship or other factors such as disaster relief, consistent with established loan program servicing policies and procedures.
The period of delinquency is based on the number of days scheduled payments are contractually past due.
Allowance for Private Education Loan Losses — GAAP and Core Earnings Basis
See “Reportable Segment Earnings Summary – Core Earnings Basis – Consumer Lending Segment – Private
Education Loan Provision for Loan Losses” for discussion.
Receivable for Partially Charged-Off Private Education Loans
At the end of each month, for loans that are 212 or more days past due, we charge off the estimated loss of a
defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off.
We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic
recoveries are less than expected, the difference is immediately charged off through the allowance for Private
Education Loan losses with an offsetting reduction in the receivable for partially charged-off Private Education
Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the
allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount
originally expected to be recovered.
66
The following table summarizes the activity in the receivable for partially charged-off loans.
(Dollars in millions)
Receivable at beginning of period
Expected future recoveries of current period defaults(1)
Recoveries(2)
Charge-offs(3)
Receivable at end of period
Years Ended December 31,
2017
2016
2018
$
$
760 $
89
(139)
(36)
674 $
815 $
110
(155)
(10)
760 $
881
128
(181)
(13)
815
(1)
(2)
(3)
Represents our estimate of the amount to be collected in the future.
Current period cash collections.
Represents the current period recovery shortfall — the difference between what was expected to be collected and what was actually
collected. In addition, in 2018, the portion of the loan amount charged off at default increased from 79 percent to 80.5 percent. This change
resulted in a $32 million reduction to the balance of the receivable for partially charged-off loans. These amounts are included in total
charge-offs as reported in the “Allowance for Private Education Loan Losses” table.
Use of Forbearance as a Private Education Loan Collection Tool
Forbearance involves granting the customer a temporary cessation of payments (or temporary acceptance of
smaller than scheduled payments) for a specified period of time. Using forbearance extends the original term of the
loan. Forbearance does not grant any reduction in the total repayment obligation (principal or interest). While in
forbearance status, interest continues to accrue and is capitalized to principal when the loan re-enters repayment
status. Our forbearance policies include limits on the number of forbearance months granted consecutively and the
total number of forbearance months granted over the life of the loan. In some instances, we require good-faith
payments before granting forbearance. Exceptions to forbearance policies are permitted when such exceptions are
judged to increase the likelihood of recovery of the loan. Forbearance as a recovery tool is used most effectively
when applied based on a customer’s unique situation, including historical information and judgments. We leverage
updated customer information and other decision support tools to best determine who will be granted forbearance
based on our expectations as to a customer’s ability and willingness to repay their obligation. This strategy is aimed
at mitigating the overall risk of the portfolio as well as encouraging cash resolution of delinquent loans.
Forbearance may be granted to customers who are exiting their grace period to provide additional time to
obtain employment and income to support their obligations, or to current customers who are faced with a hardship
and request forbearance time to provide temporary payment relief. In these circumstances, a customer’s loan is
placed into a forbearance status in limited monthly increments and is reflected in the forbearance status at month-
end during this time. At the end of their granted forbearance period, the customer will enter repayment status as
current and is expected to begin making their scheduled monthly payments on a go-forward basis.
Forbearance may also be granted to customers who are delinquent in their payments. In these circumstances,
the forbearance cures the delinquency and the customer is returned to a current repayment status. In more limited
instances, delinquent customers will also be granted additional forbearance time.
The tables below show the composition and status of the Private Education Loan portfolio aged by the number
of months for which a scheduled monthly payment was received. As indicated in the tables, the percentage of loans
that are in forbearance status, are delinquent greater than 90 days or that are charged off decreases the longer the
loans have been making scheduled monthly payments.
At December 31, 2018, loans in forbearance status as a percentage of loans in repayment and forbearance
were 3.9 percent for loans that have made less than 25 monthly payments. The percentage drops to 2.3 percent for
loans that have made more than 48 monthly payments.
At December 31, 2018, loans in repayment that are delinquent greater than 90 days as a percentage of loans in
repayment were 2.4 percent for loans that have made less than 25 monthly payments. The percentage drops to
2.3 percent for loans that have made more than 48 monthly payments.
For the year ended December 31, 2018, charge-offs as a percentage of loans in repayment were 2.8 percent for
loans that have made less than 25 monthly payments. The percentage drops to 1.1 percent for loans that have made
more than 48 monthly payments.
67
GAAP and Core Earnings Basis:
(Dollars in millions)
Monthly Scheduled Payments Received
Not Yet in
December 31, 2018
Loans in-school/grace/deferment
Loans in forbearance
Loans in repayment — current
Loans in repayment — delinquent 31-60 days
Loans in repayment — delinquent 61-90 days
Loans in repayment — delinquent greater than
90 days
Total
Unamortized discount
Receivable for partially charged-off loans
Allowance for loan losses
Total Private Education Loans, net
Loans in forbearance as a percentage of loans in
repayment and forbearance
Loans in repayment — delinquent greater than 90
days as a percentage of loans in repayment
Net charge-offs as a percentage of loans in
repayment, excluding the net adjustment
from the change in the charge-off rate(1)
0 to 12
$ —
121
3,470
29
17
13 to 24
$ —
61
760
26
20
25 to 36
$ —
65
783
36
25
37 to 48
$ —
68
1,090
45
32
More than 4
8
$
—
361
14,638
279
173
Repayment
818
$
—
—
—
—
Total
$
818
676
20,741
415
267
51
$ 3,688
$
55
922
$
73
982
82
$ 1,317
$
353
15,804
$
—
818
614
23,531
(759)
674
(1,201)
$22,245
3.3%
6.6%
6.6%
5.1%
2.3%
—%
3.0%
1.4%
6.3%
8.0%
6.6%
2.3%
—%
2.8%
2.3%
4.5%
3.9%
2.9%
1.1%
—%
1.7%
(1)
In 2018, the portion of the loan amount charged off at default increased from 79 percent to 80.5 percent. This change resulted in a $32 million
reduction to the balance of the receivable for partially charged-off loans.
(Dollars in millions)
Monthly Scheduled Payments Received
Not Yet in
December 31, 2017
Loans in-school/grace/deferment
Loans in forbearance
Loans in repayment — current
Loans in repayment — delinquent 31-60 days
Loans in repayment — delinquent 61-90 days
Loans in repayment — delinquent greater than
90 days
Total
Unamortized discount
Receivable for partially charged-off loans
Allowance for loan losses
Total Private Education Loans, net
Loans in forbearance as a percentage of loans in
repayment and forbearance
Loans in repayment — delinquent greater than 90
days as a percentage of loans in repayment
Net charge-offs as a percentage of average loans
in repayment
0 to 12
$ —
188
1,605
37
26
13 to 24
$ —
90
868
39
22
25 to 36
$ —
93
1,164
47
30
37 to 48
$ —
105
1,840
63
39
More than 4
8
$
—
419
16,113
285
149
Repayment
1,061
$
—
—
—
—
Total
$ 1,061
895
21,590
471
266
74
$ 1,930
62
$ 1,081
79
$ 1,413
91
$ 2,138
$
291
17,257
$
—
1,061
597
24,880
(924)
760
(1,297)
$23,419
9.7%
8.3%
6.6%
4.9%
2.4%
—%
3.8%
4.2%
6.3%
6.0%
4.5%
1.7%
—%
2.6%
5.4%
4.1%
3.3%
2.4%
.8%
—%
1.5%
68
(Dollars in millions)
Monthly Scheduled Payments Received
Not Yet in
December 31, 2016
Loans in-school/grace/deferment
Loans in forbearance
Loans in repayment — current
Loans in repayment — delinquent 31-60 days
Loans in repayment — delinquent 61-90 days
Loans in repayment — delinquent greater than
90 days
Total
Unamortized discount
Receivable for partially charged-off loans
Allowance for loan losses
Total Private Education Loans, net
Loans in forbearance as a percentage of loans in
repayment and forbearance
Loans in repayment — delinquent greater than 90
days as a percentage of loans in repayment
Net charge-offs as a percentage of average loans
in repayment
0 to 12
$ —
239
860
65
45
13 to 24
$ —
98
973
56
37
25 to 36
$ —
95
1,565
69
48
37 to 48
$ —
99
2,363
81
51
More than 4
8
$
—
259
14,745
251
140
Repayment
1,393
$
—
—
—
—
Total
$ 1,393
790
20,506
522
321
131
$ 1,340
107
$ 1,271
131
$ 1,908
129
$ 2,723
$
303
15,698
$
—
1,393
801
24,333
(457)
815
(1,351)
$23,340
17.8%
7.7%
5.0%
3.6%
1.6%
—%
3.4%
11.9%
9.1%
7.2%
4.9%
2.0%
—%
3.6%
12.6%
5.7%
4.1%
2.5%
1.0%
—%
2.3%
Liquidity and Capital Resources
Funding and Liquidity Risk Management
The following “Liquidity and Capital Resources” discussion concentrates on our Federal Education Loans and
Consumer Lending segments. Our Business Processing and Other segments require minimal capital and funding.
We define liquidity as cash and high-quality liquid assets that we can use to meet our cash requirements. Our
two primary liquidity needs are: (1) servicing our debt and (2) our ongoing ability to meet our cash needs for
running the operations of our businesses (including derivative collateral requirements) throughout market cycles,
including during periods of financial stress. Secondary liquidity needs, which can be adjusted as needed, include the
origination of Private Education Refinance Loans, acquisitions of Private Education Loan and FFELP Loan
portfolios, acquisitions of companies, the payment of common stock dividends and the repurchase of common stock
under common share repurchase programs. To achieve these objectives, we analyze and monitor our liquidity needs,
maintain excess liquidity and access diverse funding sources including the issuance of unsecured debt and the
issuance of secured debt primarily through asset-backed securitizations and/or other financing facilities.
We define our liquidity risk as the potential inability to meet our obligations when they become due without
incurring unacceptable losses or to invest in future asset growth and business operations at reasonable market rates.
Our primary liquidity risk relates to our ability to service our debt, meet our other business obligations and to
continue to grow our business. The ability to access the capital markets is impacted by general market and economic
conditions, our credit ratings, as well as the overall availability of funding sources in the marketplace. In addition,
credit ratings may be important to customers or counterparties when we compete in certain markets and when we
seek to engage in certain transactions, including over-the-counter derivatives.
Credit ratings and outlooks are opinions subject to ongoing review by the ratings agencies and may change,
from time to time, based on our financial performance, industry and market dynamics and other factors. Other
factors that influence our credit ratings include the ratings agencies’ assessment of the general operating
environment, our relative positions in the markets in which we compete, reputation, liquidity position, the level and
volatility of earnings, corporate governance and risk management policies, capital position and capital management
practices. A negative change in our credit rating could have a negative effect on our liquidity because it might raise
the cost and availability of funding and potentially require additional cash collateral or restrict cash currently held as
collateral on existing borrowings or derivative collateral arrangements. It is our objective to improve our credit
ratings so that we can continue to efficiently access the capital markets even in difficult economic and market
conditions. We have unsecured debt that totaled $11.5 billion at December 31, 2018. Three credit rating agencies
currently rate our long-term unsecured debt at below investment grade.
69
We expect to fund our ongoing liquidity needs, including the repayment of $0.8 billion of senior unsecured
notes that mature in the next twelve months, primarily through our current cash, investments and unencumbered
FFELP Loan portfolio, the predictable operating cash flows provided by operating activities ($1.1 billion in the year
ended December 31, 2018), the repayment of principal on unencumbered education loan assets, and the distribution
of overcollateralization from our securitization trusts. We may also, depending on market conditions and
availability, draw down on our secured FFELP Loan and Private Education Loan facilities, issue term ABS, enter
into additional Private Education Loan ABS repurchase facilities, or issue additional unsecured debt.
We originate Private Education Refinance Loans. We also have purchased and may purchase, in future
periods, Private Education Loan and FFELP Loan portfolios from third parties. Those originations and purchases are
part of our ongoing liquidity needs. We repurchased 17.4 million common shares for $220 million in 2018 and have
$440 million of remaining share repurchase authority as of December 31, 2018.
Sources of Liquidity and Available Capacity
Ending Balances
(Dollars in millions)
Sources of primary liquidity:
Total unrestricted cash and liquid investments
Unencumbered FFELP Loans
Total GAAP and Core Earnings basis
December 31,
2018
December 31,
2017
$
$
1,286 $
332
1,618 $
1,520
690
2,210
Average Balances
(Dollars in millions)
Sources of primary liquidity:
Total unrestricted cash and liquid investments
Unencumbered FFELP Loans
Total GAAP and Core Earnings basis
Years Ended December 31,
2017
2016
2018
$
$
1,672 $
705
2,377 $
1,234 $
960
2,194 $
1,185
1,035
2,220
Liquidity may also be available under secured credit facilities to the extent we have eligible collateral and
capacity available. Maximum borrowing capacity under the FFELP Loan-other facilities will vary and be subject to
each agreement’s borrowing conditions, including, among others, facility size, current usage and availability of
qualifying collateral from unencumbered FFELP Loans. As of December 31, 2018 and 2017, the maximum
additional capacity under these facilities was $752 million and $2.4 billion, respectively. For the years ended
December 31, 2018, 2017 and 2016, the average maximum additional capacity under these facilities was
$2.0 billion, $2.8 billion and $2.6 billion, respectively. As of December 31, 2018, the maturity dates of the FFELP
Loan-other facilities ranged from November 2019 to April 2020.
Liquidity may also be available from our Private Education Loan asset-backed commercial paper (“ABCP”)
facilities. Maximum borrowing capacity under the Private Education Loan-other facilities will vary and be subject to
each agreement’s borrowing conditions, including, among others, facility size, current usage and availability of
qualifying collateral from unencumbered Private Education Loans. As of December 31, 2018 and 2017, the
maximum additional capacity under these facilities was $635 million and $925 million, respectively. For the years
ended December 31, 2018, 2017 and 2016, the average maximum additional capacity under these facilities was
$714 million, $373 million and $474 million, respectively. As of December 31, 2018, the maturity dates of the
Private Education Loan facilities ranged from June 2019 to June 2020.
At December 31, 2018, we had a total of $5.7 billion of unencumbered tangible assets inclusive of those listed
in the table above as sources of primary liquidity. Total unencumbered education loans comprised $2.9 billion of our
unencumbered tangible assets of which $2.6 billion and $332 million related to Private Education Loans and FFELP
Loans, respectively. In addition, as of December 31, 2018, we had $9.4 billion of encumbered net assets (i.e.,
overcollateralization) in our various financing facilities (consolidated variable interest entities). Since the fourth
quarter of 2015, we have closed on $3.2 billion of Private Education Loan ABS Repurchase Facilities. These
repurchase facilities are collateralized by Residual Interests in previously issued Private Education Loan ABS trusts.
These are examples of how we can effectively finance previously encumbered assets to generate additional liquidity
in addition to the unencumbered assets we traditionally have encumbered in the past. Additionally, these repurchase
facilities had a cost of funds lower than that of a new unsecured debt issuance.
70
The following table reconciles encumbered and unencumbered assets and their net impact on total tangible
equity.
(Dollars in billions)
Net assets of consolidated variable interest entities
(encumbered assets) — FFELP Loans
Net assets of consolidated variable interest entities
(encumbered assets) — Private Education Loans
Tangible unencumbered assets(1)
Senior unsecured debt
Mark-to-market on unsecured hedged debt(2)
Other liabilities, net
Total tangible equity — GAAP Basis(1)
December 31,
2018
December 31,
2017
$
4.6 $
4.7
4.8
5.7
(11.5)
(.1)
(.7)
2.8 $
5.9
6.6
(13.9)
(.3)
(.3)
2.7
$
(1)
(2)
At December 31, 2018 and 2017, excludes goodwill and acquired intangible assets, net, of $786 million and $810 million,
respectively.
At December 31, 2018 and 2017, there were $51 million and $189 million, respectively, of net gains on derivatives hedging this
debt in unencumbered assets, which partially offset these gains.
2018 Financing Transactions
During 2018, Navient issued $4.0 billion in FFELP Loan ABS, $3.0 billion in Private Education Loan ABS
and $500 million in unsecured debt.
Shareholder Distributions
During 2018, we paid four quarterly common stock dividends of $0.16 per share.
We repurchased 17.4 million shares of common stock for $220 million in 2018. In September 2018, our board
of directors authorized a new $500 million share repurchase program. There is $440 million of remaining share
repurchase authority outstanding at December 31, 2018. Since the Spin-Off in April 2014, we have repurchased
185 million shares for $2.8 billion.
Counterparty Exposure
Counterparty exposure related to financial instruments arises from the risk that a lending, investment or
derivative counterparty will not be able to meet its obligations to us. Risks associated with our lending portfolio are
discussed in the section titled “Financial Condition — FFELP Loan Portfolio Performance” and “— Private
Education Loan Portfolio Performance.”
Our investment portfolio is comprised of very short-term securities issued by a diversified group of highly
rated issuers, limiting our counterparty exposure. Additionally, our investing activity is governed by board of
director approved limits on the amount that is allowed to be invested with any one issuer based on the credit rating
of the issuer, further minimizing our counterparty exposure. Counterparty credit risk is considered when valuing
investments and considering impairment.
Related to derivative transactions, protection against counterparty risk is generally provided by Master
Agreements, Schedules, and Credit Support Annexes (“CSAs”) developed by the International Swaps and
Derivatives Association, Inc. (“ISDA documentation”). In particular, Navient’s CSAs require a counterparty to post
collateral if a potential default would expose the other party to a loss. All corporate derivative contracts entered into
by Navient that are not cleared through a derivatives clearing organization are covered under such agreements and
require collateral to be exchanged based on the net fair value of derivatives with each counterparty. Corporate
derivative contracts entered into by Navient that are cleared through a derivatives clearing organization are settled
daily by participants on a multilateral, net basis, which mitigates counterparty credit exposure. Our securitization
trusts with swaps have ISDA documentation with protections against counterparty risk. The collateral calculations
contemplated in the ISDA documentation of our securitization trusts require collateral based on the fair value of the
derivative which may be adjusted for additional collateral based on rating agency criteria requirements considered
within the collateral agreement. The trusts are not required to post collateral to the counterparties. In all cases, our
exposure is limited to the value of the derivative contracts in a gain position net of any collateral we are holding. We
consider counterparties’ credit risk when determining the fair value of derivative positions on our exposure net of
collateral.
71
We have liquidity exposure related to collateral movements between us and our derivative counterparties.
Movements in the value of the derivatives, which are primarily affected by changes in interest rate and foreign
exchange rates, may require us to return cash collateral held or may require us to post collateral to counterparties.
See “Note 7 — Derivative Financial Instruments” for more information on the amount of cash that has been
received and delivered to derivative counterparties. Effective June 30, 2018, our counterparty exposure reflects rule
changes adopted by clearing organizations that require entities to treat daily variation margin payments as legal
settlements of the outstanding exposure of the derivative, rather than recording these positions on a gross basis with
a related collateral receivable or payable.
The table below highlights exposure related to our derivative counterparties at December 31, 2018.
(Dollars in millions)
Exposure, net of collateral
Percent of exposure to counterparties with credit ratings
below S&P AA- or Moody’s Aa3
Percent of exposure to counterparties with credit ratings
below S&P A- or Moody’s A3
Corporate
Contracts
Securitization
Trust
Contracts
$
19
$
100%
80%
7
17%
0%
Core Earnings Basis Borrowings
The following tables present the ending balances, average balances and average interest rates of our Core
Earnings basis borrowings. The average interest rates include derivatives that are economically hedging the
underlying debt but may not qualify for hedge accounting treatment (see “Non-GAAP Financial Measures – Core
Earnings — Derivative Accounting – Reclassification of Settlements on Derivative and Hedging Activities” of this
Item 7).
Ending Balances
(Dollars in millions)
Unsecured borrowings:
Senior unsecured debt(1)
Total unsecured borrowings
Secured borrowings:
FFELP Loan securitizations(2)
Private Education Loan
securitizations(3)
FFELP Loan — other facilities
Private Education Loan — other
facilities
Other(4)
Total secured borrowings
Core Earnings basis borrowings
Adjustment for GAAP accounting
treatment
GAAP basis borrowings
December 31, 2018
Long
Term Total
Short
Term
December 31, 2017
Long
Term Total
Short
Term
December 31, 2016
Long
Term Total
Short
Term
$
817 $10,674 $11,491 $ 1,306 $ 12,624 $ 13,930 $
817 10,674 11,491 1,306 12,624 13,930
717 $ 13,029 $ 13,746
717 13,029 13,746
— 66,318 66,318
— 71,208 71,208
— 73,522 73,522
300 12,985 13,285
2,927 2,625 5,552 1,536
686 12,646 13,332
8,366
6,830
548 14,125 14,673
— 12,443 12,443
267
1,114 1,266 2,380
267
464
606
4,608 83,194 87,802 3,444 92,394 95,838 1,618 100,090 101,708
5,425 93,868 99,293 4,750 105,018 109,768 2,335 113,119 115,454
2,394
538
1,710
—
684
538
464
606
—
—
—
(3)
(752)
$ 5,422 $93,519 $98,941 $ 4,771 $105,012 $109,783 $ 2,334 $112,368 $114,702
(352)
(349)
(751)
21
15
(6)
(1)
(1)
(2)
(3)
(4)
Includes principal amount of $817 million, $1.3 billion and $719 million of short-term debt as of December 31, 2018, 2017 and 2016, respectively.
Includes principal amount of $10.8 billion, $12.7 billion and $13.1 billion of long-term debt as of December 31, 2018, 2017 and 2016, respectively.
Includes $244 million of long-term debt related to the FFELP Loan asset-backed securitization repurchase facilities (“FFELP Loan Repurchase
Facilities”) as of December 31, 2018.
Includes $300 million, $686 million and $548 million of short-term debt related to the Private Education Loan asset-backed securitization
repurchase facilities (“Private Education Loan Repurchase Facilities”) as of December 31, 2018, 2017 and 2016, respectively. Includes $2.0
billion, $1.3 billion and $475 million of long-term debt related to the Private Education Loan Repurchase Facilities as of December 31, 2018, 2017
and 2016, respectively.
“Other” primarily includes the obligation to return cash collateral held related to derivative exposures.
Secured borrowings comprised 88 percent and 87 percent of our Core Earnings basis debt outstanding at
December 31, 2018 and 2017, respectively.
72
Average Balances
(Dollars in millions)
Unsecured borrowings:
Senior unsecured debt
Total unsecured borrowings
Secured borrowings:
FFELP Loan securitizations(1)
Private Education Loan securitizations(2)
FFELP Loan — other facilities
Private Education Loan — other facilities
Other(3)
Total secured borrowings
Core Earnings basis borrowings
2018
Years Ended December 31,
2017
2016
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
$
13,109
13,109
6.25% $
6.25
14,005
14,005
5.32% $
5.32
14,134
14,134
69,200
13,247
5,834
2,346
292
90,919
$ 104,028
72,628
2.94
13,563
4.13
10,053
2.97
1,575
3.68
458
3.34
3.14
98,277
3.53% $ 112,282
75,397
2.13
15,906
3.27
14,610
2.00
389
2.64
629
2.53
2.28
106,931
2.66% $ 121,065
4.45%
4.45
1.54
2.61
1.25
2.60
1.33
1.66
1.99%
1.99%
.03
2.02%
Core Earnings basis borrowings
Adjustment for GAAP accounting treatment
GAAP basis borrowings
$ 104,028
—
$ 104,028
3.53% $ 112,282
—
(.01)
3.52% $ 112,282
2.66% $ 121,065
—
(.01)
2.65% $ 121,065
(1)
(2)
(3)
Includes $40 million of debt related to the FFELP Loan Repurchase Facilities for the year ended December 31, 2018.
Includes $2.4 billion, $1.5 billion and $885 million of debt related to the Private Education Loan Repurchase Facilities for the years ended
December 31, 2018, 2017 and 2016, respectively.
“Other” primarily includes the obligation to return cash collateral held related to derivative exposures.
Contractual Cash Obligations
The following table provides a summary of our contractual principal obligations associated with long-term
notes at December 31, 2018. For further discussion of these obligations, see “Note 6 — Borrowings.”
(Dollars in millions)
Long-term notes:
Senior unsecured debt
Secured borrowings(1)
Total contractual cash obligations(2)
1 Year or
Less
1 to 3
Years
3 to 5
Years
Over
5 Years
Total
$
$
— $
10,274
10,274 $
3,480 $
16,171
19,651 $
3,232 $
12,325
15,557 $
3,962 $
44,424
48,386 $
10,674
83,194
93,868
(1)
(2)
Includes $79.3 billion of long-term notes issued by consolidated VIEs in conjunction with our securitization transactions and included in long-term
notes in the consolidated balance sheet. Timing of obligations is estimated based on our current projection of prepayment speeds of the securitized
assets.
The aggregate principal amount of debt that matures in each period is $10.3 billion, $19.8 billion, $15.7 billion and $48.8 billion, respectively.
Specifically excludes derivative market value adjustments of $(349) million for long-term notes. Interest obligations on notes are predominantly
variable in nature, resetting monthly and quarterly based on LIBOR.
Unrecognized tax benefits were $79 million and $68 million for 2018 and 2017, respectively. For additional
information, see “Note 14 — Income Taxes.”
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our
consolidated financial statements, which have been prepared in accordance with generally accepted accounting
principles in the United States of America (“GAAP”). “Note 2 — Significant Accounting Policies” includes a
summary of the significant accounting policies and methods used in the preparation of our consolidated financial
statements. The preparation of these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the
reporting periods. Actual results may differ from these estimates under varying assumptions or conditions. On a
quarterly basis, management evaluates its estimates, particularly those that include the most difficult, subjective or
complex judgments and are often about matters that are inherently uncertain. The most significant judgments,
estimates and assumptions relate to the following critical accounting policies that are discussed in more detail below.
73
Allowance for Loan Losses
Purchased Credit Impaired (“PCI”) Loans
Loans acquired with evidence of deterioration of credit quality since origination for which it is probable, at
acquisition, that the investor will be unable to collect all contractually required payments receivable are PCI loans
accounted for under Accounting Standard Codification (“ASC”) 310-30, “Loans and Debt Securities Acquired with
Deteriorated Credit Quality.” When considering whether evidence of credit quality deterioration exists as of the
purchase date, the Company considers loan guarantees and the following credit attributes: delinquency status, use of
forbearance, recent borrower FICO scores, use of loan modification programs, and borrowers who have filed for
bankruptcy.
The Company aggregates loans with common risk characteristics into pools and accounts for each pool as a
single asset with a single composite interest rate and an aggregate expectation of cash flows. The pools are initially
recorded at fair value. The Company recognizes interest income based on each pool’s effective interest rate which is
based on our estimate of all cash flows expected to be received and includes an assumption about prepayment rates.
The pools are tested quarterly for impairment by re-estimating the future cash flows to be received from the pools. If
the new estimated cash flows result in a pool’s effective interest rate increasing, then this new yield is used
prospectively over the remaining life of the pool. If the new estimated cash flows result in a pool’s effective interest
rate decreasing, the pool is impaired and written down through a valuation allowance to maintain the effective
interest rate. Loans classified as PCI do not have charge-offs reported nor are they reported as Trouble Debt
Restructuring (“TDR”) loans.
Based on the credit attributes discussed above, we determined that $261 million principal amount of Private
Education Loans acquired in 2017 are accounted for as PCI loans with a fair value and resulting carry value of
$101 million as of the acquisition date. As of acquisition, this portfolio’s contractually required payments receivable
(the total undiscounted amount of all uncollected contractual principal and interest payments both past due and
scheduled for the future, adjusted for prepayments) was $411 million with an estimated accretable yield (income
expected to be recognized in future periods) of $108 million. As of December 31, 2018, the carrying amount was
$82 million with no valuation allowance recorded. The most significant assumptions and estimates used to recognize
interest income and determine if a valuation allowance is required are default rates, recovery rates and prepayment
speeds. The default rate and recovery rate assumptions are derived in the same manner as they are for the TDR
loans that are a part of the Private Education Loan allowance for loan losses discussed below. The prepayment
speed assumptions are derived in the same manner as discussed in the “Premium and Discount Amortization”
section that follows.
Purchased Non-Credit Impaired Loans
Loans acquired that do not have evidence of credit deterioration since origination are recorded at fair value
with no allowance for loan losses established at the acquisition date. Loan premiums and discounts are amortized as
a part of interest income using the interest method under ASC 310-20, “Nonrefundable Fees and Other Costs,” using
the same prepayment speed assumption methodology discussed in the “Premium and Discount Amortization”
section that follows. An allowance for loan losses would be established if incurred losses in the loans exceed the
remaining unamortized discount recorded at the time of acquisition (i.e., the next two years of expected charge-offs
as well as any additional TDR allowance required is greater than the remaining discount). As a result of this policy,
to the extent that actual charge-offs exceed any related allowance for loan losses recognized post-acquisition,
provision for loan losses is recorded when the loans are charged off. Charge-offs are recorded through the allowance
for loan losses. In 2017, we acquired Private Education Loans with unpaid principal balance of $2.8 billion at a
discount of $424 million that are accounted for under this policy. No allowance for loan losses has been established
for these loans as of December 31, 2018, as the remaining purchased discount associated with the Private Education
Loans of $326 million as of December 31, 2018 remains greater than the incurred losses. The incurred losses are
derived in the same manner that the Private Education Loan allowance for loan losses is derived below.
Private Education Loan Allowance for Loan Losses
Our Private Education Loan portfolio contains TDR and non-TDR loans. For customers experiencing financial
difficulty, certain Private Education Loans for which we have granted a forbearance of greater than three months, an
interest rate reduction or an extended repayment plan are classified as TDRs. The allowance requirements are
different based on these designations. In determining the allowance for loan losses on our non-TDR portfolio, we
estimate the principal amount of loans that will default over the next two years (two years being the expected period
between a loss event and default) and how much we expect to recover over time related to the defaulted amount.
Expected defaults less our expected recoveries equal the allowance related to this portfolio. Our historical
74
experience indicates that, on average, the time between the date that a customer experiences a default causing event
(i.e., the loss trigger event) and the date that we charge off the unrecoverable portion of that loan is two years.
Separately, for our TDR portfolio, we estimate an allowance amount sufficient to cover life-of-loan expected losses
through an impairment calculation based on the difference between the loan’s basis and the present value of
expected future cash flows (which would include life-of-loan default and recovery assumptions) discounted at the
loan’s original effective interest rate. Our TDR portfolio is comprised mostly of loans with forbearance usage
greater than three months and interest rate reductions. The separate allowance estimates for our TDR and non-TDR
portfolios are combined into our total allowance for Private Education Loan losses.
In estimating both the non-TDR and TDR allowance amounts, we start with historical experience of customer
default behavior. We make judgments about which historical period to start with and then make further judgments
about whether that historical experience is representative of future expectations and whether additional adjustments
may be needed to those historical default rates. We also take the economic environment into consideration when
calculating the allowance for loan losses. We analyze key economic statistics and the effect we expect them to have
on future defaults. Key economic statistics analyzed as part of the allowance for loan losses are primarily
unemployment rates. Our allowance for loan losses is estimated using an analysis of delinquent and current
accounts. Our model is used to estimate the likelihood that a loan may progress through the various delinquency
stages and ultimately charge off. The evaluation of the allowance for loan losses is inherently subjective, as it
requires material estimates that may be susceptible to significant changes. The estimate for the allowance for loan
losses is subject to a number of assumptions. If actual future performance in delinquency, charge-offs and recoveries
are significantly different than estimated, this could materially affect our estimate of the allowance for loan losses
and the related provision for loan losses on our income statement.
We determine the collectability of our Private Education Loan portfolio by evaluating certain risk
characteristics. We consider school type, credit score (FICO), existence of a cosigner, loan status and loan seasoning
as the key credit quality indicators because they have the most significant effect on our determination of the
adequacy of our allowance for loan losses. The type of school customers attend can have an impact on their
graduation rate and job prospects after graduation and therefore affects their ability to make payments. Credit scores
are an indicator of the credit worthiness of a customer and the higher the credit score the more likely it is the
customer will be able to make all of their contractual payments. Loan status affects the credit risk because a past due
loan is more likely to result in a credit loss than an up-to-date loan. Additionally, loans in a deferred payment status
have different credit risk profiles compared with those in current payment status. Of the portfolio in repayment, loan
seasoning is an important factor. It affects credit risk because a loan with a history of making payments generally
has a lower incidence of default than a loan with a history of making infrequent or no payments. The existence of a
cosigner lowers the likelihood of default. We monitor and update these credit quality indicators in the analysis of the
adequacy of our allowance for loan losses on a quarterly basis.
To estimate the probable credit losses incurred in the loan portfolio at the reporting date, we use historical
experience of customer payment behavior in connection with the key credit quality indicators and incorporate
management expectations regarding macroeconomic and collection performance factors. Our model is based upon
the most recent twelve months of actual collection experience as the starting point for the non-TDR portfolio and the
most recent approximate 15 years for the TDR portfolio and applies expected macroeconomic changes and
collection procedure changes to estimate expected losses caused by loss events incurred as of the balance sheet date.
Our model for the non-TDR portfolio places a greater emphasis on the more recent default experience rather than
the default experience for older historical periods, as we believe the more recent default experience is more
indicative of the probable losses incurred in the loan portfolio today that will default over the next two years. The
TDR portfolio uses a longer historical default experience since we are projecting life of loan remaining losses.
Similar to estimating defaults, we use historical customer payment behavior to estimate the timing and amount of
future recoveries on charged-off loans. We use judgment in determining whether historical performance is
representative of what we expect to collect in the future. We then apply the default and collection rate projections to
each category of loans. Once the quantitative calculation is performed, we review the adequacy of the allowance for
loan losses and determine if qualitative adjustments need to be considered. Additionally, we consider changes in
laws and regulations that could potentially impact the allowance for loan losses.
Our collection policies allow for periods of nonpayment for customers requesting additional payment grace
periods upon leaving school or experiencing temporary difficulty meeting payment obligations. This is referred to as
forbearance status and is considered in our allowance for loan losses. The loss confirmation period is in alignment
with our typical collection cycle and takes into account these periods of nonpayment.
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At the end of each month, for loans that are 212 or more days past due, we charge off the estimated loss of a
defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off.
We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic
recoveries are less than expected, the difference is immediately charged off through the allowance for Private
Education Loan losses with an offsetting reduction in the receivable for partially charged-off Private Education
Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the
allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount
originally expected to be recovered.
Premium and Discount Amortization
The Company has a net unamortized discount balance of $160 million, or 0.17 percent, in connection with its
$96 billion education loan portfolio as of December 31, 2018. The most judgmental estimate for premium and
discount amortization on education loans is the Constant Prepayment Rate (“CPR”), which measures the rate at
which loans in the portfolio pay down principal compared to their stated terms. In determining the CPR we only
consider payments made in excess of contractually required payments. This would include loan consolidation and
other early payoff activity. These activities are affected by changes in our business strategy, changes in our
competitors’ business strategies, legislative changes including the ability to consolidate, interest rates and changes to
the current economic and credit environment. When we determine the CPR we begin with historical prepayment
rates. We make judgments about which historical period to start with and then make further judgments about
whether that historical experience is representative of future expectations and whether additional adjustment may be
needed to those historical prepayment rates.
In the past (prior to 2008), the consolidation of FFELP Loans and Private Education Loans significantly
affected our CPRs and updating those assumptions often resulted in material adjustments to our amortization
expense. As a result of the passage of the Health Care and Education Reconciliation Act of 2010 (“HCERA”), there
is no longer the ability to consolidate loans under the FFELP although there are other consolidation options with ED
and private refinancing options with other lenders. As a result, we expect CPRs related to our FFELP Loans to
remain relatively stable over time, unless there is a legislative change by ED or by Congress to encourage or force
consolidation. Some education loan companies offer private education loans to refinance a borrower’s loan or to
consolidate both FFELP and Private Education Loans (both activities referred to as “consolidation”) and we
anticipate more entrants to offer similar products. In 2017, we began to consolidate FFELP and Private Education
Loans as well. These products and expectations are built into the CPR assumption we use for FFELP and Private
Education Loans. However, it is difficult to accurately project the timing and level at which this consolidation
activity will continue and our assumption may need to be updated by a material amount in the future based on
changes in the economy, marketplace and legislation.
In 2018 there was a net $15 million decrease in net interest income due to a cumulative adjustment related to
an increase in prepayment speed assumptions used to amortize loan premiums and discounts. The FFELP Stafford
Loan Constant Prepayment Rate (“CPR”) assumption was increased from 6 percent to 7 percent, the FFELP
Consolidation Loan CPR assumption remained at 4 percent and the Private Education Loan CPR assumption was
increased from 6 percent to 8 percent. These CPR assumption increases were primarily a result of increased
voluntary payoffs primarily due to an improving economy as well as increased third-party consolidation activity.
Goodwill and Intangible Assets
In determining annually (or more frequently if required) whether goodwill is impaired, we complete a
goodwill impairment analysis which may be a qualitative or a quantitative analysis depending on the facts and
circumstances associated with the reporting unit. Qualitative factors considered in conjunction with a qualitative
analysis include: (1) the amount of cushion that existed the last time a quantitative Step 1 valuation was performed,
(2) macroeconomic factors (economy), (3) industry specific factors (growth or deterioration of the market;
regulatory/political developments), (4) cost factors (margins), (5) financial performance of the reporting unit itself,
(6) other specific items (litigation, change in management or key personnel) and (7) a sustained decrease in our
share price. There can be significant judgment involved in assessing these qualitative factors. If, based on a
qualitative analysis, we determine it is “more-likely-than-not” that the fair value of a reporting unit is less than its
carrying amount, then we will also complete a quantitative impairment analysis. A quantitative goodwill
impairment analysis consists of a comparison of the fair value of the reporting unit to the carrying value. If the
carrying value of the reporting unit exceeds the fair value (what we believe a third party would pay for such
reporting unit), a goodwill impairment analysis will be performed to measure the amount of impairment loss, if any.
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There are significant judgments involved in determining the fair value of a reporting unit, including assumptions
regarding estimates of future revenues, expenses, net income and cash flows from existing and new business
activities, the appropriate market multiples, discount rates and growth rates to apply and the appropriate control
premium to apply to arrive at the final fair value. The reporting units for which we must estimate the fair value are
not publicly traded and for some reporting units there may not be directly comparable market data available to aid in
its valuation. In 2018, we determined the fair value of the Government Services and Healthcare Services reporting
units as part of our impairment testing and concluded such reporting units were not impaired. We used a market
multiple approach that applied market multiples related to revenue, EBITDA and net income to the respective
measures of these reporting units. The market multiples were derived from similar publicly-traded companies.
Fair Value Measurement
The most significant assumptions used in fair value measurements, including those related to credit and
liquidity risk, are as follows:
1. Derivatives — When determining the fair value of derivatives, we take into account counterparty credit
risk for positions where we are exposed to the counterparty on a net basis by assessing exposure net of
collateral held. The net exposure for each counterparty is adjusted based on market information available
for that specific counterparty, including spreads from credit default swaps. Additionally, when the
counterparty has exposure to us related to our derivatives, we fully collateralize the exposure, minimizing
the adjustment necessary to the derivative valuations for our own credit risk. Trusts that contain derivatives
are not required to post collateral to counterparties as the credit quality and securitized nature of the trusts
minimizes any adjustments for the counterparty’s exposure to the trusts. Adjustments related to credit risk
reduced the overall value of our derivatives by $26 million as of December 31, 2018. We also take into
account changes in liquidity when determining the fair value of derivative positions. We adjusted the fair
value of certain less liquid positions downward by approximately $19 million as of December 31, 2018,
related primarily to basis swaps indexed to interest rate indices with inactive markets. A major indicator of
market inactivity is the widening of the bid/ask spread in these markets. In general, the widening of
counterparty credit spreads and reduced liquidity for derivative instruments as indicated by wider bid/ask
spreads will reduce the fair value of derivatives. In addition, certain cross-currency interest rate swaps
hedging foreign currency denominated reset rate and amortizing notes in our trusts contain extension
features that coincide with the remarketing dates of the notes. The valuation of the extension feature
requires significant judgment based on internally developed inputs.
2. Education Loans — Our FFELP Loans and Private Education Loans are accounted for at cost or at the
lower of cost or fair value if the loan is held-for-sale. The fair values of our education loans are disclosed in
“Note 12 — Fair Value Measurements.” For both FFELP Loans and Private Education Loans accounted
for at cost, fair value is determined by modeling loan level cash flows using stated terms of the assets and
internally-developed assumptions to determine aggregate portfolio yield, net present value and average life.
The significant assumptions used to project cash flows are prepayment speeds, default rates, cost of funds,
the amount funded by debt versus equity, and required return on equity. In addition, the Floor Income
component of our FFELP Loan portfolio is valued through discounted cash flow and option models using
both observable market inputs and internally developed inputs. Significant inputs into the models are not
generally market observable. They are either derived internally through a combination of historical
experience and management’s qualitative expectation of future performance (in the case of prepayment
speeds, default rates, and capital assumptions) or are obtained through external broker quotes (as in the
case of cost of funds). When possible, market transactions are used to validate the model. In most cases,
these are either infrequent or not observable.
For further information regarding the effect of our use of fair values on our results of operations, see “Note
12 — Fair Value Measurements.”
Risk Management
Our Approach
The consumer lending, loan servicing, asset recovery and business processing services Navient provides, as
well as the financial markets in which Navient operates, continue to undergo dramatic competitive, technological
and regulatory changes. Identifying, understanding and effectively managing the risks inherent in our business are
critical to our continued success. Navient assigns risk oversight, management and assessment responsibilities at
various levels within our organization and continuously coordinates these activities and responsibilities across our
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organization. We maintain comprehensive risk management practices to identify, measure, monitor, evaluate,
control and report on our significant risks and we routinely evaluate these practices to determine whether they are
functioning properly and can be improved.
Risk Management Philosophy
Navient’s risk management philosophy is to ensure all significant risk inherent in our business is identified,
measured, monitored, evaluated, controlled and reported. In furtherance of these goals, Navient
• maintains a comprehensive and uniform risk management framework;
• follows a “three lines of defense” structure based upon: (1) accountability and ownership at the business area
level for risks inherent in their activities (first line of defense); (2) supporting areas, such as Human
Resources, Legal, Compliance, Finance and Accounting, Information-Technology and Information Security,
monitor, guide and advise the business areas in their respective areas of expertise (second line of defense);
and (3) Internal Audit independently reviews both business and support areas to ensure compliance with
applicable laws, regulations and internal policies and procedures (third line of defense);
• provides appropriate reporting tools to management and our board of directors and their respective
committees; and
• trains our employees on our risk management processes and philosophy.
Risk Oversight, Roles and Responsibilities
The Navient board of directors and its standing committees oversee our strategic direction, including setting
our risk management philosophy, tolerance and parameters; and assessing the risks our businesses face as well as the
risk management practices our management team develops and implements. We escalate to our board of directors
any significant departures from established tolerances and parameters and review new and emerging risks with
them.
Responsibility for risk management is assigned at several different levels of our organization, including our
board of directors and its committees. Each business area within our organization is primarily responsible for
managing its specific risks following processes and procedures developed in collaboration with our executive
management team and internal risk management partners. In addition, our Human Resources, Legal, Compliance,
Finance and Accounting, Information-Technology and Information Security support areas are responsible for
providing our business areas with the training, systems and specialized expertise necessary to properly perform their
risk management responsibilities.
Board of Directors. Our board of directors, directly and through its standing committees, is responsible for
overseeing our strategic direction and risk management approach. It approves our annual business plan, periodically
reviews our strategic approach and priorities and spends significant time considering our capital requirements and
our dividend and share repurchase levels and activities. Standing committees of our board of directors include
Executive, Audit, Compensation and Personnel, Nominations and Governance, and Finance and Operations.
Charters for each committee providing their specific responsibilities and areas of risk oversight are published on our
website together with the names of the directors serving on these committees.
Chief Executive Officer. Our Chief Executive Officer is responsible for establishing our risk management
culture and ensuring business areas operate within risk parameters and in accordance with our annual business plan.
Chief Risk and Compliance Officer. Our Chief Risk and Compliance Officer is responsible for ensuring proper
oversight, management and reporting to our board of directors and management regarding our risk management
practices, the timely escalation and complete resolution of any significant risk issues and for instilling our risk
management culture in our people and our practices, ensuring business areas operate within risk parameters and in
accordance with our annual business plan.
Enterprise Risk and Compliance Committee. Our Enterprise Risk and Compliance Committee is an executive
management-level committee chaired by our Chief Risk and Compliance Officer where senior management reviews
our significant risks, receives periodic reports on adherence to agreed risk parameters, prioritizes and provides
direction on mitigation of our risks and closure of issues and supervises the continued evolution of our enterprise
risk management program. This committee also oversees regulatory compliance risk management activities
including compliance regulatory training, compliance regulatory change management, compliance and operational
risk assessment, transactional testing and monitoring, customer complaint monitoring, policies and procedures, our
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privacy and information sharing practices, Sarbanes-Oxley compliance, and our Code of Business Conduct. Lastly,
this committee evaluates risks associated with new or modified business and makes recommendations regarding
proposed business initiatives based on their inherent risks and controls. In addition to the Chair, committee
membership includes our Chief Executive Officer, the heads of Asset Management and Servicing, Business
Processing Solutions and Consumer Lending, our Chief Financial Officer, Chief Legal Officer, Chief Information
Officer and Chief Audit Officer. The committee meets at least four times per year, usually in advance of each
regularly scheduled board of directors meeting and more frequently if needed to address emerging risks and specific
issues.
Credit and Loan Loss Committee. Our Credit and Loan Loss Committee is an executive management-level
committee chaired by our Chief Risk and Compliance Officer to oversee our credit and portfolio management
monitoring and strategies, the sufficiency of our loan loss reserves, and current or emerging issues affecting
delinquency and default trends which may result in adjustments in our allowances for loan losses.
Disclosure Committee. Our Disclosure Committee reviews our periodic SEC reporting documents, earnings
releases and related disclosure policies and procedures, and evaluates whether modified or additional disclosures are
required.
Critical Accounting Assumptions Committee. Our Critical Accounting Assumptions Committee oversees
critical accounting assumptions, as well as key judgments and estimates involved in preparing our financial
statements. These include assumptions about matters such as default, recovery and prepayment rates.
Asset and Liability Committee. Our Asset and Liability Committee oversees our investment portfolio and
strategy and our compliance with our investment policy.
Information-Technology and Operations Management Committee. Our Information-Technology and
Operations Management Committee oversees our business area operations and the activities of our Information-
Technology support area, including Information Security.
Human Resources Committee. Our Human Resources Committee ensures that human resources projects and
activities are properly reviewed and approved prior to implementation, and that the prioritization of human resources
projects is appropriate for and responsive to the business, human capital and risk management needs of our
company.
Incentive Compensation Plan Committee. Our Incentive Compensation Plan Committee defines the approach
and practices utilized to effectively govern all Incentive Compensation Plans in order to achieve business results
while preventing unreasonable risk taking.
Internal Audit Risk Assessment
Navient’s Internal Audit function monitors the Company’s various risk management and compliance efforts,
identifies areas that may require increased focus and resources, and reports its findings and recommendations to
executive management and the Audit Committee of our board of directors. Internal Audit performs an annual risk
assessment evaluating the risk of all significant components of our company and uses the results to develop an
annual risk-based internal audit plan as well as a multi-year rotational audit schedule. The risk assessment process
includes detailed measures of risk and formalized identification of auditable components of our company to ensure
Internal Audit’s efforts are both properly focused and comprehensive.
Risk Appetite Framework
Navient’s Risk Appetite Framework establishes the level of risk we are willing to accept within each risk
category in pursuit of our business strategy. Our Audit Committee of the board of directors reviews our Risk
Appetite Framework annually, helping to ensure consistency in our business decisions, monitoring and reporting.
Our management-level Enterprise Risk and Compliance Committee monitors approved risk limits and thresholds to
ensure our businesses are operating within approved risk limits. Through ongoing monitoring of risk exposures,
management identifies potential risks and develops appropriate responses and mitigation strategies.
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Risk Categories
Our Risk Appetite Framework segments Navient’s risks across nine domains: (1) credit; (2) market;
(3) funding and liquidity; (4) compliance; (5) legal; (6) operational; (7) reputational/political; (8) governance; and
(9) strategy.
Credit Risk. Credit risk is the risk to earnings or capital resulting from an obligor’s failure to meet the terms of
any contract with us or otherwise fail to perform as agreed. Credit risk is found in all activities where success
depends on counterparty, issuer or borrower performance.
Navient has credit or counterparty risk exposure with borrowers and cosigners of our Private Education Loans
and Private Education Refinance Loans, the various counterparties with whom we have entered into derivative or
other similar contracts and the various entities with whom we make investments. Credit and counterparty risks are
overseen by our Chief Risk and Compliance Officer, our Loss Forecasting staff and the management-level Credit
and Loan Loss Committee. Our Chief Risk and Compliance Officer reports regularly to our board of directors and
both the Finance and Operations and Audit Committees of the board on these issues.
The credit risk related to our Private Education Loans and Private Education Refinance Loans is managed
within a credit risk infrastructure which includes: (i) a well-defined underwriting, asset quality and collection policy
framework; (ii) an ongoing monitoring and review process of portfolio concentration and trends; (iii) assignment
and management of credit and loss forecasting authorities and responsibilities; and (iv) establishment of an
allowance for loan losses that covers estimated losses based upon portfolio and economic analysis.
Credit risk related to derivative contracts is managed by reviewing counterparties for credit strength on an
ongoing basis and through our credit policies, which place limits on our exposure with any single counterparty and,
in most cases, require collateral to secure the position. Credit and counterparty risk associated with derivatives is
measured based on the replacement cost if counterparties in a gain position fail to perform under the terms of the
contract.
Market Risk. Market risk is the risk to earnings or capital resulting from changes in market conditions, such as
interest rates, index mismatches, credit spreads, commodity prices or volatilities. Navient is exposed to various types
of market risk, in particular the risk of loss resulting in a mismatch between the maturity/duration of assets and
liabilities, interest rate risk and other risks that arise through the management of our investment, debt and education
loan portfolios. Market risk exposure is managed primarily through our management-level Asset and Liability
Committee, which is responsible for all market risks associated with managing our assets and liabilities and
recommending limits to be included in our risk appetite and investment structure. These activities are closely tied to
those related to the management of our funding and liquidity risks. The Finance and Operations Committee of our
board of directors periodically reviews and approves the investment, asset and liability management policies,
establishes and monitors various tolerances or other risk measurements, as well as contingency funding plans
developed and administered by our Asset and Liability Committee. The Finance and Operations Committee and our
Chief Financial Officer report to the full board of directors on matters of market risk management.
Funding and Liquidity Risk. Funding and liquidity risk is the risk to earnings, capital or the conduct of our
business arising from the inability to meet our obligations when they become due without incurring unacceptable
losses, such as the ability to fund liability maturities or invest in future asset growth and business operations at
reasonable market rates. Our primary liquidity risks are any mismatch between the maturity of our assets and
liabilities and the servicing of our indebtedness.
Navient’s Finance department oversees our funding and liquidity management activities and is responsible for
planning and executing our funding activities and strategies, analyzing and monitoring our liquidity risk,
maintaining excess liquidity and accessing diverse funding sources depending on current market conditions.
Funding and liquidity risks are overseen and recommendations approved primarily through our management-level
Asset and Liability Committee. The Finance and Operations Committee of our board of directors periodically
reviews and approves our funding and liquidity positions and the contingency funding plan developed and
administered by our Asset and Liability Committee. The Finance and Operations Committee also receives regular
reports on our performance against funding and liquidity plans at each of its meetings.
Operational Risk. Operational risk is the risk to earnings or the conduct of our business resulting from
inadequate or failed internal processes, people or systems or from external events. Operational risk is pervasive,
existing in all business areas, functional units, legal entities and geographic locations, and it includes information
technology risk, cybersecurity risk, physical security risk on tangible assets, third-party vendor risk, legal risk,
compliance risk and reputational risk.
80
The Finance and Operations Committee of our board of directors receives operations reports (including
operating metrics and performance against annual plan) from the heads of Asset Management and Servicing,
Business Processing Solutions and Consumer Lending, our Chief Financial Officer and Chief Information Officer at
each regularly scheduled meeting. The Finance & Operations Committee also receives business development
updates regarding our various business initiatives providing information and metrics about each key component of
our business operations. The Finance and Operations Committee of our board of directors also receives periodic
information security and cyber security updates and reviews operational and systems-related matters to ensure their
implementation produces no significant internal control issues.
Operational risk exposures are managed through a combination of business area management (first line of
defense), support area oversight and expertise (second line of defense) and enterprise-wide oversight including
periodic, independent and objective review and assessment by Internal Audit (third line of defense). Our heads of
Asset Management and Servicing, Business Processing Solutions and Consumer Lending are responsible for all of
our business operations (servicing, consumer lending, asset recovery and business processing services, and our Chief
Information Officer is responsible for our information technology systems and processes). Management-level
committees, comprised of senior managers and subject matter experts, including our Enterprise Risk and
Compliance Committee, Credit and Loan Loss Committee, Information-Technology and Operations Management
Committee, Human Resources Committee, and Incentive Compensation Plan Committee, focus on particular aspects
of operational risk.
Compliance, Legal and Governance Risk. Compliance risk is the risk to earnings or capital or reputation
arising from violations of, or non-conformance with, laws, rules, regulations, prescribed practices, internal policies
and procedures, or ethical standards. Legal risk is the risk to earnings, capital or reputation manifested by claims
made through the legal system and may arise from a product or service, a transaction, a business relationship,
property (real, personal or intellectual), conduct of an employee or change in law or regulation. Governance risk is
the risk of not establishing and maintaining a control environment that aligns with stakeholder and regulatory
expectations, including tone at the top and board performance. These risks are inherent in all of our businesses.
Compliance, legal and governance risk are subsets of operational risk but are recognized as a separate and
complementary risk category given their importance in our business. We can be exposed to these risks in key areas
such as our consumer lending, asset recovery or loan servicing businesses if compliance with legal and regulatory
requirements is not properly implemented, maintained, documented or tested, or when an oversight program does
not include appropriate audit and control features.
The Audit Committee of our board of directors oversees our monitoring and control of legal and compliance
risks and the qualifications of employees overseeing these risk management functions. The Audit Committee
annually reviews our Compliance Plan and significant breaches of our Code of Business Conduct and receives
regular reports from executive management responsible for the regulatory and compliance risk management
functions. The board of directors and the Audit Committee receive reports on significant litigation and regulatory
matters at each regularly scheduled meeting.
Reputational/Political Risk. Reputational risk is the risk to earnings or capital arising from damage to our
reputation in the view of, or loss of the trust of, customers and the general public. Political risk is the closely related
risk to earnings or capital arising from damage to our relationships with governmental entities, regulators and
political leaders and candidates. These risks can arise due to both our own acts and omissions (both real and
perceived), and the acts and omissions of other industry participants or other third parties, and they are inherent in
all of our businesses. Reputational risk and political risk are managed through a combination of business area
management (first line of defense), support area oversight and expertise (second line of defense) and enterprise-wide
oversight including periodic, independent and objective review and assessment by Internal Audit (third line of
defense). Our Nominations and Governance Committee oversees our reputational and political risk and regularly
receives reports on these matters.
Strategic Risk. Strategic risk is the risk to earnings or capital arising from our potential inability to
successfully carry out our strategy. This risk can arise due to both our own acts or omissions, and the acts or
omissions of other industry participants or other third parties, and it is inherent in all of our businesses. Strategic risk
is managed through a combination of business area management (first line of defense), support area oversight and
expertise (second line of defense) and enterprise-wide oversight including periodic, independent and objective
review and assessment by Internal Audit (third line of defense).
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Common Stock
The following table summarizes our common share repurchases and issuances.
Common stock repurchased(1)
Average purchase price per share
Shares repurchased related to employee stock-based
compensation plans(2)
Average purchase price per share
Common shares issued(3)
2018
Years Ended December 31,
2017
17,443,351 29,646,374 59,625,325
12.68
$
12.64 $
14.85 $
2016
3,829,629 1,847,651 3,197,355
$
13.21
5,659,681 3,680,479 5,476,010
13.71 $
15.40 $
(1)
(2)
(3)
Common shares purchased under our share repurchase program.
Comprises shares withheld from stock option exercises and vesting of restricted stock for employees’ tax withholding obligations
and shares tendered by employees to satisfy option exercise costs.
Common shares issued under our various compensation and benefit plans.
Our shareholders have authorized the issuance of 1.125 billion shares of common stock (par value of $0.01).
At December 31, 2018, 247 million shares were issued and outstanding and 22 million shares were unissued but
encumbered for outstanding stock options, restricted stock units and dividend equivalent units for employee
compensation and remaining authority for stock-based compensation plans. The stock-based compensation plans are
described in “Note 11 — Stock-Based Compensation Plans and Arrangements.”
The closing price of our common stock on December 31, 2018 was $8.81.
Dividend and Share Repurchase Program
In 2018, 2017 and 2016, we paid full-year common stock dividends of $0.64 per share.
In 2016, we repurchased 59.6 million shares of common stock for $755 million. In 2017, we repurchased
29.6 million shares of common stock for $440 million. In 2018, we repurchased 17.4 million shares of common
stock for $220 million. In September 2018, our board of directors authorized a new $500 million share repurchase
program. As of December 31, 2018, the remaining repurchase authority was $440 million.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity Analysis
Our interest rate risk management seeks to limit the impact of short-term movements in interest rates on our
results of operations and financial position. The following tables summarize the potential effect on earnings over the
next 12 months and the potential effect on fair values of balance sheet assets and liabilities at December 31, 2018
and December 31, 2017, 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.
Additionally, as it relates to the effect on earnings before mark-to-market gains (losses) on derivative and hedging
activities, a sensitivity analysis was performed assuming the funding index increases 10 basis points while holding
the asset index constant, if the funding index and repricing frequency are different than the asset index. These
earnings sensitivities are applied only to financial assets and liabilities, including hedging instruments that existed at
the balance sheet date and do not take into account new assets, liabilities or hedging instruments that may arise over
the next 12 months.
(Dollars in millions, except per share amounts)
Effect on Earnings:
Change in pre-tax net income before mark-to
-market gains (losses) on derivative and
hedging activities
Mark-to-market gains (losses) on derivative and
hedging activities
Increase (decrease) in income before taxes
Increase (decrease) in net income after taxes
Increase (decrease) in diluted earnings per
common share
As of December 31, 2018
Impact on Annual Earnings If:
As of December 31, 2017
Impact on Annual Earnings If:
Interest Rates:
Increase
100 Basis
Points
Increase
300 Basis
Points
Funding
Indices
Increase
10 Basis
Points(1)
Interest Rates:
Increase
100 Basis
Points
Increase
300 Basis
Points
Funding
Indices
Increase
10 Basis
Points(1)
$
(10) $
32 $
(83) $
(8) $
3 $
(90)
(25)
(35) $
(27) $
(116)
(84) $
(65) $
—
(83) $
(64) $
(8)
(16) $
(12) $
(119)
(116) $
(89) $
—
(90)
(69)
(.11) $
(.26) $
(.26) $
(.05) $
(.34) $
(.26)
$
$
$
(1)
If an asset is not funded with the same index/frequency reset of the asset then it is assumed the funding index increases 10 basis points while
holding the asset index constant. There is no sensitivity analysis related to the mark-to-market gains (losses) on derivative and hedging activities as
part of this potential impact on earnings.
(Dollars in millions)
Effect on Fair Values:
Assets
Education Loans
Other earning assets
Other assets
Total assets gain/(loss)
Liabilities
Interest-bearing liabilities
Other liabilities
Total liabilities (gain)/loss
At December 31, 2018
Interest Rates:
Change from
Increase of
100 Basis
Points
Change from
Increase of
300 Basis
Points
Fair Value
$
%
$
%
$ 95,032 $
5,488
4,190
$ 104,710 $
$ 97,591 $
1,688
$ 99,279 $
(184)
—
168
(16)
(437)
242
(195)
—% $
—
4
—% $
(353)
—
693
340
$
—
14
—% $
(1,216)
933
(283)
—
—
17
—%
(1)%
55
—%
83
(Dollars in millions)
Effect on Fair Values:
Assets
Education Loans
Other earning assets
Other assets
Total assets gain/(loss)
Liabilities
Interest-bearing liabilities
Other liabilities
Total liabilities (gain)/loss
At December 31, 2017
Interest Rates:
Change from Increase of
100 Basis Points
%
$
Change from Increase of
300 Basis Points
%
$
Fair Value
$ 106,692 $
5,034
4,835
$ 116,561 $
$ 109,704 $
1,723
$ 111,427 $
(287)
—
148
(139)
(588)
301
(287)
—% $
—
3
—% $
(611)
—
613
2
(1)% $
17
—% $
(1,643)
1,132
(511)
(1)%
—
13
—%
(1)%
66
—%
A primary objective in our funding is to minimize our sensitivity to changing interest rates by generally
funding our floating rate education loan portfolio with floating rate debt and our fixed rate education loan portfolio
with fixed rate debt. However, we can have a mismatch in the index (including the frequency of reset) of floating
rate debt versus floating rate assets. In addition, due to the ability of some FFELP Loans to earn Floor Income, we
can have a fixed versus floating mismatch in funding if the education loan earns at the fixed borrower rate and the
funding remains floating. During 2018 and 2017, certain FFELP Loans were earning Floor Income and we locked in
a portion of that Floor Income through the use of derivative contracts. The result of these hedging transactions was
to fix the relative spread between the education loan asset rate and the variable rate liability.
In the preceding tables, under the scenario where interest rates increase by either 100 or 300 basis points, the
change in pre-tax net income before the mark-to-market gains (losses) on derivative and hedging activities is
primarily due to the impact of (i) our unhedged loans being in a fixed-rate mode due to Floor Income, while being
funded with variable rate debt in low interest rate environments; and (ii) a portion of our fixed rate assets being
funded with variable rate liabilities. Both items will generally cause income to decrease when interest rates
increase. In both 2018 and 2017, the decrease to income when interest rates increase 100 basis points is primarily
due to both items (i) and (ii) above and is relatively minor in connection with a $95 billion education loan portfolio.
The increase in income when interest rates increase 300 basis points relates to certain FFELP fixed rate loans that
become variable interest rate loans when variable interest rates rise above a certain level (Special Allowance
Payment or “SAP”). When these loans are funded with fixed rate debt (as we do to hedge certain floor income), we
earn additional interest income when earning the higher variable rate that is in effect. The impact in 2018 is greater
than 2017 as a result of interest rates being higher in 2018 than 2017.
In the preceding tables, under the scenario where interest rates increase by either 100 or 300 basis points, the
change in mark-to-market gains (losses) on derivative and hedging activities in 2018 and 2017 is primarily due to
(i) the notional amount and remaining term of our derivative portfolio and related hedged debt and (ii) the interest
rate environment. The mark-to-market losses are primarily from both the ineffectiveness on fair value hedges as well
as trading hedges related to receive fix/pay variable swaps. The impact is relatively consistent between the two years
in connection with the size of the derivative portfolio.
Under the scenario in the tables above labeled “Impact on Annual Earnings If: Funding Indices Increase 10
Basis Points,” the main driver of the decrease in pre-tax income before mark-to-market gains (losses) on derivative
and hedging activities in both the 2018 and 2017 analyses is primarily the result of daily reset one-month LIBOR-
indexed FFELP Loans being funded with monthly reset one-month LIBOR, three-month LIBOR and other non-
discrete indexed liabilities, as well as, to a lesser extent, Prime-indexed Private Education Loans being funded with
LIBOR and other non-discrete indexed liabilities. The decrease in the loss between 2017 and 2018 relates to the
decrease in the size of the education loan portfolio. See “Asset and Liability Funding Gap” of this Item 7A. for a
further discussion.
In addition to interest rate risk addressed in the preceding tables, we are also exposed to risks related to
foreign currency exchange rates. Foreign currency exchange risk is primarily the result of foreign currency
denominated debt issued by us. When we issue foreign denominated corporate unsecured and securitization debt,
our policy is to use cross currency interest rate swaps to swap all foreign currency denominated debt payments
(fixed and floating) to U.S. dollar LIBOR using a fixed exchange rate. In the tables above, there would be an
84
immaterial impact on earnings if exchange rates were to decrease or increase, due to the terms of the hedging
instrument and hedged items matching. The balance sheet interest bearing liabilities would be affected by a change
in exchange rates; however, the change would be materially offset by the cross-currency interest rate swaps in other
assets or other liabilities. In the current economic environment, volatility in the spread between spot and forward
foreign exchange rates has resulted in mark-to-market impacts to current-period earnings which have not been
factored into the above analysis. The earnings impact is noncash, and at maturity of the instruments the cumulative
mark-to-market impact will be zero. Navient has not issued foreign currency denominated debt since 2008.
Asset and Liability Funding Gap
The tables below present our assets and liabilities (funding) arranged by underlying indices as of
December 31, 2018. In the following GAAP presentation, the funding gap only includes derivatives that qualify as
effective hedges (those derivatives which are reflected in net interest margin, as opposed to those reflected in the
“gains (losses) on derivatives and hedging activities, net” line on the consolidated statements of income). The
difference between the asset and the funding is the funding gap for the specified index. This represents our exposure
to interest rate risk in the form of basis risk and repricing risk, which is the risk that the different indices may reset at
different frequencies or may not move in the same direction or at the same magnitude.
Management analyzes interest rate risk and in doing so includes all derivatives that are economically hedging
our debt whether they qualify as effective hedges or not (Core Earnings basis). Accordingly, we are also presenting
the asset and liability funding gap on a Core Earnings basis in the table that follows the GAAP presentation.
GAAP Basis
Index
(Dollars in billions)
3-month Treasury bill
3-month Treasury bill
Prime
Prime
Prime
3-month LIBOR
3-month LIBOR
1-month LIBOR
1-month LIBOR
CMT/CPI Index
Non-Discrete reset(2)
Non-Discrete reset(3)
Fixed Rate(4)
Total
$
Frequency of
Variable Resets
weekly
annual
annual
quarterly
monthly
quarterly
daily
monthly
daily
monthly/quarterly
monthly
daily/weekly
$
Assets
Funding(1)
Funding
Gap
3.4 $
.2
.3
2.7
9.0
.6
—
5.4
68.2
—
—
5.5
8.9
104.2 $
— $
—
—
—
—
36.3
2.6
37.9
—
.1
9.5
.3
17.5
104.2 $
3.4
.2
.3
2.7
9.0
(35.7)
(2.6)
(32.5)
68.2
(.1)
(9.5)
5.2
(8.6)
—
(1)
(2)
(3)
(4)
Funding (by index) includes all derivatives that qualify as hedges.
Funding consists of auction rate ABS and ABCP facilities.
Assets include restricted and unrestricted cash equivalents and other overnight type instruments. Funding includes the obligation to return
cash collateral held related to derivatives exposures.
Assets include receivables and other assets (including goodwill and acquired intangibles). Funding includes 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 typically through the use of basis swaps that typically convert
quarterly reset three-month LIBOR to other indices that are more correlated to our asset indices. These basis swaps
do not qualify as effective hedges and, as a result, the effect on the funding index is not included in our interest
margin and is therefore excluded from the GAAP presentation.
85
Core Earnings Basis
Index
(Dollars in billions)
3-month Treasury bill
3-month Treasury bill
Prime
Prime
Prime
3-month LIBOR
3-month LIBOR
1-month LIBOR
1-month LIBOR
Non-Discrete reset(2)
Non-Discrete reset(3)
Fixed Rate(4)
Total
$
Frequency of
Variable Resets
weekly
annual
annual
quarterly
monthly
quarterly
daily
monthly
daily
monthly
daily/weekly
$
Assets
Funding(1)
Funding
Gap
3.4 $
.2
.3
2.7
9.0
.6
—
5.4
68.2
—
5.5
8.6
103.9 $
— $
—
—
—
—
—
.7
78.2
—
9.5
.3
15.2
103.9 $
3.4
.2
.3
2.7
9.0
.6
(.7)
(72.8)
68.2
(9.5)
5.2
(6.6)
—
(1)
(2)
(3)
(4)
Funding (by index) includes all derivatives that management considers economic hedges of interest rate risk and reflects how we
internally manage our interest rate exposure.
Funding consists of auction rate ABS and ABCP facilities.
Assets include restricted and unrestricted cash equivalents and other overnight type instruments. Funding includes the obligation to return
cash collateral held related to derivatives exposures.
Assets include receivables and other assets (including goodwill and acquired intangibles). Funding includes other liabilities and
stockholders’ equity.
We use interest rate swaps and other derivatives to achieve our risk management objectives. Our asset liability
management strategy is to match assets with debt (in combination with derivatives) that have the same underlying
index and reset frequency or, when economical, have interest rate characteristics that we believe are highly
correlated. The use of funding with index types and reset frequencies that are different from our assets exposes us to
interest rate risk in the form of basis and repricing risk. This could result in our cost of funds not moving in the same
direction or with the same magnitude as the yield on our assets. While we believe 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, market disruptions
(which have occurred in prior years) can lead to a temporary divergence between indices resulting in a negative
impact to our earnings.
Weighted Average Life
The following table reflects the weighted average life for our earning assets and liabilities at December 31,
2018.
(Averages in Years)
Earning assets
Education loans
Other loans
Cash and investments
Total earning assets
Borrowings
Short-term borrowings
Long-term borrowings
Total borrowings
Weighted
Average Life
6.4
7.4
—
6.0
.7
6.0
5.7
86
Item 8. Financial Statements and Supplementary Data
Reference is made to the financial statements listed under the heading “(a) 1.A. Financial Statements” of
Item 15 hereof, which financial 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 principal executive and principal financial officers, evaluated
the effectiveness of our disclosure controls and procedures (as defined 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, 2018. Based on this
evaluation, our chief principal executive and principal financial officers concluded that, as of December 31, 2018,
our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to our management,
including our chief principal executive and principal financial officers as appropriate, to allow timely decisions
regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act). Under the supervision and with the participation of
our management, including our Principal Executive Officer and Principal Financial Officer, we assessed the
effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment,
our management used the criteria established in Internal Control — Integrated Framework (2013) 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, 2018, our internal control over financial reporting is
effective.
KPMG LLP, an independent registered public accounting firm, audited the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2018, as stated in their report which appears below.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness 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.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) occurred during the fiscal quarter ended December 31, 2018 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Nothing to report.
87
PART III.
Item 10. Directors, Executive Officers and Corporate Governance
The information contained in the 2019 Proxy Statement, including information appearing in the sections titled
“Proposal 1 — Election of Directors,” “Executive Officers,” “Other Matters — Section 16(a) Beneficial Ownership
Reporting Compliance” and “Corporate Governance” in the 2019 Proxy Statement, is incorporated herein by
reference.
Item 11. Executive Compensation
The information contained in the 2019 Proxy Statement, including information appearing in the sections titled
“Executive Compensation” and “Director Compensation” in the 2019 Proxy Statement, is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information contained in the 2019 Proxy Statement, including information appearing in the sections titled
“Ownership of Common Stock” and “Ownership of Common Stock by Directors and Executive Officers” in the
2019 Proxy Statement, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information contained in the 2019 Proxy Statement, including information appearing under “Other
Matters — Certain Relationships and Transactions” and “Corporate Governance” in the 2019 Proxy Statement, is
incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information contained in the 2019 Proxy Statement, including information appearing under “Independent
Registered Public Accounting Firm” in the 2019 Proxy Statement, is incorporated herein by reference.
88
Item 15. Exhibits, Financial Statement Schedules
(a)
1. Financial Statements
PART IV.
A. The following consolidated financial statements of Navient Corporation and the Report of the Independent
Registered Public Accounting Firm thereon are included in Item 8 above:
Report of Independent Registered Public Accounting Firm...........................................................................................................
Report of Independent Registered Public Accounting Firm...........................................................................................................
Consolidated Balance Sheets as of December 31, 2018 and 2017 .................................................................................................
Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016......................................................
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016 ...........................
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2016, 2017
and 2018..........................................................................................................................................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016...............................................
Notes to Consolidated Financial Statements ..................................................................................................................................
F-2
F-4
F-5
F-6
F-7
F-8
F-11
F-12
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the
consolidated financial statements or notes thereto.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this
Annual Report on Form 10-K.
We will furnish at cost a copy of any exhibit filed with or incorporated by reference into this Annual Report
on Form 10-K. Oral or written requests for copies of any exhibits should be directed to the Secretary.
Item 16. Form 10-K Summary
N/A
4. Appendices
Appendix A — Federal Family Education Loan Program
(b) Exhibits
2.1
3.1
3.2
4.1
4.2
The Agreement and Plan of Merger, dated as of October 16, 2014, between Navient Corporation and
Navient, LLC (incorporated by reference to Exhibit 2.1 to Navient Corporation’s Current Report on
Form 8-K filed on October 17, 2014).
Amended and Restated Certificate of Incorporation of Navient Corporation (incorporated by reference
to Exhibit 3.1 of Amendment No. 3 to Navient Corporation’s Registration Statement on Form 10 (File
No. 001-36228) filed on March 27, 2014).
Amended and Restated By-Laws of Navient Corporation (incorporated by reference to Exhibit 3.2 of
Amendment No. 3 to Navient Corporation’s Registration Statement on Form 10 (File No. 001-36228)
filed on March 27, 2014).
The Second Supplemental Indenture, dated as of October 16, 2014, between Navient Corporation and
Deutsche Trust Company Limited, as trustee (incorporated by reference to Exhibit 4.1 to Navient
Corporation’s Current Report on Form 8-K filed on October 17, 2014).
The Eighth Supplemental Indenture, dated as of October 16, 2014, between Navient Corporation and
The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.2 to Navient
Corporation’s Current Report on Form 8-K filed on October 17, 2014).
89
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
10.1†
10.2†
10.3†
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
The Third Supplemental Indenture, dated as of July 29, 2016, between Navient Corporation and The
Bank of New York Mellon as trustee (incorporated by reference to Exhibit 4.2 to Navient
Corporation’s Current Report on Form 8-K filed on July 29, 2016).
The Fourth Supplemental Indenture, dated as of September 16, 2016, between Navient Corporation
and The Bank of New York Mellon as trustee (incorporated by reference to Exhibit 4.2 to Navient
Corporation’s Current Report on Form 8-K filed on September 16, 2016).
The Fifth Supplemental Indenture, dated as of March 7, 2017 to the Indenture dated as of July 18, 2014
between Navient Corporation and The Bank of New York Mellon as trustee (incorporated by reference
to Exhibit 4.2 to Navient Corporation’s Current Report on Form 8-K filed on March 7, 2017).
The Sixth Supplemental Indenture, dated as of March 17, 2017 to the Indenture dated as of July 18,
2014 between Navient Corporation and The Bank of New York Mellon as trustee (incorporated by
reference to Exhibit 4.3 to Navient Corporation’s Current Report on Form 8-K filed on March 17,
2017)
The Seventh Supplemental Indenture, dated as of May 26, 2017 to the Indenture dated as of July 18,
2014 between Navient Corporation and The Bank of New York Mellon as trustee (incorporated by
reference to Exhibit 4.2 to Navient Corporation’s Current Report on Form 8-K filed on May 26, 2017).
The Eighth Supplemental Indenture, dated as of June 9, 2017 to the Indenture dated as of July 18, 2014
between Navient Corporation and The Bank of New York Mellon as trustee (incorporated by reference
to Exhibit 4.4 to Navient Corporation’s Current Report on Form 8-K filed on June 9, 2017).
The Ninth Supplemental Indenture, dated as of December 4, 2017 to the Indenture dated as of July 18,
2014 between Navient Corporation and The Bank of New York Mellon as trustee (incorporated by
reference to Exhibit 4.3 to Navient Corporation’s Current Report on Form 8-K filed on December 4,
2017).
The Tenth Supplemental Indenture, dated as of June 11, 2018 to the Indenture dated as of July 18,
2014 between Navient Corporation and The Bank of New York Mellon as trustee (incorporated by
reference to Exhibit 4.2 to Navient Corporation’s Current Report on Form 8-K filed on June 11, 2018).
Navient Deferred Compensation Plan, as amended and restated effective January 1, 2015 (incorporated
by reference to Exhibit 10.1 to Navient Corporation’s Current Report on Form 8-K filed on
December 23, 2014).
Navient Supplemental 401(k) Savings Plan (incorporated by reference to Exhibit 4.3 of the Company’s
Registration Statement on Form S-8 (File No. 333-195536) filed on April 28, 2014).
Navient Deferred Compensation Plan for Key Employees (incorporated by reference to Exhibit 4.3 of
the Company’s Registration Statement on Form S-8 (File No. 333-195539) filed on April 28, 2014).
Navient Deferred Compensation Plan for Directors, as amended and restated effective October 1, 2015
(incorporated by reference to Exhibit 10.1 of the Company’s Form 10-K (File No. 001-36228) filed on
October 30, 2015).
Navient Deferred Compensation Plan for Directors (incorporated by reference to Exhibit 4.3 of the
Company’s Registration Statement on Form S-8 (File No. 333-195538) filed on April 28, 2014).
Navient Corporation 2014 Omnibus Incentive Plan, Amended and Restated as of April 6, 2015
(incorporated by reference to the Company’s Proxy Statement on Form DEF 14A (File No. 001-
36228) filed on April 10, 2015).
Navient Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.3 of the Company’s
Registration Statement on Form S-8 (File No. 333-195533) filed on April 28, 2014).
Form of Navient Corporation 2014 Omnibus Incentive Plan, Stock Option Agreement, Net Settled
Options — 2014 (incorporated by reference to Exhibit 10.14 of the Company’s Quarterly Report on
Form 10-Q filed on August 1, 2014).
Form of Navient Corporation 2014 Omnibus Incentive Plan, Stock Option Agreement, Net Settled
Options — 2013 (incorporated by reference to Exhibit 10.17 of the Company’s Quarterly Report on
Form 10-Q filed on August 1, 2014).
90
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16†
10.17†
10.18†
10.19†
10.20†
10.21†
10.22†
10.23†
10.24
10.25
Form of Navient Corporation 2014 Omnibus Incentive Plan, Stock Option Agreement, Net Settled
Options — 2011 (incorporated by reference to Exhibit 10.22 of the Company’s Quarterly Report on
Form 10-Q filed on August 1, 2014).
Form of Navient Corporation 2014 Omnibus Incentive Plan, Stock Option Agreement, Net Settled
Options — 2010 (incorporated by reference to Exhibit 10.23 of the Company’s Quarterly Report on
Form 10-Q filed on August 1, 2014).
Navient Corporation 2014 Omnibus Incentive Plan, Stock Option Agreement for John M. Kane —
2008 (incorporated by reference to Exhibit 10.24 of the Company’s Quarterly Report on Form 10-Q
filed on August 1, 2014).
Navient Corporation 2014 Omnibus Incentive Plan, Stock Option Agreement for Timothy J. Hynes —
2008 (incorporated by reference to Exhibit 10.25 of the Company’s Quarterly Report on Form 10-Q
filed on August 1, 2014).
Navient Corporation 2014 Omnibus Incentive Plan, Stock Option Notice for John F. Remondi — 2008
(incorporated by reference to Exhibit 10.26 of the Company’s Quarterly Report on Form 10-Q filed on
August 1, 2014).
Navient Corporation 2014 Omnibus Incentive Plan, Additional Stock Option Notice for John F.
Remondi — 2008 (incorporated by reference to Exhibit 10.27 of the Company’s Quarterly Report on
Form 10-Q filed on August 1, 2014).
Form of Navient Corporation 2014 Omnibus Incentive Plan, Independent Director Stock Option
Agreement — 2011 (incorporated by reference to Exhibit 10.31 of the Company’s Quarterly Report on
Form 10-Q filed on August 1, 2014).
Form of Navient Corporation 2014 Omnibus Incentive Plan, Independent Director Stock Option
Agreement — 2010 (incorporated by reference to Exhibit 10.32 of the Company’s Quarterly Report on
Form 10-Q filed on August 1, 2014).
Form of Navient Corporation 2014 Omnibus Incentive Plan, Independent Director Stock Option
Agreement — 2009 (incorporated by reference to Exhibit 10.33 of the Company’s Quarterly Report on
Form 10-Q filed on August 1, 2014).
Form of Navient Corporation 2014 Omnibus Incentive Plan, Independent Director Stock Option
Agreement — 2008 (incorporated by reference to Exhibit 10.34 of the Company’s Quarterly Report on
Form 10-Q filed on August 1, 2014).
Form of Navient Corporation 2014 Omnibus Incentive Plan Three-Year Bonus Restricted Stock Unit
Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-
Q filed on April 30, 2015)
Form of Navient Corporation 2014 Omnibus Incentive Plan Performance Stock Unit Agreement
(incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on
April 28, 2016).
Form of Navient Corporation 2014 Omnibus Incentive Plan Restricted Stock Unit Agreement
(incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q filed on
April 28, 2016).
Form of Navient Corporation 2014 Omnibus Incentive Plan Stock Option Agreement — Net Settled
Options (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q
filed on April 28, 2016).
Underwriting Agreement, dated July 26, 2016, among Navient Corporation and Barclays Capital Inc.,
J.P. Morgan Securities LLC, and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by
reference to Exhibit 1.1 of the Company’s Current Report on Form 8-K filed on July 29, 2016).
Underwriting Agreement, dated September 13, 2016, among Navient Corporation and J.P. Morgan
Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and RBC Capital Markets, LLC,
as representatives of the Underwriters named therein (incorporated by reference to Exhibit 1.1 to
Navient Corporation’s Current Report on Form 8-K filed on September 16, 2016).
91
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
Underwriting Agreement, dated March 2, 2017 (the “Underwriting Agreement”), among the Company
and J.P. Morgan Securities LLC, Barclays Capital Inc. and RBC Capital Markets, LLC, as
representatives of the underwriters named therein (together, the “Underwriters”) (incorporated by
reference to Exhibit 1.01 to Navient Corporation’s Current Report on Form 8-K filed on March 7,
2017).
Federal Student Loan Sale Agreement (the “Agreement”) dated April 18, 2017 (the “Effective Date”),
by and between Navient Credit Finance Corporation, a Delaware corporation (the “Purchaser”), and
JPMorgan Chase Bank, N.A., a national banking association (the “Seller”). (incorporated by reference
to Exhibit 10.4 to Navient Corporation’s Quarterly Report on Form 10-Q filed on April 27, 2017).
Private Student Loan Sale Agreement (the “Agreement”) is made and entered into as of April 18, 2017
(the “Effective Date”), by and between Navient Credit Finance Corporation, a Delaware corporation
(the “Purchaser”), and JPMorgan Chase Bank, N.A., a national banking association (the “Seller”)
(incorporated by reference to Exhibit 10.5 to Navient Corporation’s Quarterly Report on Form 10-Q
filed on April 27, 2017).
Underwriting Agreement, dated May 23, 2017 (the “Underwriting Agreement”), among the Company
and Barclays Capital Inc., J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as representatives of the underwriters named therein (together, the “Underwriters”)
(incorporated by reference to Exhibit 1.01 to Navient Corporation’s Current Report on Form 8-K filed
on May 26, 2017).
Underwriting Agreement, dated November 30, 2017 (the “Underwriting Agreement”), among the
Company and Barclays Capital Inc., J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, as representatives of the underwriters named therein (together, the
“Underwriters”) (incorporated by reference to Exhibit 1.1 to Navient Corporation’s Current Report on
Form 8-K filed on December 4, 2017).
Form of Navient Corporation 2014 Omnibus Incentive Plan Performance Stock Unit Agreement
(incorporated by reference to Exhibit 10.1 to Navient Corporation’s Quarterly Report on Form 10-Q
filed on April 27, 2017).
Form of Navient Corporation 2014 Omnibus Incentive Plan Restricted Stock Unit Agreement
(incorporated by reference to Exhibit 10.2 to Navient Corporation’s Quarterly Report on Form 10-Q
filed on April 27, 2017).
Form of Navient Corporation 2014 Omnibus Incentive Plan Stock Option Agreement (incorporated by
reference to Exhibit 10.3 to Navient Corporation’s Quarterly Report on Form 10-Q filed on April 27,
2017).
Form of Navient Corporation 2014 Omnibus Incentive Plan Performance Stock Unit Agreement
(incorporated by reference to Exhibit 10.1 to Navient Corporation’s Quarterly Report on Form 10-Q
filed on May 3, 2018).
Form of Navient Corporation 2014 Omnibus Incentive Plan Restricted Stock Unit Agreement
(incorporated by reference to Exhibit 10.2 to Navient Corporation’s Quarterly Report on Form 10-Q
filed on May 3, 2018).
Form of Navient Corporation 2014 Omnibus Incentive Plan Stock Option Agreement (incorporated by
reference to Exhibit 10.3 to Navient Corporation’s Quarterly Report on Form 10-Q filed on May 3,
2018).
Underwriting Agreement, dated June 7, 2018 (the “Underwriting Agreement”), among the Company
and Barclays Capital Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and RBC Capital
Markets, LLC, as representatives of the underwriters named therein (together, the “Underwriters”)
(incorporated by reference to Exhibit 1.1 to Navient Corporation’s Current Report on Form 8-K filed
on June 11, 2018).
Separation and Release Agreement (this “Agreement”) dated July 13, 2018 by and between John F.
(Jeff) Whorley, Jr. and Navient Corporation incorporated by reference to Exhibit 10.01 to Navient
Corporation’s Current Report on Form 8-K filed on July 20, 2018).
92
10.39
10.40
10.41
10.42
Navient Corporation 2014 Omnibus Incentive Plan, Amended and Restated as of May 24, 2018
incorporated by reference to Exhibit 10.1 to Navient Corporation’s Quarterly Report filed on Form 10-
Q filed on August 3, 2018.
Navient Corporation Deferred Compensation Plan, Amended and Restated as of May 24, 2018
incorporated by reference to Exhibit 10.2 to Navient Corporation’s Quarterly Report filed on Form 10-
Q filed on August 3, 2018.
Navient Corporation Change in Control Severance Plan for Senior Officers, Amended and Restated as
of May 24, 2018 incorporated by reference to Exhibit 10.3 to Navient Corporation’s Quarterly Report
filed on Form 10-Q filed on August 3, 2018.
Navient Corporation Executive Severance Plan for Senior Officers, Amended and Restated as of May
24, 2018 incorporated by reference to Exhibit 10.4 to Navient Corporation’s Quarterly Report filed on
Form 10-Q filed on August 3, 2018.
12.1*
Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.
21.1*
List of Subsidiaries.
23.1*
Consent of KPMG LLP
31.1*
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
32.2**
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
101.INS*
XBRL Instance Document.
101.SCH* XBRL Taxonomy Extension Schema Document.
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB* XBRL Taxonomy Extension Label Linkbase Document.
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document.
†
*
**
Management Contract or Compensatory Plan or Arrangement
Filed herewith
Furnished herewith
93
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: February 25, 2019
NAVIENT CORPORATION
By:
/S/ JOHN F. REMONDI
John F. Remondi
President and Chief Executive Officer
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/ JOHN F. REMONDI
John F. Remondi
/S/ CHRISTIAN M. LOWN
Christian M. Lown
/S/ WILLIAM M. DIEFENDERFER, III
William M. Diefenderfer, III
/S/ FREDERICK ARNOLD
Frederick Arnold
/S/ ANNA ESCOBEDO CABRAL
Anna Escobedo Cabral
/S/ KATHERINE A. LEHMAN
Katherine A. Lehman
/S/ LINDA A. MILLS
Linda A. Mills
/S/ JANE J. THOMPSON
Jane J. Thompson
/S/ LAURA S. UNGER
Laura S. Unger
/S/ BARRY L. WILLIAMS
Barry L. Williams
/S/ DAVID L. YOWAN
David L. Yowan
President, Chief Executive Officer and
Director (Principal Executive Officer)
February 25, 2019
Chief Financial Officer (Principal
Financial Officer)
February 25, 2019
Chairman of the Board of Directors
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
February 25, 2019
Director
Director
Director
Director
Director
Director
Director
Director
94
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Report of Independent Registered Public Accounting Firm...........................................................................................................
Report of Independent Registered Public Accounting Firm...........................................................................................................
Consolidated Balance Sheets..........................................................................................................................................................
Consolidated Statements of Income ...............................................................................................................................................
Consolidated Statements of Comprehensive Income .....................................................................................................................
Consolidated Statements of Changes in Stockholders’ Equity.......................................................................................................
Consolidated Statements of Cash Flows.........................................................................................................................................
Notes to Consolidated Financial Statements ..................................................................................................................................
F-2
F-4
F-5
F-6
F-7
F-8
F-11
F-12
Page
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Navient Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Navient Corporation and subsidiaries’ (the Company) internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related
consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each
of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated
financial statements), and our report dated February 25, 2019 expressed an unqualified opinion on those
consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial 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 (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
F-2
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness 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.
(signed) KPMG LLP
McLean, Virginia
February 25, 2019
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Navient Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Navient Corporation and subsidiaries (the
Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive
income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated February 25, 2019 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these consolidated financial statements based on our audits. We are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks
of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
(signed) KPMG LLP
We have served as the Company’s auditor since 2012.
McLean, Virginia
February 25, 2019
F-4
NAVIENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
Assets
FFELP Loans (net of allowance for losses of $76 and $60, respectively)
Private Education Loans (net of allowance for losses of $1,201 and $1,297,
respectively)
Investments
December 31, 2018 December 31, 2017
$
72,253 $
81,703
22,245
23,419
Available-for-sale
Other
Total investments
Cash and cash equivalents
Restricted cash and cash equivalents
Goodwill and acquired intangible assets, net
Other assets
Total assets
Liabilities
Short-term borrowings
Long-term borrowings
Other liabilities
Total liabilities
Commitments and contingencies
Equity
Common stock, par value $0.01 per share; 1.125 billion shares authorized:
445 million and 440 million shares issued, respectively
Additional paid-in capital
Accumulated other comprehensive income (net of tax expense of $35 and
$36, respectively)
Retained earnings
Total Navient Corporation stockholders’ equity before treasury stock
Less: Common stock held in treasury at cost: 198 million and 177 million
shares, respectively
Total Navient Corporation stockholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
$
$
$
—
226
226
1,286
3,976
786
3,404
104,176 $
5,422 $
93,519
1,688
100,629
4
3,145
113
3,218
6,480
(2,961)
3,519
28
3,547
104,176 $
2
386
388
1,518
3,128
810
4,025
114,991
4,771
105,012
1,723
111,506
4
3,077
61
3,004
6,146
(2,692)
3,454
31
3,485
114,991
Supplemental information — assets and liabilities of consolidated variable interest entities:
FFELP Loans
Private Education Loans
Restricted cash
Other assets, net
Short-term borrowings
Long-term borrowings
Net assets of consolidated variable interest entities
December 31, 2018 December 31, 2017
77,710
$
20,886
3,091
1,160
2,906
89,317
10,624
71,921 $
19,698
3,928
956
4,341
82,738
9,424 $
$
See accompanying notes to consolidated financial statements.
F-5
NAVIENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
Interest income:
FFELP Loans
Private Education Loans
Other loans
Cash and investments
Total interest income
Total interest expense
Net interest income
Less: provisions for loan losses
Net interest income after provisions for loan losses
Other income (loss):
Servicing revenue
Asset recovery and business processing revenue
Other income
Gains on sales of loans and investments
Gains (losses) on debt repurchases
Gains (losses) on derivative and hedging activities, net
Total other income
Expenses:
Salaries and benefits
Other operating expenses
Total operating expenses
Goodwill and acquired intangible asset impairment and
amortization expense
Restructuring/other reorganization expenses
Total expenses
Income before income tax expense
Income tax expense
Net income
Basic earnings per common share
Average common shares outstanding
Diluted earnings per common share
Average common and common equivalent shares outstanding
Dividends per common share
$
$
$
$
$
Years Ended December 31,
2017
2016
2018
3,027 $
1,778
6
97
4,908
3,668
1,240
370
870
274
430
17
—
19
(38)
702
507
477
984
47
13
1,044
528
133
395 $
1.52 $
260
1.49 $
264
.64 $
2,693 $
1,634
13
43
4,383
2,971
1,412
426
986
290
475
9
3
(3)
22
796
519
447
966
23
29
1,018
764
472
292 $
1.06 $
275
1.04 $
281
.64 $
2,528
1,587
9
22
4,146
2,441
1,705
429
1,276
304
390
7
—
1
117
819
500
451
951
36
—
987
1,108
427
681
2.15
316
2.12
322
.64
See accompanying notes to consolidated financial statements.
F-6
NAVIENT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Years Ended December 31,
2017
2016
2018
$
395 $
292 $
Net income
Other comprehensive income:
Gains on derivatives
Reclassification adjustments for derivative (gains) losses
included in net income (interest expense)
Total gains on derivatives
Income tax expense
Other comprehensive income, net of tax expense
Total comprehensive income
$
66
89
(15)
51
(12)
39
434 $
(1)
88
(33)
55
347 $
681
91
(1)
90
(33)
57
738
See accompanying notes to consolidated financial statements.
F-7
Balance at December 31, 2015
Comprehensive income:
Net income
Other comprehensive income, net of tax
Total comprehensive income
Cash dividends:
Common stock ($.64 per share)
Dividend equivalent units related to employee
stock-based compensation plans
Issuance of common shares
Tax impact of employee stock-based
compensation plans
Stock-based compensation expense
Common stock repurchased
Shares repurchased related to employee
stock-based compensation plans
Balance at December 31, 2016
NAVIENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In millions, except share and per share amounts)
Common Stock Shares
Treasury
Outstanding
Issued
430,561,656
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Common
Stock
Retained
Earnings
Treasury
Stock
Total
Stockholders’
Equity
Noncontrolling
Interest
Total
Equity
24 $ 3,933
(82,350,868 ) 348,210,788 $
4 $
2,967 $
(51 ) $
2,414 $ (1,425 ) $
3,909 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
57
—
681
—
—
—
—
—
681
57
738
—
—
—
681
57
738
—
—
—
—
(201 )
—
(201 )
—
(201 )
—
5,476,010
—
—
—
5,476,010
—
—
—
—
—
—
—
(59,625,325 ) (59,625,325 )
—
—
—
—
—
—
35
(6 )
26
—
—
—
—
—
—
(4 )
—
—
—
—
—
—
—
—
(755 )
(4 )
35
(6 )
26
(755 )
(3,197,355 )
436,037,666 (145,173,548 ) 290,864,118 $
(3,197,355 )
—
—
4 $
—
3,022 $
—
6 $
—
(43 )
2,890 $ (2,223 ) $
(43 )
3,699 $
—
—
(4 )
35
—
—
—
(6 )
26
(755 )
—
(43 )
24 $ 3,723
See accompanying notes to consolidated financial statements.
F-8
Balance at December 31, 2016
Comprehensive income:
Net income
Other comprehensive income, net of tax
Total comprehensive income
Cash dividends:
Common stock ($.64 per share)
Dividend equivalent units related to employee
stock-based compensation plans
Issuance of common shares
Stock-based compensation expense
Common stock repurchased
Shares repurchased related to employee
stock-based compensation plans
Noncontrolling interest in Earnest upon
acquisition
Balance at December 31, 2017
NAVIENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In millions, except share and per share amounts)
Additional
Accumulated
Other
Total
6 $
—
55
—
Issued
Common Stock Shares
Treasury
Outstanding
436,037,666 (145,173,548 ) 290,864,118 $
Common
Paid-In
Stock Capital
4 $
3,022 $
Comprehensive Retained Treasury
Stock
Income (Loss) Earnings
2,890 $ (2,223 ) $
Stockholders’ Noncontrolling Total
Equity
24 $ 3,723
3,699 $
Interest
Equity
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
292
—
—
—
—
—
292
55
347
—
—
—
292
55
347
—
—
—
—
(176 )
—
(176 )
—
(176 )
—
3,680,479
—
—
—
—
—
—
3,680,479
—
(29,646,374 ) (29,646,374 )
—
—
—
—
—
20
35
—
—
—
—
—
(2 )
—
—
—
—
—
—
(440 )
(2 )
20
35
(440 )
—
—
—
—
(2 )
20
35
(440 )
—
(1,847,651 )
(1,847,651 )
—
—
—
—
(29 )
(29 )
—
(29 )
—
439,718,145 (176,667,573 ) 263,050,572 $
—
—
—
4 $
—
3,077 $
—
61 $
—
—
3,004 $ (2,692 ) $
—
3,454 $
7
7
31 $ 3,485
See accompanying notes to consolidated financial statements.
F-9
Balance at December 31, 2017
Comprehensive income:
Net income
Other comprehensive income (loss), net of
tax
Total comprehensive income
Cash dividends:
Common stock ($.64 per share)
Dividend equivalent units related to employee
stock-based compensation plans
Issuance of common shares
Stock-based compensation expense
Repurchase of common stock:
Common stock repurchased
Derivative contract settlement:
Settlement cost, cash
(Gain)/loss on settlement
Shares repurchased related to employee
stock-based compensation plans
Purchase of noncontrolling interest
Reclassification from adoption of ASU
No. 2018-02
Balance at December 31, 2018
NAVIENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In millions, except share and per share amounts)
Additional
Accumulated
Other
Issued
Common Stock Shares
Treasury
Outstanding
439,718,145 (176,667,573 ) 263,050,572 $
Common
Paid-In
Stock Capital
4 $
3,077 $
Comprehensive Retained Treasury
Stock
Income (Loss) Earnings
61 $
3,004 $ (2,692 ) $
3,454 $
Total
Stockholders’ Noncontrolling Total
Equity
Interest
Equity
3,485
31 $
—
—
—
—
—
5,659,681
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
395
—
395
—
395
39
—
—
—
—
—
39
434
—
—
39
434
—
—
—
—
(166 )
—
(166 )
—
(166 )
—
5,659,681
—
—
—
—
—
43
25
—
—
—
(2 )
—
—
—
—
—
(2 )
43
25
—
—
—
(2 )
43
25
—
—
—
—
—
(13,131,159 ) (13,131,159 )
—
(4,312,192 )
—
(4,312,192 )
—
(3,829,629 )
—
(3,829,629 )
—
—
445,377,826 (197,940,553 ) 247,437,273 $
—
—
—
—
—
—
(160 )
(160 )
—
(160 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(60 )
4
(53 )
—
(60 )
4
(53 )
—
—
—
—
(3 )
(60 )
4
(53 )
(3 )
—
4 $
—
3,145 $
13
113 $
(13 )
—
3,218 $ (2,961 ) $
—
3,519 $
—
28 $
—
3,547
See accompanying notes to consolidated financial statements.
F-10
NAVIENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
2018
Years Ended December 31,
2017
2016
$
395 $
292 $
681
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
(Gains) losses on debt repurchases
Goodwill and acquired intangible asset impairment and amortization expense
Stock-based compensation expense
Mark-to-market (gains)/losses on derivative and hedging activities, net
Provisions for loan losses
(Increase) in accrued interest receivable
Increase (decrease) in accrued interest payable
Decrease in other assets
Increase (decrease) in other liabilities
Total net cash provided by operating activities
Investing activities
Education loans acquired
Principal payments on education loans
Other investing activities, net
Proceeds from sales and maturities of other securities
Purchase of subsidiaries, net of cash and restricted cash acquired
Total net cash provided by investing activities
Financing activities
Borrowings collateralized by loans in trust - issued
Borrowings collateralized by loans in trust - repaid
Asset-backed commercial paper conduits, net
Long-term notes issued
Long-term notes repaid
Other financing activities, net
Common stock repurchased
Common dividends paid
Total net cash used in financing activities
(19 )
47
25
37
370
(125 )
58
321
31
1,140
(3,652 )
13,973
(76 )
115
—
10,360
9,006
(14,057 )
(2,833 )
495
(2,947 )
(162 )
(220 )
(166 )
(10,884 )
3
23
35
(83 )
426
(29 )
11
485
(5 )
1,158
(7,371 )
14,738
(88 )
23
(184 )
7,118
8,440
(13,919 )
(2,363 )
1,613
(1,464 )
(33 )
(440 )
(176 )
(8,342 )
Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash
equivalents
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of
period
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of
period
Cash disbursements made (refunds received) for:
Interest
Income taxes paid
Income taxes received
Reconciliation of the Consolidated Statements of Cash Flows to the Consolidated
Balance Sheets:
Cash and cash equivalents
Restricted cash and restricted cash equivalents
Total cash, cash equivalents, restricted cash and restricted cash equivalents at end
of period
Supplemental cash flow information:
Noncash activity
Investing activity - Education loans
Operating activity - Other assets acquired and other liabilities assumed, net
Financing activity - Borrowings assumed in acquisition of education loans
$
$
$
$
$
$
$
$
$
616
(66 )
4,646
4,712
5,262 $
4,646 $
3,460 $
57 $
(6 ) $
2,872 $
157 $
(1 ) $
1,286 $
3,976
1,518 $
3,128
5,262 $
4,646 $
— $
— $
— $
1,746 $
137 $
1,883 $
See accompanying notes to consolidated financial statements.
F-11
(1 )
36
26
(328 )
429
(26 )
(92 )
628
(6 )
1,347
(3,683 )
14,923
(7 )
49
—
11,282
6,691
(13,226 )
(4,002 )
1,231
(2,603 )
(238 )
(755 )
(201 )
(13,103 )
(474 )
5,186
4,712
2,301
249
(4 )
1,253
3,459
4,712
—
—
—
NAVIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Navient’s Business
Navient is a leading provider of education loan management and business processing solutions for education,
healthcare, and government clients at the federal, state, and local levels. We help our clients and millions of
Americans achieve financial success through services and support. Headquartered in Wilmington, Delaware,
Navient also employs team members in western New York, northeastern Pennsylvania, Indiana, Tennessee, Texas,
Virginia, Wisconsin, California and other locations.
With a focus on data-driven insights, service, compliance and innovative support, Navient:
•
•
•
•
owns $94.5 billion of education loans;
originates Private Education Loans;
services and performs asset recovery activities on its own portfolio of education loans, as well as
education loans owned by other institutions including the United States Department of Education
(“ED”); and
provides revenue cycle management and business processing services to federal, state and municipal
clients, public authorities and healthcare organizations.
2. Significant Accounting Policies
Use of Estimates
Our financial reporting and accounting policies conform to generally accepted accounting principles in the
United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Uncertain and volatile market and economic conditions increase
the risk and complexity of the judgments in these estimates and actual results could differ from estimates. Key
accounting policies that include the most significant judgments, estimates and assumptions include the allowance for
loan losses, the amortization of loan premiums and discounts using the effective interest rate method, goodwill and
intangible asset impairment assessment and fair value measurement.
Consolidation
The consolidated financial statements include the accounts of Navient Corporation and its majority-owned and
controlled subsidiaries and those Variable Interest Entities (“VIEs”) for which we are the primary beneficiary, after
eliminating the effects of intercompany accounts and transactions.
We consolidate any VIEs where we have determined we are the primary beneficiary. A VIE is a legal entity
that does not have sufficient equity at risk to finance its own operations, or whose equity holders do not have the
power to direct the activities that most significantly affect the economic performance of the entity, or whose equity
holders do not share proportionately in the losses or benefits of the entity. The primary beneficiary of the VIE is the
entity which has both: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s
economic performance and (2) the obligation to absorb losses or receive benefits of the entity that could potentially
be significant to the VIE. As it relates to our securitizations and other secured borrowing facilities that are VIEs as
of December 31, 2018, we are the servicer of the related education loan assets and own the Residual Interest of the
securitization trusts and secured borrowing facilities. As a result, we are the primary beneficiary and consolidate
those VIEs.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
2. Significant Accounting Policies (Continued)
Fair Value Measurement
We use estimates of fair value in applying various accounting standards for our financial statements. Fair
value measurements are used in one of four ways:
• In the consolidated balance sheet with changes in fair value recorded in the consolidated statement of
income;
• In the consolidated balance sheet with changes in fair value recorded in the accumulated other
comprehensive income section of the consolidated statement of changes in stockholders’ equity;
• In the consolidated balance sheet for instruments carried at lower of cost or fair value with impairment
charges recorded in the consolidated statement of income; and
• In the notes to the financial statements.
Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing
and able market participants. In general, our policy in estimating fair value is to first look at observable market
prices for identical assets and liabilities in active markets, where available. When these are not available, other
inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment
speeds, default rates and credit spreads, relying first on observable data from active markets. Depending on current
market conditions, additional adjustments to fair value may be based on factors such as liquidity and credit spreads.
Transaction costs are not included in the determination of fair value. When possible, we seek to validate the model’s
output to market transactions. Depending on the availability of observable inputs and prices, different valuation
models could produce materially different fair value estimates. The values presented may not represent future fair
values and may not be realizable.
We categorize our fair value estimates based on a hierarchical framework associated with three levels of price
transparency utilized in measuring financial instruments at fair value. Classification is based on the lowest level of
input that is significant to the fair value of the instrument. The three levels are as follows:
•
•
•
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the
ability to access at the measurement date. The types of financial instruments included in level 1 are highly
liquid instruments with quoted prices.
Level 2 — Inputs from active markets, other than quoted prices for identical instruments, are used to
determine fair value. Significant inputs are directly observable from active markets for substantially the full
term of the asset or liability being valued.
Level 3 — Pricing inputs significant to the valuation are unobservable. Inputs are developed based on the
best information available. However, significant judgment is required by us in developing the inputs.
Loans
Loans, consisting primarily of federally insured education loans and Private Education Loans, that we have the
ability and intent to hold for the foreseeable future are classified as held-for-investment and are carried at amortized
cost. Amortized cost includes the unamortized premiums, discounts, and capitalized origination costs and fees, all of
which are amortized to interest income as further discussed below. Loans which are held-for-investment also have
an allowance for loan loss as needed. Any loans we have not classified as held-for-investment are classified as held-
for-sale and carried at the lower of cost or fair value. Loans are classified as held-for-sale when we have the intent
and ability to sell such loans. Loans which are held-for-sale do not have the associated premium, discount, and
capitalized origination costs and fees amortized into interest income. In addition, once a loan is classified as held-
for-sale, there is no further adjustment to the loan’s allowance for loan losses that existed immediately prior to the
reclassification to held-for-sale.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
2. Significant Accounting Policies (Continued)
Allowance for Loan Losses
Purchased Credit Impaired (“PCI”) Loans
Loans acquired with evidence of deterioration of credit quality since origination for which it is probable, at
acquisition, that the investor will be unable to collect all contractually required payments receivable are PCI loans
accounted for under Accounting Standard Codification (“ASC”) 310-30, “Loans and Debt Securities Acquired with
Deteriorated Credit Quality.” When considering whether evidence of credit quality deterioration exists as of the
purchase date, the Company considers loan guarantees and the following credit attributes: delinquency status, use of
forbearance, recent borrower FICO scores, use of loan modification programs, and borrowers who have filed for
bankruptcy.
The Company aggregates loans with common risk characteristics into pools and accounts for each pool as a
single asset with a single composite interest rate and an aggregate expectation of cash flows. The pools are initially
recorded at fair value. The Company recognizes interest income based on each pool’s effective interest rate which is
based on our estimate of all cash flows expected to be received and includes an assumption about prepayment rates.
The pools are tested quarterly for impairment by re-estimating the future cash flows to be received from the pools. If
the new estimated cash flows result in a pool’s effective interest rate increasing, then this new yield is used
prospectively over the remaining life of the pool. If the new estimated cash flows result in a pool’s effective interest
rate decreasing, the pool is impaired and written down through a valuation allowance to maintain the effective
interest rate. Loans classified as PCI do not have charge-offs reported nor are they reported as Trouble Debt
Restructuring (“TDR”) loans.
Based on the credit attributes discussed above, we determined that $261 million principal amount of Private
Education Loans acquired in 2017 are accounted for as PCI loans with a fair value and resulting carry value of
$101 million as of the acquisition date. As of acquisition, this portfolio’s contractually required payments receivable
(the total undiscounted amount of all uncollected contractual principal and interest payments both past due and
scheduled for the future, adjusted for prepayments) was $411 million with an estimated accretable yield (income
expected to be recognized in future periods) of $108 million. As of December 31, 2018, the carrying amount was
$82 million with no valuation allowance recorded.
Purchased Non-Credit Impaired Loans
Loans acquired that do not have evidence of credit deterioration since origination are recorded at fair value
with no allowance for loan losses established at the acquisition date. Loan premiums and discounts are amortized as
a part of interest income using the interest method under ASC 310-20, “Nonrefundable Fees and Other Costs.” An
allowance for loan losses would be established if incurred losses in the loans exceed the remaining unamortized
discount recorded at the time of acquisition (i.e., the next two years of expected charge-offs as well as any additional
TDR allowance required is greater than the remaining discount). As a result of this policy, to the extent that actual
charge-offs exceed any related allowance for loan losses recognized post-acquisition, provision for loan losses is
recorded when the loans are charged off. Charge-offs are recorded through the allowance for loan losses. In 2017,
we acquired Private Education Loans with an unpaid principal balance of $2.8 billion at a discount of $424 million
and FFELP Loans with an unpaid principal balance of $3.5 billion at a discount of $47 million, that are accounted
for under this policy. No allowance for loan losses has been established for these loans as of December 31, 2018, as
the remaining purchased discount associated with the Private Education Loans of $326 million and FFELP Loans of
$37 million as of December 31, 2018 remains greater than the incurred losses.
Allowance for Private Education Loan Losses
We consider a loan to be impaired when, based on current information, a loss has been incurred and it is
probable that we will not receive all contractual amounts due. When making our assessment as to whether a loan is
impaired, we also take into account more than insignificant delays in payment. We generally evaluate impaired
loans on an aggregate basis by grouping similar loans. Impaired loans also include those loans which are
individually assessed for impairment at a loan level, such as in a troubled debt restructuring (“TDR”). We maintain
an allowance for loan losses at an amount sufficient to absorb losses incurred in our portfolios at the reporting date
based on a projection of estimated probable credit losses incurred in the portfolio.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
2. Significant Accounting Policies (Continued)
Our Private Education Loan portfolio contains TDR and non-TDR loans. For customers experiencing financial
difficulty, certain Private Education Loans for which we have granted a forbearance of greater than three months, an
interest rate reduction or an extended repayment plan are classified as TDRs. The allowance requirements are
different based on these designations. In determining the allowance for loan losses on our non-TDR portfolio, we
estimate the principal amount of loans that will default over the next two years (two years being the expected period
between a loss event and default) and how much we expect to recover over time related to the defaulted amount.
Expected defaults less our expected recoveries equal the allowance related to this portfolio. Our historical
experience indicates that, on average, the time between the date that a customer experiences a default causing event
(i.e., the loss trigger event) and the date that we charge off the unrecoverable portion of that loan is two years.
Separately, for our TDR portfolio, we estimate an allowance amount sufficient to cover life-of-loan expected losses
through an impairment calculation based on the difference between the loan’s basis and the present value of
expected future cash flows (which would include life-of-loan default and recovery assumptions) discounted at the
loan’s original effective interest rate. Our TDR portfolio is comprised mostly of loans with forbearance usage
greater than three months and interest rate reductions. The separate allowance estimates for our TDR and non-TDR
portfolios are combined into our total allowance for Private Education Loan losses.
In estimating both the non-TDR and TDR allowance amounts, we start with historical experience of customer
default behavior. We make judgments about which historical period to start with and then make further judgments
about whether that historical experience is representative of future expectations and whether additional adjustments
may be needed to those historical default rates. We also take the economic environment into consideration when
calculating the allowance for loan losses. We analyze key economic statistics and the effect we expect them to have
on future defaults. Key economic statistics analyzed as part of the allowance for loan losses are primarily
unemployment rates. Our allowance for loan losses is estimated using an analysis of delinquent and current
accounts. Our model is used to estimate the likelihood that a loan may progress through the various delinquency
stages and ultimately charge off. The evaluation of the allowance for loan losses is inherently subjective, as it
requires material estimates that may be susceptible to significant changes. The estimate for the allowance for loan
losses is subject to a number of assumptions. If actual future performance in delinquency, charge-offs and recoveries
are significantly different than estimated, this could materially affect our estimate of the allowance for loan losses
and the related provision for loan losses on our income statement.
We determine the collectability of our Private Education Loan portfolio by evaluating certain risk
characteristics. We consider school type, credit score (FICO), existence of a cosigner, loan status and loan seasoning
as the key credit quality indicators because they have the most significant effect on our determination of the
adequacy of our allowance for loan losses. The type of school customers attend can have an impact on their
graduation rate and job prospects after graduation and therefore affects their ability to make payments. Credit scores
are an indicator of the credit worthiness of a customer and the higher the credit score the more likely it is the
customer will be able to make all of their contractual payments. Loan status affects the credit risk because a past due
loan is more likely to result in a credit loss than an up-to-date loan. Additionally, loans in a deferred payment status
have different credit risk profiles compared with those in current payment status. Of the portfolio in repayment, loan
seasoning is an important factor. It affects credit risk because a loan with a history of making payments generally
has a lower incidence of default than a loan with a history of making infrequent or no payments. The existence of a
cosigner lowers the likelihood of default. We monitor and update these credit quality indicators in the analysis of the
adequacy of our allowance for loan losses on a quarterly basis.
To estimate the probable credit losses incurred in the loan portfolio at the reporting date, we use historical
experience of customer payment behavior in connection with the key credit quality indicators and incorporate
management expectations regarding macroeconomic and collection performance factors. Our model is based upon
the most recent twelve months of actual collection experience as the starting point for the non-TDR portfolio and the
most recent approximate 15 years for the TDR portfolio and applies expected macroeconomic changes and
collection procedure changes to estimate expected losses caused by loss events incurred as of the balance sheet date.
Our model for the non-TDR portfolio places a greater emphasis on the more recent default experience rather than
the default experience for older historical periods, as we believe the more recent default experience is more
indicative of the probable losses incurred in the loan portfolio today that will default over the next two years. The
TDR portfolio uses a longer historical default experience since we are projecting life of loan remaining losses.
Similar to estimating defaults, we use historical customer payment behavior to estimate the timing and amount of
future recoveries on charged-off loans. We use judgment in determining whether historical performance is
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
2. Significant Accounting Policies (Continued)
representative of what we expect to collect in the future. We then apply the default and collection rate projections to
each category of loans. Once the quantitative calculation is performed, we review the adequacy of the allowance for
loan losses and determine if qualitative adjustments need to be considered. Additionally, we consider changes in
laws and regulations that could potentially impact the allowance for loan losses.
Our collection policies allow for periods of nonpayment for customers requesting additional payment grace
periods upon leaving school or experiencing temporary difficulty meeting payment obligations. This is referred to as
forbearance status and is considered in our allowance for loan losses. The loss confirmation period is in alignment
with our typical collection cycle and takes into account these periods of nonpayment.
Our allowance for Private Education Loan losses also provides for possible additional future charge-offs as
they occur related to the receivable for partially charged-off Private Education Loans. At the end of each month, for
loans that are 212 days past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are
applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the
“receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference is
immediately charged off through the allowance for loan losses with an offsetting reduction in the receivable for
partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be
reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery
amount exceeds the cumulative amount originally expected to be recovered.
Allowance for FFELP Loan Losses
FFELP Loans are insured as to their principal and accrued interest in the event of default subject to a Risk
Sharing level based on the date of loan disbursement. These insurance obligations are supported by contractual
rights against the United States. For loans disbursed after October 1, 1993, and before July 1, 2006, we receive
98 percent reimbursement on all qualifying default claims. For loans disbursed on or after July 1, 2006, we receive
97 percent reimbursement. For loans disbursed prior to October 1, 1993, we receive 100 percent reimbursement.
Similar to the allowance for Private Education Loan losses, the allowance for FFELP Loan losses uses
historical experience of customer default behavior and a two-year loss confirmation period to estimate the credit
losses incurred in the loan portfolio at the reporting date. We apply the default rate projections, net of applicable
Risk Sharing, to each category for the current period to perform our quantitative calculation. Once the quantitative
calculation is performed, we review the adequacy of the allowance for loan losses and determine if qualitative
adjustments need to be considered. For FFELP Loans that have lost their government insurance and have been
charged off, any subsequent cash recoveries benefit the allowance for loan losses when received.
Investments
Our available-for-sale investment portfolio consists of investments that are carried at fair value, with the
temporary changes in fair value carried as a separate component of stockholders’ equity, net of taxes. The amortized
cost of debt securities in this category is adjusted for the amortization of related premiums and discounts, which are
amortized using the effective interest rate method. Other-than-temporary impairment is evaluated by considering
several factors, including the length of time and extent to which the fair value has been less than the amortized cost
basis, the financial condition and near-term prospects of the security (considering factors such as adverse conditions
specific to the security and ratings agency actions), and the intent and ability to retain the investment to allow for an
anticipated recovery in fair value. The entire fair value loss on a security that is other-than-temporary impairment is
recorded in earnings if we intend to sell the security or if it is more likely than not that we will be required to sell the
security before the expected recovery of the loss. However, if the impairment is other-than-temporary, and those two
conditions do not exist, the portion of the impairment related to credit losses is recorded in earnings and the
impairment related to other factors is recorded in other comprehensive income. Securities classified as trading are
accounted for at fair value with unrealized gains and losses included in investment income. Securities that we have
the intent and ability to hold to maturity are classified as held-to-maturity and are accounted for at amortized cost
unless the security is determined to have an other-than-temporary impairment. In this case it is accounted for in the
same manner described above.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
2. Significant Accounting Policies (Continued)
We also have other investments, primarily a receivable for cash collateral posted to derivative counterparties.
Cash and Cash Equivalents
Cash and cash equivalents can include term federal funds, Eurodollar deposits, commercial paper, asset-
backed commercial paper, CDs, treasuries and money market funds with original terms to maturity of less than three
months.
Restricted Cash and Investments
Restricted cash primarily includes amounts held in education loan securitization trusts and other secured
borrowings. This cash must be used to make payments related to trust obligations. Amounts on deposit in these
accounts are primarily the result of timing differences between when principal and interest is collected on the trust
assets and when principal and interest is paid on trust liabilities.
Securities pledged as collateral related to our derivative portfolio, where the counterparty has rights to replace
the securities, are classified as restricted. When the counterparty does not have these rights, the security is recorded
in investments and disclosed as pledged collateral in the notes. Additionally, certain counterparties require cash
collateral pledged to us to be segregated and held in restricted cash accounts.
Goodwill and Acquired Intangible Assets
Goodwill is not amortized but is tested periodically for impairment. We test goodwill for impairment annually
as of October 1 at the reporting unit level, which is the same as or one level below a business segment. Goodwill is
also tested at interim periods if an event occurs or circumstances change that would indicate the carrying amount
may be impaired.
We complete a goodwill impairment analysis which may be a qualitative or a quantitative two-step analysis
depending on the facts and circumstances associated with the reporting unit. In conjunction with a qualitative
impairment analysis, we assess relevant qualitative factors to determine whether it is “more-likely-than-not” that the
fair value of a reporting unit is less than its carrying amount. The “more-likely-than-not” threshold is defined as
having a likelihood of more than 50 percent. In conjunction with a quantitative impairment analysis, we complete
Step 1 of the goodwill impairment analysis. Step 1 consists of a comparison of the fair value of the reporting unit to
the reporting unit’s carrying value, including goodwill. If the carrying value of the reporting unit exceeds the fair
value, Step 2 in the goodwill impairment analysis is performed to measure the amount of impairment loss, if any.
Step 2 of the goodwill impairment analysis compares the implied fair value of the reporting unit’s goodwill to the
carrying value of the reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner
consistent with determining goodwill in a business combination. If the carrying amount of the reporting unit’s
goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to that
excess. If, based on first assessing impairment utilizing a qualitative approach, we determine it is “more-likely-than-
not” that the fair value of the reporting unit is less than its carrying amount, we will also complete a quantitative
impairment analysis.
Acquired intangible assets include, but are not limited to, trade names, customer and other relationships, and
non-compete agreements. Acquired intangible assets with finite lives are amortized over their estimated useful lives
in proportion to their estimated economic benefit. Finite-lived acquired intangible assets are reviewed for
impairment using an undiscounted cash flow analysis when an event occurs or circumstances change indicating the
carrying amount of a finite-lived asset or asset group may not be recoverable. If the carrying amount of the asset or
asset groups exceeds the undiscounted cash flows, the fair value of the asset or asset group is determined using an
acceptable valuation technique. An impairment loss would be recognized if the carrying amount of the asset
(or asset group) exceeds the fair value of the asset or asset group. The impairment loss recognized would be the
difference between the carrying amount and fair value. Indefinite-life acquired intangible assets are not amortized.
We test these indefinite-life acquired intangible assets for impairment annually as of October 1 or at interim periods
if an event occurs or circumstances change that would indicate the carrying value of these assets may be impaired.
The annual or interim impairment test of indefinite-life acquired intangible assets is based primarily on a discounted
cash flow analysis.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
2. Significant Accounting Policies (Continued)
Securitization Accounting
Our securitizations use a two-step structure with a special purpose entity that legally isolates the transferred
assets from us, even in the event of bankruptcy. Transactions receiving sale treatment are also structured to ensure
that the holders of the beneficial interests issued are not constrained from pledging or exchanging their interests, and
that we do not maintain effective control over the transferred assets. If these criteria are not met, then the transaction
is accounted for as an on-balance sheet secured borrowing. In all cases, irrespective of whether they qualify as
accounting sales our securitizations are legally structured to be sales of assets that isolate the transferred assets from
us. If a securitization qualifies as a sale, we then assess whether we are the primary beneficiary of the securitization
trust (VIE) and are required to consolidate such trust. If we are the primary beneficiary, then no gain or loss is
recognized. See “Consolidation” of this Note 2 for additional information regarding the accounting rules for
consolidation when we are the primary beneficiary of these trusts.
Irrespective of whether a securitization receives sale or on-balance sheet treatment, our continuing
involvement with our securitization trusts is generally limited to:
• Owning equity certificates or other certificates of certain trusts and, in certain cases, securities retained for
the purpose of complying with risk retention requirements under securities laws.
• Lending to certain trusts, under a revolving credit, amounts necessary to cover temporary cash flow needs
of the trust. These amounts are repaid to us on subordinated basis with interest at a market rate.
• The servicing of the education loan assets within the securitization trusts, on both a pre- and post-default
basis.
• Our acting as administrator for the securitization transactions we sponsored, which includes remarketing
certain bonds at future dates.
• Our responsibilities relative to representation and warranty violations.
• Temporarily advancing to the trust certain borrower benefits afforded the borrowers of education loans that
have been securitized. These advances subsequently are returned to us in the next quarter.
• Certain back-to-back derivatives entered into by us contemporaneously with the execution of derivatives
by certain Private Education Loan securitization trusts.
• The option held by us to buy certain delinquent loans from certain Private Education Loan securitization
trusts.
• The option to exercise the clean-up call and purchase the education loans from the trust when the asset
balance is 10 percent or less of the original loan balance.
• The option, on some trusts, to purchase education loans aggregating up to 10 percent of the trust’s initial
pool balance.
• The option (in certain trusts) to call rate reset notes in instances where the remarketing process has failed.
The investors of the securitization trusts have no recourse to our other assets should there be a failure of the
trusts to pay when due. Generally, the only arrangements under which we have to provide financial support to the
trusts are representation and warranty violations requiring the buyback of loans.
Under the terms of the transaction documents of certain trusts, we have, from time to time, exercised our
options to purchase delinquent loans from Private Education Loan trusts, to purchase the remaining loans from trusts
once the loan balance falls below 10 percent of the original amount, to purchase education loans up to 10 percent of
the trust’s initial balance, or to call rate reset notes. Certain trusts maintain financial arrangements with third parties
also typical of securitization transactions, such as derivative contracts (swaps) and bond insurance policies that, in
the case of a counterparty failure, could adversely impact the value of any Residual Interest.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
2. Significant Accounting Policies (Continued)
We do not record servicing assets or servicing liabilities when our securitization trusts are accounted for as on-
balance sheet secured financings. As of December 31, 2018, we have $19 million of servicing assets on our balance
sheet, of which $9 million is related to Residual Interests in FFELP Loan securitization trusts we sold in 2013 and
$10 million is related to the acquisition of Earnest in 2017.
Education Loan Interest Income
For loans classified as held-for-investment, we recognize education loan interest income as earned, adjusted
for the amortization of premiums (which includes purchased premiums and capitalized direct origination costs),
discounts and Repayment Borrower Benefits. These adjustments result in income being recognized based upon the
expected yield of the loan over its life after giving effect to expected prepayments. We amortize premium and
discount on education loans using a Constant Prepayment Rate (“CPR”) which measures the rate at which loans in
the portfolio pay down principal compared to their stated terms. In determining the CPR, we only consider payments
made in excess of contractually required payments. This would include loan consolidation and other early payoff
activity. For Repayment Borrower Benefits, the estimates of their effect on education loan yield are based on
analyses of historical payment behavior of customers who are eligible for the incentives and its effect on the
ultimate qualification rate for these incentives. We regularly evaluate the assumptions used to estimate the
prepayment speeds and the qualification rates used for Repayment Borrower Benefits. In instances where there are
changes to the assumptions, amortization is adjusted on a cumulative basis to reflect the change since the acquisition
of the loan. Additionally, interest earned on education loans reflects potential non-payment adjustments in
accordance with our uncollectible interest recognition policy. We do not amortize any premiums, discounts or other
adjustments to the basis of education loans when they are classified as held-for-sale. See “Allowance for Loan
Losses – Purchased Credit Impaired (‘PCI’) Loans” and “–Purchased Non-Credit Impaired Loans” of this Note 2 for
discussion of the interest income methodology related to those portfolios.
Interest Expense
Interest expense is based upon contractual interest rates adjusted for the amortization of debt issuance costs,
premiums and discounts. Our interest expense may also be adjusted for net payments/receipts related to interest rate
and foreign currency swap agreements that qualify and are designated as hedges. Interest expense also includes the
amortization of deferred gains and losses on closed hedge transactions that qualified as hedges. Amortization of debt
issuance costs, premiums, discounts and terminated hedge-basis adjustments are recognized using the effective
interest rate method.
Servicing Revenue
We perform loan servicing functions for third-parties in return for a servicing fee. Our compensation is
typically based on a per-unit fee arrangement or a percentage of the loans outstanding. We recognize servicing
revenues associated with these activities based upon the contractual arrangements as the services are rendered. We
recognize late fees on third-party serviced loans as well as on loans in our portfolio according to the contractual
provisions of the promissory notes, as well as our expectation of collectability.
Asset Recovery and Business Processing Revenue
Asset recovery fees are received for collections or rehabilitation of delinquent or defaulted debt on behalf of
clients performed on a contingency basis. Revenue is earned and recognized upon the completion of rehabilitation
activities or upon receipt of the delinquent customer funds.
Prior to the third quarter of 2018, we received fees from Guarantor agencies for performing default aversion
services on delinquent loans prior to default. The fee is received when the loan is initially placed with us and we are
obligated to provide such services for the remaining life of the loan for no additional fee. In the event that the loan
defaults, in accordance with certain contracts, we are obligated to rebate a portion of the fee to the Guarantor agency
in proportion to the principal and interest outstanding when the loan defaults. We defer the fees received, net of an
estimate of future rebates owed due to subsequent defaults, and recognize such fees over the service period which is
estimated to be the life of the loan.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
2. Significant Accounting Policies (Continued)
In the third quarter of 2017, $47 million of previously deferred asset recovery revenue, net of a reserve, was
recognized as revenue related to loans for which the Company performs these default aversion services. In the third
quarter of 2017, the Company was notified that it would no longer perform these services after 2017 due to the
termination of the related contract as of December 31, 2017. In accordance with GAAP, we recognized this
previously deferred revenue during the third-quarter 2017 to reflect a shortened period over which it is expected to
be earned.
Business processing fees are received generally based on processing transactions. Revenue is earned and
recognized upon the completion of processing the transaction and in some cases also upon the processing of a
payment.
Transfer of Financial Assets and Extinguishments of Liabilities
We account for loan sales and debt repurchases in accordance with the applicable accounting guidance. Our
securitizations and other secured borrowings are accounted for as on-balance sheet secured borrowings. See
“Securitization Accounting” of this Note 2 for further discussion on the criteria assessed to determine whether a
transfer of financial assets is a sale or a secured borrowing. If a transfer of loans qualifies as a sale, we derecognize
the loan and recognize a gain or loss as the difference between the carrying basis of the loan sold and liabilities
retained and the compensation received.
We periodically repurchase our outstanding debt in the open market or through public tender offers. We
record a gain or loss on the early extinguishment of debt based upon the difference between the carrying cost of the
debt and the amount paid to the third party and is net of hedging gains and losses when the debt is in a qualifying
hedge relationship.
We recognize the results of a transfer of loans and the extinguishment of debt based upon the settlement date
of the transaction.
Derivative Accounting
The accounting guidance for our derivative instruments, which primarily includes interest rate swaps, cross-
currency interest rate swaps and Floor Income Contracts, 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. Derivative positions are recorded as net positions by counterparty based on master netting arrangements
exclusive of accrued interest and cash collateral held or pledged.
Many of our derivatives, mainly fixed to variable or variable to fixed interest rate swaps and cross-currency
interest rate swaps, qualify as effective hedges. For these derivatives, the relationship between the hedging
instrument and the hedged items (including the hedged risk and method for assessing effectiveness), 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 specific (or pool of) asset(s) or liability(ies) on
the balance sheet or expected future cash flows and designated as either a “fair value” or a “cash flow” hedge. Fair
value hedges are designed to hedge our exposure to changes in fair value of a fixed rate or foreign denominated
asset or liability, while cash flow hedges are designed to hedge our exposure to variability of either a floating rate
asset’s or liability’s cash flows or an expected fixed rate debt issuance. For effective fair value hedges, both the
derivative and the hedged item (for the risk being hedged) are marked-to-market with any difference reflecting
ineffectiveness and recorded immediately in the statement of income. For effective cash flow hedges, the 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 effects of the hedged item. The ineffective portion of a cash flow hedge is recorded
immediately through earnings. The assessment of the hedge’s effectiveness is performed at inception and on an
ongoing basis, generally using regression testing. For hedges of a pool of assets or liabilities, tests are performed to
demonstrate the similarity of individual instruments of the pool. When it is determined that a derivative is not
currently an effective hedge, ineffectiveness is recognized for the full change in value of the derivative with no
offsetting mark-to-market of the hedged item for the current period. If it is also determined the hedge will not be
effective in the future, we discontinue the hedge accounting prospectively, cease recording changes in the fair value
of the hedged item, and begin amortization of any basis adjustments that exist related to the hedged item.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
2. Significant Accounting Policies (Continued)
We also have derivatives, primarily Floor Income Contracts and certain basis swaps, that we believe are
effective economic hedges but do not qualify for hedge accounting treatment. These derivatives are classified as
“trading” and as a result they are marked-to-market through earnings with no consideration for the fair value
fluctuation of the economically hedged item.
The “gains (losses) on derivative and hedging activities, net” line item in the consolidated statements of
income includes the mark-to-market gains and losses of our derivatives (except effective cash flow 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. Net settlement income/expense on derivatives that qualify as hedges are
included with the income or expense of the hedged item (mainly interest expense).
Accounting for Stock-Based Compensation
We recognize stock-based compensation cost in our consolidated statements of income using the fair value
based method. Under this method we determine the fair value of the stock-based compensation at the time of the
grant and recognize the resulting compensation expense over the grant’s vesting period. We record stock-based
compensation expense net of estimated forfeitures and as such, only those stock-based awards that we expect to vest
are recorded. We estimate the forfeiture rate based on historical forfeitures of equity awards and adjust the rate to
reflect changes in facts and circumstances, if any. Ultimately, the total expense recognized over the vesting period
will equal the fair value of awards that actually vest.
Restructuring and Other Reorganization Expenses
From time to time we implement plans to restructure our business. In conjunction with these restructuring
plans, involuntary benefit arrangements, disposal costs (including contract termination costs and other exit costs), as
well as certain other costs that are incremental and incurred as a direct result of our restructuring plans, are classified
as restructuring expenses in the consolidated statements of income.
The Company administers the Navient Corporation Employee Severance Plan and the Navient Corporation
Executive Severance Plan for Senior Officers (collectively, “the Severance Plan”). The Severance Plan provides
severance benefits in the event of termination of the Company’s full-time employees and part-time employees who
work at least 24 hours per week. The Severance Plan establishes specified benefits based on base salary, job level
immediately preceding termination and years of service upon involuntary termination of employment. The benefits
payable under the Severance Plan relate to past service, and they accumulate and vest. Accordingly, we recognize
severance expenses to be paid pursuant to the Severance Plan when payment of such benefits is probable and can be
reasonably estimated in accordance with ASC 712, “Compensation — Nonretirement Postemployment Benefits.”
Such benefits, include severance pay calculated based on the Severance Plan, medical and dental benefits, and
outplacement services expenses.
Contract termination costs are expensed at the earlier of (1) the contract termination date or (2) the cease use
date under the contract. Other exit costs are expensed as incurred and classified as restructuring expenses if (1) the
cost is incremental to and incurred as a direct result of planned restructuring activities and (2) the cost is not
associated with or incurred to generate revenues subsequent to our consummation of the related restructuring
activities.
Other reorganization expenses include certain internal costs and third-party costs incurred in connection with
our cost reduction initiatives.
During 2018 and 2017, the Company incurred $13 million and $29 million, respectively, of restructuring/other
reorganization expense in connection with an effort that will reduce costs and improve operating efficiency. These
charges were due primarily to severance-related costs.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
2. Significant Accounting Policies (Continued)
Income Taxes
We account for income taxes under the asset and liability approach which requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying
amounts and tax basis of our 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. See “Note 14 – Income Taxes” for a description of the
impact of the “Tax Cuts and Jobs Act” (“TCJA”) on the net deferred tax asset as of December 31, 2017.
“Income tax expense/(benefit)” includes (i) deferred tax expense/(benefit), 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/(benefit), which represents the amount of tax currently payable to or receivable from a tax authority plus
amounts accrued for unrecognized tax benefits. Income tax expense/(benefit) excludes the tax effects related to
adjustments recorded in equity.
If we have an uncertain tax position, then that tax position is recognized only if it is more likely than not to be
sustained upon examination based on the technical merits of the position. The amount of tax benefit recognized in
the financial statements is the largest amount of benefit that is more than 50 percent likely of being sustained upon
ultimate settlement of the uncertain tax position. We recognize interest related to unrecognized tax benefits in
income tax expense/(benefit) and penalties, if any, in operating expenses.
Earnings (Loss) per Common Share
We compute earnings (loss) per common share (“EPS”) by dividing net income allocated to common
shareholders by the weighted average common shares outstanding. Net income allocated to common shareholders
represents net income applicable to common shareholders. Diluted earnings per common share is computed by
dividing income allocated to common shareholders by the weighted average common shares outstanding plus
amounts representing the dilutive effect of stock options outstanding, restricted stock, restricted stock units, and the
outstanding commitment to issue shares under the Employee Stock Purchase Plan. See “Note 10 — Earnings (Loss)
per Common Share” for further discussion.
Reclassifications
Certain reclassifications have been made to the balances as of and for the years ended December 31, 2017 and
2016, to be consistent with classifications adopted for 2018, which had no effect on net income, total assets or total
liabilities.
Recently Issued Accounting Pronouncements
Effective in 2018
Revenue Recognition
On January 1, 2018, we adopted Accounting Standard Codification (“ASC”) 606, “Revenue from Contracts
with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for
the transfer of promised goods or services to its customers. The contract transaction price is allocated to each distinct
contractual performance obligation and recognized as revenue at a point in time or over time when or as the good or
service is provided to the customer and the performance obligation is satisfied. Generally, our performance
obligations are satisfied over time. In conjunction with our implementation plan, we identified revenue streams
related to asset recovery and other business processing within our Federal Education Loans and Business Processing
segments that are within the scope of the new standard and reviewed related contracts. We determined there was no
material change in the timing of our recognition of our asset recovery and business processing revenue or expenses
and we did not record a cumulative adjustment as of January 1, 2018 as a result of the adoption of ASC 606. We
recognized $8 million of revenue and $5 million of expenses in 2018 related to a contract in our Business Processing
segment that would not have been recognized under the prior accounting standard until 2019.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
2. Significant Accounting Policies (Continued)
The new guidance does not apply to financial instruments and transfers and servicing that are accounted for
under other GAAP. Accordingly, the new revenue recognition guidance does not have an impact on our recognition
of revenue and costs associated with our loan portfolios, investments, derivatives and servicing contracts. However,
we considered the ASC 606 principal versus agent guidance with respect to certain asset recovery guarantor
servicing contracts pursuant to which we serve in a portfolio management role and use third-party collection
agencies. We determined that we are required under the new accounting standard to reflect the revenue earned and
paid to third-party collection agencies as revenue and operating expense. Under the prior accounting standards, we
netted payments to third-party collection agencies against revenue. We adopted the new accounting standard using
the “cumulative effect transition adjustment” which results in prospectively making this change in 2018. This
change in accounting policy resulted in both asset recovery revenue and operating expense in the Federal Education
Loan segment being $46 million higher for the year ended December 31, 2018, with no impact on net income. See
“Note 15 – Revenue from Contracts with Customers Accounted in Accordance with ASC 606” for the new required
disclosures.
Classification and Measurement
On January 5, 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards
Updates (“ASU”) No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,”
which reconsiders the classification and measurement of financial instruments. The new standard requires certain
equity instruments be measured at fair value, with fair value changes recognized in earnings. In addition, the
standard requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of
adoption. It was effective for the Company as of January 1, 2018. The adoption of this new accounting standard is
immaterial to our consolidated financial statements and footnote disclosures.
Intra-Entity Transfer of Assets
On October 24, 2016, the FASB issued ASU No. 2016-16, “Income Taxes — Intra-Entity Transfer of Assets
Other and Inventory,” which requires recognition of the income tax consequences of an intra-entity transfer of non-
inventory assets when the transfer occurs. The new standard was effective for the Company as of January 1, 2018.
The adoption of this new accounting standard is immaterial to our consolidated financial statements and footnote
disclosures.
Income Taxes
On February 14, 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income,” which allows reclassification from Accumulated Other
Comprehensive Income (Loss) (“AOCI”), as required by ASC No. 740, “Income Taxes,” to retained earnings for the
residual tax effects resulting from the Tax Cuts and Jobs Act (“TCJA”) enacted on December 22, 2017. The new
standard is effective for the Company as of January 1, 2019. However, early adoption is permitted and the Company
adopted the standard on January 1, 2018, resulting in a decrease of $13 million to retained earnings due to the
reclassification of AOCI to retained earnings.
Effective in 2019
Leases
On February 25, 2016, the FASB issued ASU No. 2016-02, “Leases,” which requires the identification of
arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a
twelve-month term, these arrangements must be recognized as assets and liabilities on the balance sheet of the
lessee. Under previous GAAP, all operating leases were off-balance sheet, regardless of the term. A right-of-use
asset and lease obligation will be recorded for all leases with a term exceeding twelve months, whether operating or
financing, while the income statement will reflect lease expense for operating leases and amortization/interest
expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption must be
calculated using the applicable incremental borrowing rate at the date of adoption. The standard allows the option to
apply the new guidance prospectively at the effective date, without adjustment to comparative periods presented
with certain practical expedients available. It is effective for the Company on January 1, 2019. The Company has
assessed the impact that adopting this new accounting standard will have on our consolidated financial statements
and footnote disclosures and has concluded it will be immaterial. There will be an immaterial increase to assets and
liabilities in equal and offsetting amounts with no change to the income statement presentation.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
2. Significant Accounting Policies (Continued)
Hedging Activities
On August 28, 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging,” which is intended to
better align risk management activities and financial reporting for hedging relationships through changes to both the
designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.
The amendments expand and refine hedge accounting for both nonfinancial and financial risk components and are
intended to better align the recognition and presentation of the effects of the hedging instrument and the hedged item
in the financial statements. The new standard is effective for the Company on January 1, 2019. The Company has
assessed the impact this new standard will have on our consolidated financial statements and footnote disclosures
and has concluded it will be immaterial.
Effective in 2020
Allowance for Loan Losses
On June 16, 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses,” which
requires measurement and recognition of an allowance for loan loss that estimates remaining expected credit losses
for financial assets held at the reporting date. Our current allowance for loan loss is an incurred loss model. As a
result, we expect the new guidance will result in an increase to our allowance for loan losses. The standard is to be
applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period
in which the guidance is effective. The standard is effective for the Company as of January 1, 2020 and will
primarily impact the allowance for loan losses related to our Private Education Loans and FFELP Loans. This
standard represents a significant change from existing GAAP and may result in material changes to the Company’s
accounting for the allowance for loan losses. We are currently evaluating the impact of adopting this accounting
standard on our consolidated financial statements and footnote disclosures.
3. Education Loans
Education loans consist of FFELP and Private Education Loans.
There are three principal categories of FFELP Loans: Stafford, PLUS, and FFELP Consolidation Loans.
Generally, Stafford and PLUS Loans have repayment periods of between 5 and 10 years. FFELP Consolidation
Loans have repayment periods of 12 to 30 years. FFELP Loans do not require repayment, or have modified
repayment plans, while the customer is in-school and during the grace period immediately upon leaving school. The
customer may also be granted a deferment or forbearance for a period of time based on need, during which time the
customer is not considered to be in repayment. Interest continues to accrue on loans in the in-school, deferment and
forbearance period. FFELP Loans obligate the customer to pay interest at a stated fixed rate or a variable rate reset
annually (subject to a cap) on July 1 of each year depending on when the loan was originated and the loan type.
FFELP Loans disbursed before April 1, 2006 earn interest at the greater of the borrower’s rate or a floating rate
based on the Special Allowance Payment (“SAP”) formula, with the interest earned on the floating rate that exceeds
the interest earned from the customer being paid directly by ED. For loans disbursed after April 1, 2006, FFELP
Loans effectively only earn at the SAP rate, as the excess interest earned when the borrower rate exceeds the SAP
rate (Floor Income) is required to be rebated to ED.
FFELP Loans are insured as to their principal and accrued interest in the event of default subject to a Risk
Sharing level based on the date of loan disbursement. These insurance obligations are supported by contractual
rights against the United States. For loans disbursed after October 1, 1993 and before July 1, 2006, we receive
98 percent reimbursement on all qualifying default claims. For loans disbursed on or after July 1, 2006, we receive
97 percent reimbursement.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
3. Education Loans (Continued)
Private Education Loans bear the full credit risk of the customer. Private Education Refinance Loans generally
have a fixed interest rate with the remaining Private Education Loans generally at a variable rate indexed to LIBOR
or Prime indices. The majority of loans in our portfolio are cosigned. Similar to FFELP loans, Private Education
Loans are generally non-dischargeable in bankruptcy. Most loans have repayment terms of 10 to 15 years or more,
and for loans made prior to 2009, payments are typically deferred until after graduation. However, since 2009 we
began to encourage interest-only or fixed payment options while the customer is enrolled in school.
The estimated weighted average life of education loans in our portfolio was approximately 6 years and 7 years
at December 31, 2018 and 2017, respectively. The following table reflects the distribution of our education loan
portfolio by program.
(Dollars in millions)
FFELP Stafford and Other Education Loans, net(1)
FFELP Consolidation Loans, net
Private Education Loans, net
Total education loans, net
(Dollars in millions)
FFELP Stafford and Other Education Loans, net(1)
FFELP Consolidation Loans, net
Private Education Loans, net
Total education loans, net
December 31, 2018
Year Ended
December 31, 2018
Ending
Balance
% of
Balance
Average
Balance
Average
Effective
Interest
Rate
$
$
24,641
47,612
22,245
94,498
26,612
26% $
50,359
50
23,281
24
100% $ 100,252
3.98%
3.91
7.64
4.79%
December 31, 2017
Year Ended
December 31, 2017
Ending
Balance
% of
Balance
Average
Balance
Average
Effective
Interest
Rate
$
28,409
53,294
23,419
$ 105,122
27% $
30,462
51
54,527
23,762
22
100% $ 108,751
2.94%
3.30
6.88
3.98%
(1)
Primarily Stafford Loans, but also includes federally guaranteed PLUS and HEAL Loans.
As of both December 31, 2018 and 2017, 86 percent of our education loan portfolio was in repayment.
4. Allowance for Loan Losses
Our provisions for loan losses represent the periodic expense of maintaining an allowance sufficient to absorb
incurred probable losses, net of expected recoveries, in the held-for-investment loan portfolios. The evaluation of the
provisions for loan losses is inherently subjective, as it requires material estimates that may be susceptible to
significant changes. We segregate our Private Education Loan portfolio in two classes of loans in monitoring and
assessing credit risk — Troubled Debt Restructurings (“TDRs”) and Non-TDRs. We believe that the allowance for
loan losses is appropriate to cover probable losses incurred in the loan portfolios.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
4. Allowance for Loan Losses (Continued)
Allowance for Loan Losses Metrics
(Dollars in millions)
Allowance for Loan Losses
Beginning balance
Total provision
Net adjustment resulting from the change in the charge-
off rate(1)
Net charge-offs remaining(2)
Total net charge-offs
Reclassification of interest reserve(3)
Ending balance
Allowance Ending Balance:
Individually evaluated for impairment — TDR
Collectively evaluated for impairment:
Excluding Purchased Non-Credit Impaired Loans
acquired at a discount and Purchased Credit
Impaired Loans
Purchased Non-Credit Impaired Loans acquired at a
discount(4)
Purchased Credit Impaired Loans(4)
Ending total allowance
Loans Ending Balance:
Individually evaluated for impairment — TDR
Collectively evaluated for impairment:
Excluding Purchased Non-Credit Impaired Loans
acquired at a discount and Purchased Credit
Impaired Loans
Purchased Non-Credit Impaired Loans acquired at a
discount(4)
Purchased Credit Impaired Loans(4)
Ending total loans(5)
Net charge-offs as a percentage of average loans in
repayment, excluding the net adjustment resulting
from the change in the charge-off rate(1)
Net adjustment resulting from the change in charge-off
rate as a percentage of average loans in repayment(1)
Allowance coverage of charge-offs
Allowance as a percentage of the ending total loan balance
Allowance as a percentage of the ending loans in repayment
Ending total loans(5)
Average loans in repayment
Ending loans in repayment
$
$
$
$
$
$
$
$
$
Year Ended December 31, 2018
FFELP
Loans
Private
Education
Loans
Other
Loans
Total
$
60
70
—
(54)
(54)
—
76
$
$
1,297
299
(32)
(371)
(403)
8
1,201
$
$
10
1
—
(2)
(2)
—
9
$
1,367
370
(32)
(427)
(459)
8
1,286
—
$
1,100
$
8
$
1,108
76
—
—
76
$
101
—
—
1,201
$
1
—
—
9
$
178
—
—
1,286
—
$
10,336
$
28
$
10,364
68,880
11,464
2,850
—
71,730
$
2,180
225
24,205
$
51
—
—
79
$
80,395
5,030
225
96,014
.09%
1.66%
—%
—%
1.4
.11%
.13%
$
$
$
71,730
62,927
59,551
.14%
3.0
4.96%
5.45%
$
$
$
24,205
22,312
22,037
—%
—
11.52%
11.52%
79
75
79
(1)
In third-quarter 2018, the portion of the loan amount charged off at default on Private Education Loans increased from 79 percent to 80.5
percent. This charge resulted in a $32 million reduction to the balance of the receivable for partially charged-off loan balance.
(2) Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the
receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which
represents the difference between what was expected to be recovered and any shortfalls in what was actually recovered in the period. See
“Receivable for Partially Charged-Off Private Education Loans” for further discussion.
(3)
(4)
Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the
period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.
The Purchased Credit Impaired Loans’ losses are not provided for by the allowance for loan losses in the above table as these loans are
separately reserved for, if needed. No allowance for loan losses has been established for these loans as of December 31, 2018. The losses of
the Purchased Non-Credit Impaired Loans acquired at a discount are not provided for by the allowance for loan losses in the above table as
the remaining purchased discount associated with the FFELP and Private Education Loans of $37 million and $326 million, respectively, as
of December 31, 2018 is greater than the incurred losses and as a result no allowance for loan losses has been established for these loans as of
December 31, 2018.
(5)
Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
4. Allowance for Loan Losses (Continued)
(Dollars in millions)
Allowance for Loan Losses
Beginning balance
Total provision
Charge-offs(1)
Reclassification of interest reserve(2)
Ending balance
Allowance Ending Balance:
Individually evaluated for impairment - TDR
Collectively evaluated for impairment:
Excluding Purchased Non-Credit Impaired Loans
acquired at a discount and Purchased Credit
Impaired Loans
Purchased Non-Credit Impaired Loans acquired at a
discount(3)
Purchased Credit Impaired Loans(3)
Ending total allowance
Loans Ending Balance:
Individually evaluated for impairment - TDR
Collectively evaluated for impairment:
Excluding Purchased Non-Credit Impaired Loans
acquired at a discount and Purchased Credit
Impaired Loans
Purchased Non-Credit Impaired Loans acquired at a
discount(3)
Purchased Credit Impaired Loans(3)
Ending total loans(4)
Charge-offs as a percentage of average loans in
repayment
Allowance coverage of charge-offs
Allowance as a percentage of the ending total loan
balance
Allowance as a percentage of the ending loans in
repayment
Ending total loans(4)
Average loans in repayment
Ending loans in repayment
Year Ended December 31, 2017
FFELP
Loans
Private
Education
Loans
Other
Loans
Total
$
$
$
$
$
$
67
42
(49)
—
60
$
$
1,351
382
(443)
7
1,297
$
$
15
2
(7)
—
10
$
1,433
426
(499)
7
1,367
—
$
1,171
$
9
$
1,180
60
—
—
60
$
126
—
—
1,297
$
1
—
—
10
$
187
—
—
1,367
—
$
10,921
$
30
$
10,951
77,860
11,861
3,237
—
81,097
$
2,610
248
25,640
$
$
40
—
—
70
89,761
5,847
248
$ 106,807
.07%
1.2
1.98%
2.9
5.39%
1.5
.07%
5.06%
14.32%
.09%
$
$
$
81,097
68,318
67,853
5.66%
$
$
$
25,640
22,342
22,924
$
$
$
14.32%
70
130
70
(1)
(2)
(3)
(4)
Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the
receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans
which represents the difference between what was expected to be recovered and any shortfalls in what was actually recovered in the period.
See “Receivable for Partially Charged-Off Private Education Loans” for further discussion.
Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the
period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.
The Purchased Credit Impaired Loans’ losses are not provided for by the allowance for loan losses in the above table as these loans are
separately reserved for, if needed. No allowance for loan losses has been established for these loans as of December 31, 2017. The losses of
the Purchased Non-Credit Impaired Loans acquired at a discount are not provided for by the allowance for loan losses in the above table as
the remaining purchased discount associated with the FFELP and Private Education Loans of $43 million and $392 million, respectively,
as of December 31, 2017 is greater than the incurred losses and as a result no allowance for loan losses has been established for these loans
as of December 31, 2017.
Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
4. Allowance for Loan Losses (Continued)
(Dollars in millions)
Allowance for Loan Losses
Beginning balance
Total provision
Charge-offs(1)
Reclassification of interest reserve(2)
Ending balance
Allowance Ending Balance:
Individually evaluated for impairment - TDR
Collectively evaluated for impairment
Ending total allowance
Loans Ending Balance:
Individually evaluated for impairment - TDR
Collectively evaluated for impairment
Ending total loans(3)
Charge-offs as a percentage of average loans in
repayment
Allowance coverage of charge-offs
Allowance as a percentage of the ending total loan
balance
Allowance as a percentage of the ending loans in
repayment
Ending total loans(3)
Average loans in repayment
Ending loans in repayment
Year Ended December 31, 2016
FFELP
Loans
Private
Education
Loans
Other
Loans
Total
$
$
$
$
$
$
$
78
43
(54)
—
67
$
$
1,471
383
(513)
10
1,351
$
—
67
67
—
86,918
86,918
$
$
$
$
1,190
161
1,351
11,165
13,983
25,148
$
$
$
$
$
15
3
(3)
—
15
$
11
4
15
$
$
1,564
429
(570)
10
1,433
1,201
232
1,433
32
132
164
$
11,197
101,033
$ 112,230
.07%
1.2
2.20%
2.6
2.10%
7.0
.08%
5.37%
9.35%
.09%
$
$
$
86,918
72,714
70,557
6.10%
$
$
$
25,148
23,275
22,150
$
$
$
9.35%
164
104
164
(1)
(2)
(3)
Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the
receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans
which represents the difference between what was expected to be recovered and any shortfalls in what was actually recovered in the period.
See “Receivable for Partially Charged-Off Private Education Loans” for further discussion.
Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the
period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.
Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
4. Allowance for Loan Losses (Continued)
Key Credit Quality Indicators
FFELP Loans are substantially insured and guaranteed as to their principal and accrued interest in the event of
default. The key credit quality indicator for this portfolio is loan status. The impact of changes in loan status is
incorporated quarterly into the allowance for loan losses calculation.
(Dollars in millions)
Loans in-school/grace/deferment(1)
Loans in forbearance(2)
Loans in repayment and percentage of each status:
Loans current
Loans delinquent 31-60 days(3)
Loans delinquent 61-90 days(3)
Loans delinquent greater than 90 days(3)
Total FFELP Loans in repayment
Total FFELP Loans, gross
FFELP Loan unamortized premium
Total FFELP Loans
FFELP Loan allowance for losses
FFELP Loans, net
Percentage of FFELP Loans in repayment
Delinquencies as a percentage of FFELP Loans in
repayment
FFELP Loans in forbearance as a percentage of
loans in repayment and forbearance
December 31, 2018
Balance %
$
3,793
8,386
FFELP Loan Delinquencies
December 31, 2017
Balance %
$
4,711
8,533
December 31, 2016
Balance %
$
5,871
10,490
53,500
1,964
910
3,177
59,551
71,730
599
72,329
(76)
$ 72,253
89.8%
3.4
1.5
5.3
100%
59,264
2,638
1,763
4,188
67,853
81,097
666
81,763
(60)
$ 81,703
87.3%
3.9
2.6
6.2
100%
61,977
2,820
1,325
4,435
70,557
86,918
879
87,797
(67)
$ 87,730
83.0%
10.2%
12.3%
83.7%
12.7%
11.2%
87.8%
4.0
1.9
6.3
100%
81.2%
12.2%
12.9%
(1)
(2)
(3)
Loans for customers who may still be attending school or engaging in other permitted educational activities and are not yet required to make
payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for customers who
have requested and qualify for other permitted program deferments such as military, unemployment, or economic hardships.
Loans for customers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment
or who have temporarily ceased making full payments due to hardship or other factors such as disaster relief.
The period of delinquency is based on the number of days scheduled payments are contractually past due.
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
4. Allowance for Loan Losses (Continued)
For Private Education Loans, the key credit quality indicators are FICO scores, school type, the existence of a
cosigner, the loan status and loan seasoning. The FICO scores and school type are assessed at origination. The other
Private Education Loan key quality indicators can change and are incorporated quarterly into the allowance for loan
losses calculation. The following table highlights the principal balance (excluding the receivable for partially
charged-off loans) of our Private Education Loan portfolio stratified by the key credit quality indicators.
(Dollars in millions)
Credit Quality Indicators
Original Winning FICO Scores:
FICO 640 and above
FICO below 640
Total
School Type:
Not-for-profit
For-profit
Total
Cosigners:
With cosigner
Without cosigner
Total
Seasoning(1):
1-12 payments
13-24 payments
25-36 payments
37-48 payments
More than 48 payments
Not yet in repayment
Total
Private Education Loans Credit Quality Indicators
TDRs
December 31, 2018
December 31, 2017
Balance(2)
% of Balance
Balance(2)
% of Balance
$
$
$
$
$
$
$
$
9,133
836
9,969
7,888
2,081
9,969
6,172
3,797
9,969
335
436
660
934
7,178
426
9,969
92% $
8
100% $
79% $
21
100% $
62% $
38
100% $
3% $
4
7
10
72
4
100% $
9,647
889
10,536
8,247
2,289
10,536
6,441
4,095
10,536
506
644
947
1,271
6,691
477
10,536
92%
8
100%
78%
22
100%
61%
39
100%
5%
6
9
12
63
5
100%
(1)
(2)
Number of months in active repayment for which a scheduled payment was received.
Balance equals the gross Private Education Loans.
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
4. Allowance for Loan Losses (Continued)
Private Education Loans Credit Quality Indicators
Non-TDRs
December 31, 2018
December 31, 2017
Balance(2)
% of Balance
Balance(2)
% of Balance
$
$
$
$
$
$
$
$
13,087
475
13,562
11,953
1,609
13,562
6,961
6,601
13,562
3,353
486
322
383
8,626
392
13,562
96% $
4
100% $
88% $
12
100% $
51% $
49
100% $
25% $
3
2
3
64
3
100% $
13,752
592
14,344
12,431
1,913
14,344
9,193
5,151
14,344
1,424
437
466
867
10,566
584
14,344
96%
4
100%
87%
13
100%
64%
36
100%
10%
3
3
6
74
4
100%
(Dollars in millions)
Credit Quality Indicators
Original Winning FICO Scores:
FICO 640 and above
FICO below 640
Total
School Type:
Not-for-profit
For-profit
Total
Cosigners:
With cosigner
Without cosigner
Total
Seasoning(1):
1-12 payments
13-24 payments
25-36 payments
37-48 payments
More than 48 payments
Not yet in repayment
Total
(1)
(2)
Number of months in active repayment for which a scheduled payment was received.
Balance equals the gross Private Education Loans.
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
4. Allowance for Loan Losses (Continued)
(Dollars in millions)
Loans in-school/grace/deferment(1)
Loans in forbearance(2)
Loans in repayment and percentage of each status:
Loans current
Loans delinquent 31-60 days(3)
Loans delinquent 61-90 days(3)
Loans delinquent greater than 90 days(3)
Total TDR loans in repayment
Total TDR loans, gross
TDR loans unamortized discount
Total TDR loans
TDR loans receivable for partially charged-off
loans
TDR loans allowance for losses
TDR loans, net
Percentage of TDR loans in repayment
Delinquencies as a percentage of TDR loans in
repayment
Loans in forbearance as a percentage of TDR
loans in repayment and forbearance
December 31,
2018
Balance %
426
$
518
Private Education Loan Delinquencies
TDRs
December 31,
2017
Balance %
477
$
681
December 31,
2016
Balance %
579
$
588
7,890
344
235
556
9,025
9,969
(212)
9,757
367
(1,100)
9,024
$
8,273
412
267
686
9,638
10,805
(237)
10,568
360
(1,190)
9,738
8,333
351
207
487
9,378
10,536
(225)
10,311
385
(1,171)
9,525
87.4%
3.8
2.6
6.2
100%
$
90.5%
12.6%
5.4%
88.9%
3.7
2.2
5.2
100%
$
89.0%
11.1%
6.8%
85.8%
4.3
2.8
7.1
100%
89.2%
14.2%
5.7%
(1)
(2)
(3)
Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to
make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.
Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making
full payments due to hardship or other factors such as disaster relief, consistent with established loan program servicing policies and procedures.
The period of delinquency is based on the number of days scheduled payments are contractually past due.
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
4. Allowance for Loan Losses (Continued)
(Dollars in millions)
Loans in-school/grace/deferment(1)
Loans in forbearance(2)
Loans in repayment and percentage of each status:
Loans current
Loans delinquent 31-60 days(3)
Loans delinquent 61-90 days(3)
Loans delinquent greater than 90 days(3)
Total non-TDR loans in repayment
Total non-TDR loans, gross
Non-TDR loans unamortized discount
Total non-TDR loans
Non-TDR loans receivable for partially
charged-off loans
Non-TDR loans allowance for losses
Non-TDR loans, net
Percentage of non-TDR loans in repayment
Delinquencies as a percentage of non-TDR
loans in repayment
Loans in forbearance as a percentage of non-
TDR loans in repayment and forbearance
December 31,
2018
Balance %
392
$
158
Private Education Loan Delinquencies
Non-TDRs
December 31,
2017
Balance %
584
$
214
December 31,
2016
Balance %
814
$
202
12,851
71
32
58
13,012
13,562
(547)
13,015
98.8%
.5
.3
.4
100%
13,257
120
59
110
13,546
14,344
(699)
13,645
97.9%
.9
.4
.8
100%
12,233
110
54
115
12,512
13,528
(220)
13,308
307
(101)
$ 13,221
375
(126)
$ 13,894
455
(161)
$ 13,602
95.9%
94.4%
1.2%
1.2%
2.1%
1.6%
97.8%
.9
.4
.9
100%
92.5%
2.2%
1.6%
(1)
(2)
(3)
Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to
make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.
Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making
full payments due to hardship or other factors such as disaster relief, consistent with established loan program servicing policies and procedures.
The period of delinquency is based on the number of days scheduled payments are contractually past due.
Receivable for Partially Charged-Off Private Education Loans
At the end of each month, for loans that are 212 or more days past due, we charge off the estimated loss of a
defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off.
We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic
recoveries are less than expected, the difference is immediately charged off through the allowance for Private
Education Loan losses with an offsetting reduction in the receivable for partially charged-off Private Education
Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the
allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount
originally expected to be recovered.
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
4. Allowance for Loan Losses (Continued)
The following table summarizes the activity in the receivable for partially charged-off loans.
(Dollars in millions)
Receivable at beginning of period
Expected future recoveries of current period defaults(1)
Recoveries(2)
Charge-offs(3)
Receivable at end of period
$
$
Years Ended December 31,
2017
2018
2016
760 $
89
(139)
(36)
674 $
815 $
110
(155)
(10)
760 $
881
128
(181)
(13)
815
(1)
(2)
(3)
Represents our estimate of the amount to be collected in the future.
Current period cash collections.
Represents the current period recovery shortfall — the difference between what was expected to be collected and what was actually
collected. Additionally, in third-quarter 2018, the portion of the loan amount charged off at default increased from 79 percent to
80.5 percent. This change resulted in a $32 million reduction to the balance of the receivable for partially charged-off loans. These
amounts are included in total charge-offs as reported in the “Allowance for Private Education Loan Losses” table.
Troubled Debt Restructurings (“TDRs”)
We sometimes modify the terms of loans for customers experiencing financial difficulty. Where we have
granted either a forbearance of greater than three months, an interest rate reduction or an extended repayment plan,
these are classified as TDRs. Approximately 65 percent and 61 percent of the loans granted forbearance have
qualified as a TDR loan at December 31, 2018, and 2017, respectively. The unpaid principal balance of TDR loans
that were in an interest rate reduction plan as of December 31, 2018 and 2017 was $1.8 billion and $2.7 billion,
respectively.
At December 31, 2018 and 2017, all of our TDR loans had a related allowance recorded. The following table
provides the recorded investment, unpaid principal balance and related allowance for our TDR loans.
(Dollars in millions)
Recorded investment(1)
Total ending loans(2)
Related allowance
December 31, 2018
December 31, 2017
TDRs
$
$
$
10,326 $
10,336 $
1,100 $
10,890
10,921
1,171
(1)
(2)
Recorded investment is equal to the unpaid principal balance (which includes the receivable for partially charged-off loans),
accrued interest and unamortized discount.
Total ending loans includes the receivable for partially charged-off loans.
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
4. Allowance for Loan Losses (Continued)
The following table provides the average recorded investment and interest income recognized for our TDR
loans.
(Dollars in millions)
Average recorded investment
Interest income recognized
2018
Years Ended December 31,
2017
2016
$
$
10,637
764
$
$
10,989 $
708 $
11,078
667
The following table provides the amount of loans modified in the periods presented that resulted in a TDR.
Additionally, the table summarizes charge-offs occurring in the TDR portfolio, as well as TDRs for which a
payment default occurred in the current period within 12 months of the loan first being designated as a TDR. We
define payment default as 60 days past due for this disclosure.
(Dollars in millions)
Modified loans(1)
Charge-offs(2)
Payment-default
2018
Years Ended December 31,
2017
2016
$
$
$
596 $
343 $
142 $
816 $
346 $
181 $
1,169
382
265
(1)
(2)
Represents period ending balance of loans that have been modified during the period and resulted in a TDR.
Represents loans that charged off that were classified as TDRs.
Accrued Interest Receivable
The following table provides information regarding accrued interest receivable on our Private Education
Loans.
(Dollars in millions)
December 31, 2018
TDR
Non-TDR
Total
December 31, 2017
TDR
Non-TDR
Total
December 31, 2016
TDR
Non-TDR
Total
Greater Than
90 Days
Past Due
Allowance for
Uncollectible
Interest
Total
$
$
$
$
$
$
205 $
149
354 $
196 $
187
383 $
192 $
199
391 $
26 $
3
29 $
20 $
4
24 $
28 $
5
33 $
23
4
27
20
6
26
23
7
30
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
5. Business Combinations, Goodwill and Acquired Intangible Assets
Business Combinations
Acquisitions are accounted for under the acquisition method of accounting as defined in ASC 805, “Business
Combinations.” The Company allocates the purchase price to the fair value of the acquired tangible assets, liabilities
and identifiable intangible assets as of the acquisition date as determined by an independent appraiser.
Acquisition of Earnest
In November 2017, Navient acquired a 95 percent majority controlling interest in Earnest for approximately
$149 million in cash. Earnest is a leading financial technology and education finance company that originates
Private Education Refinance Loans. We engaged an independent appraiser to assist in the valuation of the assets
acquired and liabilities assumed including identifiable intangible assets. In November 2018, the Company finalized
its purchase price allocation for Earnest, which resulted in an excess purchase price over fair value of net assets
acquired, or goodwill, of $77 million. The results of operations of Earnest have been included in Navient’s
consolidated financial statements since the acquisition date and are reflected in Navient’s Consumer Lending
segment and its Private Education Refinance Loans reporting unit. Navient has not disclosed the pro forma impact
of this acquisition to the results of operations for the year ended December 31, 2017, as the pro forma impact was
deemed immaterial.
Identifiable intangible assets at the acquisition date included definite life intangible assets with an aggregate
fair value of approximately $20 million primarily including the Earnest trade name and developed technology. The
intangible assets will be amortized over a period of 5 to 10 years based on the estimated economic benefit derived
from each of the underlying assets.
Acquisition of Duncan Solutions
In July 2017, Navient acquired a 100 percent controlling interest in Duncan Solutions for approximately
$86 million in cash. Duncan Solutions is a leading transportation revenue management company serving
municipalities and toll authorities, offering a range of technology-enabled products and services to support its
clients’ parking and tolling operations. We engaged an independent appraiser to assist in the valuation of the assets
acquired and liabilities assumed including identifiable intangible assets. In July 2018, the Company finalized its
purchase price allocation for Duncan Solutions, which resulted in an excess purchase price over the fair value of net
assets acquired, or goodwill, of $39 million. The results of operations of Duncan Solutions have been included in
Navient’s consolidated financial statements since the acquisition date and are reflected in Navient’s Business
Processing segment and its Government Services reporting unit. Navient has not disclosed the pro forma impact of
this acquisition to the results of operations for the year ended December 31, 2017, as the pro forma impact was
deemed immaterial.
Identifiable intangible assets at the acquisition date include definite life intangible assets with an aggregate fair
value of approximately $33 million primarily including customer relationships, developed technology and the
Duncan Solutions trade name. The intangible assets will be amortized over a period of 2 to 10 years based on the
estimated economic benefit derived from each of the underlying assets.
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
5. Business Combinations, Goodwill and Acquired Intangible Assets (Continued)
Goodwill
Goodwill resulting from our acquisitions is assigned to a reporting unit or units. A reporting unit is the same
or one level below an operating segment. As discussed in “Note 12 – Segment Reporting," we have the following
new reportable operating segments effective first-quarter 2018: Federal Education Loans, Consumer Lending,
Business Processing and Other. As a result of this change in our reporting structure, our reporting units with
goodwill as of December 31, 2018 include (1) FFELP Loans (inclusive of the former FFELP Loans reporting unit
and the related internal loan servicing which was formerly a part of the old Servicing reporting unit), (2) Federal
Education Loan Servicing (inclusive of the former Servicing reporting unit except for the internal loan servicing
that was moved to the FFELP loans reporting unit), (3) Private Education Loans, (4) Private Education Refinance
Loans ( formerly called the Earnest reporting unit), (5) Government Services (inclusive of the former Asset
Recovery – Gila reporting unit and other government services lines of businesses previously included in our Asset
Recovery – Contingency reporting unit) and (6) Healthcare Services (formerly called the Asset Recovery – Xtend
Healthcare reporting unit).
This change in composition of our reporting units required a reallocation of $50 million of goodwill from our
former Servicing reporting unit to the newly comprised FFELP Loans and Federal Education Loan Servicing
reporting units, which were allocated $37 million and $13 million, respectively. In connection with the reallocation
of goodwill, we assessed relevant qualitative factors to determine whether it was “more-likely-than-not” that the fair
values of the FFELP Loans and Federal Education Loan Servicing reporting units were less than their respective
carrying values at March 31, 2018. No goodwill was deemed impaired after assessing these relevant qualitative
factors.
The change in our reporting structure also resulted in a change in the composition of the former Asset
Recovery – Contingency reporting unit (now referred to as the Federal Education Loan Asset Recovery reporting
unit), which did not have any goodwill. In connection with the realignment of our reportable segments, components
of this reporting unit were moved to the Government Services reporting unit. Since the composition of the
Government Services reporting unit, which had a goodwill balance, changed as a result of our new reporting
structure, we assessed relevant qualitative factors to determine whether it was “more-likely-than-not” that the fair
value of the Government Services reporting unit was less than its carrying value at March 31, 2018. No goodwill
was deemed impaired after assessing these relevant qualitative factors.
The following table summarizes our goodwill, accumulated impairments and net goodwill for our reporting
units and reportable segments as of December 31, 2018.
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
5. Business Combinations, Goodwill and Acquired Intangible Assets (Continued)
(Dollars in millions)
Federal Education Loans reportable segment:
FFELP Loans
Federal Education Loan Servicing
Total Federal Education Loans reportable segment
Consumer Lending reportable segment:
$
Private Education Loans(1)
Private Education Refinance Loans
Total Consumer Lending reportable segment
Business Processing reportable segment:
Government Services
Healthcare Services
Total Business Processing reportable segment
Total
$
(Dollars in millions)
FFELP Loans reportable segment
Private Education Loans reportable segment:
Private Education Loans(1)
Earnest
Total Private Education Loans reportable segment
Business Services reportable segment:
Servicing
Asset Recovery - Contingency
Asset Recovery - Gila
Asset Recovery - Xtend Healthcare
Total Business Services reportable segment
Total
$
As of December 31, 2018
Accumulated
Impairments
and Other
Gross
Adjustments
Net
231 $
13
244
147
77
224
272
106
378
846 $
(4) $
—
(4)
(41)
—
(41)
(136)
—
(136)
(181) $
As of December 31, 2017
Accumulated
Impairments
and Other
Adjustments
Net
Gross
194
(4)
147
87
234
50
136
160
108
454
882 $
(41)
—
(41)
—
(136)
—
—
(136)
(181) $
227
13
240
106
77
183
136
106
242
665
190
106
87
193
50
—
160
108
318
701
(1)
In conjunction with our Separation from SLM BankCo in 2014, we removed $41 million of goodwill from our balance
sheet as required under ASC 350, “Intangibles — Goodwill and Other.” This goodwill was allocated to the consumer
banking business retained by SLM BankCo based on relative fair value.
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
5. Business Combinations, Goodwill and Acquired Intangible Assets (Continued)
Interim Goodwill Impairment Testing – Third-Quarter 2018
In third-quarter 2018, we wrote off a $16 million toll services relationship intangible asset as a result of
receiving a notice of termination related to a toll services contract in our Government Services reporting unit. As a
result of this termination, we also performed a valuation of the Government Services reporting unit, which has $136
million of goodwill and concluded the goodwill was not impaired as the fair value of the reporting unit was 56
percent greater than the book basis. We estimated the fair value of the reporting unit utilizing a market approach
which applies market-based revenue, EBITDA and net income multiples from comparable publicly-traded
companies to the reporting unit’s revenue, EBITDA and net income indicators.
Annual Goodwill Impairment Testing – October 1, 2018
We perform our goodwill impairment testing annually in the fourth quarter as of October 1. As part of the
2018 annual impairment testing associated with our FFELP Loans, Federal Education Loan Servicing (both
inclusive of portions of the former Servicing reporting unit), and Private Education Loans reporting units, we
assessed relevant qualitative factors to determine whether it is “more-likely-than-not” that the fair value of an
individual reporting unit is less than its carrying value. We considered the amount of excess fair values over the
carrying values of the FFELP Loans, Servicing and the Private Education Loans reporting units as of October 1,
2016 when we last performed a Step 1 goodwill impairment test. The fair values of these reporting units at October
1, 2016 were substantially in excess of their carrying amounts. In addition, the cash flows for our FFELP Loans and
Private Education Loans reporting units are very predictable and the outlook and associated cash flow projections of
these reporting units have not changed significantly since our 2016 assessment. No goodwill was deemed impaired
for the reporting units after assessing these relevant qualitative factors. We also performed a qualitative assessment
for the Federal Education Loan Servicing reporting unit and concluded that it is “more-likely-than-not” that the fair
value of the reporting unit exceeded its carrying amount. The remaining goodwill in this reporting unit was not
impaired.
In conjunction with 2018 annual impairment testing, we also assessed relevant qualitative factors to
determine whether it is “more-likely-than-not” that the fair values of the Private Education Refinance Loans and the
Government Services reporting units are less than their respective carrying values. For the Private Education
Refinance Loans reporting unit, we considered the current status and outlook for this reporting unit since our
November 2017 acquisition of Earnest and our 2018 launch of our Navi Refinance Loan product including
origination volume, our ability to issue private credit ABS comprised entirely of the reporting unit’s refinance loans
and the acquisition value of Earnest. Loan origination volume has exceeded the acquisition plan. Accordingly, the
outlook of this reporting unit has improved since our 2017 acquisition of Earnest and the launch of the Navi
Refinance Loan product. No goodwill was deemed impaired for the Private Education Refinance Loans reporting
unit.
We performed goodwill impairment testing in association with the Government Services reporting unit in
third-quarter 2018 as discussed above. In conjunction with annual impairment testing, we assessed the outlook for
this reporting unit in comparison with the outlook as of third-quarter 2018, 2018 earnings, and the current customer
base and revenue backlog. Goodwill was not deemed to be impaired for this reporting unit after assessing these
relevant qualitative factors.
We performed a valuation as of October 1, 2018 of the Healthcare Services reporting unit, which has $106
million of goodwill. We concluded the goodwill was not impaired as the fair value of the reporting unit was 28
percent greater than the carrying value of this reporting unit. We estimated the fair value of the reporting unit
utilizing a market approach which applies market-based revenue, EBITDA and net income multiples from
comparable publicly-traded companies to the reporting unit’s revenue, EBITDA and net income indicators.
We also considered the current regulatory and legislative environment, the current economic environment, our
2018 earnings and 2019 expected earnings. We view these factors as favorable. Although our market capitalization
was less than our book equity during fourth-quarter 2018, it was concluded that our market capitalization in relation
to our book equity does not indicate impairment of our reporting units’ respective goodwill at December 31, 2018.
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
5. Business Combinations, Goodwill and Acquired Intangible Assets (Continued)
Acquired Intangible Assets
Acquired intangible assets include the following:
(Dollars in millions)
Customer, services and lending
relationships
Favorable lease
Non-competes
Software and technology
Trade names and trademarks(2)
Total acquired intangible assets $
$
As of December 31, 2018
Accumulated
Impairment an
d
Amortization(1)
Cost
Basis(1)
As of December 31, 2017
Accumulated
Impairment an
d
Amortization(1)
Net
Net
Cost
Basis(1)
284 $
1
3
115
61
464 $
(226) $
—
(3)
(90)
(24)
(343) $
58 $
1
—
25
37
121 $
292 $
1
2
104
48
447 $
(234) $
—
(2)
(85)
(18)
(339) $
58
1
—
19
30
108
(1)
(2)
Accumulated impairment and amortization include impairment amounts only if the acquired intangible asset has been deemed partially impaired.
When an acquired intangible asset is considered fully impaired and no longer in use, the cost basis and any accumulated amortization related to the
asset is written off.
During 2016 we reclassified certain trade names from indefinite life to definite life intangible assets and began to amortize these assets over their
expected benefit period.
We recorded amortization of acquired intangible assets from continuing operations totaling $31 million,
$23 million and $29 million in 2018, 2017 and 2016, respectively. We will continue to amortize our intangible
assets with definite useful lives over their remaining estimated useful lives. We estimate amortization expense
associated with these intangible assets will be $26 million, $22 million, $19 million, $16 million and $38 million in
2019, 2020, 2021, 2022 and after 2022, respectively.
As discussed above, we wrote off a $16 million toll services relationship acquired intangible asset in its
entirety due to the termination of a significant toll services contract in our Government Services reporting unit.
6. Borrowings
Borrowings consist of secured borrowings issued through our securitization program, borrowings through
secured facilities, unsecured notes issued by us, and other interest-bearing liabilities related primarily to obligations
to return cash collateral held.
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
6. Borrowings (Continued)
The following table summarizes our borrowings.
(Dollars in millions)
Unsecured borrowings:
Senior unsecured debt(1)
Total unsecured borrowings
Secured borrowings:
FFELP Loan securitizations(2)
Private Education Loan securitizations(3)
FFELP Loan — other facilities
Private Education Loan — other facilities
Other(4)
Total secured borrowings
Total before hedge accounting adjustments
Hedge accounting adjustments
Total
December 31, 2018
Long
Term
Short
Term
Total
December 31, 2017
Long
Term
Short
Term
Total
$
817 $ 10,674 $ 11,491 $ 1,306 $ 12,624 $ 13,930
1,306 12,624 13,930
817 10,674 11,491
2,927
1,114
267
— 66,318 66,318
300 12,985 13,285
5,552
2,625
2,380
1,266
—
267
4,608 83,194 87,802
5,425 93,868 99,293
(352)
(349)
— 71,208 71,208
686 12,646 13,332
8,366
6,830
2,394
1,710
—
538
3,444 92,394 95,838
4,750 105,018 109,768
15
$ 5,422 $ 93,519 $ 98,941 $ 4,771 $105,012 $109,783
1,536
684
538
21
(6)
(3)
(1)
(2)
(3)
(4)
Includes principal amount of $817 million and $1.3 billion of short-term debt as of December 31, 2018 and 2017, respectively. Includes principal
amount of $10.8 billion and $12.7 billion of long-term debt as of December 31, 2018 and 2017, respectively.
Includes $244 million of long-term debt related to the FFELP Loan asset-backed securitization repurchase facilities (“FFELP Loan Repurchase
Facilities”) as of December 31, 2018.
Includes $300 million and $686 million of short-term debt related to the Private Education Loan asset-backed securitization repurchase facilities
(“Private Education Loan Repurchase Facilities”) as of December 31, 2018 and 2017, respectively. Includes $2.0 billion and $1.3 billion of long-
term debt related to the Private Education Loan Repurchase Facilities as of December 31, 2018 and 2017, respectively.
“Other” primarily includes the obligation to return cash collateral held related to derivative exposures.
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
6. Borrowings (Continued)
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 (secured and unsecured), the weighted average interest rates at the end of each
period, and the related average balances and weighted average interest rates during the periods.
(Dollars in millions)
Private Education Loan securitizations(1)
FFELP Loan — other facilities
Private Education Loan — other facilities
Senior unsecured debt
Other interest-bearing liabilities
Total short-term borrowings
Maximum outstanding at any month end
(Dollars in millions)
Private Education Loan securitizations(1)
FFELP Loan — other facilities
Private Education Loan —other facilities
Senior unsecured debt
Other interest-bearing liabilities
Total short-term borrowings
Maximum outstanding at any month end
December 31, 2018
Year Ended
December 31, 2018
Ending
Balance
Weighted
Average
Interest Rate
Average
Balance
Weighted
Average
Interest Rate
300
2,927
1,114
814
267
5,422
6,363
5.23% $
3.10
3.63
4.92
2.39
3.56% $
536
1,137
847
2,021
292
4,833
4.72%
2.79
3.40
5.90
1.73
4.35%
December 31, 2017
Year Ended
December 31, 2017
Ending
Balance
Weighted
Average
Interest Rate
Average
Balance
Weighted
Average
Interest Rate
686
1,536
684
1,327
538
4,771
4,771
4.65% $
2.11
2.92
8.06
1.33
4.16% $
706
261
572
1,197
458
3,194
4.32%
1.26
2.42
6.80
1.27
4.22%
$
$
$
$
$
$
(1)
Relates to Private Education Loan Repurchase Facilities.
F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
6. Borrowings (Continued)
Long-term Borrowings
The following tables summarize outstanding long-term borrowings, the weighted average interest rates at the
end of the periods, and the related average balances during the periods.
(Dollars in millions)
Floating rate notes:
U.S. dollar-denominated:
Interest bearing, due 2019-2083
Non-U.S. dollar-denominated:
Interest bearing, due 2023-2040
Total floating rate notes
Fixed rate notes:
U.S. dollar-denominated:
Interest bearing, due 2020-2059
Non-U.S.-dollar denominated:
Interest bearing, due 2034
Total fixed rate notes
Total long-term borrowings
(Dollars in millions)
Floating rate notes:
U.S. dollar-denominated:
Interest bearing, due 2018-2083
Non-U.S. dollar-denominated:
Interest bearing, due 2023-2041
Total floating rate notes
Fixed rate notes:
U.S. dollar-denominated:
Interest bearing, due 2019-2058
Non-U.S.-dollar denominated:
Interest bearing, due 2034-2035
Total fixed rate notes
Total long-term borrowings
December 31, 2018
Weighted
Average
Interest
Rate(2)
Year Ended
December 31,
2018
Average
Balance
Ending
Balance(1)
$
74,842
3.38% $
80,189
4,064
78,906
.66
3.24
4,919
85,108
14,431
5.57
13,814
182
14,613
93,519
$
2.49
5.53
3.60% $
273
14,087
99,195
December 31, 2017
Weighted
Average
Interest
Rate(2)
Year Ended
December 31,
2017
Average
Balance
Ending
Balance(1)
$
83,209
2.31% $
86,186
6,423
89,632
.37
2.17
7,355
93,541
15,114
5.60
15,266
266
15,380
$ 105,012
2.72
5.55
2.67% $
281
15,547
109,088
(1)
(2)
Ending balance is expressed in U.S. dollars using the spot currency exchange rate. Includes fair value adjustments under hedge
accounting for notes designated as the hedged item in a fair value hedge.
Weighted average interest rate is stated rate relative to currency denomination of debt.
F-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
6. Borrowings (Continued)
As of December 31, 2018, the expected maturities of our long-term borrowings are shown in the following
table.
(Dollars in millions)
Year of Maturity
2019
2020
2021
2022
2023
2024-2043
Hedge accounting adjustments
Total
Expected Maturity
Senior
Unsecured
Debt
Secured
Borrowings(1)
Total(2)
$
$
— $
2,046
1,434
1,736
1,496
3,962
10,674
107
10,781 $
10,274 $
9,814
6,357
6,215
6,110
44,424
83,194
(456)
82,738 $
10,274
11,860
7,791
7,951
7,606
48,386
93,868
(349)
93,519
(1)
(2)
We view our securitization trust debt as long-term based on the contractual maturity dates which range from 2019 to 2083.
However, we have projected the expected principal paydowns based on our current estimates regarding the securitized loans’
prepayment speeds for purposes of this disclosure to better reflect how we expect this debt to be paid down over time. The
projected principal paydowns in year 2019 include $10.3 billion related to the securitization trust debt.
The aggregate principal amount of debt that matures in each period is $10.3 billion in 2019, $11.9 billion in 2020, $7.9 billion in
2021, $8.0 billion in 2022, $7.7 billion in 2023 and $48.8 billion in 2024-2043.
F-44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
6. Borrowings (Continued)
Variable Interest Entities
We consolidate the following financing VIEs as of December 31, 2018 and 2017, as we are the primary
beneficiary. As a result, these VIEs are accounted for as secured borrowings.
December 31, 2018
$
(Dollars in millions)
Secured Borrowings — VIEs:
FFELP Loan securitizations(1)
Private Education Loan securitizations(2)
FFELP Loan — other facilities
Private Education Loan — other facilities
Total before hedge accounting
adjustments
Hedge accounting adjustments
Total
$
Debt Outstanding
Short
Term
Long
Term Total
Carrying Amount of Assets Securing
Debt Outstanding
Other
Assets, Ne
t
Cash
Total
Loans
— $ 66,318 $ 66,318 $ 66,266 $
300 12,985 13,285 16,336
5,656
3,361
5,552
2,380
2,625
1,266
2,927
1,114
4,341 83,194 87,535 91,619
—
4,341 $ 82,738 $ 87,079 $ 91,619 $
(456)
(456)
—
3,181 $
536
132
79
3,928
—
3,928 $
1,211 $ 70,658
198 17,070
162
5,950
27
3,467
1,598 97,145
(642)
(642)
956 $ 96,503
December 31, 2017
Debt Outstanding
Long
Term Total
Short
Term
Carrying Amount of Assets Securing
Debt Outstanding
Other
Assets, Net
Cash
Total
Loans
(Dollars in millions)
Secured Borrowings — VIEs:
FFELP Loan securitizations(1)
Private Education Loan securitizations(2)
FFELP Loan — other facilities
Private Education Loan — other facilities
Total before hedge accounting
adjustments
Hedge accounting adjustments
Total
$
— $71,208 $71,208 $72,145 $ 2,335 $
484
204
68
686 12,646 13,332 17,739
1,536 3,999 5,535 5,565
684 1,710 2,394 3,147
2,906 89,563 92,469 98,596 3,091
—
$ 2,906 $89,317 $92,223 $98,596 $ 3,091 $
(246)
(246)
—
—
1,078 $ 75,558
237 18,460
5,925
156
3,246
31
1,502 103,189
(342)
(342)
1,160 $102,847
(1)
(2)
Includes $244 million of long-term debt and $9 million of restricted cash related to the FFELP Loan Repurchase Facilities as of December 31,
2018.
Includes $300 million of short-term debt, $2.0 billion of long-term debt and $115 million of restricted cash related to the Private Education Loan
Repurchase Facilities as of December 31, 2018. Includes $686 million of short-term debt, $1.3 billion of long-term debt and $96 million of
restricted cash related to the Private Education Loan Repurchase Facilities as of December 31, 2017.
F-45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
6. Borrowings (Continued)
Secured Facilities and Unsecured Debt
FFELP Loans — Other Facilities
We have various secured borrowing facilities that we use to finance our FFELP Loans. Liquidity is available
under these secured credit facilities to the extent we have eligible collateral and available capacity. The maximum
borrowing capacity under these facilities will vary and is subject to each agreement’s borrowing conditions. These
include but are not limited to the facility’s size, current usage and the availability and fair value of qualifying
unencumbered FFELP Loan collateral. Our borrowings under these facilities are non-recourse. The maturity dates
on these facilities range from November 2019 to April 2020. The interest rate on certain facilities can increase under
certain circumstances. The facilities are subject to termination under certain circumstances. As of December 31,
2018, there was approximately $5.6 billion outstanding under these facilities, with approximately $6.0 billion of
assets securing these facilities. As of December 31, 2018, the maximum unused capacity under these facilities was
$752 million. As of December 31, 2018, we had $332 million of unencumbered FFELP Loans.
FFELP Loan ABS Repurchase Facilities
In 2018, we closed a $0.9 billion FFELP Loan ABS Repurchase Facility that provides liquidity for the
acquisition of certain Navient-sponsored auction rate securities. Borrowings under the facility are secured by the
auction rate securities. The lenders also have unsecured recourse to Navient Corporation as guarantor for any
shortfall in amounts payable. Because the facility is secured by Navient-sponsored instruments issued in previous
securitizations, we show the debt as part of FFELP Loan securitizations in the Secured Borrowings table above. As
of December 31, 2018, there was approximately $0.2 billion outstanding under this facility.
Private Education Loans — Other Facilities
We have various secured borrowing facilities that we use to finance our Private Education Loans. Liquidity is
available under these secured credit facilities to the extent we have eligible collateral and available capacity. The
maximum borrowing capacity under these facilities will vary and is subject to each agreement’s borrowing
conditions. These include but are not limited to the facility’s size, current usage and the availability and fair value of
qualifying unencumbered Private Education Loan collateral. Our borrowings under these facilities are non-recourse.
The maturity dates on these facilities range from June 2019 to June 2020. The interest rate on certain facilities can
increase under certain circumstances. The facilities are subject to termination under certain circumstances. As of
December 31, 2018, there was approximately $2.4 billion outstanding under these facilities, with approximately $3.5
billion of assets securing these facilities. As of December 31, 2018, the maximum unused capacity under these
facilities was $635 million. As of December 31, 2018, we had $2.6 billion of unencumbered Private Education
Loans.
Private Education Loan ABS Repurchase Facilities
Since the fourth quarter of 2015, we have closed on $3.2 billion of Private Education Loan ABS Repurchase
Facilities. These repurchase facilities are collateralized by Residual Interests in previously issued Private Education
Loan ABS trusts. The lenders also have unsecured recourse to Navient Corporation as guarantor for any shortfall in
amounts payable. Because these facilities are secured by the Residual Interests in previous securitizations, we show
the debt as part of Private Education Loan securitizations in the Secured Borrowings table above. As of December
31, 2018, there was approximately $2.3 billion outstanding.
Senior Unsecured Debt
We issued $500 million, $1.6 billion and $1.3 billion of unsecured debt in 2018, 2017 and 2016, respectively.
F-46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
6. Borrowings (Continued)
Debt Repurchases
The following table summarizes activity related to our senior unsecured debt and ABS repurchases. “Gains
(losses) on debt repurchases” is shown net of hedging-related gains and losses.
(Dollars in millions)
Debt principal repurchased
Gains (losses) on debt repurchases
7. Derivative Financial Instruments
Risk Management Strategy
Years Ended December 31,
2017
2016
2018
$
2,809 $
19
513 $
(3)
1,467
1
We maintain an overall interest rate risk management strategy that incorporates the use of derivative
instruments to minimize the economic effect of interest rate changes. Our goal is to manage interest rate sensitivity
by modifying the repricing frequency and underlying index characteristics of certain balance sheet assets and
liabilities so the net interest margin is not, on a material basis, adversely affected by movements in interest rates. We
do not use derivative instruments to hedge credit risk. As a result of interest rate fluctuations, 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 offset the effect of this unrealized appreciation or depreciation for
the period the item is being hedged. We view this strategy as a prudent management of interest rate sensitivity. In
addition, we utilize 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
fluctuate, these liabilities will appreciate and depreciate in value. These fluctuations, to the extent the hedge
relationship is effective, are offset 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 and basis swaps, are economically effective; however, those transactions generally do not
qualify for hedge accounting under GAAP (as discussed below) and thus may adversely impact earnings.
F-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
7. Derivative Financial Instruments (Continued)
Although we use derivatives to minimize the risk of interest rate and foreign currency changes, the use of
derivatives does expose us to both market and credit risk. Market risk is the chance of financial loss resulting from
changes in interest rates, foreign exchange rates and market liquidity. Credit risk is the risk that a counterparty will
not perform its obligations under a contract and it is limited to the loss of the fair value gain in a derivative that the
counterparty owes us. When the fair value of a derivative contract is negative, we owe the counterparty and,
therefore, have no credit risk exposure to the counterparty; however, the counterparty has exposure to us. We
minimize the credit risk in derivative instruments by entering into transactions with highly rated counterparties that
are reviewed regularly by our Credit Department. We also maintain 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 related to Navient Corporation contracts generally are
required as well. When we have more than one outstanding derivative transaction with the counterparty, and there
exists legally enforceable netting provisions with the counterparty (i.e., a legal right to offset receivable and payable
derivative contracts), the “net” mark-to-market exposure, less collateral the counterparty has posted to us, represents
exposure with the counterparty. When there is a net negative exposure, we consider our exposure to the counterparty
to be zero. At December 31, 2018 and 2017, we had a net positive exposure (derivative gain positions to us less
collateral which has been posted by counterparties to us) related to Navient Corporation derivatives of $19 million
and $24 million, respectively.
Our on-balance sheet securitization trusts have $4.5 billion of Euro and British Pound Sterling denominated
bonds outstanding as of December 31, 2018. 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. In addition, the trusts
have entered into $5.1 billion notional of interest rates swaps which are primarily used to convert Prime received on
securitized education loans to LIBOR paid on the bonds. Our securitization trusts with swaps have ISDA
documentation with protections against counterparty risk. The collateral calculations contemplated in the ISDA
documentation of our securitization trusts require collateral based on the fair value of the derivative which may be
adjusted for additional collateral based on rating agency criteria requirements considered within the collateral
agreement. The trusts are not required to post collateral to the counterparties. At December 31, 2018 and 2017, the
net positive exposure on swaps in securitization trusts was $7 million and $64 million, respectively.
Accounting for Derivative Instruments
Derivative instruments that are used as part of our interest rate and foreign currency risk management strategy
include interest rate swaps, cross-currency interest rate swaps, and interest rate floor contracts with indices that
relate to the pricing of specific balance sheet assets and liabilities. The accounting for derivative instruments
requires that every derivative instrument, including certain derivative instruments embedded in other contracts, be
recorded on 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 classified and accounted for by us as either fair value or cash
flow hedges. If these criteria are not met, the derivative financial instruments are accounted for as trading.
Fair Value Hedges
Fair value hedges are generally used by us to hedge the exposure to changes in fair value of a recognized fixed
rate asset or liability. We enter into interest rate swaps to economically convert fixed rate assets into variable rate
assets and fixed rate debt into variable rate debt. We also enter into cross-currency interest rate swaps to
economically convert foreign currency denominated fixed and floating debt to U.S. dollar denominated variable
debt. For fair value hedges, we generally consider all components of the derivative’s gain and/or loss when assessing
hedge effectiveness and generally hedge changes in fair values due to interest rates or interest rates and foreign
currency exchange rates.
F-48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
7. Derivative Financial Instruments (Continued)
Cash Flow Hedges
We use cash flow hedges to hedge the exposure to variability in cash flows for a forecasted debt issuance and
for exposure to variability in cash flows of floating rate debt. This strategy is used primarily to minimize the
exposure to volatility from future changes in interest rates. Gains and losses on the effective portion of a qualifying
hedge are recorded in accumulated other comprehensive income and ineffectiveness is recorded immediately to
earnings. In the case of a forecasted debt issuance, gains and losses are reclassified to earnings over the period which
the stated hedged transaction affects earnings. If we determine it is not probable that the anticipated transaction will
occur, gains and losses are reclassified immediately to earnings. In assessing hedge effectiveness, generally all
components of each derivative’s gains or losses are included in the assessment. We generally hedge exposure to
changes in cash flows due to changes in interest rates or total changes in cash flow.
Trading Activities
When derivative instruments do not qualify as hedges, they are accounted for as trading instruments where all
changes in fair value are recorded through earnings. We sell interest rate floors (Floor Income Contracts) to hedge
the embedded Floor Income options in education loan assets. The Floor Income Contracts are written options which
have a more stringent hedge effectiveness hurdle to meet. Specifically, our Floor Income Contracts do not qualify
for hedge accounting treatment because the pay down of principal of the education loans underlying the Floor
Income embedded in those education loans does not exactly match the change in the notional amount of our written
Floor Income Contracts. Additionally, the term, the interest rate index and the interest rate index reset frequency of
the Floor Income Contracts can be different from that of the education loans. Therefore, Floor Income Contracts do
not qualify for hedge accounting treatment and are recorded as trading instruments. Regardless of the accounting
treatment, we consider these contracts to be economic hedges for risk management purposes. We use this strategy to
minimize our exposure to changes in interest rates.
We use basis swaps to minimize earnings variability caused by having different reset characteristics on our
interest-earning assets and interest-bearing liabilities. The specific terms and notional amounts of the swaps are
determined based on a review of our asset/liability structure, our assessment of future interest rate relationships, and
on other factors such as short-term strategic initiatives. Hedge accounting requires that when using basis swaps, the
change in the cash flows of the hedge effectively offset both the change in the cash flows of the asset and the change
in the cash flows of the liability. Our basis swaps hedge variable interest rate risk; however, they generally do not
meet this effectiveness criterion because the index of the swap does not exactly match the index of the hedged
assets. Additionally, some of our FFELP Loans can earn at either a variable or a fixed interest rate depending on
market interest rates and, therefore, swaps economically hedging these FFELP Loans do not meet the criteria for
hedge accounting treatment. As a result, these swaps are recorded at fair value with changes in fair value reflected
currently in the statement of income.
F-49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
7. 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, 2018 and 2017, and their impact on other comprehensive income and earnings for
2018, 2017 and 2016.
Impact of Derivatives on Consolidated Balance Sheet
Cash Flow
Fair Value
Trading
Total
(Dollars in millions)
Fair Values(1)
Derivative Assets:
Interest rate swaps
Cross-currency interest rate
swaps
Total derivative assets(2)
Derivative Liabilities:
Interest rate swaps
Floor Income Contracts
Cross-currency interest rate
swaps
Other(3)
Total derivative liabilities(2)
Net total derivatives
Hedged Risk
Exposure
Interest rate
Foreign currency and
interest rate
Interest rate
Interest rate
Foreign currency and
interest rate
Interest rate
Dec.
31,
2018
Dec.
31,
2017
Dec.
31,
2018
Dec.
31,
2017
Dec.
31,
2018
Dec.
31,
2017
Dec.
31,
2018
Dec.
31,
2017
$ — $
95 $
170 $
290 $
3 $
7 $
173 $
392
—
—
—
95
6
176
88
378
—
3
—
7
6
179
88
480
—
—
(16)
—
(34)
—
(102)
—
(45)
(53)
(71)
(74)
(79)
(53)
(189)
(74)
—
—
—
$ — $
(639)
—
(673)
—
(454)
(26)
—
(18)
(4)
(16)
(735)
(128)
79 $ (497) $ (134) $ (125) $ (200) $ (622) $ (255)
(44)
(18)
(207)
(665)
(4)
(801)
(410)
—
(512)
(1)
(2)
Fair values reported are exclusive of collateral held and pledged and accrued interest. Assets and liabilities are presented without consideration of
master netting agreements. Derivatives are carried on the balance sheet based on net position by counterparty under master netting agreements, and
classified in other assets or other liabilities depending on whether in a net positive or negative position.
The following table reconciles gross positions without the impact of master netting agreements to the balance sheet classification:
(Dollar in millions)
Gross position
Impact of master netting agreements
Derivative values with impact of master netting
agreements (as carried on balance sheet)
Cash collateral (held) pledged
Net position
Other Assets
Other Liabilities
December 31,
2018
December 31,
2017
December 31,
2018
December 31,
2017
$
$
179 $
(22)
157
(266)
(109) $
480 $
(42)
438
(536)
(98) $
(801) $
22
(779)
188
(591) $
(735)
42
(693)
235
(458)
(3)
“Other” includes derivatives related to our Total Return Swap Facility.
F-50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
7. Derivative Financial Instruments (Continued)
The above fair values at December 31, 2018 reflect rule changes adopted by clearing organizations that
require entities to treat derivative assets, liabilities and the related variation margin as a settlement of the derivative
position for legal and accounting purposes, rather than recording these positions on a gross basis with a related
collateral receivable or payable. As a result, the tables above reflect a reduction of $183 million of derivative assets
and $159 million of derivative liabilities as of December 31, 2018, that previously were reported on a gross basis but
are now settled and not subject to collateral.
The above fair values also include adjustments when necessary for counterparty credit risk for both when we
are exposed to the counterparty, net of collateral postings, and when the counterparty is exposed to us, net of
collateral postings. The net adjustments decreased the asset position at December 31, 2018 and December 31, 2017
by $26 million and $6 million, respectively. In addition, the above fair values reflect adjustments for illiquid
derivatives as indicated by a wide bid/ask spread in the interest rate indices to which the derivatives are indexed.
These adjustments decreased the overall net asset positions at December 31, 2018 and December 31, 2017 by
$19 million and $30 million, respectively.
Cash Flow
Dec. 31,
Fair Value
Dec. 31,
Trading
Dec. 31,
Dec. 31,
Dec. 31,
Dec. 31,
Dec. 31,
Dec. 31,
Total
(Dollars in billions)
Notional Values:
Interest rate swaps
Floor Income Contracts
Cross-currency interest rate swaps
Other(1)
Total derivatives
2018
2017
2018
2017
2018
2017
2018
2017
$
$
21.4 $
—
—
—
21.4 $
24.1 $
—
—
—
24.1 $
10.3 $
—
4.5
—
14.8 $
12.4 $
—
6.7
—
19.1 $
66.9 $
27.9
.2
.2
95.2 $
72.0 $
21.9
.3
.5
94.7 $
98.6 $
27.9
4.7
.2
131.4 $
108.5
21.9
7.0
.5
137.9
(1)
“Other” includes derivatives related to our Total Return Swap Facility.
Impact of Derivatives on Consolidated Statements of Income
(Dollars in millions)
Fair Value Hedges(2):
Interest Rate Swaps
Gains (losses) recognized in net income on derivatives
Gains (losses) recognized in net income on hedged items
Net fair value hedge ineffectiveness gains (losses)
Cross currency interest rate swaps
Gains (losses) recognized in net income on derivatives
Gains (losses) recognized in net income on hedged items
Net fair value hedge ineffectiveness gains (losses)
Total fair value hedges
Cash Flow Hedges(2):
Interest rate swaps(3)
Total cash flow hedges
Trading
Interest rate swaps
Floor income contracts
Cross currency interest rate swaps
Other
Total trading derivatives
Gains (losses) on derivative and hedging activities, net
Total Gains (Losses)(1)
Years Ended December 31,
2017
2016
2018
$
(137) $
162
25
(214) $
193
(21)
(311)
210
(101)
(76)
—
—
22
15
(3)
4
38
(38) $
921
(954)
(33)
(54)
—
—
8
81
2
(15)
76
22 $
$
(288)
302
14
(319)
350
31
45
—
—
29
51
5
(13)
72
117
(1)
(2)
(3)
Recorded in “Gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.
The accrued interest income (expense) on fair value hedges and cash flow hedges is recorded in net interest income (expense) and is excluded from
this table.
Represents ineffectiveness related to cash flow hedges.
F-51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
7. Derivative Financial Instruments (Continued)
Impact of Derivatives on Consolidated Statements of Changes in Stockholders’ Equity (net of tax)
(Dollars in millions)
Total gains (losses) on cash flow hedges
Reclassification adjustments for derivative (gains) losses
included in net income (interest expense)(1)(2)
Total change in stockholders’ equity for unrealized gains
(losses) on derivatives
Years Ended December 31,
2017
2016
2018
$
50 $
(11)
$
39 $
25 $
30
55 $
26
31
57
(1)
(2)
Includes net settlement income/expense.
We expect to reclassify $3 million of after-tax net losses from accumulated other comprehensive income to earnings during the next
12 months related to amortization of terminated hedge relationships.
Collateral
The following table details collateral held and pledged related to derivative exposure between us and our
derivative counterparties.
(Dollars in millions)
Collateral held:
Cash (obligation to return cash collateral is recorded in short-term borrowings)
Securities at fair value — corporate derivatives (not recorded in financial
statements)(1)
Securities at fair value — on-balance sheet securitization derivatives (not
recorded in financial statements)(2)
Total collateral held
Derivative asset at fair value including accrued interest
Collateral pledged to others:
Cash (right to receive return of cash collateral is recorded in investments)
Total collateral pledged
Derivative liability at fair value including accrued interest and premium
receivable
(1)
(2)
The Company has the ability to sell or re-pledge securities it holds as collateral.
The trusts do not have the ability to sell or re-pledge securities they hold as collateral.
December 31, 2018
December 31, 2017
$
266
$
—
90
356
210
188
188
752
$
$
$
$
$
$
$
$
$
$
536
—
297
833
618
235
235
659
Our corporate derivatives contain credit contingent features. At our current unsecured credit rating, we have
fully collateralized our corporate derivative liability position (including accrued interest and net of premiums
receivable) of $87 million with our counterparties. Downgrades in our unsecured credit rating would not result in
any additional collateral requirements. Trust related derivatives do not contain credit contingent features related to
our or the trusts’ credit ratings.
F-52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
8. Other Assets
The following table provides the detail of our other assets.
(Dollars in millions)
Accrued interest receivable
Benefit and insurance-related investments
Income tax asset, net (current and deferred)
Derivatives at fair value
Fixed assets, net
Accounts receivable
Other loans, net
Other
Total
$
$
December 31,
2018
December 31,
2017
1,999 $
470
271
157
136
95
69
207
3,404 $
1,965
481
380
438
156
108
59
438
4,025
9. Stockholders’ Equity
Common Stock
Our shareholders have authorized the issuance of 1.125 billion shares of common stock. The par value of
Navient common stock is $0.01 per share. At December 31, 2018, 247 million shares were issued and outstanding
and 22 million shares were unissued but encumbered for outstanding stock options, restricted stock units,
performance stock units and dividend equivalent units for employee compensation and remaining authority for
stock-based compensation plans. The stock-based compensation plans are described in “Note 11 — Stock-Based
Compensation Plans and Arrangements.”
Dividend and Share Repurchase Program
In 2018, 2017 and 2016, we paid full-year common stock dividends of $0.64 per share.
In 2018, 2017 and 2016, we repurchased 17.4 million, 29.6 million and 59.6 million shares of common stock,
respectively, for $220 million, $440 million and $755 million, respectively. Our board of directors authorized a new
$500 million share repurchase program in September 2018. As of December 31, 2018, the remaining common share
repurchase authority was $440 million.
The following table summarizes our common share repurchases and issuances.
Common stock repurchased(1)
Average purchase price per share
Shares repurchased related to employee stock-based
compensation plans(2)
Average purchase price per share
Common shares issued(3)
2018
17,443,351
Years Ended December 31,
2017
29,646,374
$
12.64 $
14.85 $
2016
59,625,325
12.68
3,829,629
1,847,651
$
13.71 $
15.40 $
5,659,681
3,680,479
3,197,355
13.21
5,476,010
(1)
(2)
(3)
Common shares purchased under our share repurchase program.
Comprises shares withheld from stock option exercises and vesting of restricted stock for employees’ tax withholding obligations and
shares tendered by employees to satisfy option exercise costs.
Common shares issued under our various compensation and benefit plans.
The closing price of our common stock on December 31, 2018 was $8.81.
F-53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
10. Earnings (Loss) per Common Share
Basic earnings (loss) per common share (“EPS”) are calculated using the weighted average number of shares
of common stock outstanding during each period. A reconciliation of the numerators and denominators of the basic
and diluted EPS calculations follows.
(In millions, except per share data)
Numerator:
Net income
Denominator:
Weighted average shares used to compute basic EPS
Effect of dilutive securities:
Dilutive effect of stock options, restricted stock, restricted
stock units, performance stock units and Employee
Stock Purchase Plan (“ESPP”)(1)
Dilutive potential common shares(2)
Weighted average shares used to compute diluted EPS
Basic earnings per common share
Diluted earnings per common share
Years Ended December 31,
2017
2016
2018
$
395 $
292 $
260
275
4
4
264
1.52 $
1.49 $
6
6
281
1.06 $
1.04 $
$
$
681
316
6
6
322
2.15
2.12
(1)
(2)
Includes the potential dilutive effect of additional common shares that are issuable upon exercise of outstanding stock options, restricted stock,
restricted stock units, performance stock units and the outstanding commitment to issue shares under applicable ESPPs, determined by the treasury
stock method.
For the years ended December 31, 2018, 2017 and 2016, stock options covering approximately 6 million, 5 million and 4 million shares,
respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.
11. Stock-Based Compensation Plans and Arrangements
We have one active stock-based incentive plan that provides for grants of equity awards to our employees and
non-employee directors in various forms including stock options, restricted stock awards, restricted stock units and
performance stock units. We also maintain an ESPP. Shares issued under these plans may be either shares
reacquired by us or shares that are authorized but unissued. Our Navient Corporation 2014 Omnibus Incentive Plan
became effective on April 7, 2014, and 55 million shares are authorized to be issued from this plan as of
December 31, 2018. Our Navient Corporation ESPP became effective on May 1, 2014, and 1 million shares are
authorized to be issued from this plan as of December 31, 2018.
For most awards, expense generally is recognized ratably over the vesting period net of estimated forfeitures,
unless the employee meets certain retirement eligibility criteria. For employee awards that meet retirement eligibility
criteria, we record the expense generally upon grant and for employees that become retirement eligible during the
vesting period, we recognize expense from the grant date to the date on which the employee becomes retirement
eligible. The total stock-based compensation cost recognized in 2018, 2017 and 2016 was $25 million, $35 million
and $26 million, respectively. As of December 31, 2018, there was $12 million of total unrecognized compensation
expense related to unvested stock awards, which is expected to be recognized over a weighted average period of 1.8
years.
F-54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
11. Stock-Based Compensation Plans and Arrangements (Continued)
Stock Options
The exercise price of stock options equals the fair market value of our common stock on the date of grant. The
maximum contractual term for stock options is 5 years for grants made since 2012, and 10 years for grants made
prior to 2012. Most stock options are time-vested, with one-third vesting per year beginning with the first
anniversary of the grant date.
The fair values of the options granted in 2018, 2017 and 2016 were estimated as of the grant date using a
Black-Scholes option pricing model with the following weighted average assumptions:
Expected life of the option
Expected volatility
Risk-free interest rate
Expected dividend rate
Weighted average fair value of options granted
Years Ended December 31,
2017
3.0 years
2018
3.2 years
2016
3.0 years
36%
2.27%
4.70%
$
2.59
34%
1.44%
4.13%
$
2.69
30%
.90%
6.97%
1.01
$
The expected life is based in general on observed historical exercise patterns of SLM Corporation’s employees
pre-Spin-Off (excluding employees who transitioned to SLM Bank) and Navient’s employees post-Spin-Off. The
expected volatility is based in general on implied volatility from publicly-traded options on our stock at the grant
date and historical volatility of our stock consistent with the expected life of the option. The risk-free interest rate is
based on the U.S. Treasury spot rate at the grant date consistent with the expected life of the option. The dividend
yield is based on the projected annual dividend payment per share based on the dividend amount at the grant date,
divided by the stock price at the grant date.
The following table summarizes Navient’s stock option activity in 2018.
(Dollars in millions, except per share data)
Outstanding at December 31, 2017
Granted
Exercised(2)
Canceled
Outstanding at December 31, 2018(3)
Exercisable at December 31, 2018
Weighted
Average
Exercise
Price per
Share
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value(1)
12.48
13.63
10.53
16.69
12.97
13.24
1.8 yrs. $
1.2 yrs. $
4
4
Number of
Options
14,183,726 $
1,551,307
(3,715,212)
(844,931)
11,174,890 $
7,500,940 $
(1)
(2)
(3)
The aggregate intrinsic value represents the total intrinsic value (the aggregate difference between our closing stock price on December 31,
2018 and the exercise price of in-the-money options) that would have been received by the option holders if all in-the-money options had
been exercised on December 31, 2018.
The total intrinsic value of Navient stock options exercised was $12 million, $9 million and $13 million for 2018, 2017 and 2016,
respectively.
As of December 31, 2018, there was $1 million of unrecognized compensation cost related to stock options, which is expected to be
recognized over a weighted average period of 1.9 years.
Restricted Stock
Restricted stock awards generally are granted to non-employee directors and generally vest upon the director’s
election to the board. Outstanding restricted stock is entitled to dividend equivalent units that vest subject to the
same vesting requirements or lapse of transfer restrictions, as applicable, as the underlying restricted stock award.
The fair value of restricted stock awards is based on our stock price at the grant date.
F-55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
11. Stock-Based Compensation Plans and Arrangements (Continued)
The following table summarizes Navient’s restricted stock activity in 2018.
Non-vested at December 31, 2017
Granted
Vested(1)
Canceled
Non-vested at December 31, 2018(2)
Number
of Shares
— $
55,503
(36,429)
(19,074)
— $
Weighted
Average
Grant Date
Fair Value
—
13.56
13.52
13.63
—
(1)
(2)
The total fair value of Navient shares that vested was $1 million, $1 million and $1 million for 2018, 2017 and 2016, respectively.
As of December 31, 2018, there was no unrecognized compensation cost related to restricted stock.
Restricted Stock Units and Performance Stock Units
Restricted stock units (“RSUs”) and performance stock units (“PSUs”) are equity awards granted to
employees that entitle the holder to shares of our common stock when the award vests. RSUs generally are time-
vested, with one-third vesting per year beginning with the first anniversary of the grant date, while PSUs vest based
on achieving certain corporate performance goals over a three-year performance period. Outstanding RSUs and
PSUs are entitled to dividend equivalent units that vest subject to the same vesting requirements as the underlying
award. The fair value of RSUs and PSUs is based on our stock price at the grant date.
The following table summarizes Navient’s RSU and PSU activity in 2018.
Outstanding at December 31, 2017
Granted
Vested and converted to common stock(1)
Forfeited
Canceled
Outstanding at December 31, 2018(2)
Number of
RSUs/PSUs
4,428,305 $
1,884,580
(1,598,227)
(226,323)
(228,564)
4,259,771 $
Weighted
Average
Grant Date
Fair Value
13.33
12.97
13.87
21.65
12.89
12.55
(1)
(2)
The total fair value of Navient RSUs and PSUs that vested and converted to common stock was $22 million, $23 million and $30 million
for 2018, 2017 and 2016, respectively.
As of December 31, 2018, there was $11 million of unrecognized compensation cost related to RSUs and PSUs, which is expected to be
recognized over a weighted average period of 1.8 years.
F-56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
12. Fair Value Measurements
We use estimates of fair value in applying various accounting standards for our financial statements. We
categorize our fair value estimates based on a hierarchical framework associated with three levels of price
transparency utilized in measuring financial instruments at fair value.
Education Loans
Our FFELP Loans and Private Education Loans are accounted for at cost or at the lower of cost or market if
the loan is held-for-sale. Fair values were determined by modeling loan cash flows using stated terms of the assets
and internally-developed assumptions to determine aggregate portfolio yield, net present value and average life.
FFELP Loans
The significant assumptions used to determine fair value of our FFELP Loans are prepayment speeds, default
rates, cost of funds, discount rate, capital levels and expected Repayment Borrower Benefits to be earned. In
addition, the Floor Income component of our FFELP Loan portfolio is valued with option models using both
observable market inputs and internally developed inputs. A number of significant inputs into the models are
internally derived and not observable in active markets. While the resulting fair value can be validated against
market transactions where we are a participant, these markets are not considered active. As such, these are level 3
valuations.
Private Education Loans
The significant assumptions used to determine fair value of our Private Education Loans are prepayment
speeds, default rates, recovery rates, cost of funds, discount rate and capital levels. A number of significant inputs
into the models are internally derived and not observable in active markets. While the resulting fair value can be
validated against market transactions where we are a participant, these markets are not considered active. As such,
these are level 3 valuations.
Cash and Investments (Including “Restricted Cash and Investments”)
Cash and cash equivalents are carried at cost. Carrying value approximates fair value. The fair value of
investments in commercial paper, asset-backed commercial paper, or demand deposits that have a remaining term of
less than 90 days when purchased are estimated to equal their cost and, when needed, adjustments for liquidity and
credit spreads are made depending on market conditions and counterparty credit risks. No additional adjustments
were deemed necessary. These are level 2 valuations.
Borrowings
Borrowings are accounted for at cost in the financial statements except when denominated in a foreign
currency or when designated as the hedged item in a fair value hedge relationship. When the hedged risk is the
benchmark interest rate (which for us is LIBOR) and not full fair value, the cost basis is adjusted for changes in
value due to benchmark interest rates only. Foreign currency-denominated borrowings are re-measured at current
spot rates in the financial statements. The full fair value of all borrowings is disclosed. Fair value was determined
through standard bond pricing models and option models (when applicable) using the stated terms of the
borrowings, observable yield curves, foreign currency exchange rates, volatilities from active markets or from
quotes from broker-dealers. Fair value adjustments for unsecured corporate debt are made based on indicative
quotes from observable trades and spreads on credit default swaps specific to the Company. Fair value adjustments
for secured borrowings are based on indicative quotes from broker-dealers. These adjustments for both secured and
unsecured borrowings are material to the overall valuation of these items and, currently, are based on inputs from
inactive markets. As such, these are level 3 valuations.
F-57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
12. Fair Value Measurements (Continued)
Derivative Financial Instruments
All derivatives are accounted for at fair value in the financial statements. The fair value of a majority of
derivative financial instruments was determined by standard derivative pricing and option models using the stated
terms of the contracts and observable market inputs. In some cases, we utilized internally developed inputs that are
not observable in the market, and as such, classified these instruments as level 3 fair values. Complex structured
derivatives or derivatives that trade in less liquid markets require significant estimates and judgment in determining
fair value that cannot be corroborated with market transactions.
When determining the fair value of derivatives, we take into account counterparty credit risk for positions
where there is exposure to the counterparty on a net basis by assessing exposure net of collateral held. The net
exposures for each counterparty are adjusted based on market information available for the specific counterparty,
including spreads from credit default swaps. When the counterparty has exposure to us under derivatives with us, we
fully collateralize the exposure, minimizing the adjustment necessary to the derivative valuations for our credit risk.
While trusts that contain derivatives are not required to post collateral, when the counterparty is exposed to the trust
the credit quality and securitized nature of the trusts minimizes any adjustments for the counterparty’s exposure to
the trusts. The net credit risk adjustment (adjustments for our exposure to counterparties net of adjustments for the
counterparties’ exposure to us) decreased the valuations at December 31, 2018 by $26 million.
Inputs specific to each class of derivatives disclosed in the table below are as follows:
• Interest rate swaps — Derivatives are valued using standard derivative cash flow models. Derivatives that
swap fixed interest payments for LIBOR interest payments (or vice versa) and derivatives swapping
quarterly reset LIBOR for daily reset LIBOR or one-month LIBOR were valued using the LIBOR swap
yield curve which is an observable input from an active market. These derivatives are level 2 fair value
estimates in the hierarchy. Other derivatives swapping LIBOR interest payments for another variable
interest payment (primarily Prime) are valued using the LIBOR swap yield curve and observable market
spreads for the specified index. The markets for these swaps are generally illiquid as indicated by a wide
bid/ask spread. The adjustment made for liquidity decreased the valuations by $19 million at December 31,
2018. These derivatives are level 3 fair value estimates.
• Cross-currency interest rate swaps — Derivatives are valued using standard derivative cash flow models.
Derivatives hedging foreign-denominated bonds are valued using the LIBOR swap yield curve (for both
USD and the foreign-denominated currency), cross-currency basis spreads and forward foreign currency
exchange rates. These inputs are observable inputs from active markets. Therefore, the resulting valuation
is a level 2 fair value estimate. Amortizing notional derivatives (derivatives whose notional amounts
change based on changes in the balance of, or pool of, assets or debt) hedging trust debt use internally
derived assumptions for the trust assets’ prepayment speeds and default rates to model the notional
amortization. Management makes assumptions concerning the extension features of derivatives hedging
rate-reset notes denominated in a foreign currency. These inputs are not market observable; therefore, these
derivatives are level 3 fair value estimates.
• Floor Income Contracts — Derivatives are valued using an option pricing model. Inputs to the model
include the LIBOR swap yield curve and LIBOR interest rate volatilities. The inputs are observable inputs
in active markets and these derivatives are level 2 fair value estimates.
The carrying value of borrowings designated as the hedged item in a fair value hedge is adjusted for changes
in fair value due to benchmark interest rates and foreign-currency exchange rates. These valuations are determined
through standard bond pricing models and option models (when applicable) using the stated terms of the
borrowings, and observable yield curves, foreign currency exchange rates and volatilities.
F-58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
12. Fair Value Measurements (Continued)
The following table summarizes the valuation of our financial instruments that are marked-to-market on a
recurring basis. During 2018 and 2017, there were no significant transfers of financial instruments between levels.
(Dollars in millions)
Assets
Available-for-sale investments:
Other
Total available-for-sale investments
Derivative instruments:(1)
Interest rate swaps
Cross-currency interest rate swaps
Total derivative assets(2)
Total
Liabilities(3)
Derivative instruments(1)
Interest rate swaps
Floor Income Contracts
Cross-currency interest rate swaps
Other
Total derivative liabilities(2)
Total
Fair Value Measurements on a Recurring Basis
December 31, 2018
December 31, 2017
Level 1 Level 2 Level 3
Total
Level 1 Level 2 Level 3
Total
$
$
$
$
— $
—
—
—
—
— $
— $
—
—
—
—
— $
— $
—
— $
—
— $
—
171
—
171
171 $
2
6
8
8 $
173
6
179
179 $
(50) $
(53)
(26)
—
(129)
(129) $
(29) $
—
(639)
(4)
(672)
(672) $
(79) $
(53)
(665)
(4)
(801)
(801) $
— $
—
—
—
—
— $
— $
—
—
—
—
— $
2 $
2
388
—
388
390 $
— $
—
4
88
92
92 $
(144) $
(74)
(44)
—
(262)
(262) $
(45) $
—
(410)
(18)
(473)
(473) $
2
2
392
88
480
482
(189)
(74)
(454)
(18)
(735)
(735)
(1)
(2)
(3)
Fair value of derivative instruments excludes accrued interest and the value of collateral.
See “Note 7 — Derivative Financial Instruments” for a reconciliation of gross positions without the impact of master netting agreements to the
balance sheet classification.
Borrowings which are the hedged items in a fair value hedge relationship and which are adjusted for changes in value due to benchmark interest
rates only are not carried at full fair value and are not reflected in this table.
F-59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
12. Fair Value Measurements (Continued)
The following tables summarize the change in balance sheet carrying value associated with level 3 financial
instruments carried at fair value on a recurring basis.
(Dollars in millions)
Balance, beginning of period
Total gains/(losses):
Included in earnings(1)
Included in other comprehensive income
Settlements
Transfers in and/or out of level 3
Balance, end of period
Change in mark-to-market gains/(losses) relating to instruments
still held at the reporting date(2)
(Dollars in millions)
Balance, beginning of period
Total gains/(losses):
Included in earnings(1)
Included in other comprehensive income
Settlements
Transfers in and/or out of level 3
Balance, end of period
Change in mark-to-market gains/(losses) relating to instruments
still held at the reporting date(2)
(Dollars in millions)
Balance, beginning of period
Total gains/(losses):
Included in earnings(1)
Included in other comprehensive income
Settlements
Transfers in and/or out of level 3(3)
Balance, end of period
Change in mark-to-market gains/(losses) relating to instruments
still held at the reporting date(2)
Year Ended December 31, 2018
Derivative Instruments
Cross
Currency
Interest
Rate Swaps
Other
Interest
Rate Swaps
$
(41) $
(322) $
(18) $
Total
Derivative
Instruments
(381)
11
—
3
—
(27) $
(433)
—
122
—
(633) $
8
—
6
—
(4) $
(414)
—
131
—
(664)
13 $
(284) $
14 $
(257)
$
$
Year Ended December 31, 2017
Derivative Instruments
Cross
Currency
Interest
Rate Swaps
Other
Interest
Rate Swaps
$
(46) $
(1,243) $
(13) $
Total
Derivative
Instruments
(1,302)
—
—
5
—
(41) $
803
—
118
—
(322) $
(15)
—
10
—
(18) $
788
—
133
—
(381)
5 $
795 $
(5) $
795
$
$
Year Ended December 31, 2016
Derivative Instruments
Cross
Currency
Interest
Rate Swaps
Other
Interest
Rate Swaps
$
(44) $
(903) $
(2) $
Total
Derivative
Instruments
(949)
3
—
3
(8)
(46) $
(428)
—
88
—
(1,243) $
(14)
—
3
—
(13) $
(439)
—
94
(8)
(1,302)
7 $
(340) $
(11) $
(344)
$
$
(1)
“Included in earnings” is comprised of the following amounts recorded in the specified line item in the consolidated statements of
income:
(Dollars in millions)
Gains (losses) on derivative and hedging activities, net
Interest expense
Total
Years Ended December 31,
2017
2018
2016
$
$
(292) $
(122)
(414) $
906 $
(118)
788 $
(351)
(88)
(439)
(2)
(3)
Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.
Consumer Price Index/LIBOR basis swaps were transferred from level 3 to level 2 in the fourth quarter of 2016 due to the
conclusion that these swaps now trade in an active market.
F-60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
12. Fair Value Measurements (Continued)
The following table presents the significant inputs that are unobservable or from inactive markets used in the
recurring valuations of the level 3 financial instruments detailed above.
(Dollars in millions)
Derivatives
Prime/LIBOR basis swaps
Fair Value at
December 31,
2018
Valuation
Technique
Input
$
(27) Discounted cash flow Constant Prepayment Rate
Cross-currency interest rate swaps
Other
Total
$
(633) Discounted cash flow Constant Prepayment Rate
Bid/ask adjustment to
discount rate
(4)
(664)
Range
(Weighted
Average)
7%
.08% — .08%
(.08%)
4%
The significant inputs that are unobservable or from inactive markets related to our level 3 derivatives detailed
in the table above would be expected to have the following impacts to the valuations:
• Prime/LIBOR basis swaps — These swaps do not actively trade in the markets as indicated by a wide
bid/ask spread. A wider bid/ask spread will result in a decrease in the overall valuation. In addition, the
unobservable inputs include Constant Prepayment Rates of the underlying securitization trust the swap
references. A decrease in this input will result in a longer weighted average life of the swap which will
increase the value for swaps in a gain position and decrease the value for swaps in a loss position,
everything else equal. The opposite is true for an increase in the input.
• Cross-currency interest rate swaps — The unobservable inputs used in these valuations are Constant
Prepayment Rates of the underlying securitization trust the swap references. A decrease in this input will
result in a longer weighted average life of the swap. All else equal in a typical currency market, this will
result in a decrease to the valuation due to the delay in the cash flows of the currency exchanges as well as
diminished liquidity in the forward exchange markets as you increase the term. The opposite is true for an
increase in the input.
F-61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
12. Fair Value Measurements (Continued)
The following table summarizes the fair values of our financial assets and liabilities, including derivative
financial instruments.
(Dollars in millions)
Earning assets
FFELP Loans
Private Education Loans
Cash and investments(1)
Total earning assets
Interest-bearing liabilities
Short-term borrowings
Long-term borrowings
Total interest-bearing liabilities
Derivative financial instruments
Floor Income Contracts
Interest rate swaps
Cross-currency interest rate swaps
Other
Excess of net asset fair value over
carrying value
December 31, 2018
Carrying
Value
December 31, 2017
Carrying
Value
Fair Value
Difference Fair Value
Difference
$
72,074 $
22,958
5,488
100,520
72,253 $
22,245
5,488
99,986
(179) $
713
—
534
82,271 $
24,421
5,034
111,726
81,703 $
23,419
5,034
110,156
568
1,002
—
1,570
5,418
92,173
97,591
5,422
93,519
98,941
4
1,346
1,350
4,783
104,921
109,704
4,771
105,012
109,783
(53)
94
(659)
(4)
(53)
94
(659)
(4)
—
—
—
—
(74)
203
(366)
(18)
(74)
203
(366)
(18)
(12)
91
79
—
—
—
—
$
1,884
$
1,649
(1)
“Cash and investments” includes available-for-sale investments whose cost basis is $0 million and $2 million at December 31, 2018 and 2017,
respectively, versus a fair value of $0 million and $2 million at December 31, 2018 and 2017, respectively.
13. Commitments, Contingencies and Guarantees
Legal Proceedings
The Company has been named as defendant in a number of putative class action cases alleging violations of
various state and federal consumer protection laws including the Telephone Consumer Protection Act (“TCPA”), the
Consumer Financial Protection Act of 2010 (“CFPA”), the Fair Credit Reporting Act (“FCRA”), the Fair Debt
Collection Practices Act (“FDCPA”) and various other state consumer protection laws.
In January 2017, the Consumer Financial Protection Bureau (the “CFPB”) and Attorneys General for the State
of Illinois and the State of Washington initiated civil actions naming Navient Corporation and several of its
subsidiaries as defendants alleging violations of certain Federal and State consumer protection statutes, including the
CFPA, FCRA, FDCPA and various state consumer protection laws. In October 2017, the Attorney General for the
Commonwealth of Pennsylvania initiated a civil action against Navient Corporation and Navient Solutions, LLC
(“Solutions”), containing similar alleged violations of the CFPA and the Pennsylvania Unfair Trade Practices and
Consumer Protection Law. Additionally, the Attorneys General for the States of California and Mississippi recently
initiated similar actions against the Company and certain subsidiaries alleging violations of various state and federal
consumer protection laws. We refer to the Illinois, Pennsylvania, Washington, California, and Mississippi Attorneys
General collectively as the “State Attorneys General.” In addition to these matters, a number of lawsuits have been
filed by nongovernmental parties or, in the future, may be filed by additional governmental or nongovernmental
parties seeking damages or other remedies related to similar issues raised by the CFPB and the State Attorneys
General. As the Company has previously stated, we believe the suits improperly seek to impose penalties on Navient
based on new, unannounced servicing standards applied retroactively only against one servicer, and that the
allegations are false. We therefore have denied these allegations and intend to vigorously defend against the
allegations in each of these cases. For additional information on these civil actions, please refer to section entitled
“Regulatory Matters” below.
F-62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
13. Commitments, Contingencies and Guarantees (Continued)
At this point in time, the Company is unable to anticipate the timing of a resolution or the impact that these
legal proceedings may have on the Company’s consolidated financial position, liquidity, results of operation or cash
flows. As a result, it is not possible at this time to estimate a range of potential exposure, if any, for amounts that
may be payable in connection with these matters and reserves have not been established. It is possible that an
adverse ruling or rulings may have a material adverse impact on the Company.
Regulatory Matters
In addition, Navient and its subsidiaries are subject to examination or regulation by the SEC, CFPB, FFIEC,
ED and various state agencies as part of its ordinary course of business. Items or matters similar to or different from
those described above may arise during the course of those examinations. We also routinely receive inquiries or
requests from various regulatory entities or bodies or government agencies concerning our business or our assets.
Generally, the Company endeavors to cooperate with each such inquiry or request.
As previously disclosed, the Company and various of its subsidiaries have been subject to the following
investigations and inquiries:
•
•
•
•
In December 2013, Navient received Civil Investigative Demands (“CIDs”) issued by the Illinois Attorney
General, the Washington Attorney General and multiple other state Attorneys General. According to the
CIDs, the investigations were initiated to ascertain whether any practices declared to be unlawful under the
Consumer Fraud and Deceptive Business Practices Act have occurred or are about to occur. The Company
subsequently received separate but similar CIDs or subpoenas from the Attorneys General for the District
of Columbia, Kansas, Oregon, Colorado, New Jersey and New York. We may receive additional CIDs or
subpoenas from these or other Attorneys General with respect to similar or different matters.
In April 2014, Solutions received a CID from the CFPB as part of the CFPB’s separate investigation
regarding allegations relating to Navient’s disclosures and assessment of late fees and other matters.
Navient has received a series of supplemental CIDs on these matters. In August 2015, Solutions received a
letter from the CFPB notifying Solutions that, in accordance with the CFPB’s discretionary Notice and
Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of Enforcement was
considering recommending that the CFPB take legal action against Solutions. The NORA letter related to a
previously disclosed investigation into Solutions’ disclosures and assessment of late fees and other matters
and states that, in connection with any action, the CFPB may seek restitution, civil monetary penalties and
corrective action against Solutions. The Company responded to the NORA letter in September 2015.
In November 2014, Navient’s subsidiary, Pioneer Credit Recovery, Inc. (“Pioneer”), received a CID from
the CFPB as part of an investigation regarding Pioneer’s activities relating to rehabilitation loans and
collection of defaulted student debt.
In December 2014, Solutions received a subpoena from the New York Department of Financial Services
(the “NY DFS”) as part of the NY DFS’s inquiry with regard to whether persons or entities have engaged
in fraud or misconduct with respect to a financial product or service under New York Financial Services
Law or other laws.
In January 2017, the CFPB initiated a civil action naming Navient Corporation and several of its subsidiaries
as defendants alleging violations of Federal and State consumer protection statutes, including the DFPA, FCRA,
FDCPA and various state consumer protection laws. The CFPB, Washington Attorney General and Illinois Attorney
General lawsuits relate to matters which were covered under the CIDs or the NORA letter discussed above. In
addition, various State Attorneys General have filed suits alleging violations of various state and federal consumer
protection laws covering matters similar to those covered by the CIDs or the NORA letter. As stated above, we
have denied these allegations and intend to vigorously defend against the allegations in each of these cases.
F-63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
13. Commitments, Contingencies and Guarantees (Continued)
Under the terms of the Separation and Distribution Agreement between the Company and SLM BankCo,
Navient has agreed to indemnify SLM BankCo for all claims, actions, damages, losses or expenses that may arise
from the conduct of activities of pre-Spin-Off SLM BankCo occurring prior to the Spin-Off other than those
specifically excluded in the Separation and Distribution Agreement. As a result, subject to the terms, conditions and
limitations set forth in the Separation and Distribution Agreement, Navient has agreed to indemnify and hold
harmless Sallie Mae and its subsidiaries, including Sallie Mae Bank from liabilities arising out of the regulatory
matters and CFPB and State Attorneys General lawsuits mentioned above. Navient has asserted various claims for
indemnification against Sallie Mae and Sallie Mae Bank for such specifically excluded items arising out of the
CFPB and the State Attorneys General lawsuits if and to the extent any indemnified liabilities exist now or in the
future. Navient has no additional reserves related to indemnification matters with SLM BankCo as of December 31,
2018.
OIG Audit
The Office of the Inspector General (the “OIG”) of ED commenced an audit regarding Special Allowance
Payments (“SAP”) on September 10, 2007. In September 2013, we received the final audit determination of Federal
Student Aid (the “Final Audit Determination”) on the final audit report issued by the OIG in August 2009 related to
this audit. The Final Audit Determination concurred with the final audit report issued by the OIG and instructed us
to make adjustment to our government billing to reflect the policy determination. In August 2016, we filed our
notice of appeal to the Administrative Actions and Appeals Service Group of ED. A hearing was held in April 2017
and a ruling has not yet been issued. We continue to believe that our SAP billing practices were proper, considering
then-existing ED guidance and lack of applicable regulations. The Company established a reserve for this matter in
2014 and does not believe, at this time, that an adverse ruling would have a material effect on the Company as a
whole.
Contingencies
In the ordinary course of business, we and our subsidiaries are defendants in or parties to pending and
threatened legal actions and proceedings including actions brought on behalf of various classes of claimants. These
actions and proceedings may be based on alleged violations of consumer protection, securities, employment and
other laws. In certain of these actions and proceedings, claims for substantial monetary damage are asserted against
us and our subsidiaries. We and our subsidiaries are also subject to potential unasserted claims by third parties.
In the ordinary course of business, we and our subsidiaries are subject to regulatory examinations, information
gathering requests, inquiries and investigations. In connection with formal and informal inquiries in these cases, we
and our subsidiaries receive requests, subpoenas and orders for documents, testimony and information in connection
with various aspects of our regulated activities.
We are required to establish reserves for litigation and regulatory matters where those matters present loss
contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable,
we do not establish reserves.
In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, we
cannot predict what the eventual outcome of the pending matters will be, what the timing or the ultimate resolution
of these matters will be, or what the eventual loss, fines or penalties, if any, related to each pending matter may be.
Based on current knowledge, reserves have been established for certain litigation, regulatory matters, and
unasserted contract claims where the loss is both probable and estimable. Based on current knowledge, management
does not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters
will have a material adverse effect on our consolidated financial position, liquidity, results of operations or cash
flows, except as otherwise disclosed.
As of June 30, 2018, we concluded that a contingency loss was no longer probable of occurring. Accordingly,
the related $40 million contingency reserve was released as a reduction of operating expenses in the second quarter
of 2018.
F-64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
14. Income Taxes
Reconciliations of the statutory U.S. federal income tax rates to our effective tax rate for continuing operations
follow:
Statutory rate
DTA Remeasurement Loss(1)
State tax, net of federal benefit
Other, net
Effective tax rate
Years Ended December 31,
2017
2016
2018
21.0%
—
3.9
.3
25.2%
35.0%
27.2
.7
(1.1)
61.8%
35.0%
—
3.8
(.3)
38.5%
(1)
The TCJA, enacted on December 22, 2017, made significant changes to all aspects of income taxation, including a reduction to the
corporate federal statutory tax rate. GAAP requires the effects of the TCJA to be recognized in the period the law is enacted, even though
the effective date of the law for most provisions is January 1, 2018. The primary impact to us is the reduction to the corporate federal
statutory tax rate from 35 percent to 21 percent as of January 1, 2018. This rate reduction required us to remeasure our deferred tax asset
at December 31, 2017, at the 21 percent corporate federal statutory tax rate and resulted in a DTA Remeasurement Loss of $208 million
for GAAP, which is reflected as incremental income tax expense in the fourth quarter of 2017.
Income tax expense consists of:
(Dollars in millions)
Current provision/(benefit):
Federal
State
Foreign
Total current provision/(benefit)
Deferred provision/(benefit):
Federal
State
Foreign
Total deferred provision/(benefit)
Provision for income tax expense/(benefit)
2018
December 31,
2017
2016
$
$
71 $
13
3
87
33
13
—
46
133 $
77 $
(3)
3
77
385
11
(1)
395
472 $
246
47
1
294
115
18
—
133
427
F-65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
14. Income Taxes (Continued)
The tax effect of temporary differences that give rise to deferred tax assets and liabilities include the
following:
(Dollars in millions)
Deferred tax assets:
Loan reserves
Education loan premiums and discounts, net
Operating loss and credit carryovers
Stock-based compensation plans
Accrued expenses not currently deductible
Other
Total deferred tax assets
Deferred tax liabilities:
Market value adjustments on education
loans, investments and derivatives
Acquired intangible assets
Original issue discount on borrowings
Debt repurchases
Other
Total deferred tax liabilities
Net deferred tax assets
December 31,
2018
2017
$
$
292 $
48
18
16
14
18
406
46
12
7
6
13
84
322 $
317
52
22
18
24
14
447
14
3
11
8
19
55
392
Included in operating loss and credit carryovers is a valuation allowance of $43 million and $42 million as of
December 31, 2018 and 2017, respectively, against a portion of the Company’s federal and state deferred tax assets.
The valuation allowance is primarily attributable to deferred tax assets for federal and state net operating loss
carryforwards that management believes it is more likely than not will expire prior to being realized. The ultimate
realization of the deferred tax assets is dependent upon the generation of future taxable income of the appropriate
character (i.e. capital or ordinary) during the period in which the temporary differences become deductible. Factors
generally considered by management include (but are not limited to): any changes in economic conditions, the
scheduled reversals of deferred tax liabilities, and the history of positive taxable income available for net operating
loss carrybacks in evaluating the realizability of the deferred tax assets.
As of December 31, 2018, we have gross federal net operating loss (“NOL”) carryforwards of $78 million
(which begin to expire in 2031) and gross state NOL carryforwards of $640 million (which begin to expire in 2021).
Tax-effected NOL amounts of $16 million (federal) and $42 million (state) have corresponding valuation
allowances of $0 million (federal) and $40 million (state).
As of December 31, 2018, we have gross federal and state capital loss carryforwards of $10 million (which
begin to expire in 2021). Tax-effected capital loss amount of $3 million (federal and state) has a corresponding
valuation allowance of $3 million (federal and state).
F-66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
14. Income Taxes (Continued)
Accounting for Uncertainty in Income Taxes
The following table summarizes changes in unrecognized tax benefits:
(Dollars in millions)
Unrecognized tax benefits at beginning of year
Increases resulting from tax positions taken during a prior period
Decreases resulting from tax positions taken during a prior period
Increases resulting from tax positions taken during the current period
Decreases related to settlements with taxing authorities
Increases related to settlements with taxing authorities
Reductions related to the lapse of statute of limitations
Unrecognized tax benefits at end of year
$
$
2018
December 31,
2017
2016
57.4 $
8.0
(.3)
3.8
(1.4)
—
(1.8)
65.7 $
73.0 $
.7
(1.8)
4.4
(5.1)
—
(13.8)
57.4 $
56.3
19.9
(5.6)
4.4
(.1)
—
(1.9)
73.0
As of December 31, 2018, the gross unrecognized tax benefits are $65.7 million. Included in the $65.7 million
are $51.9 million of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate.
The Company or one of its subsidiaries files income tax returns at the U.S. federal level, in most U.S. states,
and various foreign jurisdictions. All periods prior to 2015 are closed for federal examination purposes. Various
combinations of subsidiaries, tax years, and jurisdictions remain open for review, subject to statute of limitations
periods (typically 3 to 4 prior years). We do not expect the resolution of open audits to have a material impact on our
unrecognized tax benefits.
15. Revenue from Contracts with Customers Accounted in Accordance with ASC 606
We account for certain contract revenue in accordance with ASC 606. Servicing contract revenue is not
accounted for under ASC 606. Contract revenue earned by our Federal Education Loans segment is derived from
asset recovery activities related to the collection of delinquent education loans on behalf of ED, Guarantor agencies
and other institutions. Revenue earned by our Business Processing segment is derived from government services,
which includes receivables management services and account processing solutions, and healthcare services, which
includes revenue cycle management services.
Most of our revenue is derived from long-term contracts, the duration of which is expected to span more than
one year. These contracts are billable monthly, as services are rendered, based on a percentage of the balance
collected or the transaction processed, a flat fee per transaction or a stated rate per the service performed. In
accordance with ASC 606, the unit of account is a contractual performance obligation, a promise to provide a
distinct good or service to a customer. The transaction price is allocated to each distinct performance obligation
when or as the good or service is transferred to the customer and the obligation is satisfied. Distinct performance
obligations are identified based on the services specified in the contract that are capable of being distinct such that
the customer can benefit from the service on its own or together with other resources that are available from the
Company or a third party, and are also distinct in the context of the contract such that the transfer of the services is
separately identifiable from other services promised in the contract. Most of our contracts include integrated service
offerings that include obligations that are not separately identifiable and distinct in the context of our contracts.
Accordingly, our contracts generally have a single performance obligation. A limited number of full service
offerings include multiple performance obligations.
Substantially all our revenue from contracts with customers is variable revenue which is recognized over time
as our customers receive and consume the benefit of our services in an amount consistent with monthly billings.
Accordingly, we do not disclose variable consideration associated with the remaining performance obligation as we
have recognized revenue in the amount we have the right to invoice for services performed. Our fees correspond to
the value the customer has realized from our performance of each increment of the service (for example, an
individual transaction processed or collection of a past due balance).
F-67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
15. Revenue from Contracts with Customers Accounted in Accordance with ASC 606 (Continued)
The following tables illustrate the disaggregation of revenue from contracts accounted for under ASC 606
with customers according to service type and client type by reportable operating segment.
Revenue by Service Type
(Dollars in millions)
Federal Education Loan asset recovery services
Government services
Healthcare services
Total
Revenue by Client Type
(Dollars in millions)
Federal government
Guarantor agencies
Other institutions
State and local government
Tolling authorities
Hospitals and other healthcare providers
Total
Federal Education
Loans
Year Ended December 31, 2018
Business
Processing
Total Revenue
$
$
91
—
—
91
$
$
—
175
93
268
Federal Education
Loans
Year Ended December 31, 2018
Business
Processing
$
$
21
58
12
—
—
—
91
$
$
7
—
—
92
76
93
268
$
$
$
$
91
175
93
359
Total Revenue
28
58
12
92
76
93
359
As of January 1, 2018, and December 31, 2018, there was $63 million and $74 million, respectively, of net
accounts receivable related to these contracts. Navient had no material contract assets or contract liabilities.
F-68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
16. Segment Reporting
In the fourth quarter of 2017, Navient entered the Private Education Refinance Loan origination market. This
new activity changed the way the Company manages the business, reviews operating performance and allocates
resources. This resulted in the following four new reportable operating segments, effective first-quarter 2018: (1)
Federal Education Loans (2) Consumer Lending (3) Business Processing and (4) Other. In connection with this
change in reportable operating segments, there was also a change in how unallocated shared services expense is
defined (which was previously referred to as overhead expense).
The following table shows the realignment of our business lines (operating segments) from the prior
reportable operating segments to the new reportable operating segments:
New Reportable Operating Segment
Business Lines
Federal Education Loans
FFELP Loans
Federal Education Loans-Servicing
Federal Education Loans
Federal Education Loans-Asset Recovery Federal Education Loans
Prior Reportable Operating Segment
FFELP Loans
Business Services
Business Services
Private Education Refinance Loans
Private Education Loans-Other
Consumer Lending
Consumer Lending
Private Education Loans
Private Education Loans
Non-Education Government Services
Non-Education Healthcare Services
Business Processing
Business Processing
Business Services
Business Services
Unallocated Shared Services Expenses
Corporate Liquidity Portfolio
Other
Other
Other
Other
These segments meet the quantitative thresholds for reportable operating segments. Accordingly, the results
of operations of these reportable operating segments are presented separately. The underlying operating segments
are used by the Company’s chief operating decision maker to manage the business, review operating performance
and allocate resources, and qualify to be aggregated as part of the primary reportable operating segments. As
discussed further below, we measure the profitability of our operating segments based on Core Earnings net income.
Accordingly, information regarding our reportable operating segments is provided on a Core Earnings basis. As a
result of this change in segment reporting in the first quarter of 2018, prior periods have been recast for comparison
purposes.
Federal Education Loans Segment
In this segment, Navient holds and acquires FFELP Loans and performs servicing and asset recovery services
on its own loan portfolio, federal education loans owned by ED and other institutions. Although FFELP Loans are
no longer originated, we continue to pursue acquisitions of FFELP Loan portfolios as well as servicing and asset
recovery services contracts. These acquisitions leverage our servicing scale and generate incremental earnings and
cash flow. In this segment, we generate revenue primarily through net interest income on the FFELP Loan portfolio
(after provision for loan losses) as well as servicing and asset recovery services revenue. This segment is expected to
generate significant amounts of earnings and cash flow over the remaining life of the portfolio.
The following table includes GAAP-basis asset information for our Federal Education Loans segment.
(Dollars in millions)
FFELP Loans, net
Cash and investments(1)
Other
Total assets
(1)
Includes restricted cash and investments.
December 31,
2018
72,253 $
3,368
2,100
77,721 $
2017
81,703
2,821
2,601
87,125
$
$
F-69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
16. Segment Reporting (Continued)
Consumer Lending Segment
In this segment, Navient holds, originates and acquires consumer loans and performs servicing activities on
its own education loan portfolio. Originations and acquisitions leverage our servicing scale and generate incremental
earnings and cash flow. In this segment, we generate revenue primarily through net interest income on the Private
Education Loan portfolio (after provision for loan losses). This segment is expected to generate significant amounts
of earnings and cash flow over the remaining life of the portfolio.
The following table includes GAAP-basis asset information for our Consumer Lending segment.
(Dollars in millions)
Private Education Loans, net
Cash and investments(1)
Other
Total assets
(1)
Includes restricted cash and investments.
December 31,
2018
22,245 $
732
1,076
24,053 $
2017
23,419
706
1,143
25,268
$
$
Business Processing Segment
In this segment, Navient performs revenue cycle management and business processing services for over 600
non-education related government and healthcare clients. Our integrated solutions technology and superior data
driven approach allows state governments, agencies, court systems, municipalities, and toll authorities (Government
Services) to reduce their operating expenses while maximizing revenue opportunities. Healthcare services include
revenue cycle outsourcing, accounts receivable management, extended business office support and consulting
engagements. We offer customizable solutions for our clients that include non-profit/religious-affiliated hospital
systems, teaching hospitals, urban medical centers, for-profit healthcare systems, critical access hospitals, children’s
hospitals and large physician groups.
At December 31, 2018 and 2017, the Business Processing segment had total assets of $448 million and
$466 million, respectively, on a GAAP basis.
Other Segment
Our Other segment primarily consists of our corporate liquidity portfolio and the repurchase of debt,
unallocated expenses of shared services, restructuring/other reorganization expenses, and the deferred tax asset
remeasurement loss recognized due to the enactment of the TCJA in the fourth quarter of 2017.
Unallocated expenses of shared services are comprised of costs primarily related to certain executive
management, the board of directors, accounting, finance, legal, human resources, compliance and risk management,
regulatory-related costs, stock-based compensation expense, and information technology costs related to
infrastructure and operations. Regulatory-related costs include actual settlement amounts as well as third-party
professional fees we incur in connection with regulatory matters.
At December 31, 2018 and 2017, the Other segment had total assets of $2.0 billion and $2.1 billion,
respectively, on a GAAP basis.
F-70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
16. Segment Reporting (Continued)
Measure of Profitability
We prepare financial statements and present financial results in accordance with GAAP. However, we also
evaluate our business segments and present financial results on a basis that differs from GAAP. We refer to this
different basis of presentation as Core Earnings. We provide this Core Earnings basis of presentation on a
consolidated basis and for each business segment because this is what we review internally when making
management decisions regarding our performance and how we allocate resources. We also refer to this information
in our presentations with credit rating agencies, lenders and investors. Because our Core Earnings basis of
presentation corresponds to our segment financial presentations, we are required by GAAP to provide Core Earnings
disclosure in the notes to our consolidated financial statements for our business segments.
Core Earnings are not a substitute for reported results under GAAP. We use Core Earnings to manage our
business segments because Core Earnings reflect adjustments to GAAP financial results for two items, discussed
below, that are mostly due to timing factors generally beyond the control of management. Accordingly, we believe
that Core Earnings provide management with a useful basis from which to better evaluate results from ongoing
operations against the business plan or against results from prior periods. Consequently, we disclose this information
because we believe it provides investors with additional information regarding the operational and performance
indicators that are most closely assessed by management. When compared to GAAP results, the two items we
remove to result in our Core Earnings presentations are:
1. Mark-to-market gains/losses resulting from our use of derivative instruments to hedge our economic risks
that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result
in ineffectiveness; and
2. The accounting for goodwill and acquired intangible assets.
While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, our
Core Earnings basis of presentation does not. Core Earnings are subject to certain general and specific limitations
that investors should carefully consider. For example, there is no comprehensive, authoritative guidance for
management reporting. Our Core Earnings are not defined terms within GAAP and may not be comparable to
similarly titled measures reported by other companies. Accordingly, our Core Earnings presentation does not
represent a comprehensive basis of accounting. Investors, therefore, may not be able to compare our performance
with that of other financial services companies based upon Core Earnings. Core Earnings results are only meant to
supplement GAAP results by providing additional information regarding the operational and performance indicators
that are most closely used by management, our board of directors, credit rating agencies, lenders and investors to
assess performance.
F-71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
16. Segment Reporting (Continued)
Segment Results and Reconciliations to GAAP
Year Ended December 31, 2018
Adjustments
(Dollars in millions)
Interest income:
Education loans
Other loans
Cash and investments
Total interest income
Total interest expense
Net interest income (loss)
Less: provisions for loan losses
Net interest income (loss) after provisions
for loan losses
Other income (loss):
Servicing revenue
Asset recovery and business processing
revenue
Other income (loss)
Gains on debt repurchases
Total other income (loss)
Expenses:
Direct operating expenses
Unallocated shared services expenses
Operating expenses
Goodwill and acquired intangible asset
impairment and amortization
Restructuring/other reorganization
expenses
Total expenses
Income (loss) before income tax expense
(benefit)
Income tax expense (benefit)(2)
Net income (loss)
Federal
Education
Loans
Consumer
Lending
Business
Processing Other
Reclassi-
fications
Additions/
(Subtractions)
Total
Adjustments(1)
Total
GAAP
Total
Core
Earnings
$
3,080 $
4
46
3,130
2,467
663
70
1,778 $
2
13
1,793
1,013
780
300
— $ — $
— —
—
38
—
38
— 192
— (154 )
— —
4,858 $
6
97
4,961
3,672
1,289
370
17 $
—
—
17
8
9
—
593
480
— (154 )
919
9
— —
274
—
262
163
24
—
449
298
—
298
12
—
—
—
12
169
—
169
267 —
6
9
15
—
—
267
229 —
— 288
229 288
430
30
9
743
696
288
984
—
—
— —
—
—
298
744
164
580 $
—
169
323
71
252 $
—
13
229 301
38 (440 )
(97 )
8
30 $ (343 ) $
13
997
665
146
519 $
$
—
(22 )
13
(9 )
—
—
—
—
—
—
—
—
— $
(70 ) $
—
—
(70 )
(12 )
(58 )
—
(58 )
—
—
(29 )
(3 )
(32 )
—
—
—
47
—
47
(53 ) $ 4,805
—
6
—
97
(53 ) 4,908
(4 ) 3,668
(49 ) 1,240
—
370
(49 )
870
—
274
—
(51 )
10
(41 )
—
—
—
430
(21 )
19
702
696
288
984
47
47
—
13
47 1,044
(137 )
(13 )
(124 ) $
(137 )
528
133
(13 )
(124 ) $ 395
(1)
Core Earnings adjustments to GAAP:
(Dollars in millions)
Net interest income (loss) after provisions for loan losses
Total other income (loss)
Goodwill and acquired intangible asset impairment and amortization
Total Core Earnings adjustments to GAAP
Income tax expense (benefit)
Net income (loss)
Year Ended December 31, 2018
Net Impact
of
Acquired
Intangibles
Net Impact
of
Derivative
Accounting
Total
$
$
(49 ) $
(41 )
—
(90 ) $
— $
—
47
(47 )
$
(49 )
(41 )
47
(137 )
(13 )
(124 )
(2)
Income taxes are based on a percentage of net income before tax for the individual reportable segment.
F-72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
16. Segment Reporting (Continued)
Year Ended December 31, 2017
Adjustments
Federal
Education
Loans
Consumer
Lending
Business
Processing Other
Reclassi-
fications
Additions/
(Subtractions)
Total
Adjustments(1)
Total
GAAP
Total
Core
Earnings
(Dollars in millions)
Interest income:
Education loans
Other loans
Cash and investments
Total interest income
Total interest expense
Net interest income (loss)
Less: provisions for loan losses
Net interest income (loss) after provisions
for loan losses
Other income (loss):
Servicing revenue
Asset recovery and business processing
revenue
Other income (loss)
Gains on sales of loans and investments
Losses on debt repurchases
Total other income (loss)
Expenses:
Direct operating expenses
Unallocated shared services expenses
Operating expenses
Goodwill and acquired intangible asset
impairment and amortization
Restructuring/other reorganization
expenses
Total expenses
Income (loss) before income tax expense
(benefit)
Income tax expense (benefit)(2)
Net income (loss)
$
(1)
Core Earnings adjustments to GAAP:
$
2,679 $
13
29
2,721
2,022
699
44
1,634 $
—
5
1,639
825
814
382
— $ — $
— —
—
9
—
9
— 143
— (134 )
— —
4,313 $
13
43
4,369
2,990
1,379
426
69 $
—
—
69
(8 )
77
—
655
432
— (134 )
953
77
— —
290
—
280
263
3
3
—
549
316
—
316
10
—
—
—
—
10
156
—
156
212 —
—
16
— —
—
(3 )
13
212
187 —
— 307
187 307
475
19
3
(3 )
784
659
307
966
—
—
— —
—
—
316
888
321
567 $
—
156
286
103
183 $
—
29
187 336
25 (457 )
58
9
16 $ (515 ) $
29
995
742
491
251 $
—
(77 )
—
—
(77 )
—
—
—
—
—
—
—
—
— $
(55 ) $
—
—
(55 )
(11 )
(44 )
—
(44 )
—
—
89
—
—
89
—
—
—
23
—
23
22
(19 )
41 $
14 $ 4,327
—
13
—
43
14 4,383
(19 ) 2,971
33 1,412
—
426
33
986
—
290
—
12
—
—
12
—
—
—
475
31
3
(3 )
796
659
307
966
23
23
—
29
23 1,018
764
22
472
(19 )
41 $ 292
(Dollars in millions)
Net interest income after provisions for loan losses
Total other income (loss)
Goodwill and acquired intangible asset impairment and amortization
Total Core Earnings adjustments to GAAP
Income tax expense (benefit)
Net income (loss)
Year Ended December 31, 2017
Net Impact
of
Acquired
Intangibles
Net Impact
of
Derivative
Accounting
Total
$
$
33 $
12
—
45 $
— $
—
23
(23 )
$
33
12
23
22
(19 )
41
(2)
Income taxes are based on a percentage of net income before tax for the individual reportable segment with the impact of the DTA
Remeasurement Loss included in the Other segment.
F-73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
16. Segment Reporting (Continued)
Year Ended December 31, 2016
Adjustments
(Dollars in millions)
Interest income:
Education loans
Other loans
Cash and investments
Total interest income
Total interest expense
Net interest income (loss)
Less: provisions for loan losses
Net interest income (loss) after provisions
for loan losses
Other income (loss):
Servicing revenue
Asset recovery and business processing
revenue
Other income (loss)
Gains on debt repurchases
Total other income (loss)
Expenses:
Direct operating expenses
Unallocated shared services expenses
Operating expenses
Goodwill and acquired intangible asset
impairment and amortization
Restructuring/other reorganization
expenses
Total expenses
Income (loss) before income tax expense
(benefit)
Income tax expense (benefit)(2)
Net income (loss)
Federal
Education
Loans
Consumer
Lending
Business
Processing Other
Reclassi-
fications
Additions/
(Subtractions)
Total
Adjustments(1)
Total
GAAP
Total
Core
Earnings
$
2,395 $
9
16
2,420
1,597
823
46
1,587 $
—
2
1,589
704
885
383
— $ — $
— —
—
4
—
4
— 109
— (105 )
— —
3,982 $
9
22
4,013
2,410
1,603
429
247 $
—
—
247
31
216
—
(114 ) $
—
—
(114 )
—
(114 )
—
—
—
133 $ 4,115
9
22
133 4,146
31 2,441
102 1,705
429
—
777
502
— (105 )
1,174
216
(114 )
102 1,276
289
216
—
—
505
366
—
366
15
—
—
—
15
149
—
149
— —
304
—
174 —
14
1
15
—
—
174
149 —
— 287
149 287
390
14
1
709
664
287
951
—
(216 )
—
(216 )
—
—
—
—
—
— —
—
—
—
366
916
338
578 $
—
149
368
137
231 $
— —
149 287
25 (377 )
9 (139 )
16 $ (238 ) $
—
951
932
345
587 $
—
—
—
—
— $
$
—
—
326
—
326
—
—
—
36
—
36
176
82
94 $
—
304
—
110
—
110
—
—
—
390
124
1
819
664
287
951
36
36
— —
987
36
176 1,108
82
427
94 $ 681
(1)
Core Earnings adjustments to GAAP:
(Dollars in millions)
Net interest income after provisions for loan losses
Total other income (loss)
Goodwill and acquired intangible asset impairment and amortization
Total Core Earnings adjustments to GAAP
Income tax expense (benefit)
Net income (loss)
Year Ended December 31, 2016
Net Impact
of
Acquired
Intangibles
Net Impact
of
Derivative
Accounting
Total
$
$
102 $
110
—
212 $
— $
—
36
(36 )
$
102
110
36
176
82
94
(2)
Income taxes are based on a percentage of net income before tax for the individual reportable segment.
F-74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
16. Segment Reporting (Continued)
Summary of Core Earnings Adjustments to GAAP
(Dollars in millions)
Core Earnings net income
Core Earnings adjustments to GAAP:
Net impact of derivative accounting(1)
Net impact of goodwill and acquired intangible assets(2)
Net income tax effect(3)
Total Core Earnings adjustments to GAAP
GAAP net income
Years Ended December 31,
2017
2016
2018
$
519 $
251
$
(90 )
(47 )
13
(124 )
395 $
45
(23 )
19
41
292 $
$
587
212
(36 )
(82 )
94
681
(1)
(2)
(3)
Derivative accounting: Core Earnings exclude periodic gains and losses that are caused by the mark-to-market valuations on
derivatives that do not qualify for hedge accounting treatment under GAAP as well as the periodic mark-to-market gains and losses
that are a result of ineffectiveness recognized related to effective hedges under GAAP. These gains and losses occur in our Federal
Education Loans, Consumer Lending and Other reportable segments. Under GAAP, for our derivatives that are held to maturity, the
mark-to-market gain or loss over the life of the contract will equal $0 except for Floor Income Contracts where the mark-to-market
gain will equal the amount for which we sold the contract. In our Core Earnings presentation, we recognize the economic effect of
these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or
revenue over the hedged item’s life.
Goodwill and acquired intangible assets: Our Core Earnings exclude goodwill and intangible asset impairment and amortization
of acquired intangible assets.
Net tax effect: Such tax effect is based upon our Core Earnings effective tax rate for the year.
F-75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NAVIENT CORPORATION
17. Quarterly Financial Information (unaudited)
(Dollars in millions, except per share data)
Net interest income
Less: provisions for loan losses
Net interest income after provisions for loan losses
Other income
Gains (losses) on derivative and hedging activities, net
Operating expenses
Goodwill and acquired intangible asset impairment and
amortization expense
Restructuring/other reorganization expenses
Income tax expense
Net income
Basic earnings per common share
Diluted earnings per common share
(Dollars in millions, except per share data)
Net interest income
Less: provisions for loan losses
Net interest income after provisions for loan losses
Other income
Gains (losses) on derivative and hedging activities, net
Operating expenses
Goodwill and acquired intangible asset impairment and
amortization expense
Restructuring/other reorganization expenses
Income tax expense
Net income (loss)
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2018
329 $
87
242
163
48
275
9
7
36
126
$
.48 $
.47 $
298 $
112
186
176
(40)
201
6
2
30
83
$
.31 $
.31 $
2017
306 $
85
221
203
2
255
23
1
33
114 $
.44 $
.43 $
307
85
222
196
(48)
252
8
4
34
72
.28
.28
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
340 $
107
233
168
(16)
238
6
—
53
88
$
.31 $
.30 $
351 $
105
246
187
(25)
230
6
—
60
112
$
.40 $
.39 $
355 $
105
250
238
25
238
6
—
93
176 $
.65 $
.64 $
366
109
257
181
38
260
5
29
266
(84)
(.32)
(.32)
$
$
$
$
$
$
$
$
F-76
DESCRIPTION OF FEDERAL FAMILY EDUCATION LOAN PROGRAM
APPENDIX A
On March 30, 2010, the President of the United States signed into law the Health Care and Education
Reconciliation Act of 2010 (“HCERA”) which terminated as of July 1, 2010 the Federal Family Education Loan
Program (“FFELP”) under Title IV of the Higher Education Act. This appendix presents a summary of the program
prior to its termination date. The new law does not alter or affect the terms and conditions of existing education
loans made under the FFELP prior to July 1, 2010.
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 qualified 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. We cannot predict whether future amendments or modifications
might materially change any of the programs described in this appendix or the statutes and regulations that
implement them.
General
The FFELP provided for loans to students who were enrolled in eligible institutions, or to parents of
dependent students who were enrolled in eligible institutions, to finance their educational costs. As further described
below, payment of principal and interest on the education loans is insured by a state or not-for-profit guaranty
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 certification of the borrower’s eligibility for the loan by the school; and
• an unpaid school refund.
Claims are paid from federal assets, known as “federal student loan reserve funds,” which are maintained and
administered by state and not-for-profit guaranty agencies. In addition, the holders of education loans are entitled to
receive interest subsidy payments and special allowance payments from the United States Department of Education
(which we refer to as the Department of Education) on eligible education loans.
Special allowance payments raise the yield to education loan lenders when the statutory borrower interest rate
is below an indexed market value. Subject to certain conditions, a program of federal reinsurance under the Higher
Education Act entitles guaranty agencies to reimbursement from the Department of Education for between 75% and
100% of the amount of each guarantee payment.
Four types of education loans were authorized under the Higher Education Act:
• Subsidized Stafford Loans to students who demonstrated requisite financial need;
• Unsubsidized Stafford Loans to students who either did not demonstrate financial need or required
additional loans to supplement their Subsidized Stafford Loans;
• Parent Loans for Undergraduate Students, known as “PLUS Loans,” to parents of dependent students
whose estimated costs of attending school exceeded other available financial aid; and
• Consolidation Loans, which consolidated into a single loan a borrower’s obligations under various
federally authorized education 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 Stafford Loans. The Unsubsidized Stafford Loan program replaced the SLS program.
A-1
Legislative Matters
The federal education loan programs are subject to frequent statutory and regulatory changes. The most
significant change to the FFELP was with the enactment of the HCERA, which terminated the FFELP as of July 1,
2010.
On December 23, 2011, the President of the United States signed the Consolidated Appropriations Act
of 2012 into law. This law includes changes that permit FFELP lenders or beneficial holders to change the index on
which the special allowance payments are calculated for FFELP loans first disbursed on or after January 1, 2000.
The law allows owners of FFELP loans to elect to change the applicable index from the three-month commercial
paper rate to the one-month LIBOR index. Such elections must have been made by April 1, 2012.
Eligible Lenders, Students and Educational Institutions
Lenders who were eligible to make loans under the FFELP generally included banks, savings and loan
associations, credit unions, pension funds and, under some conditions, schools and guaranty agencies. FFELP loans
were required to be made to, or on behalf of, a “qualified student.” A “qualified student” is an individual who:
• is a United States citizen, national or permanent resident;
• has been accepted for enrollment or is enrolled and is maintaining satisfactory academic progress at a
participating educational institution;
• is carrying at least one-half of the normal full-time academic workload for the course of study the student is
pursuing; and
• meets the financial need requirements for the particular loan program.
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 had to approve its eligibility under standards established by regulation.
Financial Need Analysis
Subject to program limits and conditions, education loans generally were made in amounts sufficient 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. Generally, each loan applicant
(and parents in the case of a dependent child) underwent a financial need analysis.
Special Allowance Payments
The Higher Education Act provides for quarterly special allowance payments to be made by the Department
of Education to holders of education loans to the extent necessary to ensure that they receive at least specified
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 finance the loan.
The Department of Education makes a special allowance payment for each calendar quarter, generally within 45
to 60 days after the receipt of a bill from the lender.
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 education 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.
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If the result is negative, the special allowance payment is zero.
Date of First Disbursement
Before 10/17/86
From 10/17/86 through 09/30/92
From 10/01/92 through 06/30/95
From 07/01/95 through 06/30/98
From 07/01/98 through 12/31/99
Special Allowance Margin
3.50%
3.25%
3.10%
2.50% for Stafford Loans that are in In-School, Grace or
Deferment
3.10% for Stafford Loans that are in Repayment and all
other loans
2.20% for Stafford Loans that are in In-School, Grace or
Deferment
2.80% for Stafford Loans that are in Repayment and
Forbearance
3.10% for PLUS, SLS and Consolidation Loans
For education 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 (financial) rates
or one-month London Inter-Bank Offered Rates (LIBOR), as applicable, 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
From 01/01/00 through 09/30/07
From 10/01/07 and after
Special Allowance Margin
1.74% for Stafford Loans that are in In-School, Grace or
Deferment
2.34% for Stafford Loans that are in Repayment and
Forbearance
2.64% for PLUS and Consolidation Loans
1.19% for Stafford Loans that are In-School, Grace or
Deferment
1.79% for Stafford Loans that are in Repayment and
PLUS
2.09% for Consolidation Loans
For education loans disbursed on or after April 1, 2006, lenders are required to pay the Department of
Education any interest paid by borrowers on education loans that exceeds the special allowance support levels
applicable to such 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%
and 12%. Effective July 1, 2006, this limitation on special allowance payments for PLUS Loans made on and after
January 1, 2000 was repealed.
Fees
Origination Fee. An origination fee was required to be paid to the Department of Education for all Stafford
and PLUS Loans originated in the FFELP. An origination fee was not required on a Consolidation Loan. A 3%
origination fee was required to be deducted from the amount of each PLUS Loan.
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An origination fee may have been, but was not required to be, deducted from the amount of a Stafford Loan
according to the following table:
Date of First Disbursement
Before 07/01/06
From 07/01/06 through 06/30/07
From 07/01/07 through 06/30/08
From 07/01/08 through 06/30/09
From 07/01/09 through 06/30/10
From 07/01/10 and after
Maximum
Origination
Fee
3.0%
2.0%
1.5%
1.0%
0.5%
0.0%
Federal Default Fee. A federal default fee up to 1% (previously called an insurance premium) may have been,
but was not required to be, deducted from the amount of a Stafford or PLUS Loan. A federal default fee was not
deducted from the amount of a Consolidation Loan.
Lender Loan Fee. A lender loan fee was required to be paid to the Department of Education on the amount of
each loan disbursement of all FFELP loans. For loans disbursed from October 1, 1993 to September 30, 2007, the
fee was 0.50% of the loan amount. The fee increased to 1% of the loan amount for loans disbursed on or after
October 1, 2007.
Loan Rebate Fee. A loan rebate fee of 1.05% is paid annually on the unpaid principal and interest of each
Consolidation Loan disbursed on or after October 1, 1993. This fee was reduced to 0.62% for loans made from
October 1, 1998 to January 31, 1999.
Stafford Loan Program
For Stafford Loans, the Higher Education Act provided for:
• federal reimbursement of Stafford Loans made by eligible lenders to qualified students;
• federal interest subsidy payments on Subsidized Stafford 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 or, in certain cases, during enrollment in an income-based repayment plan; and
• special allowance payments representing an additional subsidy paid by the Department of Education to the
holders of eligible Stafford Loans.
We refer to all three types of assistance as “federal assistance.”
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Interest. The borrower’s interest rate on a Stafford Loan can be fixed or variable. Stafford Loan interest rates
are presented below.
Trigger Date
Before 10/01/81
From 01/01/81 through
09/12/83
From 09/13/83 through
06/30/88
From 07/01/88 through
09/30/92
Borrower Rate
7%
Maximum
Borrower Rate
N/A
Interest Rate Margin
N/A
9%
N/A
N/A
8%
8% for 48 months;
thereafter, 91-day Treasury
+ Interest
Rate Margin
N/A
8% for 48 months,
then 10%
N/A
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
N/A
N/A
From 10/01/92 through
06/30/94
From 07/01/94 through
06/30/95
From 07/01/95 through
06/30/98
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
91-day Treasury + Interest
Rate Margin
From 07/01/06 through
06/30/08
From 07/01/08 through
06/30/09
From 07/01/09 through
06/30/10
6.8%
6.0% for undergraduate
subsidized loans; and 6.8%
for unsubsidized loans and
graduate subsidized loans
5.6% for undergraduate
subsidized loans;
and 6.8% for unsubsidized
loans and graduate loans
9%
8.25%
8.25%
8.25%
N/A
6.0%, 6.8%
5.6%, 6.8%
The rate for variable rate Stafford Loans applicable for any 12-month period beginning on July 1 and ending
on June 30 is determined on the preceding June 1 and is equal to the lesser of:
• the applicable maximum borrower rate
and
• the sum of
• the bond equivalent rate of 91-day Treasury bills auctioned at the final auction held before that June 1,
and
• the applicable interest rate margin.
Interest Subsidy Payments. The Department of Education is responsible for paying interest on Subsidized
Stafford Loans:
• while the borrower is a qualified student,
• during the grace period,
• during prescribed deferment periods, and
• in certain cases, during a borrower’s enrollment in an income-based repayment plan.
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The Department of Education makes quarterly interest subsidy payments to the owner of a Subsidized Stafford
Loan in an amount equal to the interest that accrues on the unpaid balance of that loan before repayment begins or
during any deferment periods. The Department of Education also makes quarterly interest subsidy payments to the
owner of a Subsidized Stafford Loan in an amount equal to the unpaid interest payable during up to three
consecutive calendar years of a period of financial hardship during enrollment in an income-based repayment plan.
The Higher Education Act provides that the owner of an eligible Subsidized Stafford 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, including the following:
• satisfaction of need criteria, and
• continued eligibility of the loan for federal insurance or reinsurance.
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 eligibility for federal assistance.
Lenders generally receive interest subsidy payments within 45 days to 60 days after the submission of 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 of Education within that period.
Loan Limits. The Higher Education Act generally required that lenders disburse education loans in at least two
equal disbursements. The Higher Education Act limited the amount a student could borrow in any academic year.
The following chart shows current and historic loan limits.
Subsidized
and
Unsubsidized
on or after
10/1/93
Dependent Students
Subsidized
and
Unsubsidized
on or after
7/1/07
Subsidized
and
Unsubsidized
on or after
7/1/08
Additional
Unsubsidized
only on
or after
7/1/94
Independent Students
Additional
Unsubsidized
only on
or after
7/1/07
Additional
Unsubsidized
only on
or after
7/1/08
Maximum
Annual
Total
Amount
$
$
$
$
$
$
2,625 $
3,500 $
5,500 $
8,500 $
3,500 $
4,500 $
5,500 $
8,500 $
5,500 $
6,500 $
7,500 $
8,500 $
4,000 $
4,000 $
5,000 $
10,000 $
4,000 $
4,000 $
5,000 $
12,000 $
4,000 $
9,500
4,000 $ 10,500
5,000 $ 12,500
12,000 $ 20,500
23,000 $
23,000 $
31,000 $
23,000 $
23,000 $
26,500 $ 57,500
65,500 $
65,500 $
65,500 $
73,000 $
73,000 $
73,000 $138,500
Borrower’s Academic Level
Undergraduate (per year):
1st year
2nd year
3rd year and above
Graduate (per year)
Aggregate Limit:
Undergraduate
Graduate (including
undergraduate)
For the purposes of the table above:
• The loan limits include both FFELP and Federal Direct Lending Program (FDLP) loans.
• The amounts in the final column represent the combined maximum loan amount per year for Subsidized
and Unsubsidized Stafford Loans. Accordingly, the maximum amount that a student may borrow under an
Unsubsidized Stafford Loan is the difference between the combined maximum loan amount and the
amount the student received in the form of a Subsidized Stafford Loan.
• Independent undergraduate students, graduate students and professional students were permitted to borrow
the additional amounts shown in the third and fourth columns. Dependent undergraduate students were also
permitted to receive these additional loan amounts if their parents were unable to provide the family
contribution amount and could not qualify for a PLUS Loan.
• Students attending certain medical schools were eligible for $38,500 annually and $189,000 in the
aggregate.
• The annual loan limits were sometimes reduced when the student was enrolled in a program of less than
one academic year or had less than a full academic year remaining in his program.
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Repayment. Repayment of principal on a Stafford Loan does not begin while the borrower remains a qualified
student, but only after a 6-month grace period. 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 accumulated
FFELP loans totaling more than $30,000 in principal and unpaid interest are entitled to extend repayment for up to
25 years, subject to minimum repayment amounts. Consolidation Loan borrowers may be scheduled for repayment
up to 30 years depending on the borrower’s indebtedness. Outlined in the table below are the maximum repayment
periods available based on the outstanding FFELP indebtedness.
Outstanding FFELP Indebtedness
$7,500-$9,999
$10,000-$19,999
$20,000-$30,000
$30,001-$59,999
$60,000 or more
Maximum Repayment Period
12 Years
15 Years
20 Years
25 Years
30 Years
Note: Maximum repayment period excludes authorized periods of deferment and forbearance.
In addition to the outstanding FFELP indebtedness requirements described above, 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 Higher Education Act and related regulations require lenders
to offer a choice among standard, graduated, income-driven and extended repayment schedules, if applicable, to all
borrowers entering repayment. The 2007 legislation introduced an income-based repayment plan on July 1, 2009
that a student borrower may elect during a period of partial financial hardship and have annual payments that do not
exceed 15% of the amount by which adjusted gross income exceeds 150% of the poverty line. The Secretary repays
or cancels any outstanding principal and interest under certain criteria after 25 years.
Grace Periods, Deferment Periods and Forbearance Periods. After the borrower stops pursuing at least a
half-time course of study, he generally must begin to repay principal of a Stafford Loan following the grace period.
However, no principal repayments need be made, subject to some conditions, during deferment and forbearance
periods.
For borrowers whose first 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 deferments are available, when the borrower is:
• enrolled in an approved graduate fellowship program or rehabilitation program;
• seeking, but unable to find, full-time employment, subject to a maximum deferment of three years; or
• having an economic hardship, as defined in the Higher Education Act, subject to a maximum deferment of
three years; or
• serving on active duty during a war or other military operation or national emergency, or performing
qualifying National Guard duty during a war or other military operation or national emergency, subject to a
maximum deferment period of three years, and effective July 1, 2006 on loans made on or after July 1,
2001.
The Higher Education Act also permits, and in some cases requires, “forbearance” periods from loan
collection in some circumstances. Interest that accrues during a forbearance period is never subsidized. When a
borrower ends forbearance and enters repayment, the account is considered current. When a borrower exits grace,
deferment or forbearance, any interest that has not been subsidized is generally capitalized and added to the
outstanding principal amount.
PLUS and SLS Loan Programs
The Higher Education Act authorized PLUS Loans to be made to parents of eligible dependent students and
graduate and professional students and originally authorized SLS Loans to be made to the categories of students
later served by the Unsubsidized Stafford Loan program. Borrowers who had no adverse credit history or who were
able to secure an endorser without an adverse credit history were eligible for PLUS Loans, as well as some
borrowers with extenuating circumstances. The basic provisions applicable to PLUS and SLS Loans are similar to
those of Stafford 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.
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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 loan limits for SLS Loans disbursed on or after July 1,
1993 range from $4,000 for first and second year undergraduate borrowers to $10,000 for graduate borrowers, with
a maximum aggregate amount of $23,000 for undergraduate borrowers and $73,000 for graduate and professional
borrowers.
The annual and aggregate amounts of PLUS Loans first disbursed on or after July 1, 1993 were limited only to
the difference between the cost of the student’s education and other financial aid received, including scholarship,
grants and other education loans.
Interest. The interest rates for PLUS Loans and SLS Loans are presented in the chart below.
For PLUS or SLS Loans that bear interest based on a variable rate, the rate is set annually for 12-month
periods, from July 1 through June 30, on the preceding June 1 and is equal to the lesser of:
• the applicable maximum borrower rate
and
• the sum of:
• the applicable 1-year Index or the bond equivalent rate of 91-day Treasury bills, as applicable,
and
• the applicable interest rate margin.
Under current law, PLUS Loans with a first disbursement on or after July 1, 2006 will return to a fixed annual
interest rate of 8.5%.
Until July 1, 2001, the 1-year index was the bond equivalent rate of 52-week Treasury bills auctioned at the
final auction held prior to each June 1. Beginning July 1, 2001, the 1-year index is the weekly average 1-year
constant maturity Treasury, as published by the Board of Governors of the Federal Reserve System, for the last
calendar week ending on or before the June 26 immediately preceding the July 1 reset date.
Trigger Date
Before 10/01/81
From 10/01/81 through 10/31/82
From 11/01/82 through 06/30/87
From 07/01/87 through 09/30/92
From 10/01/92 through 06/30/94
From 07/01/94 through 06/30/98
From 07/01/98 through 06/30/06
From 07/01/06
Borrower Rate
9%
14%
12%
1-
year Index + Interest Rate Margin
1-
year Index + Interest Rate Margin
1-
year Index + Interest Rate Margin
91-
day Treasury + Interest Rate Marg
in
8.5%
Maximum
Borrower
Rate
N/A
N/A
N/A
12%
PLUS 10%,
SLS 11%
9%
9%
Interest
Rate
Margin
N/A
N/A
N/A
3.25%
3.10%
3.10%
3.10%
8.5%
N/A
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 91-day Treasury bills auctioned during that quarter
and the applicable interest rate margin exceeds the maximum borrower rate.
Effective July 1, 2006, this limitation on special allowance payments for PLUS Loans made on or after
January 1, 2000 was repealed.
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Repayment; Deferments. Borrowers begin to repay principal on their PLUS and SLS Loans no later than 60
days after the final disbursement, unless they use deferment available for the in-school period and the six-month
post enrollment period. Deferment and forbearance provisions, maximum loan repayment periods, repayment plans
and minimum payment amounts for PLUS and SLS loans are generally the same as those for Stafford Loans.
Consolidation Loan Program
The enactment of HCERA ended new originations under the FFELP consolidation program, effective July 1,
2010. Previously, the Higher Education Act authorized a program under which borrowers could consolidate one or
more of their education loans into a single Consolidation Loan that is insured and reinsured on a basis similar to
Stafford and PLUS Loans. Consolidation Loans were made in an amount sufficient to pay outstanding principal,
unpaid interest, late charges and collection costs on all federally reinsured education loans incurred under the FFELP
that the borrower selects for consolidation, as well as loans made under various other federal education loan
programs and loans made by different lenders. In general, a borrower’s eligibility to consolidate federal education
loans ends upon receipt of a Consolidation Loan. With the end of new FFELP originations, borrowers with multiple
loans, including FFELP loans, may only consolidate their loans under the FDLP.
Consolidation Loans made on or after July 1, 1994 had no minimum loan amount. Consolidation Loans for
which an application was received on or after January 1, 1993 but before July 1, 1994 were available only to
borrowers who had aggregate outstanding education 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
education loan balances of at least $5,000.
To obtain a FFELP Consolidation Loan, the borrower was required to be either in repayment status or in a
grace period before repayment begins. For applications received on or after January 1, 1993, delinquent or defaulted
borrowers were eligible to obtain Consolidation Loans if they re-entered repayment through loan consolidation.
Prior to July 1, 2006, married couples who agreed to be jointly and severally liable could apply for one
Consolidation Loan. In some cases, borrowers could enter repayment status while still in school and thereby become
eligible to obtain a Consolidation Loan.
Consolidation Loans bear interest at a fixed rate equal to the greater of the weighted average of the interest
rates on the unpaid principal balances of the consolidated loans rounded up to the nearest whole percent and 9% 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
Stafford Loans subject to a cap of 8.25%. Consolidation Loans for which the application is received on or after
October 1, 1998 bear interest at a fixed rate equal to the lesser of (i) the weighted average interest rate of the loans
being consolidated rounded up to the nearest one-eighth of one percent or (ii) 8.25%.
The 1998 reauthorization maintained interest rates for borrowers of Federal Direct Consolidation Loans whose
applications were received prior to February 1, 1999 at 7.46%, which rates are adjusted annually based on a formula
equal to the 91-day Treasury bill rate plus 2.3%. The borrower interest rates on Federal Direct Consolidation Loans
for borrowers whose applications were received on or after February 1, 1999 and before July 1, 2006 is a fixed 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%. This is the same rate that the 1998 legislation set on FFELP Consolidation
Loans for borrowers whose applications were received on or after October 1, 1998 and before July 1, 2006. The
1998 legislation, as modified by the 1999 act and in 2002, set the special allowance payment rate for FFELP
Consolidation Loans at the three-month commercial paper (financial) rate plus 2.64% for loans disbursed on or after
January 1, 2000 and before July 1, 2006. Public Law 112-74, dated December 23, 2011, allowed FFELP lenders to
make an election to permanently change the index for special allowance payment calculations on all FFELP loans in
the lender’s portfolio (with certain exceptions) disbursed after January 1, 2000 from the three-month commercial
paper (financial) rate to the one-month LIBOR index, commencing with the special allowance payment calculations
for the calendar quarter beginning on April 1, 2012. Lenders of FFELP Consolidation Loans pay a reinsurance fee to
the Department of Education. All other guarantee fees may be passed on to the borrower.
Interest on Consolidation Loans accrues and, for applications received before January 1, 1993, is paid without
interest subsidy by the Department of Education. For Consolidation Loans for which applications were received
between January 1, 1993 and August 10, 1993, all interest of the borrower is paid during all deferment periods.
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Consolidation Loans for which applications were received on or after August 10, 1993 are subsidized only if all of
the underlying loans being consolidated were Subsidized Stafford 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 Stafford Loans
retains subsidy benefits.
No insurance premium was charged to a borrower or a lender in connection with a Consolidation Loan.
However, FFELP lenders were required to pay an origination fee to the Department of Education of 0.50% on
principal of Consolidation Loans disbursed and a monthly rebate fee to the Department of Education at an
annualized rate of 1.05% on principal of and interest on Consolidation Loans disbursed on or after October 1, 1993,
or at an annualized rate of 0.62% 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 borrower must begin to repay his Consolidation Loan within 60 days after his consolidated loans have been
disbursed. For applications received on or after January 1, 1993, repayment schedule options include graduated or
income-driven repayment plans. Loans are repaid over periods determined by the sum of the Consolidation Loan
and the amount of the borrower’s other eligible education loans outstanding. The lender may, at its option, include
graduated and income-driven repayment plans in connection with education loans for which the applications were
received before that date. The maximum maturity schedule is 30 years for indebtedness of $60,000 or more.
Guaranty Agencies under the FFELP
Under the FFELP, guaranty agencies guarantee loans made by eligible lending institutions, paying claims
from “federal student loan reserve funds.” These loans are guaranteed as to 100% of principal and accrued interest
against death or discharge. The guaranty agency also pays 100% of the unpaid principal and accrued interest on
PLUS Loans, where the student on whose behalf the loan was borrowed dies.
FFELP loans are also insured against default, with the percent insured dependent on the date of the related
loan’s disbursement. For loans made prior to October 1, 1993, lenders are insured against default for 100% of
principal and accrued interest. For loans disbursed from October 1, 1993 through June 30, 2006, lenders are insured
against default for 98% of principal and accrued interest. For loans disbursed on or after July 1, 2006, lenders are
insured against default for 97% of principal and accrued interest.
The Department of Education reinsures guaranty agencies for amounts paid to lenders on loans that are
discharged or defaulted. The reimbursement rate on discharged loans is for 100% of the amount paid to the holder.
The reimbursement rate for defaulted loans decreases as a guaranty agency’s default rate increases. The first trigger
for a lower reinsurance rate is when the amount of defaulted loan reimbursements exceeds 5% of the amount of all
loans guaranteed by the agency in repayment status at the beginning of the federal fiscal year. The second trigger is
when the amount of defaults exceeds 9% of the loans in repayment. Guaranty agency reinsurance rates are presented
in the table below.
Claims Paid Date
Before October 1, 1993
October 1, 1993 — September 30, 1998
On or after October 1, 1998
Maximum
5% Trigger
9% Trigger
100%
98%
95%
90%
88%
85%
80%
78%
75%
After the Department of Education reimburses a guaranty agency for a default claim, the guaranty agency
attempts to collect the loan from the borrower. However, the Department of Education requires that the defaulted
loans be assigned to it when the guaranty agency is not successful. A guaranty agency also refers defaulted loans to
the Department of Education to “offset” any federal income tax refunds or other federal reimbursement that may be
due the borrowers. Some states have similar offset programs.
To be eligible for federal reinsurance, FFELP loans must meet the requirements of the Higher Education Act
and the regulations issued thereunder. 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 deferments 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
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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 guaranty agency.
A lender may submit a default claim to the guaranty agency after the related education loan has been
delinquent for at least 270 days. The guaranty agency must review and pay the claim within 90 days after the lender
filed it. The guaranty agency will pay the lender interest accrued on the loan for up to 450 days after delinquency.
The guaranty agency must file a reimbursement claim with the Secretary within 30 days after the guaranty agency
paid the lender for the default claim. Following payment of claims, the guaranty agency endeavors to collect the
loan. Guaranty agencies also must meet statutory and regulatory requirements for collecting loans.
Education Loan Discharges
FFELP loans are not generally dischargeable in bankruptcy. Under the United States Bankruptcy Code, before
an education loan may be discharged, the borrower must demonstrate that repaying it would cause the borrower or
his family undue hardship. When a FFELP borrower files for bankruptcy, collection of the loan is suspended during
the time of the proceeding. If the borrower files under the “wage earner” provisions of the United States Bankruptcy
Code or files a petition for discharge on the grounds of undue hardship, then the lender transfers the loan to the
guaranty agency which guaranteed that loan and that agency then participates in the bankruptcy proceeding. When
the proceeding is complete, unless there was a finding of undue hardship, the loan is transferred back to the lender
and collection resumes.
Education loans are discharged if the borrower dies or becomes totally and permanently disabled. If a school
closes while a student is enrolled, or within 120 days after the student withdrew, loans made for that enrollment
period are discharged. If a school falsely certifies 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. Effective July 1, 2006, a loan is also eligible for discharge if it is determined that the borrower’s eligibility
for the loan was falsely certified as a result of a crime of identity theft.
Rehabilitation of Defaulted Loans
The Department of Education is authorized to enter into agreements with a guaranty agency under which such
guaranty agency may sell defaulted loans that are eligible for rehabilitation to an eligible lender. For a loan to be
eligible for rehabilitation the related guaranty agency must have received reasonable and affordable payments
originally for 12 months which was reduced to 9 payments in 10 months effective July 1, 2006, and 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
benefits under the Higher Education Act for which he or she is not eligible as a borrower on a defaulted loan, such
as new federal aid, and the negative credit record is expunged. No education loan may be rehabilitated more than
once.
The July 1, 2009 technical corrections made to the Higher Education Act under H.R. 1777, Public Law 111-39
provide authority, between July 1, 2009 through September 30, 2011, for a guaranty agency to assign a defaulted
loan to the Department of Education depending on market conditions.
The Bipartisan Budget Act of 2013 reduced the charge that a guaranty agency may assess to a borrower to
defray the collection cost for assisting a borrower with the rehabilitation of a defaulted FFELP loan. The change was
effective for loans sold by a guaranty agency to an eligible lender on or after July 1, 2014.
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Guarantor Funding
In addition to administering the federal reserve funds, from which claims are paid, guaranty agencies are
charged with responsibility for maintaining records on all loans which they have insured (“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
Insurance Premium
Loan Processing and Issuance Fee
Account Maintenance Fee
Default Aversion Fee
Collection Retention Fee
Basis
Up to 1% of the principal amount guaranteed, withheld
from the proceeds of each loan disbursement
0.40% of the principal amount guaranteed, paid by the
Department of Education
Originally 0.10%, which was reduced to 0.06% on
October 1, 2007, 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
16% of the amount collected on loans on which
reinsurance has been paid (10% or 18.5% of the amount
collected for a defaulted loan that is purchased by a
lender for consolidation or rehabilitation, respectively),
withheld from gross receipts
The Higher Education Act requires guaranty agencies to establish two funds: a Federal Student Loan Reserve
Fund and an Agency Operating Fund. The Federal Student Loan Reserve Fund contains the payments received from
the Department of Education and insurance premiums. The fund is federal property and its assets may be used only
to pay Default Aversion Fees. Collection fees on defaulted loans are deposited into the Agency Operating Fund. The
Agency Operating Fund is the guaranty agency’s property and is not subject to strict limitations on its use.
Department of Education Oversight
If the Department of Education determines that a guaranty agency is unable to meet its insurance obligations,
the holders of loans insured by that guaranty agency may submit claims directly to the Department of Education and
the Department of Education is required to pay the full reimbursement amounts due, in accordance with claim
processing standards no more stringent than those applied by the affected guaranty agency. However, the
Department of Education’s obligation to pay guarantee claims directly in this fashion is contingent upon the
Department of Education determining a guaranty agency is unable to meet its obligations. While there have been
situations where the Department of Education has made such determinations regarding affected guaranty agencies,
there can be no assurances as to whether the Department of Education must make such determinations in the future
or whether payments of reimbursement amounts would be made in a timely manner.
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GLOSSARY
Listed below are definitions of key terms that are used throughout this document. See also Appendix A
“Description of Federal Family Education Loan Program” for a further discussion of the FFELP.
Consolidation Loan Rebate Fee — All holders of FFELP Consolidation Loans are required to pay to the
U.S. Department of Education an annual 1.05 percent Consolidation Loan Rebate Fee on all outstanding principal
and accrued interest balances of FFELP 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”) — A variable in life-of-loan estimates that measures the rate at which
loans in the portfolio prepay 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.
Core Earnings — We prepare financial statements in accordance with generally accepted accounting
principles in the United States of America (“GAAP”). In addition to evaluating our GAAP-based financial
information, management evaluates the business segments on a basis that, as allowed under the Financial
Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 280, “Segment Reporting,”
differs from GAAP. We refer to management’s basis of evaluating its segment results as Core Earnings
presentations for each business segment and refer to these performance measures in its presentations with credit
rating agencies and lenders. While Core Earnings results are not a substitute for reported results under GAAP, we
rely on Core Earnings performance measures in operating each business segment because we believe these measures
provide additional information regarding the operational and performance indicators that are most closely assessed
by management.
Core Earnings performance measures are the primary financial performance measures used by management to
evaluate performance and to allocate resources. Accordingly, financial information is reported to management on a
Core Earnings basis by reportable segment, as these are the measures used regularly by our chief operating decision
makers. Core Earnings performance measures are used in developing our financial plans, tracking results, and
establishing corporate performance targets and incentive compensation. Management believes this information
provides additional insight into the financial performance of our core business activities. Core Earnings performance
measures are not defined terms within GAAP and may not be comparable to similarly titled measures reported by
other companies. Our Core Earnings presentation does not represent another comprehensive basis of accounting.
See “Note 16 — Segment Reporting” and Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Non-GAAP Financial Measures — Core Earnings” for further discussion of
the differences between Core Earnings and GAAP, as well as reconciliations between Core Earnings and GAAP.
DSLP — The William D. Ford Federal Direct Loan Program.
DSLP Loans — Educational loans provided by the DSLP (see definition above) to students and parent
borrowers directly through ED (see definition below) rather than through a bank or other lender. Also referred to as
Direct Loans.
ED — The U.S. Department of Education.
FFELP — The Federal Family Education Loan Program, formerly the Guaranteed Education Loan Program,
a program that was discontinued in 2010.
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FFELP Consolidation Loans — Under the FFELP, borrowers with multiple eligible education loans may
have consolidated them into a single education loan with one lender at a fixed rate for the life of the loan. The new
loan is considered a FFELP Consolidation Loan. The borrower rate on a FFELP Consolidation Loan is fixed for the
term of the loan and was 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. Holders of FFELP Consolidation Loans are eligible to earn
interest under the Special Allowance Payment (“SAP”) formula. In April 2008, we suspended originating new
FFELP Consolidation Loans.
FFELP Stafford and Other Education Loans — Education loans to students or parents of students that are
guaranteed or reinsured under the FFELP. The loans are primarily Stafford loans but also include PLUS and HEAL
loans. The FFELP was discontinued in 2010.
Fixed Rate Floor Income — Fixed Rate Floor Income is Floor Income associated with education loans with
borrower rates that are fixed to term (primarily FFELP Consolidation Loans and Stafford Loans originated on or
after July 1, 2006).
Floor Income — For loans disbursed before April 1, 2006, FFELP Loans generally earn interest at the higher
of either the borrower rate, which is fixed over a period of time, or a floating rate based on the SAP formula. We
generally finance our education loan portfolio with floating rate debt whose interest is matched closely to the
floating nature of the applicable SAP formula. If interest rates decline to a level at which the borrower rate exceeds
the SAP formula rate, we continue to earn interest on the loan at the fixed borrower rate while the floating rate
interest on our debt continues to decline. In these interest rate environments, we refer to the additional spread it
earns between the fixed borrower rate and the SAP formula rate as Floor Income. Depending on the type of
education loan and when it was originated, the borrower rate is either fixed to term or is reset to a market rate each
July 1. As a result, for loans where the borrower rate is fixed 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. In accordance with legislation enacted in 2006, lenders are required to rebate Floor
Income to ED for all FFELP Loans disbursed on or after April 1, 2006.
The following example shows the mechanics of Floor Income for a typical fixed rate FFELP Consolidation
Loan (with a LIBOR-based SAP spread of 2.64 percent):
Fixed Borrower Rate
SAP Spread over LIBOR
Floor Strike Rate(1)
4.25%
(2.64)
1.61%
(1)
The interest rate at which the underlying index (LIBOR, Treasury bill or commercial
paper) plus the fixed SAP spread equals the fixed 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 LIBOR rate is over 1.61 percent, the holder of the education
loan will earn at a floating rate based on the SAP formula, which in this example is a fixed spread to LIBOR of
2.64 percent. On the other hand, if the quarterly average LIBOR rate is below 1.61 percent, the SAP formula will
produce a rate below the fixed borrower rate of 4.25 percent and the loan holder earns at the borrower rate of
4.25 percent.
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Graphic Depiction of Floor Income:
Floor Income Contracts — We enter into contracts with counterparties under which, in exchange for an
upfront contractual payment representing the present value of the Floor Income that we expect to earn on a notional
amount of underlying education loans being economically hedged, we will pay the counterparties the Floor Income
earned on that notional amount over the life of the Floor Income Contract. Specifically, we agree to pay the
counterparty the difference, if positive, between the fixed borrower rate less the SAP (see definition below) spread
and the average of the applicable interest rate index on that notional amount, regardless of the actual balance of
underlying education loans, over the life of the contract. The contracts generally do not extend over the life of the
underlying education loans. This contract effectively locks in the amount of Floor Income we will earn over the
period of the contract. Floor Income Contracts are not considered effective hedges under ASC 815, “Derivatives and
Hedging,” and each quarter we must record the change in fair value of these contracts through income.
GAAP — Generally accepted accounting principles in the United States of America.
Guarantor(s) — State agencies or non-profit companies that guarantee (or insure) FFELP Loans made by
eligible lenders under The Higher Education Act of 1965 (“HEA”), as amended.
HCERA — The Health Care and Education Reconciliation Act of 2010.
Private Education Loans — Education loans to students or their families that bear the full credit risk of the
customer and any cosigner. Private Education Loans are made primarily to bridge the gap between the cost of higher
education and the amount funded through financial aid, federal loans or students’ and families’ resources. Private
Education Loans include loans for higher education (undergraduate and graduate degrees) and for alternative
education, such as career training, private kindergarten through secondary education schools and tutorial schools.
Certain higher education loans have repayment terms similar to FFELP Loans, whereby repayments begin after the
borrower leaves school while others require repayment of interest or a fixed pay amount while the borrower is still
in school. Our higher education Private Education Loans are not dischargeable in bankruptcy, except in certain
limited circumstances.
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In the context of our Private Education Loan business, we use the term “Private Education Refinance Loans”
to describe education loans made to certain customers that have simplified their payments by consolidating private
and/or federal education loans into a single Private Education Loan. These loans are expected to have low default
rates as a result of a number of factors including high FICO scores, employment record and educational history.
Repayment Borrower Benefits — Financial incentives offered to borrowers based on pre-determined
qualifying factors, which are generally tied directly to making on-time monthly payments. The impact of Repayment
Borrower Benefits is dependent on the estimate of the number of borrowers who will eventually qualify for these
benefits and the amount of the financial benefit offered to the borrower.
Residual Interest — When we securitize education loans, we retain the right to receive cash flows from the
education loans sold to trusts that we sponsor in excess of amounts needed to pay derivative costs (if any), other
fees, and the principal and interest on the bonds backed by the education loans.
Risk Sharing — When a FFELP Loan first disbursed on and after July 1, 2006 defaults, the federal
government guarantees 97 percent of the principal balance plus accrued interest (98 percent on loans disbursed
before July 1, 2006) and the holder of the loan is at risk for the remaining amount not guaranteed as a Risk Sharing
loss on the loan. FFELP Loans originated 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.
Special Allowance Payment (“SAP”) — FFELP Loans disbursed prior to April 1, 2006 (with the exception
of certain PLUS and Supplemental Loans to Students (“SLS”) loans discussed below) generally earn interest at the
greater of the borrower rate or a floating rate determined by reference to the average of the applicable floating rates
(LIBOR, 91-day Treasury bill rate or commercial paper) in a calendar quarter, plus a fixed spread that is dependent
upon when the loan was originated and the loan’s repayment status. If the resulting floating rate exceeds the
borrower rate, ED pays the difference directly to us. This payment is referred to as the Special Allowance Payment
or SAP and the formula used to determine the floating rate is the SAP formula. We refer to the fixed spread to the
underlying index as the SAP spread. For loans disbursed after April 1, 2006, FFELP Loans effectively only earn at
the SAP rate, as the excess interest earned when the borrower rate exceeds the SAP rate (Floor Income) must be
refunded to ED.
Variable rate PLUS Loans and SLS Loans earn SAP only if the variable rate, which is reset annually, exceeds
the applicable maximum borrower rate. For PLUS Loans disbursed on or after January 1, 2000, this limitation on
SAP was repealed effective April 1, 2006.
TDR — Troubled Debt Restructuring. The accounting and reporting standards for loan modifications and
TDRs are primarily found in FASB’s ASC 310-40, “Troubled Debt Restructurings by Creditors.”
Variable Rate Floor Income — Variable Rate Floor Income is Floor Income that is earned only through the
next date at which the borrower interest rate is reset to a market rate. For FFELP Stafford Loans whose borrower
interest rate resets annually on July 1, we may earn Floor Income based on a calculation of the difference between
the borrower rate and the then current interest rate.
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