UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 
For the quarterly period ended June 30, 2011
 
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 NUMBER 001-31924

NELNET, INC.
 
(Exact name of registrant as specified in its charter)
 
NEBRASKA
(State or other jurisdiction of incorporation or organization)	84-0748903
(I.R.S. Employer Identification No.)	
121 SOUTH 13TH STREET, SUITE 201
LINCOLN, NEBRASKA
(Address of principal executive offices)	 
68508
(Zip Code)	
  (402) 458-2370
(Registrant’s telephone number, including area code)

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 [X] No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [  ]                                                   Accelerated filer [X]
Non-accelerated filer [  ]                                                     Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ]   No [X]

As of July 31, 2011, there were 37,043,597 and 11,495,377 shares of Class A Common Stock and Class B Common Stock, par value $0.01 per share, outstanding, respectively (excluding 11,317,364 shares of Class A Common Stock held by wholly owned subsidiaries).  

 

NELNET, INC.
FORM 10-Q
INDEX
June 30, 2011

PART I. FINANCIAL INFORMATION	 	
 	Item 1.	Financial Statements	2	
 	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28	
 	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	70	
 	Item 4.	Controls and Procedures	76	
 	 	 	 	
PART II. OTHER INFORMATION	 	
 	Item 1.	Legal Proceedings	76	
 	Item 1A.	Risk Factors	77	
 	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78	
 	Item 6.	Exhibits	80	
 	 	 	 	
Signatures	 	81	

 

 
PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
NELNET, INC. AND SUBSIDIARIES	 	
CONSOLIDATED BALANCE SHEETS	 	
(Dollars in thousands, except share data)	 	
 	 	 	 	 	 	 	
 	 	As of	 	 	As of	 	
 	 	June 30, 2011	 	 	December 31, 2010	 	
 	 	(unaudited)	 	 	 	 	
Assets:	 	 	 	 	 	 	
Student loans receivable (net of allowance for loan losses of $42,300 and $43,626, respectively)	 	$	23,228,778	 	 	 	23,948,014	 	
Student loans receivable - held for sale	 	 	—	 	 	 	84,987	 	
Cash and cash equivalents:	 	 	 	 	 	 	 	 	
Cash and cash equivalents - not held at a related party	 	 	12,851	 	 	 	6,952	 	
Cash and cash equivalents - held at a related party	 	 	103,490	 	 	 	276,849	 	
Total cash and cash equivalents	 	 	116,341	 	 	 	283,801	 	
Investments - trading securities	 	 	31,664	 	 	 	43,236	 	
Restricted cash and investments	 	 	610,730	 	 	 	668,757	 	
Restricted cash - due to customers	 	 	64,452	 	 	 	88,528	 	
Accrued interest receivable	 	 	302,481	 	 	 	318,152	 	
Accounts receivable (net of allowance for doubtful accounts of $1,172 and $1,221, respectively)	 	 	51,116	 	 	 	52,614	 	
Goodwill	 	 	117,118	 	 	 	117,118	 	
Intangible assets, net	 	 	37,564	 	 	 	38,712	 	
Property and equipment, net	 	 	34,593	 	 	 	30,573	 	
Other assets	 	 	94,224	 	 	 	101,054	 	
Fair value of derivative instruments	 	 	182,450	 	 	 	118,346	 	
 	 	 	 	 	 	 	 	 	
Total assets	 	$	24,871,511	 	 	 	25,893,892	 	
 	 	 	 	 	 	 	 	 	
Liabilities:	 	 	 	 	 	 	 	 	
Bonds and notes payable	 	$	23,605,413	 	 	 	24,672,472	 	
Accrued interest payable	 	 	17,093	 	 	 	19,153	 	
Other liabilities	 	 	172,386	 	 	 	191,017	 	
Due to customers	 	 	64,452	 	 	 	88,528	 	
Fair value of derivative instruments	 	 	23,383	 	 	 	16,089	 	
Total liabilities	 	 	23,882,727	 	 	 	24,987,259	 	
 	 	 	 	 	 	 	 	 	
Shareholders' equity:	 	 	 	 	 	 	 	 	
Preferred stock, $0.01 par value. Authorized 50,000,000 shares; no shares issued or outstanding	 	 	—	 	 	 	—	 	
Common stock:	 	 	 	 	 	 	 	 	
Class A, $0.01 par value. Authorized 600,000,000 shares; issued and outstanding 37,044,372 shares as of June 30, 2011 and 36,846,353 shares as of December 31, 2010	 	 	370	 	 	 	368	 	
Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding 11,495,377 shares as of June 30, 2011 and December 31, 2010	 	 	115	 	 	 	115	 	
Additional paid-in capital	 	 	74,646	 	 	 	76,263	 	
Retained earnings	 	 	914,823	 	 	 	831,057	 	
Employee notes receivable	 	 	(1,170	)	 	 	(1,170	)	
Total shareholders' equity	 	 	988,784	 	 	 	906,633	 	
Commitments and contingencies	 	 	 	 	 	 	 	 	
Total liabilities and shareholders' equity	 	$	24,871,511	 	 	 	25,893,892	 	

See accompanying notes to consolidated financial statements.

2

 
NELNET, INC. AND SUBSIDIARIES	 	
CONSOLIDATED STATEMENTS OF INCOME	 	
(Dollars in thousands, except share data)	 	
(unaudited)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months	 	 	Six months	 	
 	 	ended June 30,	 	 	ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
Interest income:	 	 	 	 	 	 	 	 	 	 	 	 	
Loan interest	 	$	138,934	 	 	 	155,353	 	 	 	276,292	 	 	 	290,320	 	
Investment interest	 	 	856	 	 	 	1,304	 	 	 	1,582	 	 	 	2,305	 	
Total interest income	 	 	139,790	 	 	 	156,657	 	 	 	277,874	 	 	 	292,625	 	
Interest expense:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest on bonds and notes payable	 	 	51,054	 	 	 	59,243	 	 	 	103,361	 	 	 	110,102	 	
Net interest income	 	 	88,736	 	 	 	97,414	 	 	 	174,513	 	 	 	182,523	 	
Less provision for loan losses	 	 	5,250	 	 	 	6,200	 	 	 	9,000	 	 	 	11,200	 	
Net interest income after provision for loan losses	 	 	83,486	 	 	 	91,214	 	 	 	165,513	 	 	 	171,323	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing revenue	 	 	37,389	 	 	 	36,652	 	 	 	73,025	 	 	 	73,046	 	
Tuition payment processing and campus commerce revenue	 	 	14,761	 	 	 	12,795	 	 	 	34,130	 	 	 	30,177	 	
Enrollment services revenue	 	 	32,315	 	 	 	35,403	 	 	 	66,183	 	 	 	68,674	 	
Software services revenue	 	 	4,346	 	 	 	5,499	 	 	 	9,123	 	 	 	9,843	 	
Other income	 	 	6,826	 	 	 	8,496	 	 	 	13,318	 	 	 	15,756	 	
Gain on sale of loans and debt repurchases	 	 	—	 	 	 	8,759	 	 	 	8,307	 	 	 	18,936	 	
Derivative market value and foreign currency adjustments and derivative settlements, net	 	 	(20,335	)	 	 	(10,608	)	 	 	(23,371	)	 	 	(8,926	)	
Total other income	 	 	75,302	 	 	 	96,996	 	 	 	180,715	 	 	 	207,506	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	42,881	 	 	 	40,962	 	 	 	86,793	 	 	 	81,606	 	
Cost to provide enrollment services	 	 	22,140	 	 	 	24,111	 	 	 	44,979	 	 	 	46,136	 	
Depreciation and amortization	 	 	6,769	 	 	 	9,728	 	 	 	13,545	 	 	 	20,511	 	
Restructure expense	 	 	—	 	 	 	72	 	 	 	—	 	 	 	1,269	 	
Other	 	 	28,767	 	 	 	33,348	 	 	 	54,872	 	 	 	62,403	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	100,557	 	 	 	108,221	 	 	 	200,189	 	 	 	211,925	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes	 	 	58,231	 	 	 	79,989	 	 	 	146,039	 	 	 	166,904	 	
Income tax expense	 	 	(21,106	)	 	 	(29,996	)	 	 	(54,034	)	 	 	(62,589	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	37,125	 	 	 	49,993	 	 	 	92,005	 	 	 	104,315	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per common share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net earnings - basic	 	$	0.76	 	 	 	1.00	 	 	 	1.90	 	 	 	2.08	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net earnings - diluted	 	$	0.76	 	 	 	0.99	 	 	 	1.89	 	 	 	2.08	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average common shares outstanding:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	 	48,302,779	 	 	 	49,735,398	 	 	 	48,237,411	 	 	 	49,726,099	 	
Diluted	 	 	48,488,046	 	 	 	49,934,648	 	 	 	48,425,886	 	 	 	49,923,680	 	
 
See accompanying notes to consolidated financial statements.
 
3

 
 
NELNET, INC. AND SUBSIDIARIES	 	
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME	 	
(Dollars in thousands, except share data)	 	
(unaudited)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Preferred	 	 	 	 	 	 	 	 	 	 	 	Class A	 	 	Class B	 	 	Additional	 	 	 	 	 	Employee	 	 	Total	 	
 	 	stock	 	 	Common stock shares	 	 	Preferred	 	 	common	 	 	common	 	 	paid-in	 	 	Retained	 	 	notes	 	 	shareholders’	 	
 	 	shares	 	 	Class A	 	 	Class B	 	 	stock	 	 	stock	 	 	stock	 	 	capital	 	 	earnings	 	 	receivable	 	 	equity	 	
 	 	 	 	
Balance as of March 31, 2010	 	 	—	 	 	 	38,587,293	 	 	 	11,495,377	 	 	$	—	 	 	 	386	 	 	 	115	 	 	 	112,980	 	 	 	726,982	 	 	 	(1,250	)	 	 	839,213	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	49,993	 	 	 	—	 	 	 	49,993	 	
Cash dividend on Class A and Class B common stock - $0.07 per share	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(3,507	)	 	 	—	 	 	 	(3,507	)	
Issuance of common stock, net of forfeitures	 	 	—	 	 	 	71,156	 	 	 	—	 	 	 	—	 	 	 	1	 	 	 	—	 	 	 	701	 	 	 	—	 	 	 	—	 	 	 	702	 	
Compensation expense for stock based awards	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	366	 	 	 	—	 	 	 	—	 	 	 	366	 	
Repurchase of common stock	 	 	—	 	 	 	(663,443	)	 	 	—	 	 	 	—	 	 	 	(7	)	 	 	—	 	 	 	(12,815	)	 	 	—	 	 	 	—	 	 	 	(12,822	)	
Balance as of June 30, 2010	 	 	—	 	 	 	37,995,006	 	 	 	11,495,377	 	 	$	—	 	 	 	380	 	 	 	115	 	 	 	101,232	 	 	 	773,468	 	 	 	(1,250	)	 	 	873,945	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of March 31, 2011	 	 	—	 	 	 	36,983,557	 	 	 	11,495,377	 	 	$	—	 	 	 	370	 	 	 	115	 	 	 	73,502	 	 	 	882,550	 	 	 	(1,170	)	 	 	955,367	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	37,125	 	 	 	—	 	 	 	37,125	 	
Cash dividend on Class A and Class B common stock - $0.10 per share	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(4,852	)	 	 	—	 	 	 	(4,852	)	
Issuance of common stock, net of forfeitures	 	 	—	 	 	 	70,794	 	 	 	—	 	 	 	—	 	 	 	1	 	 	 	—	 	 	 	1,027	 	 	 	—	 	 	 	—	 	 	 	1,028	 	
Compensation expense for stock based awards	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	342	 	 	 	—	 	 	 	—	 	 	 	342	 	
Repurchase of common stock	 	 	—	 	 	 	(9,979	)	 	 	—	 	 	 	—	 	 	 	(1	)	 	 	—	 	 	 	(225	)	 	 	—	 	 	 	—	 	 	 	(226	)	
Balance as of June 30, 2011	 	 	—	 	 	 	37,044,372	 	 	 	11,495,377	 	 	$	—	 	 	 	370	 	 	 	115	 	 	 	74,646	 	 	 	914,823	 	 	 	(1,170	)	 	 	988,784	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of December 31, 2009	 	 	—	 	 	 	38,396,791	 	 	 	11,495,377	 	 	$	—	 	 	 	384	 	 	 	115	 	 	 	109,359	 	 	 	676,154	 	 	 	(1,449	)	 	 	784,563	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	104,315	 	 	 	—	 	 	 	104,315	 	
Cash dividend on Class A and Class B common stock - $0.14 per share	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(7,001	)	 	 	—	 	 	 	(7,001	)	
Issuance of common stock, net of forfeitures	 	 	—	 	 	 	274,594	 	 	 	—	 	 	 	—	 	 	 	3	 	 	 	—	 	 	 	4,233	 	 	 	—	 	 	 	—	 	 	 	4,236	 	
Compensation expense for stock based awards	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	691	 	 	 	—	 	 	 	—	 	 	 	691	 	
Repurchase of common stock	 	 	—	 	 	 	(676,379	)	 	 	—	 	 	 	—	 	 	 	(7	)	 	 	—	 	 	 	(13,051	)	 	 	—	 	 	 	—	 	 	 	(13,058	)	
Reduction of employee stock notes receivable	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	199	 	 	 	199	 	
Balance as of June 30, 2010	 	 	—	 	 	 	37,995,006	 	 	 	11,495,377	 	 	$	—	 	 	 	380	 	 	 	115	 	 	 	101,232	 	 	 	773,468	 	 	 	(1,250	)	 	 	873,945	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of December 31, 2010	 	 	—	 	 	 	36,846,353	 	 	 	11,495,377	 	 	$	—	 	 	 	368	 	 	 	115	 	 	 	76,263	 	 	 	831,057	 	 	 	(1,170	)	 	 	906,633	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	92,005	 	 	 	—	 	 	 	92,005	 	
Cash dividend on Class A and Class B common stock - $0.17 per share	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(8,239	)	 	 	—	 	 	 	(8,239	)	
Contingency payment related to business combination	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(5,893	)	 	 	—	 	 	 	—	 	 	 	(5,893	)	
Issuance of common stock, net of forfeitures	 	 	—	 	 	 	222,463	 	 	 	—	 	 	 	—	 	 	 	3	 	 	 	—	 	 	 	4,113	 	 	 	—	 	 	 	—	 	 	 	4,116	 	
Compensation expense for stock based awards	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	697	 	 	 	—	 	 	 	—	 	 	 	697	 	
Repurchase of common stock	 	 	—	 	 	 	(24,444	)	 	 	—	 	 	 	—	 	 	 	(1	)	 	 	—	 	 	 	(534	)	 	 	—	 	 	 	—	 	 	 	(535	)	
Balance as of June 30, 2011	 	 	—	 	 	 	37,044,372	 	 	 	11,495,377	 	 	$	—	 	 	 	370	 	 	 	115	 	 	 	74,646	 	 	 	914,823	 	 	 	(1,170	)	 	 	988,784	 	
 
See accompanying notes to consolidated financial statements.
 
4

NELNET, INC. AND SUBSIDIARIES	 	
CONSOLIDATED STATEMENTS OF CASH FLOWS	 	
(Dollars in thousands)	 	
(unaudited)	 	
 	 	
 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	
Net income	 	$	92,005	 	 	 	104,315	 	
Adjustments to reconcile net income to net cash provided by operating activities, net of business acquisition:	 	 	 	 	 	 	 	 	
Depreciation and amortization, including loan premiums/discount  and deferred origination costs	 	 	35,841	 	 	 	50,193	 	
Provision for loan losses	 	 	9,000	 	 	 	11,200	 	
Derivative market value adjustment	 	 	(68,658	)	 	 	168,201	 	
Foreign currency transaction adjustment	 	 	84,354	 	 	 	(165,075	)	
Proceeds to terminate and/or amend derivative instruments	 	 	12,369	 	 	 	14,764	 	
Payments to terminate and/or amend derivative instruments	 	 	(522	)	 	 	(763	)	
Gain on sale of loans	 	 	(1,345	)	 	 	—	 	
Gain from debt repurchases	 	 	(6,962	)	 	 	(18,936	)	
Change in investments - trading securities, net	 	 	11,572	 	 	 	(31,017	)	
Deferred income tax (benefit) expense	 	 	(8,715	)	 	 	7,229	 	
Non-cash compensation expense	 	 	1,092	 	 	 	1,119	 	
Other non-cash items	 	 	108	 	 	 	495	 	
Decrease (increase) in accrued interest receivable	 	 	15,671	 	 	 	(68,182	)	
Decrease (increase) in accounts receivable	 	 	1,498	 	 	 	(15,393	)	
Decrease in other assets	 	 	3,258	 	 	 	4,036	 	
(Decrease) increase in accrued interest payable	 	 	(2,060	)	 	 	2,531	 	
Decrease in other liabilities	 	 	(10,290	)	 	 	(3,306	)	
 	 	 	 	 	 	 	 	 	
Net cash provided by operating activities	 	 	168,216	 	 	 	61,411	 	
 	 	 	 	 	 	 	 	 	
Cash flows from investing activities, net of business acquisition:	 	 	 	 	 	 	 	 	
Originations and purchases of student loans, including loan premiums/discounts and deferred origination costs	 	 	(662,324	)	 	 	(2,936,134	)	
Purchases of student loans, including loan premiums, from a related party	 	 	(29	)	 	 	(988,998	)	
Net proceeds from student loan repayments, claims, capitalized interest, participations, and other	 	 	1,350,344	 	 	 	1,049,712	 	
Proceeds from sale of student loans	 	 	95,131	 	 	 	21,036	 	
Purchases of property and equipment, net	 	 	(8,281	)	 	 	(4,670	)	
Decrease (increase) in restricted cash and investments, net	 	 	58,027	 	 	 	(44,397	)	
Business and asset acquisitions, net of cash acquired,  including contingency payments	 	 	(14,080	)	 	 	(3,000	)	
 	 	 	 	 	 	 	 	 	
Net cash provided by (used in) investing activities	 	 	818,788	 	 	 	(2,906,451	)	
 	 	 	 	 	 	 	 	 	
Cash flows from financing activities:	 	 	 	 	 	 	 	 	
Payments on bonds and notes payable	 	 	(1,782,953	)	 	 	(1,778,360	)	
Proceeds from issuance of bonds and notes payable	 	 	745,554	 	 	 	4,586,636	 	
Payments on bonds payable due to a related party	 	 	(107,050	)	 	 	—	 	
Payments of debt issuance costs	 	 	(1,506	)	 	 	(7,043	)	
Dividends paid	 	 	(8,239	)	 	 	(7,001	)	
Repurchases of common stock	 	 	(535	)	 	 	(13,058	)	
Proceeds from issuance of common stock	 	 	265	 	 	 	247	 	
Payments received on employee stock notes receivable	 	 	—	 	 	 	199	 	
 	 	 	 	 	 	 	 	 	
Net cash (used in) provided by financing activities	 	 	(1,154,464	)	 	 	2,781,620	 	
 	 	 	 	 	 	 	 	 	
Net decrease in cash and cash equivalents	 	 	(167,460	)	 	 	(63,420	)	
 	 	 	 	 	 	 	 	 	
Cash and cash equivalents, beginning of period	 	 	283,801	 	 	 	338,181	 	
 	 	 	 	 	 	 	 	 	
Cash and cash equivalents, end of period	 	$	116,341	 	 	 	274,761	 	
 	 	 	 	 	 	 	 	 	
Supplemental disclosures of cash flow information:	 	 	 	 	 	 	 	 	
Interest paid	 	$	101,007	 	 	 	102,783	 	
 	 	 	 	 	 	 	 	 	
Income taxes paid, net of refunds	 	$	63,331	 	 	 	51,887	 	
 
See accompanying notes to consolidated financial statements.

5

NELNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2011 and for the three and six months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 
1.    Basis of Financial Reporting

The accompanying unaudited consolidated financial statements of Nelnet, Inc. and subsidiaries (the “Company”) as of June 30, 2011 and for the three and six months ended June 30, 2011 and 2010 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2010 and, in the opinion of the Company’s management, the unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results of operations for the interim periods presented. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results for the year ending December 31, 2011. The unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Reclassifications

Certain amounts previously reported within operating expenses have been reclassified to conform to the current period presentation. These reclassifications include:

 	·	Reclassifying “professional and other services,” “occupancy and communications,” “postage and distribution,” “advertising and marketing,” and “trustee and other debt related fees” to “other” operating expenses.	

 	·	Reclassifying student list amortization, which was previously included in “advertising and marketing,” to “depreciation and amortization.”	

The reclassifications had no effect on consolidated net income or consolidated assets and liabilities.

2.    Student Loans Receivable and Allowance for Loan Losses

The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-20, Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU 2010-20”), which was an update to the Receivables Topic of the FASB Accounting Standards Codification (“ASC”).   In accordance with ASU 2010-20, the Company has expanded its disclosures about the credit quality of its student loans receivable and the associated allowance for loan losses.  ASU 2010-20 requires entities to provide disclosures on a disaggregated basis. The ASU defines two levels of disaggregation – portfolio segment and class of financing receivable.  A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses.  Classes of financing receivables generally are a disaggregation of a portfolio segment. The Company evaluates the adequacy of the allowance for loan losses on its federally insured loan portfolio separately from its non-federally insured loan portfolio.  Management has determined that each of the federally insured loan portfolio and the non-federally insured loan portfolio meets the definition of a portfolio segment.  Accordingly, the portfolio segment basis disclosures required by ASU 2010-20 are presented in this note for each of these portfolios.  The Company does not disaggregate its portfolio segment student loan portfolios into classes of financing receivables as defined in ASU 2010-20. In addition, as of June 30, 2011 and December 31, 2010, the Company does not have any impaired loans as defined in the Receivables Topic of the FASB ASC.

6

Student loans receivable consisted of the following:

 	 	As of June 30, 2011	 	 	As of December 31, 2010	 	
 	 	Held for investment	 	 	Held for investment	 	 	Held for sale (a)	 	
Federally insured loans	 	$	23,083,157	 	 	 	23,757,699 	 	 	 	—	 	
Non-federally insured loans	 	 	30,655 	 	 	 	26,370 	 	 	 	84,987 	 	
 	 	 	23,113,812 	 	 	 	23,784,069 	 	 	 	84,987 	 	
Unamortized loan premiums/discounts and deferred origination costs, net	 	 	157,266 	 	 	 	207,571 	 	 	 	—	 	
Allowance for loan losses – federally insured loans	 	 	(31,968	)  	 	 	(32,908	)  	 	 	—	 	
Allowance for loan losses – non-federally insured loans	 	 	(10,332	)  	 	 	(10,718	)  	 	 	—	 	
 	 	$	23,228,778	 	 	 	23,948,014 	 	 	 	84,987 	 	
Allowance for federally insured loans as a percentage of such loans	 	 	0.14	%	 	 	0.14	%	 	 	 	 	
Allowance for non-federally insured loans as a percentage of such loans	 	 	33.70	%	 	 	40.64	%	 	 	 	 	
 
 	(a)	On January 13, 2011, the Company sold a portfolio of non-federally insured loans for proceeds of $91.3 million (100% of par value). The Company retained credit risk related to this portfolio and will pay cash to purchase back any loans which become 60 days delinquent. As of December 31, 2010, the Company classified this portfolio as held for sale and the loans were carried at fair value.	

Activity in the Allowance for Loan Losses

The provision for loan losses represents the periodic expense of maintaining an allowance sufficient to absorb losses, net of recoveries, inherent in the portfolio of student loans. Activity in the allowance for loan losses is shown below.
 
 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of period	 	$	41,097	 	 	 	49,400 	 	 	 	43,626 	 	 	 	50,887 	 	
Provision for loan losses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Federally insured loans	 	 	5,000 	 	 	 	5,200 	 	 	 	8,500 	 	 	 	9,200 	 	
Non-federally insured loans	 	 	250 	 	 	 	1,000 	 	 	 	500 	 	 	 	2,000 	 	
Total provision for loan losses	 	 	5,250 	 	 	 	6,200 	 	 	 	9,000 	 	 	 	11,200 	 	
Charge-offs:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Federally insured loans	 	 	(4,585	)  	 	 	(4,971	)  	 	 	(9,440	)  	 	 	(9,039	)  	
Non-federally insured loans	 	 	(1,226	)  	 	 	(2,383	)  	 	 	(2,220	)  	 	 	(3,763	)  	
Total charge-offs	 	 	(5,811	)  	 	 	(7,354	)  	 	 	(11,660	)  	 	 	(12,802	)  	
Recoveries:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non-federally insured loans	 	 	283 	 	 	 	331 	 	 	 	653 	 	 	 	582 	 	
Total recoveries	 	 	283 	 	 	 	331 	 	 	 	653 	 	 	 	582 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchase of federally insured loans	 	 	—	 	 	 	2,000 	 	 	 	—	 	 	 	2,710 	 	
Purchase of non-federally insured loans	 	 	—	 	 	 	220 	 	 	 	—	 	 	 	220 	 	
Transfer to/from repurchase obligation related to loans sold/purchased, net	 	 	1,481 	 	 	 	—	 	 	 	681 	 	 	 	(2,000	)  	
Balance at end of period	 	$	42,300	 	 	 	50,797 	 	 	 	42,300 	 	 	 	50,797 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allocation of the allowance for loan losses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Federally insured loans	 	$	31,968	 	 	 	32,972 	 	 	 	31,968 	 	 	 	32,972 	 	
Non-federally insured loans	 	 	10,332 	 	 	 	17,825 	 	 	 	10,332 	 	 	 	17,825 	 	
Total allowance for loan losses	 	$	42,300	 	 	 	50,797 	 	 	 	42,300 	 	 	 	50,797 	 	

Repurchase Obligations

As of June 30, 2011, the Company had participated a cumulative amount of $117.1 million of non-federally insured loans to third parties. Loans participated under these agreements have been accounted for by the Company as loan sales. Accordingly, the participation interests sold are not included on the Company’s consolidated balance sheets. Per the terms of the servicing agreements, the Company’s servicing operations are obligated to repurchase loans subject to the participation interests in the event such loans become 60 or 90 days delinquent.

In addition, on January 13, 2011, the Company sold a portfolio of non-federally insured loans for proceeds of $91.3 million (100% of par value).  The Company retained credit risk related to this portfolio and will pay cash to purchase back any loans which become 60 days delinquent.

7

The Company’s estimate related to its obligation to repurchase these loans is included in “other liabilities” in the Company’s consolidated balance sheet. The activity related to this accrual is detailed below.
 
 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Beginning balance	 	$	19,670	 	 	 	12,600	 	 	 	12,600	 	 	 	10,600	 	
Repurchase obligation transferred to/from the allowance for loan  losses related to loans purchased/sold, net	 	 	(1,481	)	 	 	—	 	 	 	(681	)	 	 	2,000	 	
Repurchase obligation associated with loans sold (a)	 	 	—	 	 	 	—	 	 	 	6,270	 	 	 	—	 	
Current period expense (b)	 	 	2,500	 	 	 	—	 	 	 	2,500	 	 	 	—	 	
Ending balance	 	$	20,689	 	 	 	12,600	 	 	 	20,689	 	 	 	12,600	 	

 	(a)	As discussed previously, on January 13, 2011, the Company sold a portfolio of loans and retained all credit risk related to this portfolio. These loans were classified as held for sale as of December 31, 2010 and the loans were carried at fair value. Upon sale, the Company established a repurchase obligation associated with those loans that are estimated to become 60 days delinquent.	

 	(b)	The current period expense is included in “other” under operating expenses in the accompanying consolidated statements of income. During the three months ended June 30, 2011, the Company recorded an expense of $2.5 million related to its obligation to repurchase non-federally insured loans.	

Student Loan Status and Delinquencies

Delinquencies have the potential to adversely impact the Company’s earnings through increased servicing and collection costs and account charge-offs.  The table below shows the Company’s student loan delinquency amounts on loans held for investment.

 	 	As of June 30, 2011	 	 	As of December 31, 2010	 	
 	 	Dollars	 	 	Percent	 	 	Dollars	 	 	Percent	 	
Federally Insured Loans:	 	 	 	 	 	 	 	 	 	 	 	 	
Loans in-school/grace/deferment (a)	 	$	4,061,955	 	 	 	 	 	$	4,358,616	 	 	 	 	
Loans in forebearance (b)	 	 	3,263,802	 	 	 	 	 	 	2,984,869	 	 	 	 	
Loans in repayment status:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loans current	 	 	13,748,083	 	 	 	87.2	%	 	 	14,309,480	 	 	 	87.2	%	
Loans delinquent 31-60 days (c)	 	 	583,443	 	 	 	3.7	 	 	 	794,140	 	 	 	4.8	 	
Loans delinquent 61-90 days (c)	 	 	358,539	 	 	 	2.3	 	 	 	306,853	 	 	 	1.9	 	
Loans delinquent 91 days or greater (d)	 	 	1,067,335	 	 	 	6.8	 	 	 	1,003,741	 	 	 	6.1	 	
Total loans in repayment	 	 	15,757,400	 	 	 	100.0	%	 	 	16,414,214	 	 	 	100.0	%	
Total federally insured loans	 	$	23,083,157	 	 	 	 	 	 	$	23,757,699	 	 	 	 	 	
Non-Federally Insured Loans:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loans in-school/grace/deferment (a)	 	$	3,749	 	 	 	 	 	 	$	3,500	 	 	 	 	 	
Loans in forebearance (b)	 	 	510	 	 	 	 	 	 	 	292	 	 	 	 	 	
Loans in repayment status:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loans current	 	 	22,221	 	 	 	84.2	%	 	 	16,679	 	 	 	73.9	%	
Loans delinquent 31-60 days (c)	 	 	624	 	 	 	2.4	 	 	 	1,546	 	 	 	6.8	 	
Loans delinquent 61-90 days (c)	 	 	587	 	 	 	2.2	 	 	 	1,163	 	 	 	5.2	 	
Loans delinquent 91 days or greater	 	 	2,964	 	 	 	11.2	 	 	 	3,190	 	 	 	14.1	 	
Total loans in repayment	 	 	26,396	 	 	 	100.0	%	 	 	22,578	 	 	 	100.0	%	
Total non-federally insured loans	 	$	30,655	 	 	 	 	 	 	$	26,370	 	 	 	 	 	
 
(a)	Loans for borrowers who still may be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g. , residency periods for medical students or a grace period for bar exam preparation for law students.	

(b)	Loans for borrowers who have temporarily ceased making full payments due to hardship or other factors, according to a schedule approved by the servicer consistent with the established loan program servicing procedures and policies.	

(c)	The period of delinquency is based on the number of days scheduled payments are contractually past due and relate to repayment loans, that is, receivables not charged off, and not in school, grace, deferment, or forbearance.	

(d)	Loans delinquent 91 days or greater include federally insured loans in claim status, which are loans that have gone into default and have been submitted to the guaranty agency.	

Loan Sales

See note 4, “Gain on Sale of Loans and Debt Repurchases,” for a summary of loans sold by the Company.

Loan Purchases

See note 14, “Subsequent Event,” for a summary of a significant purchase of federally insured loans that occurred subsequent to June 30, 2011.

8

3.     Bonds and Notes Payable

The following tables summarize the Company’s outstanding debt obligations by type of instrument:
 
 	 	As of June 30, 2011	
 	 	Carrying	 	 	Interest rate	 	 	
 	 	amount	 	 	range	 	Final maturity	
 	 	 	 	 	 	 	 	
Variable-rate bonds and notes (a):	 	 	 	 	 	 	 	
Bonds and notes based on indices	 	$	19,629,816	 	 	 	0.26% - 6.90	%	5/26/14 - 7/27/48	
Bonds and notes based on auction or remarketing	 	 	717,175 	 	 	 	0.10% - 1.44	%	5/1/28 - 5/1/42	
 	 	 	 	 	 	 	 	 	 	
Total variable-rate bonds and notes	 	 	20,346,991 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
Commercial paper - FFELP warehouse facility	 	 	469,578 	 	 	 	0.18% - 0.29	%	7/29/13	
Department of Education Conduit	 	 	2,497,198 	 	 	 	0.25	%	5/8/14	
Unsecured line of credit	 	 	177,300 	 	 	 	0.56	%	5/8/12	
Unsecured debt - Junior Subordinated Hybrid Securities	 	 	100,697 	 	 	 	7.40	%	9/15/61	
Other borrowings	 	 	13,649 	 	 	 	3.50% - 5.10	%	11/14/11 - 11/11/15	
 	 	 	 	 	 	 	 	 	 	
 	 	$	23,605,413	 	 	 	 	 	 	
 
 	 	As of December 31, 2010	
 	 	Carrying	 	 	Interest rate	 	 	
 	 	amount	 	 	range	 	Final maturity	
Variable-rate bonds and notes (a):	 	 	 	 	 	 	 	
Bonds and notes based on indices	 	$	20,170,217	 	 	 	0.30% - 6.90	%	5/26/14 - 7/27/48	
Bonds and notes based on auction or remarketing	 	 	944,560 	 	 	 	0.24% - 1.51	%	5/1/11 - 7/1/43	
 	 	 	 	 	 	 	 	 	 	
Total variable-rate bonds and notes	 	 	21,114,777 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
Commercial paper - FFELP warehouse facility	 	 	108,381 	 	 	 	0.29% - 0.35	%	7/29/13	
Department of Education Conduit	 	 	2,702,345 	 	 	 	0.31	%	5/8/14	
Unsecured line of credit	 	 	450,000 	 	 	 	0.79	%	5/8/12	
Unsecured debt - Junior Subordinated Hybrid Securities	 	 	163,255 	 	 	 	7.40	%	9/15/61	
Related party debt	 	 	107,050 	 	 	 	0.53	%	5/20/11	
Other borrowings	 	 	26,664 	 	 	 	0.26% - 5.10	%	1/1/11 - 11/11/15	
 	 	 	 	 	 	 	 	 	 	
 	 	$	24,672,472	 	 	 	 	 	 	

 	(a)	Issued in asset-backed securitizations	

Secured Financing Transactions

The Company has historically relied upon secured financing vehicles as its most significant source of funding for student loans. The net cash flow the Company receives from the securitized student loans generally represents the excess amounts, if any, generated by the underlying student loans over the amounts required to be paid to the bondholders, after deducting servicing fees and any other expenses relating to the securitizations. The Company’s rights to cash flow from securitized student loans are subordinate to bondholder interests and may fail to generate any cash flow beyond what is due to bondholders. The Company’s secured financing vehicles during the periods presented above include a loan warehouse facility, asset-backed securitizations, and the government’s Conduit Program (as described below).

The majority of the bonds and notes payable are primarily secured by the student loans receivable, related accrued interest, and by the amounts on deposit in the accounts established under the respective bond resolutions or financing agreements. Certain variable rate bonds and notes are secured by a letter of credit and reimbursement agreement issued by a third-party liquidity provider.

FFELP warehouse facilities

The Company funds a portion of its Federal Family Education Loan Program (the “FFEL Program” or “FFELP”) loan acquisitions using its FFELP warehouse facility. Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements. As of June 30, 2011, the Company’s FFELP warehouse facility had a maximum financing amount of $500.0 million, with a revolving financing structure supported by 364-day liquidity provisions.  As of June 30, 2011, $469.6 million was outstanding under the FFELP warehouse facility, $30.4 million was available for future use, and $28.1 million was advanced as equity support.

9

On July 14, 2011, the Company renewed the liquidity agreement on its existing FFELP warehouse facility (the “NFSLW-I Warehouse”) and entered into an additional FFELP warehouse facility (the “NHELP-I Warehouse”).

Effective July 14, 2011, the Company’s NFSLW-I Warehouse facility has a maximum financing amount of $300.0 million, with a revolving financing structure supported by 364-day liquidity provisions, which expires on April  1, 2012. The final maturity date of the facility is July 1, 2014. In the event the Company is unable to renew the liquidity provisions by April 1, 2012, the facility would become a term facility at a stepped-up cost, with no additional student loans being eligible for financing, and the Company would be required to refinance the existing loans in the facility by July 1, 2014.

The NFSLW-I Warehouse facility provides for formula based advance rates depending on FFELP loan type, up to a maximum of 85 percent to 98 percent of the principal and interest of loans financed. The advance rates for collateral may increase or decrease based on market conditions, but they are subject to a minimum advance of 84.5 to 90 percent based on loan type. The facility contains financial covenants relating to levels of the Company’s consolidated net worth, ratio of adjusted EBITDA to corporate debt interest, and unencumbered cash. Any violation of these covenants could result in a requirement for the immediate repayment of any outstanding borrowings under the facility

The new NHELP-I Warehouse has a maximum financing amount of $500.0 million, with a revolving financing structure supported by 364-day liquidity provisions, which expires on October 1, 2012. The final maturity date of the facility is July 1, 2014. In the event the Company is unable to renew the liquidity provisions by October 1, 2012, the facility would become a term facility at a stepped-up cost, with no additional student loans being eligible for financing, and the Company would be required to refinance the existing loans in the facility by July 1, 2014.

The NHELP-I Warehouse facility provides for formula based advance rates depending on FFELP loan type, up to a maximum of 93 percent to 95 percent of the principal and interest of loans financed. The advance rates for collateral may increase or decrease based on market conditions, but they are subject to a minimum advance of 85 to 90 percent based on loan type. The facility contains financial covenants relating to levels of the Company’s consolidated net worth, ratio of adjusted EBITDA to corporate debt interest, and unencumbered cash. Any violation of these covenants could result in a requirement for the immediate repayment of any outstanding borrowings under the facility.

Asset-backed securitizations

During the first quarter of 2011, the Company completed an asset-backed securities transaction totaling $384.4 million.  Notes issued in this asset-backed securities transaction carry interest rates based on a spread to LIBOR.  The Company used the proceeds from the sale of these notes to purchase principal and interest on student loans, including loans which were previously financed in the FFELP warehouse facility.

See note 14, “Subsequent Event,” for a summary of notes payable related to a significant purchase of oederally insured loans that occurred subsequent to June 30, 2011.

Department of Education’s Conduit Program

In May 2009, the U.S. Department of Education (the “Department”) implemented a program under which it finances eligible FFELP Stafford and PLUS loans in a conduit vehicle established to provide funding for student lenders (the “Conduit Program”).  Loans eligible for the Conduit Program had to be first disbursed on or after October 1, 2003, but not later than June 30, 2009, and fully disbursed before September 30, 2009, and meet certain other requirements. Funding for the Conduit Program is provided by the capital markets at a cost based on market rates, with the Company being advanced 97 percent of the student loan face amount. Excess amounts needed to fund the remaining 3 percent of the student loan balances were contributed by the Company. The Conduit Program expires on May 8, 2014. The Student Loan Short-Term Notes (“Student Loan Notes”) issued by the Conduit Program are supported by a combination of  (i) notes backed by FFELP loans, (ii) a liquidity agreement with the Federal Financing Bank, and (iii) a put agreement provided by the Department.  If the conduit does not have sufficient funds to pay all Student Loan Notes, then those Student Loan Notes will be repaid with funds from the Federal Financing Bank.  The Federal Financing Bank will hold the notes for a short period of time and, if at the end of that time, the Student Loan Notes still cannot be paid off, the underlying FFELP loans that serve as collateral to the Conduit Program will be sold to the Department through a put agreement at a price of 97 percent of the face amount of the loans.  As of June 30, 2011, the Company had $2.5 billion borrowed under the facility and $87.9 million advanced as equity support in the facility. Effective July 1, 2010, no additional loans could be funded using the Conduit Program.

10

Unsecured Line of Credit

The Company has a $750.0 million unsecured line of credit that terminates in May 2012.  As of June 30, 2011, there was $177.3 million outstanding on this line.  Upon termination in 2012, there can be no assurance that the Company will be able to maintain this line of credit, find alternative funding, or increase the amount outstanding under the line, if necessary.  The lending commitment under the Company’s unsecured line of credit is provided by a total of thirteen banks, with no individual bank representing more than 11% of the total lending commitment. The bank lending group includes Lehman Brothers Bank (“Lehman”), a subsidiary of Lehman Brothers Holdings Inc., which represents approximately 7% of the lending commitment under the line of credit. In September 2008, Lehman Brothers Holdings Inc. filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. The Company does not expect that Lehman will fund future borrowing requests. As of June 30, 2011, excluding Lehman’s lending commitment, the Company has $532.6 million available for future use under its unsecured line of credit.

The line of credit agreement contains certain financial covenants that, if not met, lead to an event of default under the agreement.  The covenants include maintaining:

 	·	A minimum consolidated net worth	

 	·	A minimum adjusted EBITDA to corporate debt interest (over the last four rolling quarters)	

 	·	A limitation on subsidiary indebtedness	

 	·	A limitation on the percentage of non-guaranteed loans in the Company’s portfolio	

As of June 30, 2011, the Company was in compliance with all of these requirements. Many of these covenants are duplicated in the Company’s other lending facilities, including its FFELP warehouse facilities.

The Company’s operating line of credit does not have any covenants related to unsecured debt ratings.  However, changes in the Company’s ratings (as well as the amounts the Company borrows) have modest implications on the pricing level at which the Company obtains funding.

A default on the Company’s FFELP warehouse facilities would result in an event of default on the Company’s unsecured line of credit that would result in the outstanding balance on the line of credit becoming immediately due and payable.

Related Party Transactions

Union Bank Participation Agreement

The Company maintains an agreement with Union Bank and Trust Company (“Union Bank”), an entity under common control, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loans (the “FFELP Participation Agreement”). The Company uses this facility as an additional source to fund FFELP student loans. The Company has the option to purchase the participation interests from the grantor trusts at the end of a 364-day term upon termination of the participation certificate.  As of June 30, 2011 and December 31, 2010, $570.7 million and $350.4 million, respectively, of loans were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. The agreement automatically renews annually and is terminable by either party upon five business days notice. This agreement provides beneficiaries of Union Bank’s grantor trusts with access to investments in interests in student loans, while providing liquidity to the Company.  The Company can participate loans to Union Bank to the extent of availability under the grantor trusts, up to $750 million or an amount in excess of $750 million if mutually agreed to by both parties.  Loans participated under this agreement have been accounted for by the Company as loan sales.  Accordingly, the participation interests sold are not included on the Company’s consolidated balance sheets.

Related Party Debt

The Company has from time to time repurchased certain of its own asset-backed securities (bonds and notes payable). For accounting purposes, these notes have been effectively retired and are not included on the Company’s consolidated balance sheets. However, these securities are legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated by the trust estate. As of December 31, 2010, the Company had $107.1 million of these securities participated to Union Bank, as trustee for various grantor trusts, and such notes were included in “bonds and notes payable” on the Company’s consolidated balance sheet. During the first quarter of 2011, the Company redeemed all outstanding notes under this participation.

Debt Repurchases

During the first six months of 2010 and 2011, the Company repurchased outstanding debt as summarized in note 4, “Gain on Sale of Loans and Debt Repurchases.”

11

4.   Gain on Sale of Loans and Debt Repurchases

“Gain on sale of loans and debt repurchases” in the accompanying consolidated statements of income is composed of the following items:
 
 	 	Three months ended June 30, 2011	 	 	Six months ended June 30, 2011	 	
 	 	Notional
amount	 	 	Purchase
price	 	 	Gain	 	 	Notional
amount	 	 	Purchase
price	 	 	Gain	 	
Gains on debt repurchases:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Junior Subordinated Hybrid Securities	 	$	—	 	 	 	—	 	 	 	—	 	 	 	62,558	 	 	 	55,651	 	 	 	6,907	 	
Asset-backed securities (a)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	600	 	 	 	545	 	 	 	55	 	
 	 	$	—	 	 	 	—	 	 	 	—	 	 	 	63,158	 	 	 	56,196	 	 	 	6,962	 	
Gain on sale of loans	 	 	 	 	 	 	 	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	1,345	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gain on sale of loans and debt repurchases, net	 	 	 	 	 	 	 	 	 	$	—	 	 	 	 	 	 	 	 	 	 	$	8,307	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended June 30, 2010	 	 	Six months ended June 30, 2010	 	
 	 	Notional
amount	 	 	Purchase
price	 	 	Gain	 	 	Notional
amount	 	 	Purchase
price	 	 	Gain	 	
Gains on debt repurchases:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Asset-backed securities (a)	 	$	117,775	 	 	 	109,016	 	 	 	8,759	 	 	 	392,025	 	 	 	373,089	 	 	 	18,936	 	

 	(a)	For accounting purposes, the asset-backed securities repurchased by the Company are effectively retired and are not included on the Company’s consolidated balance sheet.  However, as of June 30, 2011, the Company has purchased a cumulative amount of $61.7 million of these securities that remain legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated by the trust estate.  Upon a sale to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale. The par value of these notes ($61.7 million as of June 30, 2011) may not represent market value of such securities.	

5.  Derivative Financial Instruments

The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are interest rate risk and foreign currency exchange risk.

Interest Rate Risk

The Company’s primary market risk exposure arises from fluctuations in its borrowing and lending rates, the spread between which could impact the Company due to shifts in market interest rates. Because the Company generates a significant portion of its earnings from its student loan spread, the interest rate sensitivity of the balance sheet is a key profitability driver.  The Company has adopted a policy of periodically reviewing the mismatch related to the interest rate characteristics of its assets and liabilities together with the Company’s assessment of current and future market conditions. Based on those factors, the Company uses derivative instruments as part of its overall risk management strategy.

Basis Swaps

The Company funds the majority of its student loan assets with one-month or three-month LIBOR indexed floating rate securities. Meanwhile, the interest earned on the Company’s student loan assets is indexed to commercial paper and treasury bill rates. The different interest rate characteristics of the Company’s loan assets and liabilities funding these assets results in basis risk. The Company also faces repricing risk due to the timing of the interest rate resets on its liabilities, which may occur as infrequently as once a quarter, in contrast to the timing of the interest rate resets on its assets, which generally occurs daily. In a declining interest rate environment, this may cause the Company’s student loan spread to compress, while in a rising rate environment, it may cause the spread to increase. As of June 30, 2011, the Company had $22.1 billion and $1.0 billion of FFELP loans indexed to the three-month financial commercial paper rate and the three-month treasury bill rate, respectively, both of which reset daily, and $18.9 billion of debt indexed to three-month LIBOR, which resets quarterly, and $0.7 billion of debt indexed to one-month LIBOR, which resets monthly.

Because of the different indice types and different indice reset frequencies, the Company is exposed to interest rate risk in the form of basis risk and repricing risk, which, as noted above, is the risk that the different indices may reset at different frequencies, or will not move in the same direction or with the same magnitude. While these indices are all short term in nature with rate movements that are highly correlated over a longer period of time, there have been points in recent history when volatility has been high and correlation has been reduced.

The Company has used derivative instruments to hedge both the basis and repricing risk on certain student loans in which the Company earns interest based on a treasury bill rate that resets daily and are funded with debt indexed to primarily three-month LIBOR.  To hedge these loans, the Company has entered into basis swaps in which the Company receives three-month LIBOR set discretely in advance and pays a weekly treasury bill rate plus a spread as defined in the agreement (“T-Bill/LIBOR Basis Swaps”).

12

However, the Company does not generally hedge the basis risk on those assets indexed to the commercial paper rate that are funded with liabilities in which the Company pays primarily on the LIBOR indice, since the derivatives needed to hedge this risk are generally illiquid or non-existent and the relationship between these indices has been highly correlated over a long period of time.

The Company has also used derivative instruments to hedge the repricing risk due to the timing of the interest rate resets on its assets and liabilities.  The Company has entered into basis swaps in which the Company receives three-month LIBOR set discretely in advance and pays one-month LIBOR plus or minus a spread as defined in the agreements (the “1:3 Basis Swaps”).

The following table summarizes the Company’s basis swaps outstanding as of both June 30, 2011 and December 31, 2010:
 
 	 	Notional Amounts	 	
 	 	1:3 Basis Swaps	 	 	T-Bill/LIBOR
Basis Swaps	 	
Maturity							
 	 	 	 	 	 	 	
2011	 	$	-	 	 	 	225,000	 	
2021	 	 	250,000	 	 	 	-	 	
2023	 	 	1,250,000	 	 	 	-	 	
2024	 	 	250,000	 	 	 	-	 	
2028	 	 	100,000	 	 	 	-	 	
2039 (a)	 	 	150,000	 	 	 	-	 	
2040 (b)	 	 	200,000	 	 	 	-	 	
 	 	 	 	 	 	 	 	 	
 	 	$	2,200,000	 	 	 	225,000	 	

 	(a)	This derivative has a forward effective start date in 2015.	

 	(b)	This derivative has a forward effective start date in 2020.	

Interest rate swaps – floor income hedges

FFELP loans originated prior to April 1, 2006 generally earn interest at the higher of a floating rate based on the Special Allowance Payment (or SAP) formula set by the Department and the borrower rate, which is fixed over a period of time. The SAP formula is based on an applicable indice plus a fixed spread that is dependent upon when the loan was originated, the loan’s repayment status, and funding sources for the loan. The Company generally finances its student loan portfolio with variable rate debt. In low and/or declining interest rate environments, when the fixed borrower rate is higher than the rate produced by the SAP formula, the Company’s student loans earn at a fixed rate while the interest on the variable rate debt typically continues to decline. In these interest rate environments, the Company may earn additional spread income that it refers to as floor income.

Depending on the type of loan and when it was originated, the borrower rate is either fixed to term or is reset to an annual rate each July 1. As a result, for loans where the borrower rate is fixed to term, the Company may earn floor income for an extended period of time, which the Company refers to as fixed rate floor income, and for those loans where the borrower rate is reset annually on July 1, the Company may earn floor income to the next reset date, which the Company refers to as variable rate floor income. In accordance with legislation enacted in 2006, lenders are required to rebate fixed rate floor income and variable rate floor income to the Department for all FFELP loans first originated on or after April 1, 2006.

Absent the use of derivative instruments, a rise in interest rates may reduce the amount of floor income received and this may have an impact on earnings due to interest margin compression caused by increasing financing costs, until such time as the federally insured loans earn interest at a variable rate in accordance with their special allowance payment formulas. In higher interest rate environments, where the interest rate rises above the borrower rate and fixed rate loans effectively become variable rate loans, the impact of the rate fluctuations is reduced.

13

As of June 30, 2011 and December 31, 2010, the Company had $9.8 billion and $8.5 billion, respectively, of student loan assets that were earning fixed rate floor income. The following tables summarize the outstanding derivative investments used by the Company to economically hedge these loans.

 	 	As of June 30, 2011	
 	 	 	 	Weighted	
 	 	 	 	average fixed	
 	 	Notional	 	rate paid by	
Maturity	 	Amount	 	the Company (a)	
 	 	 	 	 	 	
2011	 	$	3,300,000	 	0.55	%	
2012	 	 	950,000	 	1.08	 	
2013	 	 	2,150,000	 	0.85	 	
2015	 	 	100,000	 	2.26	 	
2020	 	 	50,000	 	3.23	 	
 	 	 	 	 	 	 	
 	 	$	6,550,000	 	0.77	%	

 	 	As of December 31, 2010	
 	 	 	 	Weighted	
 	 	 	 	average fixed	
 	 	Notional	 	rate paid by	
Maturity	 	Amount	 	the Company (a)	
 	 	 	 	 	 	
2011	 	$	4,300,000	 	0.53	%	
2012	 	 	3,950,000	 	0.67	 	
2013	 	 	650,000	 	1.07	 	
2015	 	 	100,000	 	2.26	 	
2020	 	 	50,000	 	3.23	 	
 	 	 	 	 	 	 	
 	 	$	9,050,000	 	0.66	%	
 (a)
 	For all interest rate derivatives, the Company receives discrete  	

Interest rate swaps – unsecured debt hedges

On September 27, 2006, the Company issued $200.0 million aggregate principal amount of Junior Subordinated Hybrid Securities. As of June 30, 2011, $100.7 million of these notes were outstanding. The interest rate on the Hybrid Securities from the date they were issued through September 28, 2011 is 7.40%, payable semi-annually. Beginning September 29, 2011 through September 29, 2036, the interest rate on the Hybrid Securities will be equal to three-month LIBOR plus 3.375%, payable quarterly. As of both June 30, 2011 and December 31, 2010, the Company had the following derivatives outstanding that were used to effectively convert the future variable interest rate on the Hybrid Securities to a fixed rate.
 
 	 	 	Weighted	
 	 	 	average fixed	
Notional	 	 	rate paid by	
Amount (a)	 	 	the Company (b)	
 	 	 	 	 	 	
$	100,000	 	 	 	4.27	 	%	

 	(a)	The effective start date on $75 million (notional amount) of the derivatives outstanding is March 2012 with a maturity date of September 29, 2036. $25 million (notional amount) of the derivatives outstanding are cancelable on September 29, 2011 at the Company’s discretion. If this one time option to cancel is not exercised by the Company, the maturity date will be September 29, 2036.	

 	(b)	For all interest rate derivatives, the Company receives discrete three-month LIBOR.	

14

Foreign Currency Exchange Risk

During 2006, the Company completed separate debt offerings of student loan asset-backed securities that included €420.5 million and €352.7 million Euro Notes with interest rates based on a spread to the EURIBOR index. As a result of these transactions, the Company is exposed to market risk related to fluctuations in foreign currency exchange rates between the U.S. dollar and Euro. The principal and accrued interest on these notes is re-measured at each reporting period and recorded on the Company’s balance sheet in U.S. dollars based on the foreign currency exchange rate on that date. Changes in the principal and accrued interest amounts as a result of foreign currency exchange rate fluctuations are included in the “derivative market value and foreign currency adjustments and derivative settlements, net” in the Company’s consolidated statements of income.

The Company entered into cross-currency interest rate swaps in connection with the issuance of the Euro Notes. Under the terms of these derivative instrument agreements, the Company receives from a counterparty a spread to the EURIBOR indice based on notional amounts of €420.5 million and €352.7 million and pays a spread to the LIBOR indice based on notional amounts of $500.0 million and $450.0 million, respectively. In addition, under the terms of these agreements, all principal payments on the Euro Notes will effectively be paid at the exchange rate in effect as of the issuance of the notes.

The following table shows the income statement impact as a result of the re-measurement of the Euro Notes and the change in the fair value of the related derivative instruments. These items are included in “derivative market value and foreign currency adjustments and derivative settlements, net” on the accompanying consolidated statements of income.
 
 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
Re-measurement of Euro Notes	 	$	(19,020	)	 	 	93,401	 	 	 	(84,355	)	 	 	165,075	 	
Change in fair value of cross currency interest rate swaps	 	 	18,734	 	 	 	(100,946	)	 	 	81,266	 	 	 	(160,021	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total impact to statements of income - income (expense)	 	$	(286	)	 	 	(7,545	)	 	 	(3,089	)	 	 	5,054	 	

The re-measurement of the Euro-denominated bonds generally correlates with the change in fair value of the cross-currency interest rate swaps. However, the Company will experience unrealized gains or losses related to the cross-currency interest rate swaps if the two underlying indices (and related forward curve) do not move in parallel. Management intends to hold the cross-currency interest rate swaps through the maturity of the Euro-denominated bonds.

Accounting for Derivative Financial Instruments

The Company records derivative instruments on the consolidated balance sheets as either an asset or liability measured at its fair value. Management has structured the majority of the Company’s derivative transactions with the intent that each is economically effective; however, the Company’s derivative instruments do not qualify for hedge accounting.  As a result, the change in fair value of the Company’s derivatives at each reporting date are included in “derivative market value and foreign currency adjustments and derivative settlements, net” in the Company’s consolidated statements of income. Changes or shifts in the forward yield curve and fluctuations in currency rates can significantly impact the valuation of the Company’s derivatives. Accordingly, changes or shifts to the forward yield curve and fluctuations in currency rates will impact the financial position and results of operations of the Company.

Any proceeds received or payments made by the Company to terminate a derivative in advance of its expiration date, or to amend the terms of an existing derivative, are included in “derivative market value and foreign currency adjustments and derivative settlements, net” on the consolidated statements of income and are accounted for as a change in fair value of such derivative. During the three and six months ended June 30, 2011, the Company terminated and/or amended certain derivatives for net payments of $0.4 million and net proceeds of $11.8 million, respectively. During the three and six months ended June 30, 2010, the Company terminated and/or amended certain derivatives for net proceeds of $13.1 million and $14.0 million, respectively.
 
The following table summarizes the fair value of the Company’s derivatives not designated as hedging:

 	 	Fair value of asset derivatives	 	 	Fair value of liability derivatives	 	
 	 	As of June 30, 2011	 	 	As of December 31, 2010	 	 	As of June 30, 2011	 	 	As of December 31, 2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
1:3 basis swaps	 	$	5,477	 	 	 	10,489	 	 	 	470	 	 	 	44	 	
T-Bill/LIBOR basis swaps	 	 	—	 	 	 	—	 	 	 	80	 	 	 	201	 	
Interest rate swaps - floor income hedges	 	 	621	 	 	 	10,569	 	 	 	20,506	 	 	 	15,372	 	
Interest rate swaps - hybrid debt hedges	 	 	166	 	 	 	1,132	 	 	 	1,953	 	 	 	470	 	
Cross-currency interest rate swaps	 	 	176,184	 	 	 	94,918	 	 	 	—	 	 	 	—	 	
Other	 	 	2	 	 	 	1,238	 	 	 	374	 	 	 	2	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	182,450	 	 	 	118,346	 	 	 	23,383	 	 	 	16,089	 	

15

The following table summarizes the effect of derivative instruments in the consolidated statements of income. All gains and losses recognized in income related to the Company’s derivative activity are included in “derivative market value and foreign currency and derivative settlements, net” on the consolidated statements of income.

Derivatives not designated as hedging	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
Settlements:	 	 	 	 	 	 	 	 	 	 	 	 	
1:3 basis swaps	 	$	373	 	 	 	80 	 	 	 	581 	 	 	 	221 	 	
T-Bill/LIBOR basis swaps	 	 	(64	)  	 	 	—	 	 	 	(194	)  	 	 	—	 	
Interest rate swaps - floor income hedges	 	 	(6,345	)  	 	 	(4,286	)  	 	 	(12,563	)  	 	 	(8,142	)  	
Interest rate swaps - hybrid debt hedges	 	 	(248	)  	 	 	(79	)  	 	 	(494	)  	 	 	(79	)  	
Cross-currency interest rate swaps	 	 	2,770 	 	 	 	917 	 	 	 	4,880 	 	 	 	2,219 	 	
Other	 	 	(8	)  	 	 	(9	)  	 	 	116 	 	 	 	(19	)  	
   Total settlements - (expense) income	 	 	(3,522	)  	 	 	(3,377	)  	 	 	(7,674	)  	 	 	(5,800	)  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in fair value:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
1:3 basis swaps	 	 	(1,228	)  	 	 	6,300 	 	 	 	(5,438	)  	 	 	5,754 	 	
T-Bill/LIBOR basis swaps	 	 	92 	 	 	 	190 	 	 	 	121 	 	 	 	236 	 	
Interest rate swaps - floor income hedges	 	 	(11,109	)  	 	 	(9	)  	 	 	(4,714	)  	 	 	(7,548	)  	
Interest rate swaps - hybrid debt hedges	 	 	(3,897	)  	 	 	(5,377	)  	 	 	(2,449	)  	 	 	(5,321	)  	
Cross-currency interest rate swaps	 	 	18,734 	 	 	 	(100,946	)  	 	 	81,266 	 	 	 	(160,021	)  	
Other	 	 	(385	)  	 	 	(790	)  	 	 	(128	)  	 	 	(1,301	)  	
   Total change in fair value - (expense) income	 	 	2,207 	 	 	 	(100,632	)  	 	 	68,658 	 	 	 	(168,201	)  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Re-measurement of Euro Notes (foreign currency transaction adjustment) - (expense) income	 	 	(19,020	)  	 	 	93,401 	 	 	 	(84,355	)  	 	 	165,075 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value and foreign currency adjustments and derivative settlements - (expense) income	 	$	(20,335	)	 	 	(10,608	)  	 	 	(23,371	)  	 	 	(8,926	)  	

Derivative Instruments - Credit and Market Risk

By using derivative instruments, the Company is exposed to credit and market risk.

When the fair value of a derivative instrument is negative (a liability on the Company’s balance sheet), the Company would owe the counterparty if the derivative was settled and, therefore, has no immediate credit risk.  Additionally, if the negative fair value of derivatives with a counterparty exceeds a specified threshold, the Company may have to make a collateral deposit with the counterparty. The threshold at which the Company posts collateral is dependent upon the Company’s unsecured credit rating.  If the Company’s credit ratings are downgraded from current levels or if interest and foreign currency exchange rates move materially, the Company could be required to deposit a significant amount of collateral with its derivative instrument counterparties. The collateral deposits, if significant, could negatively impact the Company’s liquidity and capital resources. As of June 30, 2011, the Company had $22.3 million posted as collateral to derivative counterparties, which is included in “restricted cash and investments” in the Company’s consolidated balance sheet. The Company does not use the collateral to offset fair value amounts recognized in the financial statements for derivative instruments.

When the fair value of a derivative contract is positive (an asset on the Company’s balance sheet), this generally indicates that the counterparty would owe the Company if the derivative was settled. If the counterparty fails to perform, credit risk with such counterparty is equal to the extent of the fair value gain in the derivative less any collateral held by the Company. If the Company was unable to collect from a counterparty, it would have a loss equal to the amount the derivative is recorded on the consolidated balance sheet. As of June 30, 2011, the trustee for the Company’s asset-backed securities transactions held $167.5 million of collateral from the counterparty on the cross-currency interest rate swaps. The Company considers counterparties’ credit risk when determining the fair value of derivative positions on its exposure net of collateral. However, the Company does not use the collateral to offset fair value amounts recognized in the financial statements for derivative instruments.

The Company attempts to manage market and credit risks associated with interest and foreign currency exchange rates by establishing and monitoring limits as to the types and degree of risk that may be undertaken and by entering into transactions with high-quality counterparties that are reviewed periodically by the Company’s risk committee. As of June 30, 2011, all of the Company’s derivative counterparties had investment grade credit ratings. The Company also has a policy of requiring that all derivative contracts be governed by an International Swaps and Derivatives Association, Inc. Master Agreement.

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6.    Investments

Included in “investments – trading securities” on the consolidated balance sheets as of June 30, 2011 and December 31, 2010 are debt and equity securities that are bought and held principally for the purpose of selling them in the near term. These investments are classified as trading securities and reported at fair value.

In December 2010, Union Bank established various trusts whereby Union Bank serves as trustee for the purpose of purchasing, holding, managing, and selling investments in student loan asset backed securities.  Union Bank, in its individual capacity, and the Company have both invested money into the trusts.  As of June 30, 2011 and December 31, 2010, the Company had $17.7 million and $4.9 million, respectively,  invested in the trusts. The Company’s investments held in the trusts are included in “investments – trading securities” on the consolidated balance sheets.

Prior to May 1, 2011, the Company and Union Bank employed certain individuals as dual employees and such employees provided consulting and advisory services to Union Bank as trustee for these trusts, and Union Bank agreed to pay the Company for the share of such employees’ salary and payroll based on the value of such services rendered as well as the loss of value of such dual employees’ services to the Company.  On May 9, 2011, a subsidiary of the Company entered into a management agreement with Union Bank, effective as of May 1, 2011, under which the subsidiary performs various advisory and management services on behalf of Union Bank with respect to investments in securities by the trusts, including identifying securities for purchase or sale by the trusts.  The agreement provides that Union Bank will pay to the subsidiary annual fees of 25 basis points on the outstanding balance of the investments in the trusts.  As of June 30, 2011, the outstanding balance of investments in the trusts was $279.5 million.  In addition, Union Bank will pay additional fees to the subsidiary of 50% of the gains from the sale of securities from the trusts.  During the three month period ended June 30, 2011, the Company recognized $1.2 million of fee revenue related to this agreement which is included in “other income” in the accompanying consolidated statement of income.

7.    Intangible Assets

Intangible assets consist of the following:

 	 	Weighted	 	 	 	 	 	 	 	
 	 	average	 	 	 	 	 	 	 	
 	 	remaining	 	 	 	 	 	 	 	
 	 	useful life as of	 	 	As of	 	 	As of	 	
 	 	June 30,	 	 	June 30,	 	 	December 31,	 	
 	 	2011 (months)	 	 	2011	 	 	2010	 	
Amortizable intangible assets:	 	 	 	 	 	 	
Customer relationships (net of accumulated amortization of $55,199 and $49,743, respectively)	 	 	64	 	 	$	29,907	 	 	 	28,576	 	
Computer software (net of accumulated amortization of $3,739 and $2,419, respectively)	 	 	19	 	 	 	4,179	 	 	 	5,499	 	
Trade names (net of accumulated amortization of $8,115 and $6,956, respectively)	 	 	18	 	 	 	3,478	 	 	 	4,637	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total - amortizable intangible assets	 	 	54	 	 	$	37,564	 	 	 	38,712	 	

The Company recorded amortization expense on its intangible assets of $4.0 million and $6.2 million for the three months ended June 30, 2011 and 2010, respectively, and $­­­7.9 million and $12.7 million for the six months ended June 30, 2011 and 2010, respectively. The Company will continue to amortize intangible assets over their remaining useful lives.  As of June 30, 2011, the Company estimates it will record amortization expense as follows:
 
2011 (July 1 - December 31)	 	$	8,981	 	
2012	 	 	17,531	 	
2013	 	 	4,286	 	
2014	 	 	2,429	 	
2015	 	 	925	 	
2016 and thereafter	 	 	3,412	 	
 	 	$	37,564	 	

During the first quarter of 2010, the Company purchased certain assets of a software company that constituted a business combination.  The initial consideration paid by the Company was $3.0 million in cash.  In addition to the initial purchase price, additional payments are to be made by the Company based on certain operating results as defined in the purchase agreement.  These contingent payments are payable in two additional annual installments due in March 2012 and March 2013 and in total are estimated by the Company, as of June 30, 2011, to be $3.5 million.  The contingent payments will be remeasured to fair value each reporting date until the contingency is resolved, with all changes in fair value being recognized in earnings. Substantially all of the purchase price was allocated to a computer software intangible asset that is being amortized over three years.
 
On June 30, 2011, the Company purchased contracts with more than 370 K–12 schools to provide tuition payment plan services.  The initial consideration paid by the Company was $6.9 million in cash.  The purchase price is subject to adjustment based on customer retention.  The adjustment to purchase price, if any, will occur on September 30, 2011 and May 31, 2012.  Substantially all of the purchase price was allocated to a customer relationship intangible asset that is being amortized over three years.

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8.    Goodwill

The following table summarizes the Company’s allocation of goodwill by operating segment as of June 30, 2011 and December 31, 2010:

Student Loan and Guaranty Servicing	 	$	8,596	 	
Tuition Payment Processing and Campus Commerce	 	 	58,086	 	
Enrollment Services	 	 	8,553	 	
Asset Generation and Management	 	 	41,883	 	
 	 	$	117,118	 	

9.    Shareholders’ Equity

Dividends

Dividends of $0.07 and $0.10 per share on the Company’s Class A and Class B common stock were paid on March 15, 2011 and June 15, 2011, respectively, to all holders of record as of March 1, 2011, and June 1, 2011, respectively. In addition, a $0.10 per share dividend on the Company’s Class A and Class B common stock will be paid on September 15, 2011 to all holders of record as of September 1, 2011.

Contingent Consideration - infiNET Integrated Solutions, Inc. (“infiNET”)

In 2004, the Company purchased 50% of the stock of infiNET and, in 2006, purchased the remaining 50% of infiNET’s stock. infiNET provides software for customer-focused electronic transactions, information sharing, and electronic account and bill presentment for colleges and universities. Consideration for the purchase of the remaining 50% of the stock of infiNET included 95,380 restricted shares of the Company’s Class A common stock. The purchase agreement provided that the 95,380 shares of Class A common stock issued in the acquisition were subject to stock price guaranty provisions whereby if on or about February 28, 2011 the average market trading price of the Class A common stock was less than $104.8375 per share and had not exceeded that price for any 25 consecutive trading days during the 5-year period from the closing of the acquisition to February 28, 2011, then the Company was required to pay additional cash to the sellers of infiNET for each share of Class A common stock issued in an amount representing the difference between $104.8375 less the greater of $41.9335 or the gross sales price such seller obtained from a sale of the shares occurring subsequent to February 28, 2011. On February 28, 2011, the Company paid $5.9 million in cash to satisfy this obligation. This payment was recorded by the Company as a reduction to additional paid-in capital.

10.  Earnings per Common Share

Presented below is a summary of the components used to calculate basic and diluted earnings per share. The Company applies the two-class method of computing earnings per share, which requires the calculation of separate earnings per share amounts for unvested share-based awards and for common stock. Unvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. Earnings per share attributable to common stock is shown in the table below.

A reconciliation of weighted average shares outstanding follows:
 
 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
Net income attributable to Nelnet, Inc.	 	$	37,125	 	 	 	49,993	 	 	 	92,005	 	 	 	104,315	 	
Less earnings allocated to holders of unvested restricted stock	 	 	226	 	 	 	315	 	 	 	570	 	 	 	653	 	
Net income available to common stockholders	 	$	36,899	 	 	 	49,678	 	 	 	91,435	 	 	 	103,662	 	
Weighted average common shares outstanding - basic	 	 	48,302,779	 	 	 	49,735,398	 	 	 	48,237,411	 	 	 	49,726,099	 	
Dilutive effect of the assumed vesting of restricted stock awards	 	 	185,267	 	 	 	199,250	 	 	 	188,475	 	 	 	197,581	 	
Weighted average common shares outstanding - diluted	 	 	48,488,046	 	 	 	49,934,648	 	 	 	48,425,886	 	 	 	49,923,680	 	
Basic earnings per common share	 	$	0.76	 	 	 	1.00	 	 	 	1.90	 	 	 	2.08	 	
Diluted earnings per common share	 	$	0.76	 	 	 	0.99	 	 	 	1.89	 	 	 	2.08	 	

There were no shares that were antidilutive and not included in average shares outstanding for the diluted earnings per share calculation.

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11.    Segment Reporting

The Company earns fee-based revenue through its Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, and Enrollment Services operating segments. In addition, the Company earns net interest income on its student loan portfolio in its Asset Generation and Management operating segment. The Company’s operating segments are defined by the products and services they offer and the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management.

The accounting policies of the Company’s operating segments are the same as those described in note 2 in the notes to the consolidated financial statements included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2010. Intersegment revenues are charged by a segment to another segment that provides the product or service.  Intersegment revenues and expenses are included within each segment consistent with the income statement presentation provided to management.  Changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial information. The Company allocates certain corporate overhead expenses to the individual operating segments.  These expenses include certain corporate activities related to executive management, human resources, accounting, legal, occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and services.

The management reporting process measures the performance of the Company’s operating segments based on the management structure of the Company as well as the methodology used by management to evaluate performance and allocate resources.  Management, including the Company’s chief operating decision maker, evaluates the performance of the Company’s operating segments based on their profitability.  As discussed further below, management measures the profitability of the Company’s operating segments based on “base net income.”  Accordingly, information regarding the Company’s operating segments is provided based on “base net income.”  The Company’s “base net income” is not a defined term within generally accepted accounting principles (“GAAP”) and may not be comparable to similarly titled measures reported by other companies.  Unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting.

Fee-Based Operating Segments

Student Loan and Guaranty Servicing

The following are the primary product and service offerings the Company offers as part of its Student Loan and Guaranty Servicing segment:

 	·	Servicing of FFELP loans	
 	·	Origination and servicing of non-federally insured student loans	
 	·	Servicing federally-owned student loans for the Department of Education	
 	·	Servicing and support outsourcing for guaranty agencies	
 	·	Student loan servicing software and other information technology products and services	

The Student Loan and Guaranty Servicing operating segment provides for the servicing of the Company’s student loan portfolios and the portfolios of third parties. The loan servicing activities include loan origination activities, loan conversion activities, application processing, borrower updates, payment processing, due diligence procedures, funds management reconciliations, and claim processing. These activities are performed internally for the Company’s portfolio in addition to generating external fee revenue when performed for third party clients.

In June 2009, the Department of Education named the Company as one of four private sector companies awarded a servicing contract to service federally-owned student loans. In September 2009, the Company began servicing loans under this contract. The contract spans five years with one five-year renewal at the option of the Department.

This operating segment also provides servicing activities for guarantee agencies. These activities include providing software and data center services, borrower and loan updates, default aversion tracking services, claim processing services, and post-default collection services.

This operating segment also develops student loan servicing software, which is used internally by the Company and also licensed to third party student loan holders and servicers. In addition, this operating segment provides information technology products and services with core areas of business in educational loan software solutions, technical consulting services, and Enterprise content management solutions.

Tuition Payment Processing and Campus Commerce

The Company’s Tuition Payment Processing and Campus Commerce operating segment provides products and services to help students and families manage the payment of education costs at all levels (K-12 and higher education).  It also provides innovative education-focused technologies, services, and support solutions to help schools with the everyday challenges of collecting and processing commerce data.

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In the K-12 market, the Company offers actively managed tuition payment plans as well as assistance with financial needs assessment, enrollment management, and donor management. The Company offers two principal products to the higher education market: actively managed tuition payment plans and campus commerce technologies and payment processing.

Enrollment Services

The Enrollment Services operating segment offers products and services that are focused on helping colleges recruit and retain students (interactive and list marketing services) and helping students plan and prepare for life after high school (publishing services and resource centers). Interactive marketing products and services include agency of record services, qualified inquiry generation, pay per click, and other marketing management, along with school operations consulting and call center solutions. The majority of interactive marketing revenue is derived from fees which are earned through the delivery of qualified inquiries or clicks provided to colleges and universities. List marketing services include providing lists to help higher education institutions and businesses reach the middle school, high school, college bound high school, college, and young adult market places. Publishing services include test preparation study guides, school directories and databases, and career exploration guides.  Resource centers include online courses, scholarship search and selection data, career planning, and on-line information about colleges and universities.

Asset Generation and Management Operating Segment

The Asset Generation and Management Operating Segment includes the acquisition, management, and ownership of the Company’s student loan assets, which has historically been the Company’s largest product and service offering. The Company generates a substantial portion of its earnings from the spread, referred to as the Company’s student loan spread, between the yield it receives on its student loan portfolio and the associated costs to finance such portfolio. The student loan assets are held in a series of education lending subsidiaries designed specifically for this purpose. In addition to the student loan spread earned on its portfolio, all costs and activity associated with managing the portfolio, such as servicing of the assets and debt maintenance are included in this segment.

As a result of legislation (the Reconciliation Act of 2010), effective July 1, 2010, all new federal loan originations are made through the Direct Loan Program and the Company no longer originates FFELP loans. This legislation does not alter or affect the terms and conditions of existing FFELP loans.

Corporate Activity and Overhead

Corporate Activity and Overhead includes the following items:

 	·	Income earned on certain investment activities	
 	·	Interest expense incurred on unsecured debt transactions	
 	·	Other products and service offerings that are not considered operating segments	

Corporate Activities also includes certain corporate activities and overhead functions related to executive management, human resources, accounting and finance, legal, and marketing. Beginning in 2010, these costs were allocated to each operating segment based on estimated use of such activities and services.

Segment Operating Results – “Base Net Income”

The tables below include the operating results of each of the Company’s operating segments. Management, including the chief operating decision maker, evaluates the Company on certain non-GAAP performance measures that the Company refers to as “base net income” for each operating segment. While “base net income” is not a substitute for reported results under GAAP, the Company relies on “base net income” to manage each operating segment because it believes this measure provides additional information regarding the operational and performance indicators that are most closely assessed by management.

“Base net income” is the primary financial performance measure used by management to develop the Company’s financial plans, track results, and establish corporate performance targets and incentive compensation. Management believes this information provides additional insight into the financial performance of the core business activities of the Company’s operating segments. Accordingly, the tables presented below reflect “base net income,” which is the operating measure reviewed and utilized by management to manage the business. Reconciliations of the segment totals to the Company’s operating results in accordance with GAAP are also included in the tables below.

Income Taxes

For segment reporting, income taxes are applied based on 38% of income (loss) before taxes for each individual operating segment. The difference between the consolidated income tax expense and the sum of taxes calculated for each operating segment is included in income taxes in Corporate Activity and Overhead.

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Reclassifications

Certain amounts previously reported within operating expenses have been reclassified to conform to the current period presentation. These reclassifications had no effect on any of the segments’ net income or assets and liabilities.

Segment Results and Reconciliations to GAAP

 	 	Three months ended June 30, 2011	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Tuition	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	 	Payment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Loan	 	 	Processing	 	 	 	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	and
Guaranty	 	 	and
Campus	 	 	Enrollment	 	 	Total Fee-	 	 	Generation and	 	 	Activity
and	 	 	 	 	 	Base Net	 	 	Adjustments
to GAAP	 	 	GAAP
Results of	 	
 	 	Servicing	 	 	Commerce	 	 	Services	 	 	Based	 	 	Management	 	 	Overhead	 	 	Eliminations	 	 	Income	 	 	Results	 	 	Operations	 	

Total interest income	 	$	12	 	 	 	2	 	 	 	—	 	 	 	14	 	 	 	139,284	 	 	 	1,147	 	 	 	(655	)	 	 	139,790	 	 	 	—	 	 	 	139,790	 	
Interest expense	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	49,269	 	 	 	2,440	 	 	 	(655	)	 	 	51,054	 	 	 	—	 	 	 	51,054	 	
Net interest income (loss)	 	 	12	 	 	 	2	 	 	 	—	 	 	 	14	 	 	 	90,015	 	 	 	(1,293	)	 	 	—	 	 	 	88,736	 	 	 	—	 	 	 	88,736	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	5,250	 	 	 	—	 	 	 	—	 	 	 	5,250	 	 	 	—	 	 	 	5,250	 	
Net interest income (loss) after provision for loan losses	 	 	12	 	 	 	2	 	 	 	—	 	 	 	14	 	 	 	84,765	 	 	 	(1,293	)	 	 	—	 	 	 	83,486	 	 	 	—	 	 	 	83,486	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing revenue	 	 	37,389	 	 	 	—	 	 	 	—	 	 	 	37,389	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	37,389	 	 	 	—	 	 	 	37,389	 	
Intersegment servicing revenue	 	 	16,793	 	 	 	—	 	 	 	—	 	 	 	16,793	 	 	 	—	 	 	 	—	 	 	 	(16,793	)	 	 	—	 	 	 	—	 	 	 	—	 	
Tuition payment processing and campus commerce revenue	 	 	—	 	 	 	14,761	 	 	 	—	 	 	 	14,761	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	14,761	 	 	 	—	 	 	 	14,761	 	
Enrollment services revenue	 	 	—	 	 	 	—	 	 	 	32,315	 	 	 	32,315	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	32,315	 	 	 	—	 	 	 	32,315	 	
Software services revenue	 	 	4,346	 	 	 	—	 	 	 	—	 	 	 	4,346	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	4,346	 	 	 	—	 	 	 	4,346	 	
Other income	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	3,997	 	 	 	2,829	 	 	 	—	 	 	 	6,826	 	 	 	—	 	 	 	6,826	 	
Gain on sale of loans and debt repurchases	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Derivative market value and foreign currency adjustments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(16,813	)	 	 	(16,813	)	
Derivative settlements, net	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(3,274	)	 	 	(248	)	 	 	—	 	 	 	(3,522	)	 	 	—	 	 	 	(3,522	)	
Total other income (expense)	 	 	58,528	 	 	 	14,761	 	 	 	32,315	 	 	 	105,604	 	 	 	723	 	 	 	2,581	 	 	 	(16,793	)	 	 	92,115	 	 	 	(16,813	)	 	 	75,302	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	24,731	 	 	 	7,249	 	 	 	5,931	 	 	 	37,911	 	 	 	709	 	 	 	4,261	 	 	 	—	 	 	 	42,881	 	 	 	—	 	 	 	42,881	 	
Cost to provide enrollment services	 	 	—	 	 	 	—	 	 	 	22,140	 	 	 	22,140	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	22,140	 	 	 	—	 	 	 	22,140	 	
Depreciation and amortization	 	 	1,336	 	 	 	345	 	 	 	780	 	 	 	2,461	 	 	 	—	 	 	 	349	 	 	 	—	 	 	 	2,810	 	 	 	3,959	 	 	 	6,769	 	
Restructure expense	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Other	 	 	14,605	 	 	 	2,327	 	 	 	2,442	 	 	 	19,374	 	 	 	5,139	 	 	 	4,254	 	 	 	—	 	 	 	28,767	 	 	 	—	 	 	 	28,767	 	
Intersegment expenses, net	 	 	1,060	 	 	 	1,118	 	 	 	959	 	 	 	3,137	 	 	 	17,047	 	 	 	(3,391	)	 	 	(16,793	)	 	 	—	 	 	 	—	 	 	 	—	 	
Total operating expenses	 	 	41,732	 	 	 	11,039	 	 	 	32,252	 	 	 	85,023	 	 	 	22,895	 	 	 	5,473	 	 	 	(16,793	)	 	 	96,598	 	 	 	3,959	 	 	 	100,557	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes and corporate overhead allocation	 	 	16,808	 	 	 	3,724	 	 	 	63	 	 	 	20,595	 	 	 	62,593	 	 	 	(4,185	)	 	 	—	 	 	 	79,003	 	 	 	(20,772	)	 	 	58,231	 	
Corporate overhead allocation	 	 	(1,233	)	 	 	(411	)	 	 	(411	)	 	 	(2,055	)	 	 	(2,054	)	 	 	4,109	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Income (loss) before income taxes	 	 	15,575	 	 	 	3,313	 	 	 	(348	)	 	 	18,540	 	 	 	60,539	 	 	 	(76	)	 	 	—	 	 	 	79,003	 	 	 	(20,772	)	 	 	58,231	 	
Income tax (expense) benefit	 	 	(5,917	)	 	 	(1,259	)	 	 	132	 	 	 	(7,044	)	 	 	(23,412	)	 	 	1,457	 	 	 	—	 	 	 	(28,999	)	 	 	7,893	 	 	 	(21,106	)	
Net income (loss)	 	$	9,658	 	 	 	2,054	 	 	 	(216	)	 	 	11,496	 	 	 	37,127	 	 	 	1,381	 	 	 	—	 	 	 	50,004	 	 	 	(12,879	)	 	 	37,125	 	

21

 
  	 	Three months ended June 30, 2010	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Tuition	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	 	Payment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Loan	 	 	Processing	 	 	 	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	and
Guaranty	 	 	and
Campus	 	 	Enrollment	 	 	Total
Fee-	 	 	Generation
and	 	 	Activity
and	 	 	 	 	 	Base Net	 	 	Adjustments
to GAAP	 	 	GAAP
Results of	 	
 	 	Servicing	 	 	Commerce	 	 	Services	 	 	Based	 	 	Management	 	 	Overhead	 	 	Eliminations	 	 	Income	 	 	Results	 	 	Operations	 	

Total interest income	 	$	17	 	 	 	4	 	 	 	—	 	 	 	21	 	 	 	155,701	 	 	 	1,922	 	 	 	(987	)	 	 	156,657	 	 	 	—	 	 	 	156,657	 	
Interest expense	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	54,105	 	 	 	6,125	 	 	 	(987	)	 	 	59,243	 	 	 	—	 	 	 	59,243	 	
Net interest income (loss)	 	 	17	 	 	 	4	 	 	 	—	 	 	 	21	 	 	 	101,596	 	 	 	(4,203	)	 	 	—	 	 	 	97,414	 	 	 	—	 	 	 	97,414	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	6,200	 	 	 	—	 	 	 	—	 	 	 	6,200	 	 	 	—	 	 	 	6,200	 	
Net interest income (loss) after provision for loan losses	 	 	17	 	 	 	4	 	 	 	—	 	 	 	21	 	 	 	95,396	 	 	 	(4,203	)	 	 	—	 	 	 	91,214	 	 	 	—	 	 	 	91,214	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing revenue	 	 	36,652	 	 	 	—	 	 	 	—	 	 	 	36,652	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	36,652	 	 	 	—	 	 	 	36,652	 	
Intersegment servicing revenue	 	 	21,969	 	 	 	—	 	 	 	—	 	 	 	21,969	 	 	 	—	 	 	 	—	 	 	 	(21,969	)	 	 	—	 	 	 	—	 	 	 	—	 	
Tuition payment processing and campus commerce revenue	 	 	—	 	 	 	12,795	 	 	 	—	 	 	 	12,795	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	12,795	 	 	 	—	 	 	 	12,795	 	
Enrollment services revenue	 	 	—	 	 	 	—	 	 	 	35,403	 	 	 	35,403	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	35,403	 	 	 	—	 	 	 	35,403	 	
Software services revenue	 	 	5,499	 	 	 	—	 	 	 	—	 	 	 	5,499	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	5,499	 	 	 	—	 	 	 	5,499	 	
Other income	 	 	295	 	 	 	—	 	 	 	—	 	 	 	295	 	 	 	4,636	 	 	 	3,565	 	 	 	—	 	 	 	8,496	 	 	 	—	 	 	 	8,496	 	
Gain on sale of loans and debt repurchases	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	8,759	 	 	 	—	 	 	 	—	 	 	 	8,759	 	 	 	—	 	 	 	8,759	 	
Derivative market value and foreign currency adjustments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(7,231	)	 	 	(7,231	)	
Derivative settlements, net	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(3,377	)	 	 	—	 	 	 	—	 	 	 	(3,377	)	 	 	—	 	 	 	(3,377	)	
Total other income (expense)	 	 	64,415	 	 	 	12,795	 	 	 	35,403	 	 	 	112,613	 	 	 	10,018	 	 	 	3,565	 	 	 	(21,969	)	 	 	104,227	 	 	 	(7,231	)	 	 	96,996	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	23,327	 	 	 	6,594	 	 	 	6,447	 	 	 	36,368	 	 	 	1,286	 	 	 	3,808	 	 	 	(500	)	 	 	40,962	 	 	 	—	 	 	 	40,962	 	
Cost to provide enrollment services	 	 	—	 	 	 	—	 	 	 	24,111	 	 	 	24,111	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	24,111	 	 	 	—	 	 	 	24,111	 	
Depreciation and amortization	 	 	1,157	 	 	 	339	 	 	 	1,616	 	 	 	3,112	 	 	 	—	 	 	 	384	 	 	 	—	 	 	 	3,496	 	 	 	6,232	 	 	 	9,728	 	
Restructure expense	 	 	84	 	 	 	—	 	 	 	—	 	 	 	84	 	 	 	—	 	 	 	(12	)	 	 	—	 	 	 	72	 	 	 	—	 	 	 	72	 	
Other	 	 	18,668	 	 	 	2,272	 	 	 	2,449	 	 	 	23,389	 	 	 	2,992	 	 	 	6,967	 	 	 	—	 	 	 	33,348	 	 	 	—	 	 	 	33,348	 	
Intersegment expenses, net	 	 	1,149	 	 	 	879	 	 	 	641	 	 	 	2,669	 	 	 	21,891	 	 	 	(3,091	)	 	 	(21,469	)	 	 	—	 	 	 	—	 	 	 	—	 	
Total operating expenses	 	 	44,385	 	 	 	10,084	 	 	 	35,264	 	 	 	89,733	 	 	 	26,169	 	 	 	8,056	 	 	 	(21,969	)	 	 	101,989	 	 	 	6,232	 	 	 	108,221	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes and corporate overhead allocation	 	 	20,047	 	 	 	2,715	 	 	 	139	 	 	 	22,901	 	 	 	79,245	 	 	 	(8,694	)	 	 	—	 	 	 	93,452	 	 	 	(13,463	)	 	 	79,989	 	
Corporate overhead allocation	 	 	(1,484	)	 	 	(495	)	 	 	(495	)	 	 	(2,474	)	 	 	(2,473	)	 	 	4,947	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Income (loss) before income taxes	 	 	18,563	 	 	 	2,220	 	 	 	(356	)	 	 	20,427	 	 	 	76,772	 	 	 	(3,747	)	 	 	—	 	 	 	93,452	 	 	 	(13,463	)	 	 	79,989	 	
Income tax (expense) benefit	 	 	(7,053	)	 	 	(844	)	 	 	135	 	 	 	(7,762	)	 	 	(29,173	)	 	 	1,823	 	 	 	—	 	 	 	(35,112	)	 	 	5,116	 	 	 	(29,996	)	
Net income (loss)	 	$	11,510	 	 	 	1,376	 	 	 	(221	)	 	 	12,665	 	 	 	47,599	 	 	 	(1,924	)	 	 	—	 	 	 	58,340	 	 	 	(8,347	)	 	 	49,993	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Additional information:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	11,510	 	 	 	1,376	 	 	 	(221	)	 	 	12,665	 	 	 	47,599	 	 	 	(1,924	)	 	 	—	 	 	 	58,340	 	 	 	(8,347	)	 	 	49,993	 	
Plus: Restructure expense (a)	 	 	84	 	 	 	—	 	 	 	—	 	 	 	84	 	 	 	—	 	 	 	(12	)	 	 	—	 	 	 	72	 	 	 	(72	)	 	 	—	 	
Less: Net tax effect	 	 	(32	)	 	 	—	 	 	 	—	 	 	 	(32	)	 	 	—	 	 	 	5	 	 	 	—	 	 	 	(27	)	 	 	27	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss), excluding restructure expense	 	$	11,562	 	 	 	1,376	 	 	 	(221	)	 	 	12,717	 	 	 	47,599	 	 	 	(1,931	)	 	 	—	 	 	 	58,385	 	 	 	(8,392	)	 	 	49,993	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(a) During the second quarter of 2010, the Company recorded restructuring charges associated with previously implemented restructuring plans.	 	

22

 
 
 	 	Six months ended June 30, 2011	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Tuition	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	 	Payment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Loan	 	 	Processing	 	 	 	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	and
Guaranty	 	 	and
Campus	 	 	Enrollment	 	 	Total
Fee-	 	 	Generation
and	 	 	Activity
and	 	 	 	 	 	Base Net	 	 	Adjustments
to GAAP	 	 	GAAP
Results of	 	
 	 	Servicing	 	 	Commerce	 	 	Services	 	 	Based	 	 	Management	 	 	Overhead	 	 	Eliminations	 	 	Income	 	 	Results	 	 	Operations	 	

Total interest income	 	$	27	 	 	 	8	 	 	 	—	 	 	 	35	 	 	 	276,923	 	 	 	2,293	 	 	 	(1,377	)	 	 	277,874	 	 	 	—	 	 	 	277,874	 	
Interest expense	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	98,985	 	 	 	5,753	 	 	 	(1,377	)	 	 	103,361	 	 	 	—	 	 	 	103,361	 	
Net interest income (loss)	 	 	27	 	 	 	8	 	 	 	—	 	 	 	35	 	 	 	177,938	 	 	 	(3,460	)	 	 	—	 	 	 	174,513	 	 	 	—	 	 	 	174,513	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	9,000	 	 	 	—	 	 	 	—	 	 	 	9,000	 	 	 	—	 	 	 	9,000	 	
Net interest income (loss) after provision for loan losses	 	 	27	 	 	 	8	 	 	 	—	 	 	 	35	 	 	 	168,938	 	 	 	(3,460	)	 	 	—	 	 	 	165,513	 	 	 	—	 	 	 	165,513	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing revenue	 	 	73,025	 	 	 	—	 	 	 	—	 	 	 	73,025	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	73,025	 	 	 	—	 	 	 	73,025	 	
Intersegment servicing revenue	 	 	34,650	 	 	 	—	 	 	 	—	 	 	 	34,650	 	 	 	—	 	 	 	—	 	 	 	(34,650	)	 	 	—	 	 	 	—	 	 	 	—	 	
Tuition payment processing and campus commerce revenue	 	 	—	 	 	 	34,130	 	 	 	—	 	 	 	34,130	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	34,130	 	 	 	—	 	 	 	34,130	 	
Enrollment services revenue	 	 	—	 	 	 	—	 	 	 	66,183	 	 	 	66,183	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	66,183	 	 	 	—	 	 	 	66,183	 	
Software services revenue	 	 	9,123	 	 	 	—	 	 	 	—	 	 	 	9,123	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	9,123	 	 	 	—	 	 	 	9,123	 	
Other income	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	8,133	 	 	 	5,185	 	 	 	—	 	 	 	13,318	 	 	 	—	 	 	 	13,318	 	
Gain on sale of loans and debt repurchases	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	1,400	 	 	 	6,907	 	 	 	—	 	 	 	8,307	 	 	 	—	 	 	 	8,307	 	
Derivative market value and foreign currency adjustments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(15,697	)	 	 	(15,697	)	
Derivative settlements, net	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(7,312	)	 	 	(362	)	 	 	—	 	 	 	(7,674	)	 	 	—	 	 	 	(7,674	)	
Total other income (expense)	 	 	116,798	 	 	 	34,130	 	 	 	66,183	 	 	 	217,111	 	 	 	2,221	 	 	 	11,730	 	 	 	(34,650	)	 	 	196,412	 	 	 	(15,697	)	 	 	180,715	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	50,119	 	 	 	14,401	 	 	 	12,188	 	 	 	76,708	 	 	 	1,487	 	 	 	8,598	 	 	 	—	 	 	 	86,793	 	 	 	—	 	 	 	86,793	 	
Cost to provide enrollment services	 	 	—	 	 	 	—	 	 	 	44,979	 	 	 	44,979	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	44,979	 	 	 	—	 	 	 	44,979	 	
Depreciation and amortization	 	 	2,642	 	 	 	681	 	 	 	1,593	 	 	 	4,916	 	 	 	—	 	 	 	694	 	 	 	—	 	 	 	5,610	 	 	 	7,935	 	 	 	13,545	 	
Restructure expense	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Other	 	 	29,184	 	 	 	4,961	 	 	 	4,760	 	 	 	38,905	 	 	 	6,677	 	 	 	9,290	 	 	 	—	 	 	 	54,872	 	 	 	—	 	 	 	54,872	 	
Intersegment expenses, net	 	 	2,429	 	 	 	2,211	 	 	 	1,777	 	 	 	6,417	 	 	 	35,194	 	 	 	(6,961	)	 	 	(34,650	)	 	 	—	 	 	 	—	 	 	 	—	 	
Total operating expenses	 	 	84,374	 	 	 	22,254	 	 	 	65,297	 	 	 	171,925	 	 	 	43,358	 	 	 	11,621	 	 	 	(34,650	)	 	 	192,254	 	 	 	7,935	 	 	 	200,189	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes and corporate overhead allocation	 	 	32,451	 	 	 	11,884	 	 	 	886	 	 	 	45,221	 	 	 	127,801	 	 	 	(3,351	)	 	 	—	 	 	 	169,671	 	 	 	(23,632	)	 	 	146,039	 	
Corporate overhead allocation	 	 	(1,986	)	 	 	(662	)	 	 	(662	)	 	 	(3,310	)	 	 	(3,309	)	 	 	6,619	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Income (loss) before income taxes	 	 	30,465	 	 	 	11,222	 	 	 	224	 	 	 	41,911	 	 	 	124,492	 	 	 	3,268	 	 	 	—	 	 	 	169,671	 	 	 	(23,632	)	 	 	146,039	 	
Income tax (expense) benefit	 	 	(11,575	)	 	 	(4,264	)	 	 	(85	)	 	 	(15,924	)	 	 	(47,714	)	 	 	624	 	 	 	—	 	 	 	(63,014	)	 	 	8,980	 	 	 	(54,034	)	
Net income (loss)	 	$	18,890	 	 	 	6,958	 	 	 	139	 	 	 	25,987	 	 	 	76,778	 	 	 	3,892	 	 	 	—	 	 	 	106,657	 	 	 	(14,652	)	 	 	92,005	 	

 
23

  	 	Six months ended June 30, 2010	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Tuition	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	 	Payment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Loan	 	 	Processing	 	 	 	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	and
Guaranty	 	 	and
Campus	 	 	Enrollment	 	 	Total
Fee-	 	 	Generation
and	 	 	Activity
and	 	 	 	 	 	Base net	 	 	Adjustments
to GAAP	 	 	GAAP
Results of	 	
 	 	Servicing	 	 	Commerce	 	 	Services	 	 	Based	 	 	Management	 	 	Overhead	 	 	Eliminations	 	 	income	 	 	Results	 	 	Operations	 	

Total interest income	 	$	30	 	 	 	12	 	 	 	—	 	 	 	42	 	 	 	290,963	 	 	 	3,520	 	 	 	(1,900	)	 	 	292,625	 	 	 	—	 	 	 	292,625	 	
Interest expense	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	99,761	 	 	 	12,241	 	 	 	(1,900	)	 	 	110,102	 	 	 	—	 	 	 	110,102	 	
Net interest income (loss)	 	 	30	 	 	 	12	 	 	 	—	 	 	 	42	 	 	 	191,202	 	 	 	(8,721	)	 	 	—	 	 	 	182,523	 	 	 	—	 	 	 	182,523	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	11,200	 	 	 	—	 	 	 	—	 	 	 	11,200	 	 	 	—	 	 	 	11,200	 	
Net interest income (loss) after provision for loan losses	 	 	30	 	 	 	12	 	 	 	—	 	 	 	42	 	 	 	180,002	 	 	 	(8,721	)	 	 	—	 	 	 	171,323	 	 	 	—	 	 	 	171,323	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing revenue	 	 	73,300	 	 	 	—	 	 	 	—	 	 	 	73,300	 	 	 	—	 	 	 	(254	)	 	 	—	 	 	 	73,046	 	 	 	—	 	 	 	73,046	 	
Intersegment servicing revenue	 	 	43,549	 	 	 	—	 	 	 	—	 	 	 	43,549	 	 	 	—	 	 	 	—	 	 	 	(43,549	)	 	 	—	 	 	 	—	 	 	 	—	 	
Tuition payment processing and campus commerce revenue	 	 	—	 	 	 	30,177	 	 	 	—	 	 	 	30,177	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	30,177	 	 	 	—	 	 	 	30,177	 	
Enrollment services revenue	 	 	—	 	 	 	—	 	 	 	68,674	 	 	 	68,674	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	68,674	 	 	 	—	 	 	 	68,674	 	
Software services revenue	 	 	9,843	 	 	 	—	 	 	 	—	 	 	 	9,843	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	9,843	 	 	 	—	 	 	 	9,843	 	
Other income	 	 	519	 	 	 	—	 	 	 	—	 	 	 	519	 	 	 	9,404	 	 	 	5,833	 	 	 	—	 	 	 	15,756	 	 	 	—	 	 	 	15,756	 	
Gain on sale of loans and debt repurchases	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	18,936	 	 	 	—	 	 	 	—	 	 	 	18,936	 	 	 	—	 	 	 	18,936	 	
Derivative market value and foreign currency adjustments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(3,126	)	 	 	(3,126	)	
Derivative settlements, net	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(5,800	)	 	 	—	 	 	 	—	 	 	 	(5,800	)	 	 	—	 	 	 	(5,800	)	
Total other income (expense)	 	 	127,211	 	 	 	30,177	 	 	 	68,674	 	 	 	226,062	 	 	 	22,540	 	 	 	5,579	 	 	 	(43,549	)	 	 	210,632	 	 	 	(3,126	)	 	 	207,506	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	46,909	 	 	 	13,212	 	 	 	12,518	 	 	 	72,639	 	 	 	2,644	 	 	 	7,925	 	 	 	(1,602	)	 	 	81,606	 	 	 	—	 	 	 	81,606	 	
Cost to provide enrollment services	 	 	—	 	 	 	—	 	 	 	46,136	 	 	 	46,136	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	46,136	 	 	 	—	 	 	 	46,136	 	
Depreciation and amortization	 	 	2,176	 	 	 	672	 	 	 	4,120	 	 	 	6,968	 	 	 	3	 	 	 	792	 	 	 	—	 	 	 	7,763	 	 	 	12,748	 	 	 	20,511	 	
Restructure expense	 	 	1,289	 	 	 	—	 	 	 	—	 	 	 	1,289	 	 	 	—	 	 	 	(20	)	 	 	—	 	 	 	1,269	 	 	 	—	 	 	 	1,269	 	
Other	 	 	33,168	 	 	 	4,380	 	 	 	5,007	 	 	 	42,555	 	 	 	7,210	 	 	 	12,638	 	 	 	—	 	 	 	62,403	 	 	 	—	 	 	 	62,403	 	
Intersegment expenses, net	 	 	2,992	 	 	 	1,653	 	 	 	1,074	 	 	 	5,719	 	 	 	42,716	 	 	 	(6,488	)	 	 	(41,947	)	 	 	—	 	 	 	—	 	 	 	—	 	
Total operating expenses	 	 	86,534	 	 	 	19,917	 	 	 	68,855	 	 	 	175,306	 	 	 	52,573	 	 	 	14,847	 	 	 	(43,549	)	 	 	199,177	 	 	 	12,748	 	 	 	211,925	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes and corporate overhead allocation	 	 	40,707	 	 	 	10,272	 	 	 	(181	)	 	 	50,798	 	 	 	149,969	 	 	 	(17,989	)	 	 	—	 	 	 	182,778	 	 	 	(15,874	)	 	 	166,904	 	
Corporate overhead allocation	 	 	(2,673	)	 	 	(891	)	 	 	(891	)	 	 	(4,455	)	 	 	(4,454	)	 	 	8,909	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Income (loss) before income taxes	 	 	38,034	 	 	 	9,381	 	 	 	(1,072	)	 	 	46,343	 	 	 	145,515	 	 	 	(9,080	)	 	 	—	 	 	 	182,778	 	 	 	(15,874	)	 	 	166,904	 	
Income tax (expense) benefit	 	 	(14,453	)	 	 	(3,566	)	 	 	408	 	 	 	(17,611	)	 	 	(55,296	)	 	 	4,286	 	 	 	—	 	 	 	(68,621	)	 	 	6,032	 	 	 	(62,589	)	
Net income (loss)	 	$	23,581	 	 	 	5,815	 	 	 	(664	)	 	 	28,732	 	 	 	90,219	 	 	 	(4,794	)	 	 	—	 	 	 	114,157	 	 	 	(9,842	)	 	 	104,315	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Additional information:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	23,581	 	 	 	5,815	 	 	 	(664	)	 	 	28,732	 	 	 	90,219	 	 	 	(4,794	)	 	 	—	 	 	 	114,157	 	 	 	(9,842	)	 	 	104,315	 	
Plus: Restructure expense (a)	 	 	1,289	 	 	 	—	 	 	 	—	 	 	 	1,289	 	 	 	—	 	 	 	(20	)	 	 	—	 	 	 	1,269	 	 	 	(1,269	)	 	 	—	 	
Less: Net tax effect	 	 	(490	)	 	 	—	 	 	 	—	 	 	 	(490	)	 	 	—	 	 	 	8	 	 	 	—	 	 	 	(482	)	 	 	482	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss), excluding restructure expense	 	$	24,380	 	 	 	5,815	 	 	 	(664	)	 	 	29,531	 	 	 	90,219	 	 	 	(4,806	)	 	 	—	 	 	 	114,944	 	 	 	(10,629	)	 	 	104,315	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(a) During the first six months of 2010, the Company recorded restructuring charges associated with previously implemented restructuring plans.	 	
 
The adjustments required to reconcile from the Company’s “base net income” measure to its GAAP results of operations relate to differing treatments for derivatives, foreign currency transaction adjustments, and amortization of intangible assets. These items are excluded from management’s evaluation of the Company’s operating results. The following tables reflect adjustments associated with these areas by operating segment and Corporate Activity and Overhead:
 
 	 	Student	 	 	Tuition	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Loan	 	 	Payment	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	
 	 	and	 	 	Processing	 	 	 	 	 	Generation	 	 	Activity	 	 	 	 	
 	 	Guaranty	 	 	and Campus	 	 	Enrollment	 	 	and	 	 	and	 	 	 	 	
 	 	Servicing	 	 	Commerce	 	 	Services	 	 	Management	 	 	Overhead	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended June 30, 2011	 	
 	 	 	 	
Derivative market value and foreign currency adjustments (a)	 	$	—	 	 	 	—	 	 	 	—	 	 	 	12,531 	 	 	 	4,282 	 	 	 	16,813 	 	
Amortization of intangible assets (b)	 	 	2,100 	 	 	 	981 	 	 	 	878 	 	 	 	—	 	 	 	—	 	 	 	3,959 	 	
Net tax effect (c)	 	 	(798	)  	 	 	(373	)  	 	 	(334	)  	 	 	(4,762	)  	 	 	(1,626	)  	 	 	(7,893	)  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total adjustments to GAAP	 	$	1,302	 	 	 	608 	 	 	 	544 	 	 	 	7,769 	 	 	 	2,656 	 	 	 	12,879 	 	

24

 	 	Student	 	 	Tuition	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Loan	 	 	Payment	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	
 	 	and	 	 	Processing	 	 	 	 	 	Generation	 	 	Activity	 	 	 	 	
 	 	Guaranty	 	 	and Campus	 	 	Enrollment	 	 	and	 	 	and	 	 	 	 	
 	 	Servicing	 	 	Commerce	 	 	Services	 	 	Management	 	 	Overhead	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended June 30, 2010	 	
 	 	 	 	
Derivative market value and foreign currency adjustments (a)	 	$	—	 	 	 	—	 	 	 	—	 	 	 	550 	 	 	 	6,681 	 	 	 	7,231 	 	
Amortization of intangible assets (b)	 	 	2,114 	 	 	 	1,591 	 	 	 	2,527 	 	 	 	—	 	 	 	—	 	 	 	6,232 	 	
Net tax effect (c)	 	 	(803	)  	 	 	(605	)  	 	 	(958	)  	 	 	(209	)  	 	 	(2,541	)  	 	 	(5,116	)  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total adjustments to GAAP	 	$	1,311	 	 	 	986 	 	 	 	1,569 	 	 	 	341 	 	 	 	4,140 	 	 	 	8,347 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six months ended June 30, 2011	 	
 	 	 	 	
Derivative market value and foreign currency adjustments (a)	 	$	—	 	 	 	—	 	 	 	—	 	 	 	13,120 	 	 	 	2,577 	 	 	 	15,697 	 	
Amortization of intangible assets (b)	 	 	4,200 	 	 	 	1,979 	 	 	 	1,756 	 	 	 	—	 	 	 	—	 	 	 	7,935 	 	
Net tax effect (c)	 	 	(1,596	)  	 	 	(752	)  	 	 	(667	)  	 	 	(4,986	)  	 	 	(979	)  	 	 	(8,980	)  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total adjustments to GAAP	 	$	2,604	 	 	 	1,227 	 	 	 	1,089 	 	 	 	8,134 	 	 	 	1,598 	 	 	 	14,652 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six months ended June 30, 2010	 	
 	 	 	 	
Derivative market value and foreign currency adjustments (a)	 	$	—	 	 	 	—	 	 	 	—	 	 	 	(4,011	)  	 	 	7,137 	 	 	 	3,126 	 	
Amortization of intangible assets (b)	 	 	4,350 	 	 	 	3,516 	 	 	 	4,882 	 	 	 	—	 	 	 	—	 	 	 	12,748 	 	
Net tax effect (c)	 	 	(1,653	)  	 	 	(1,337	)  	 	 	(1,858	)  	 	 	1,524 	 	 	 	(2,708	)  	 	 	(6,032	)  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total adjustments to GAAP	 	$	2,697	 	 	 	2,179 	 	 	 	3,024 	 	 	 	(2,487	)  	 	 	4,429 	 	 	 	9,842 	 	

 	(a)	Derivative market value and foreign currency adjustments:  “Base net income” excludes the periodic unrealized gains and losses that are caused by the change in fair value on derivatives used in the Company’s risk management strategy in which the Company does not qualify for “hedge treatment” under GAAP.  Included in “base net income” are the economic effects of the Company’s derivative instruments, which includes any cash paid or received being recognized as an expense or revenue upon actual derivative settlements.  “Base net income” also excludes the foreign currency transaction gains or losses caused by the re-measurement of the Company’s Euro-denominated bonds to U.S. dollars.	

 	(b)	Amortization of intangible assets:  “Base net income” excludes the amortization of acquired intangibles.	

 	(c)	Income taxes are applied based on 38% for the individual operating segments.	

12.           Fair Value

The following tables present the Company’s financial assets and liabilities that are measured at fair value on a recurring basis.
 
 	 	As of June 30, 2011	 	
 	 	Level 1	 	 	Level 2	 	 	Level 3	 	 	Total	 	
Assets:	 	 	 	 	 	 	 	 	 	 	 	 	
Investments (a)	 	$	6,992	 	 	 	—	 	 	 	24,672 	 	 	 	31,664 	 	
Fair value of derivative instruments (b)	 	 	—	 	 	 	182,450 	 	 	 	—	 	 	 	182,450 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	6,992	 	 	 	182,450 	 	 	 	24,672 	 	 	 	214,114 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fair value of derivative instruments (b)	 	$	—	 	 	 	23,383 	 	 	 	—	 	 	 	23,383 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities	 	$	—	 	 	 	23,383 	 	 	 	—	 	 	 	23,383 	 	

 
25

 	 	As of December 31, 2010	 	
 	 	Level 1	 	 	Level 2	 	 	Level 3	 	 	Total	 	
Assets:	 	 	 	 	 	 	 	 	 	 	 	 	
Investments (a)	 	$	31,375	 	 	 	—	 	 	 	11,861 	 	 	 	43,236 	 	
Fair value of derivative instruments (b)	 	 	—	 	 	 	118,346 	 	 	 	—	 	 	 	118,346 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	31,375	 	 	 	118,346 	 	 	 	11,861 	 	 	 	161,582 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fair value of derivative instruments (b)	 	$	—	 	 	 	16,089 	 	 	 	—	 	 	 	16,089 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities	 	$	—	 	 	 	16,089 	 	 	 	—	 	 	 	16,089 	 	

 	(a)	Investments represent investments classified by the Company as “trading securities” which are recorded at fair value on a recurring basis. Level 1 investments are measured based upon quoted prices and include investments traded on an active exchange, such as the New York Stock Exchange, and U.S. Treasury securities. Level 3 investments include student loan auction rate asset-backed securities. The fair value for the student loan auction rate asset-backed securities is determined using an income approach valuation technique (present value using the discount rate adjustment technique) that considers, among other things, rates currently observed in publicly traded debt markets for debt of similar terms to companies with comparable credit risk.	

 	(b)	All derivatives are accounted for at fair value on a recurring basis.  The fair value of derivative financial instruments is determined by derivative pricing models using the stated terms of the contracts and observable yield curves, forward foreign currency exchange rates, and volatilities from active markets.  Fair value of derivative instruments is comprised of market value less accrued interest and excludes collateral.	

There were no transfers into or out of level 1, level 2, or level 3 for the six months ended June 30, 2011.

The following tables present a roll-forward of the fair value of Level 3 (significant unobservable inputs) assets for the six months ended June 30, 2011:

 	 	Level 3	 	
 	 	Investments -	 	
 	 	trading securities	 	
Balance at December 31, 2010	 	$	11,861	 	
Total realized and unrealized gains (losses) included in income, net (a)	 	 	(105	)	
Purchases	 	 	23,890	 	
Redemptions/Sales	 	 	(5,931	)	
Balance at March 31, 2011	 	 	29,715	 	
 	 	 	 	 	
Total realized and unrealized gains (losses) included in income, net (a)	 	 	636	 	
Purchases	 	 	3,261	 	
Redemptions/Sales	 	 	(8,940	)	
Balance at June 30, 2011	 	$	24,672	 	

Total gains included in income attributable to the change in unrealized gains relating to assets held at June 30, 2011: (a)	 	 	 	 	
 	 	 	 	 	
Three month period ended June 30, 2011	 	$	405	 	
Six month period ended June 30, 2011	 	 	151	 	

 	(a)	Realized and unrealized gains are included in “other income” in the Company’s consolidated statements of income.	

26

The following table summarizes the fair values of all of the Company’s financial instruments on the consolidated balance sheet:

 	 	As of June 30, 2011	 	 	As of December 31, 2010	 	
 	 	Fair value	 	 	Carrying value	 	 	Fair value	 	 	Carrying value	 	
Financial assets:	 	 	 	 	 	 	 	 	 	 	 	 	
Student loans receivable	 	$	24,025,821	 	 	 	23,228,778 	 	 	 	24,836,538 	 	 	 	23,948,014 	 	
Student loans receivable - held for sale	 	 	—	 	 	 	—	 	 	 	84,987 	 	 	 	84,987 	 	
Cash and cash equivalents	 	 	116,341 	 	 	 	116,341 	 	 	 	283,801 	 	 	 	283,801 	 	
Investments - trading securities	 	 	31,664 	 	 	 	31,664 	 	 	 	43,236 	 	 	 	43,236 	 	
Restricted cash	 	 	350,703 	 	 	 	350,703 	 	 	 	453,748 	 	 	 	453,748 	 	
Restricted cash – due to customers	 	 	64,452 	 	 	 	64,452 	 	 	 	88,528 	 	 	 	88,528 	 	
Restricted investments	 	 	260,027 	 	 	 	260,027 	 	 	 	215,009 	 	 	 	215,009 	 	
Accrued interest receivable	 	 	302,481 	 	 	 	302,481 	 	 	 	318,152 	 	 	 	318,152 	 	
Derivative instruments	 	 	182,450 	 	 	 	182,450 	 	 	 	118,346 	 	 	 	118,346 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Financial liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Bonds and notes payable	 	 	23,594,840 	 	 	 	23,605,413 	 	 	 	24,651,191 	 	 	 	24,672,472 	 	
Accrued interest payable	 	 	17,093 	 	 	 	17,093 	 	 	 	19,153 	 	 	 	19,153 	 	
Due to customers	 	 	64,452 	 	 	 	64,452 	 	 	 	88,528 	 	 	 	88,528 	 	
Derivative instruments	 	 	23,383 	 	 	 	23,383 	 	 	 	16,089 	 	 	 	16,089 	 	
 
The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring basis are discussed above.  The remaining financial assets and liabilities were estimated using the following methods and assumptions:

Student Loans Receivable and Student Loans Receivable – Held for Sale

The Company’s student loans are accounted for at cost or at the lower of cost or market if the loan is held-for-sale. Student loans classified as held for sale at December 31, 2010 are those loans which the Company sold in January 2011 and were valued using the sales price (100% of par value) less the estimated credit risk related to this portfolio. The Company retained credit risk related to this portfolio and will pay cash to purchase back any loans which become 60 days delinquent. For all other loans, 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. The significant assumptions used to project cash flows are prepayment speeds, default rates, and future interest rates and indice relationships. A number of significant inputs into the models are internally derived.

Cash and Cash Equivalents, Restricted Cash, Restricted Cash – Due to Customers, Restricted Investments, Accrued Interest Receivable/Payable and Due to Customers

The carrying amount approximates fair value due to the variable rate of interest and/or the short maturities of these instruments.

Bonds and Notes Payable

The fair value of the bonds and notes payable is based on market prices for securities that possess similar credit risk and interest rate risk.

13.           Legal Proceedings

General

The Company is subject to various claims, lawsuits, and proceedings that arise in the normal course of business. These matters principally consist of claims by student loan borrowers disputing the manner in which their student loans have been processed and disputes with other business entities. In addition, from time to time, the Company receives information and document requests from state or federal regulators concerning its business practices. The Company cooperates with these inquiries and responds to the requests. While the Company cannot predict the ultimate outcome of any inquiry or investigation, the Company believes its activities have materially complied with applicable law, including the Higher Education Act, the rules and regulations adopted by the Department of Education thereunder, and the Department’s guidance regarding those rules and regulations. On the basis of present information, anticipated insurance coverage, and advice received from counsel, it is the opinion of the Company’s management that the disposition or ultimate determination of these claims, lawsuits, and proceedings will not have a material adverse effect on the Company’s business, financial position, or results of operations.

27

Bais Yaakov of Spring Valley v. Peterson’s Nelnet, LLC

On January 4, 2011, a complaint against Peterson’s Nelnet, LLC (“Peterson’s”), a subsidiary of the Company, was filed in the U.S. District Court for the District of New Jersey (the “District Court”).  The complaint alleges that Peterson’s sent six advertising faxes to the named plaintiff in 2008-2009 that were not the result of express invitation or permission granted by the plaintiff and did not include certain opt out language.  The complaint also alleges that such faxes violated the federal Telephone Consumer Protection Act (the “TCPA”), purportedly entitling the plaintiff to $500 per violation, trebled for willful violations for each of the six faxes.  The complaint further alleges that Peterson’s had sent putative class members more than 10,000 faxes that violated the TCPA, amounting to more than $5 million in statutory penalty damages and more than $15 million if trebled for willful violations.  The complaint seeks to establish a class action for two different classes of plaintiffs: Class A, to whom Peterson’s sent unsolicited fax advertisements containing opt out notices similar to those contained in the faxes received by the named plaintiff; and Class B, to whom Peterson’s sent fax advertisements containing opt out notices similar to those contained in the faxes received by the named plaintiff.  As of the filing date of this report, the District Court has not established or recognized any class.

On February 16, 2011, Peterson’s filed a motion to dismiss the complaint, which was denied by the District Court on April 15, 2011 shortly after a similar motion to dismiss that had been granted in an unrelated case involving alleged TCPA violations related to faxes was reversed by the U.S. Court of Appeals for the Third Circuit (the “Appeals Court”), which has jurisdiction over the District Court.  On April 29, 2011, Peterson’s filed an answer to the complaint, but also filed a motion for reconsideration of the motion to dismiss.  On May 17, 2011, the Appeals Court granted a petition for rehearing of the motion to dismiss in the unrelated TCPA fax case, and on May 31, 2011 Peterson’s filed a motion for stay pending the outcome of that rehearing.  The motion for reconsideration and the motion for stay are pending before the District Court.

Peterson’s intends to continue to contest the suit vigorously.  Due to the preliminary stage of this matter and the uncertainty and risks inherent in class determination and the overall litigation process, the Company believes that a meaningful estimate of a reasonably possible loss, if any, or range of reasonably possible losses, if any, cannot currently be made.

14. Subsequent Event

On July 8, 2011, the Company purchased the residual interest in $1.9 billion of FFEL Program consolidation loans. The Company acquired the ownership interest in GCO SLIMS Trust I (the “SLIMS Trust”) giving the Company rights to the residual interest in GCO Education Loan Funding Trust-I (the “GCO Trust”).  The GCO Trust includes FFELP consolidation loans funded to term with $1.9 billion of notes payable that carry interest rates on a spread to LIBOR or are set and periodically reset via a “dutch auction” (“Auction Rate Securities”).

The SLIMS Trust includes $46.2 million of notes payable that carry a fixed interest rate of 5.72%.  All excess interest earned from the GCO Trust must be used to pay the interest and principal on the notes payable in the SLIMS Trust until the SLIMS notes are paid in full.

 ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the three and six months ended June 30, 2011 and 2010. All dollars are in thousands, except per share amounts, unless otherwise noted.)

The following discussion and analysis provides information that the Company’s management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company.  The discussion should be read in conjunction with the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Reclassifications

Certain amounts previously reported within operating expenses have been reclassified to conform to the current period presentation. These reclassifications include:

 	·	Reclassifying “professional and other services,” “occupancy and communications,” “postage and distribution,” “advertising and marketing,” and “trustee and other debt related fees” to “other” operating expenses.	

 	·	Reclassifying student list amortization, which was previously included in “advertising and marketing,” to “depreciation and amortization.”	

The reclassifications had no effect on consolidated net income or consolidated assets and liabilities.

28

Forward-looking and cautionary statements

This report contains forward-looking statements and information that are based on management’s current expectations as of the date of this document.  Statements that are not historical facts, including statements about the Company’s plans and expectations for future financial condition, results of operations or economic performance, or that address management’s plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements.  The words “may,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “assume,” “forecast,” “will,” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements.

The forward-looking statements are based on assumptions and analyses made by management in light of management’s experience and its perception of historical trends, current conditions, expected future developments, and other factors that management believes are appropriate under the circumstances.  These statements are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements.  These factors include, among others, the risks and uncertainties set forth in the “Risk Factors” section included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 and subsequent Quarterly Reports on Form 10-Q and elsewhere in this report, and include such risks and uncertainties as:

 	·	risks related to the Company’s student loan portfolio, such as interest rate basis and repricing risk resulting from the fact that the interest rate characteristics of the Company’s student loan assets do not match the interest rate characteristics of the funding for those assets, the risk of loss of floor income on certain student loans originated under the FFEL Program of the U.S. Department Education, risks related to the use of derivatives to manage exposure to interest rate fluctuations, and potential losses from loan defaults, changes in prepayment rates, guaranty rates, loan floor rates, and credit spreads;	

 	·	risks related to the Company’s liquidity and funding requirements, including the Company’s ability to maintain credit facilities or obtain new facilities, the ability of lenders under the Company’s credit facilities to fulfill their lending commitments under these facilities, the Company’s ability to satisfy debt obligations secured by student loan assets and related collateral, and changes in the general interest rate environment and in the securitization markets for education loans which may increase the costs or limit the availability of financings necessary to purchase, refinance, or continue to carry education loans;	

 	·	risks from changes in the student loan and educational credit and services marketplace resulting from the implementation of, or changes in, applicable laws and regulations, including the discontinuance of private sector student loan originations under the FFEL Program effective July 1, 2010, and the Company’s ability to maintain its loan servicing contract with the Department to service federally-owned student loans and to comply with servicing agreements with third party customers for the service of loans under the Federal Direct Loan and FFEL Programs;	

 	·	risks from changes in the demand or preferences for educational financing and related services by educational institutions, students, and their families;	

 	·	uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations;	

 	·	risks associated with litigation, complex government regulations, changes in general economic and credit market conditions, and related party transactions; and	

 	·	uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company’s consolidated financial statements.	

All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document.  Although the Company may from time to time voluntarily update or revise its prior forward-looking statements to reflect actual results or changes in the Company’s expectations, the Company disclaims any commitment to do so except as required by securities laws.

OVERVIEW

The Company is an innovative education services company focused primarily on providing fee-based processing services and quality education-related products and services in four core areas: loan financing, loan servicing, payment processing, and enrollment services (education planning). These products and services help students and families plan, prepare, and pay for their education and make the administrative and financial processes more efficient for schools and financial organizations. In addition, the Company earns net interest income on a portfolio of federally insured student loans.

29

The Company has certain business objectives in place that include:

 	·	Continue to grow and diversify fee-based revenue	
 	·	Manage operating costs	
 	·	Maximize the value of existing portfolio	
 	·	Use liquidity to capitalize on market opportunities	

Achieving these business objectives, as well as significant legislation changes in the student loan industry as discussed below, has impacted and will continue to impact the financial condition and operating results of the Company.

Legislative Impact on Operating Results

The Company has a portfolio of student loans in which it earns net interest income. These loans were originated and acquired by the Company under the FFEL Program.

On March 30, 2010, President Obama signed into law the Reconciliation Act of 2010.  Effective July 1, 2010, this law prohibits new loan originations under the FFEL Program and requires that all new federal loan originations be made through the Federal Direct Loan Program.  The new law does not alter or affect the terms and conditions of existing FFELP loans.

As a result of the Reconciliation Act of 2010, effective July 1, 2010, the Company no longer originates new FFELP loans. In addition, as a result of this legislation, net interest income on the Company’s existing FFELP loan portfolio, as well as fee-based revenue from guarantee and third party FFELP servicing, will decline over time as the Company’s and the Company’s customers’ FFELP loan portfolios are paid down.

Due to the legislative changes in the student loan industry, the Company believes there will be opportunities to purchase FFELP loan portfolios and/or expand its current level of guarantee and third party FFELP servicing volume on behalf of current FFELP participants looking to adjust their FFELP businesses.  For example, during the first six months of 2011, the Company purchased $0.7 billion of FFELP student loans, and on July 8, 2011, the Company purchased the residual interest in $1.9 billion of additional FFEL Program loans.

Continue to Grow and Diversify Fee-Based Revenue

The Company has expanded products and services generated from businesses that are not dependent upon the FFEL Program, thereby reducing legislative and political risk related to the education lending industry. Revenues from these businesses are primarily generated from products and services offered in the Company’s Tuition Payment Processing and Campus Commerce and Enrollment Services operating segments. In addition, in September 2009, the Company began servicing federally-owned student loans for the Department. The amount of federally-owned student loans originated through the Direct Loan Program is expected to increase substantially, which will lead to an increase in servicing volume and related revenue for the Company. A summary of revenue from the Company’s fee-based businesses is shown below.

 	 	Three months ended June 30,	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	$ Change	 	 	% Change	 	
Student Loan and Guaranty Servicing (a)	 	$	41,747	 	 	 	42,463 	 	 	 	(716	)  	 	 	(1.7	) %	
Tuition Payment Processing and Campus Commerce	 	 	14,763 	 	 	 	12,799 	 	 	 	1,964 	 	 	 	15.3	 	
Enrollment Services (b)	 	 	32,315 	 	 	 	35,403 	 	 	 	(3,088	)  	 	 	(8.7	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
                Total revenue from fee-based businesses	 	$	88,825	 	 	 	90,665 	 	 	 	(1,840	)  	 	 	(2.0	) %	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six months ended June 30,	 	 	 	 	 	 	 	 	 	
 	 	 	2011	 	 	 	2010	 	 	$ Change	 	 	% Change	 	
Student Loan and Guaranty Servicing (a)	 	$	82,175	 	 	 	83,692 	 	 	 	(1,517	)  	 	 	(1.8	) %	
Tuition Payment Processing and Campus Commerce	 	 	34,138 	 	 	 	30,189 	 	 	 	3,949 	 	 	 	13.1	 	
Enrollment Services (b)	 	 	66,183 	 	 	 	68,674 	 	 	 	(2,491	)  	 	 	(3.6	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
                Total revenue from fee-based businesses	 	$	182,496	 	 	 	182,555 	 	 	 	(59	)  	 	 	(0.0	) %	

 
 	(a)	The Student Loan and Guaranty Servicing operating segment included $9.1 million and $12.3 million of revenue earned from rehabilitation collections on defaulted loans for the three months ended June 30, 2011 and 2010, respectively, and $15.6 million and $22.3 million for the six months ended June 30, 2011 and 2010, respectively.	

 	(b)	Growth in enrollment services revenue has been affected by the current regulatory uncertainty in the for-profit college industry, which has caused schools to decrease spending on marketing efforts as further discussed in this Item 2 under “Enrollment Services Operating Segment – Results of Operations.”	

30

As shown below, the Company’s revenue and income before taxes related to its fee-based operating segments continues to increase. The table below includes the consolidated operating results of the Company excluding the Asset Generation and Management Operating segment. Thus, the below table reflects the operating results of the Company as if it was not generating any earnings from its student loan portfolio.

Income (loss) before taxes (a)	
($5 million)	 	$67 million	$80 million	

 	(a)	Excludes restructure and impairment expenses and a litigation settlement charge recognized in 2010. See the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 for additional information on total operating expenses by segment and these adjustments thereto.	
 
Manage Operating Costs

Operating expenses decreased $7.7 million (7.1%) and $11.7 million (5.5%) for the three and six months ended June 30, 2011 compared to the same periods in 2010 as further discussed in this Item 2 under “Results of Operations – Operating Expenses.”

Maximize the Value of Existing Portfolio

Fixed rate floor income

Loans originated prior to April 1, 2006 generally earn interest at the higher of a floating rate based on the Special Allowance Payment or the SAP formula set by the Department and the borrower rate, which is fixed over a period of time.  The SAP formula is based on an applicable indice plus a fixed spread that is dependent upon when the loan was originated, the loan’s repayment status, and funding sources for the loan.  The Company generally finances its student loan portfolio with variable rate debt.  In low and/or declining interest rate environments, when the fixed borrower rate is higher than the rate produced by the SAP formula, the Company’s student loans earn at a fixed rate while the interest on the variable rate debt typically continues to decline.  In these interest rate environments, the Company earns additional spread income that it refers to as floor income.  For loans where the borrower rate is fixed to term, the Company earns floor income for an extended period of time, which the Company refers to as fixed rate floor income.

31

The Company’s core student loan spread (variable student loan spread including fixed rate floor contribution) and variable student loan spread (net interest margin excluding fixed rate floor income) is summarized below.

 	(a)	The interest earned on the majority of the Company’s FFELP student loan assets is indexed to the three-month commercial paper indice. The Company funds the majority of its assets with three-month LIBOR indexed floating rate securities. The relationship between these two indices has a significant impact on student loan spread. This table (the right axis) shows the difference between the average three-month LIBOR and commercial paper indices by quarter.	

The primary difference between variable student loan spread and core student loan spread is fixed rate floor income.  A summary of fixed rate floor income and its contribution to core spread follows.
 
 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed rate floor income, gross	 	$	39,146	 	 	 	35,340	 	 	 	77,046	 	 	 	74,467	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative settlements (a)	 	 	(6,345	)	 	 	(4,286	)	 	 	(12,563	)	 	 	(8,142	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed rate floor income, net	 	$	32,801	 	 	 	31,054	 	 	 	64,483	 	 	 	66,325	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed rate floor income contribution to spread, net	 	 	0.57	%	 	 	0.48	%	 	 	0.56	%	 	 	0.53	%	

 	(a)	Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income.	

The high levels of fixed rate floor income earned during 2011 and 2010 are due to historically low interest rates.  If interest rates remain low, the Company anticipates continuing to earn significant fixed rate floor income in future periods.  See Item 3, “Quantitative and Qualitative Disclosures about Market Risk” which provides additional detail on the Company’s portfolio earning fixed rate floor income and the derivatives used by the Company to hedge these loans.

Future Cash Flow from Portfolio

The majority of the Company’s portfolio of student loans is funded in asset-backed securitizations that are structured to substantially match the maturity of the funded assets, thereby minimizing liquidity risk. In addition, due to (i) the difference between the yield the Company receives on the loans and cost of financing within these transactions, and (ii) the excess servicing and administration fees the Company earns from these transactions, the Company has created a portfolio that will generate earnings and significant cash flow over the life of these transactions.

As of June 30, 2011, based on cash flow models developed to reflect management’s current estimate of, among other factors, prepayments, defaults, deferment, forbearance, and interest rates, the Company currently expects future undiscounted cash flows from its portfolio to be approximately $1.63 billion as detailed below.  The $1.63 billion includes approximately $350 million (as of June 30, 2011) of overcollateralization included in the asset-backed securitizations.  These excess net asset positions are reflected variously in the following balances on the consolidated balance sheet:  "student loans receivable," "restricted cash and investments," and "accrued interest receivable."

The forecasted cash flow presented below includes all loans currently funded in asset-backed securitizations.  As of June 30, 2011, the Company had $20.1 billion of loans included in asset-backed securitizations, which represented 87 percent of its total FFELP student loan portfolio. The forecasted cash flow does not include cash flows that the Company expects to receive related to loans funded through the Department of Education’s Conduit Program and other warehouse facilities or loans originated and/or acquired subsequent to June 30, 2011.

32

As previously discussed, on July 8, 2011, the Company purchased the residual interest in $1.9 billion of FFELP student loans.  The table below does not include the estimated future cash flow from this portfolio. The Company estimates these loans will add approximately $90 million to $120 million in future cash flow to the Company in addition to the amounts summarized below.

 
 	(a)	The Company uses various assumptions, including prepayments and future interest rates, when preparing its cash flow forecast.  These assumptions are further discussed below.	

Prepayments :  The primary variable in establishing a life of loan estimate is the level and timing of prepayments. Prepayment rates equal the percentage of loans that prepay annually as a percentage of the beginning of period balance, net of scheduled principal payments.  A number of factors can affect estimated prepayment rates, including the level of consolidation activity and default rates.  Should any of these factors change, management may revise its assumptions, which in turn would impact the projected future cash flow. The Company’s cash flow forecast above assumes prepayment rates that are generally consistent with those utilized in the Company’s recent asset-backed securities transactions. If management used a prepayment rate assumption two times greater than what was used to forecast the cash flow, the cash flow forecast would be reduced by approximately $330 million to $390 million.

Interest rates :  The Company funds the majority of its student loans with three-month LIBOR (“LIBOR”) indexed floating rate securities.  Meanwhile, the interest earned on the Company’s student loan assets are indexed primarily to a commercial paper rate (“CP”).  The different interest rate characteristics of the Company’s loan assets and liabilities funding these assets result in basis risk.  The Company’s cash flow forecast assumes LIBOR will exceed CP by 12 basis points for the life of the portfolio, which approximates the historical relationship between these indices.  If the forecast is computed assuming a spread of 24 basis points between CP and LIBOR for the life of the portfolio, the cash flow forecast would be reduced by approximately $80 million to $120 million.

The Company uses the current forward interest rate yield curve to forecast cash flows.  A change in the forward interest rate curve would impact the future cash flows generated from the portfolio.  An increase in future interest rates will reduce the amount of fixed rate floor income the Company is currently receiving.  The Company attempts to mitigate the impact of a rise in short-term rates by hedging interest rate risks. As of June 30, 2011, the net fair value of the Company’s interest rate derivatives used to hedge loans earning fixed rate floor income was a liability of $19.9 million. See Item 3, “Quantitative and Qualitative Disclosures about Market Risk — Interest Rate Risk.”

33

Use Liquidity to Capitalize on Market Opportunities

The Company has used and will continue to use its improved liquidity position to capitalize on market opportunities, including FFELP student loan acquisitions; strategic acquisitions and investments in its core business areas of loan financing, loan servicing, payment processing, and enrollment services (education planning); and capital management initatives, including debt repurchases, stock repurchases, and dividend distributions.

During 2011, the Company has used its improved liquidity to accomplish the following items:

 	·	FFELP Student Loan Acquisitions	
 	-	Purchased $0.7 billion of FFELP student loans through June 30, 2011	
 	-	Purchased the residual interest in $1.9 billion of FFELP student loans on July 8, 2011	

 	·	Acquisitions and Investments in Core Business Areas	
 	-	Purchased contracts with more than 370 K-12 schools to provide tuition payment plan services	

 	·	Capital Management	
 	-	Raised the quarterly dividend paid on the Company’s common stock to $0.10 per share	
 	-	Repurchased $63.2 million notional amount of debt recognizing a gain of $7.0 million	

RESULTS OF OPERATIONS

The Company’s operating results are primarily driven by the performance of its existing portfolio and the revenues generated by its fee-based businesses and the costs to provide such services.  The performance of the Company’s portfolio is driven by net interest income and losses related to credit quality of the assets along with the cost to administer and service the assets and related debt.

Net Interest Income

The Company generates a significant portion of its earnings from the spread, referred to as its student loan spread, between the yield the Company receives on its student loan portfolio and the cost of funding these loans. This spread income is reported on the Company’s consolidated statements of income as net interest income. The amortization of loan premiums and discounts, including capitalized costs of origination, the 1.05% per year consolidation loan rebate fee paid to the Department, and yield adjustments from borrower benefit programs, are netted against loan interest income on the Company’s consolidated statements of income. The amortization of debt issuance costs is included in interest expense on the Company’s consolidated statements of income.

The Company’s portfolio of FFELP loans originated prior to April 1, 2006 earns interest at the higher of a variable rate based on the special allowance payment or SAP formula set by the Department of Education and the borrower rate. The SAP formula is based on an applicable indice plus a fixed spread that is dependent upon when the loan was originated, the loan’s repayment status, and funding sources for the loan.  The Company’s portfolio of FFELP loans originated on or after April 1, 2006 earns interest at a variable rate based on the SAP formula.  For the portfolio of loans originated on or after April 1, 2006, when the borrower rate exceeds the variable rate based on the SAP formula, the Company must return the excess to the Department.

Because the Company generates a significant portion of its earnings from its student loan spread, the interest rate sensitivity of the Company’s balance sheet is very important to its operations. The current and future interest rate environment can and will affect the Company’s interest earnings, net interest income, and net income. The effects of changing interest rate environments are further outlined in Item 3, “Quantitative and Qualitative Disclosures about Market Risk — Interest Rate Risk.”

Investment interest income, which is a component of net interest income, includes income from unrestricted interest-earning deposits and investments and funds in the Company’s special purpose entities which are utilized for its asset-backed securitizations.

Net interest income also includes interest expense on unsecured debt offerings.  The proceeds from these unsecured debt offerings were used by the Company to fund general business operations and certain asset and business acquisitions.

34

Provision for Loan Losses

Management estimates and establishes an allowance for loan losses through a provision charged to expense. Losses are charged against the allowance when management believes the collection of the loan principal is unlikely. Recovery of amounts previously charged off is credited to the allowance for loan losses.  Management maintains the allowance for federally insured and non-federally insured loans at a level believed to be appropriate to provide for estimated probable credit losses inherent in the loan portfolio. This evaluation is inherently subjective because it requires estimates that may be susceptible to significant changes. The Company analyzes the allowance separately for its federally insured loans and its non-federally insured loans.

The allowance for the federally insured loan portfolio is based on periodic evaluations of the Company’s loan portfolios considering loans in repayment versus those in a nonpaying status, delinquency status, trends in defaults in the portfolio based on Company and industry data, past experience, trends in student loan claims rejected for payment by guarantors, changes to federal student loan programs, current economic conditions, and other relevant factors. The federal government guarantees 97% of the principal of and the interest on federally insured student loans disbursed on and after July 1, 2006 (and 98% for those loans disbursed prior to July 1, 2006), which limits the Company’s loss exposure on the outstanding balance of the Company’s federally insured portfolio. Student loans disbursed prior to October 1, 1993 are fully insured.

In determining the appropriateness of the allowance for loan losses on the non-federally insured loans, the Company considers several factors including: loans in repayment versus those in a nonpaying status, delinquency status, type of program, trends in defaults in the portfolio based on Company and industry data, past experience, current economic conditions, and other relevant factors. The Company places a non-federally insured loan on nonaccrual status when the collection of principal and interest is 30 days past due and charges off the loan when the collection of principal and interest is 120 days past due.

Other Income

The Company also earns fees and generates revenue from other sources as summarized below.

Student Loan and Guaranty Servicing Revenue – Loan servicing fees are determined according to individual agreements with customers and are calculated based on the dollar value of loans, number of loans, or number of borrowers serviced for each customer. Guaranty servicing fees, generally, are calculated based on the number of loans serviced, volume of loans serviced, or amounts collected.  Revenue is recognized when earned pursuant to applicable agreements, and when ultimate collection is assured.

Tuition Payment Processing and Campus Commerce Revenue – Tuition payment processing and campus commerce revenue primarily includes actively managed tuition payment solutions and online payment processing. Fees for these services are recognized over the period in which services are provided to customers.

Enrollment Services Revenue –   Enrollment services revenue primarily consists of the following items:

 	·	Interactive marketing – Interactive marketing revenue is derived primarily from fees which are earned through the delivery of qualified inquiries or clicks. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. Delivery is deemed to have occurred at the time a qualified inquiry or click is delivered to the customer provided that no significant obligations remain. From time to time, the Company may agree to credit certain inquiries or clicks if they fail to meet the contractual or other guidelines of a particular client. The Company has established a sales reserve based on historical experience. To date, such credits have been immaterial and within management’s expectations.	

For a portion of its interactive marketing revenue, the Company has agreements with providers of online media or traffic (“Publishers”) used in the generation of inquiries or clicks. The Company receives a fee from its customers and pays a fee to Publishers either on a cost per inquiry, cost per click, or cost per number of impressions basis. The Company is the primary obligor in the transaction. As a result, the fees paid by the Company’s customers are recognized as revenue and the fees paid to its Publishers are included in “cost to provide enrollment services” in the Company’s consolidated statements of income.

 	·	List marketing - Revenue from the sale of lists is generally earned and recognized, net of estimated returns, upon delivery.	

 	·	Publishing services - Revenue from the sale of print products is generally earned and recognized, net of estimated returns, upon shipment or delivery.	

 	·	Resource centers – Resource centers services include online courses, scholarship search and selection data, career planning, and online information about colleges and universities. The majority of these services are sold based on subscriptions and/or are performance based. Revenues from sales of subscription and performance based services are recognized ratably over the term of the contract as earned. Subscription and performance based revenues received or receivable in advance of the delivery of services is included in deferred revenue.	

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Software Services Revenue – Software services revenue is determined from individual agreements with customers and includes license and maintenance fees associated with student loan software products.  Computer and software consulting services are recognized over the period in which services are provided to customers.

Operating Expenses

Operating expenses includes indirect costs incurred to generate and acquire student loans; costs incurred to manage and administer the Company’s student loan portfolio and its financing transactions; costs incurred to service the Company’s student loan portfolio and the portfolios of third parties; collection costs related to rehabilitation revenue; the cost to provide enrollment services; costs incurred to provide tuition payment processing, campus commerce, resource center and list marketing services, and software and technical services to third parties; the depreciation and amortization of capital assets and intangible assets; investments in products, services, and technology to meet customer needs and support continued revenue growth; and other general and administrative expenses.  The cost to provide enrollment services, as discussed previously, consists of costs incurred to provide interactive marketing and publishing and editing services in the Company’s Enrollment Services operating segment.  Operating expenses in 2010 also includes employee termination benefits and lease termination costs.

Three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010

Net Interest Income (net of settlements on derivatives)

 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	 	 	 	 	 	 	Change	 	 	 	 	 	 	 	 	Change	 	
 	 	2011	 	 	2010	 	 	$	 	 	 	%	 	 	 	2011	 	 	 	2010	 	 	$	 	 	 	%	 	
Interest income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan interest	 	$	138,934	 	 	 	155,353	 	 	 	(16,419	)	 	 	(10.6	) %	 	$	276,292	 	 	 	290,320	 	 	 	(14,028	)	 	 	(4.8	) %	
Investment interest	 	 	856	 	 	 	1,304	 	 	 	(448	)	 	 	(34.4	)	 	 	1,582	 	 	 	2,305	 	 	 	(723	)	 	 	(31.4	)	
Total interest income	 	 	139,790	 	 	 	156,657	 	 	 	(16,867	)	 	 	(10.8	)	 	 	277,874	 	 	 	292,625	 	 	 	(14,751	)	 	 	(5.0	)	
Interest expense:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest on bonds and notes payable	 	 	51,054	 	 	 	59,243	 	 	 	(8,189	)	 	 	(13.8	)	 	 	103,361	 	 	 	110,102	 	 	 	(6,741	)	 	 	(6.1	)	
Net interest income	 	 	88,736	 	 	 	97,414	 	 	 	(8,678	)	 	 	(8.9	)	 	 	174,513	 	 	 	182,523	 	 	 	(8,010	)	 	 	(4.4	)	
Provision for loan losses	 	 	5,250	 	 	 	6,200	 	 	 	(950	)	 	 	(15.3	)	 	 	9,000	 	 	 	11,200	 	 	 	(2,200	)	 	 	(19.6	)	
Net interest income after provision for loan losses	 	 	83,486	 	 	 	91,214	 	 	 	(7,728	)	 	 	(8.5	)	 	 	165,513	 	 	 	171,323	 	 	 	(5,810	)	 	 	(3.4	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative settlements, net (a)	 	 	(3,522	)	 	 	(3,377	)	 	 	(145	)	 	 	4.3	 	 	 	(7,674	)	 	 	(5,800	)	 	 	(1,874	)	 	 	32.3	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income after provision for loan losses (net of settlements on derivatives)	 	 	79,964	 	 	 	87,837	 	 	 	(7,873	)	 	 	(9.0	) %	 	$	157,839	 	 	 	165,523	 	 	 	(7,684	)	 	 	(4.6	) %	

 	(a)	The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Management has structured the majority of the Company’s derivative transactions with the intent that each is economically effective; however, the Company’s derivative instruments do not qualify for hedge accounting.  Derivative settlements for each applicable period should be evaluated with the Company’s net interest income.	

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Net interest income after provision for loan losses, net of settlements on derivatives, changed for the three and six months ended June 30, 2011 compared to the same periods in 2010 as follows:

 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	 	 	 	 	 	 	Change	 	 	 	 	 	 	 	 	Change	 	
 	 	2011	 	 	2010	 	 	$	 	 	 	%	 	 	 	2011	 	 	 	2010	 	 	$	 	 	 	%	 	

Variable student loan interest margin, net of settlements on derivatives (a)	 	$	53,997	 	 	 	67,804	 	 	 	(13,807	)	 	 	(20.4	) %	 	$	106,527	 	 	 	120,334	 	 	 	(13,807	)	 	 	(11.5	) %	
Fixed rate floor income, net of settlements on derivatives (b)	 	 	32,801	 	 	 	31,054	 	 	 	1,747	 	 	 	5.6	 	 	 	64,483	 	 	 	66,325	 	 	 	(1,842	)	 	 	(2.8	)	
Investment interest (c)	 	 	856	 	 	 	1,304	 	 	 	(448	)	 	 	(34.4	)	 	 	1,582	 	 	 	2,305	 	 	 	(723	)	 	 	(31.4	)	
Corporate debt interest expense (d)	 	 	(2,440	)	 	 	(6,125	)	 	 	3,685	 	 	 	(60.2	)	 	 	(5,753	)	 	 	(12,241	)	 	 	6,488	 	 	 	(53.0	)	
Provision for loan losses (e)	 	 	(5,250	)	 	 	(6,200	)	 	 	950	 	 	 	(15.3	)	 	 	(9,000	)	 	 	(11,200	)	 	 	2,200	 	 	 	(19.6	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income after provision for loan losses (net of settlements on derivatives)	 	$	79,964	 	 	 	87,837	 	 	 	(7,873	)	 	 	(9.0	) %	 	$	157,839	 	 	 	165,523	 	 	 	(7,684	)	 	 	(4.6	) %	
 
 	(a)	Variable student loan spread decreased to 0.94% and 0.92% for the three and six months ended June 30, 2011 compared to 1.06% and 0.96% for the same periods in 2010. See Item 2 under “Asset Generation and Management Operating Segment – Results of Operations – Student Loan Spread Analysis,” for additional information.	

 	(b)	The Company has a portfolio of student loans that are earning interest at a fixed borrower rate which exceeds the statutorily defined variable lender rate generating fixed rate floor income. See Item 3, “Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk” for additional information.	

 	(c)	Investment interest decreased for the three and six months ended June 30, 2011 compared with the same periods in 2010 due to a decrease in average cash held.	

 	(d)	Corporate debt interest expense includes interest expense incurred by the Company on its 5.125% Senior Notes due 2010 (the “Senior Notes”), Junior Subordinated Hybrid Securities, and its $750 million unsecured line of credit. Corporate debt interest expense decreased for the three and six months ended June 30, 2011 compared with the same periods in 2010 due to a reduction in debt outstanding due to the purchase of Junior Subordinated Hybrid Securities, the maturity of the Senior Notes on June 1, 2010, and using excess cash to pay down a portion of the unsecured line of credit.	

 	(e)	The provision for loan losses represents the periodic expense of maintaining an allowance sufficient to absorb losses inherent in the Company's portfolio of loans.  The provision for loan losses recognized by the Company decreased during the three and six months ended June 30, 2011 compared to the same periods in 2010, primarily due to a decrease in the non-federally insured loan provision due to a decrease in the dollar amount of the Company's student loan portfolio, including those loans in repayment, as well as continued aging of the portfolio.	

Other Income

 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	 	 	 	 	 	 	Change	 	 	 	 	 	 	 	 	Change	 	
 	 	2011	 	 	2010	 	 	  $	 	 	 	%	 	 	 	2011	 	 	 	2010	 	 	  $	 	 	 	%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing revenue (a)	 	$	37,389	 	 	 	36,652 	 	 	 	737 	 	 	 	2.0	%	 	$	73,025	 	 	 	73,046 	 	 	 	(21	)  	 	 	(0.0	) %	
Tuition payment processing and campus commerce revenue (b)	 	 	14,761 	 	 	 	12,795 	 	 	 	1,966 	 	 	 	15.4 	 	 	 	34,130 	 	 	 	30,177 	 	 	 	3,953 	 	 	 	13.1 	 	
Enrollment services revenue (c)	 	 	32,315 	 	 	 	35,403 	 	 	 	(3,088	)  	 	 	(8.7	)  	 	 	66,183 	 	 	 	68,674 	 	 	 	(2,491	)  	 	 	(3.6	)  	
Software services revenue (d)	 	 	4,346 	 	 	 	5,499 	 	 	 	(1,153	)  	 	 	(21.0	)  	 	 	9,123 	 	 	 	9,843 	 	 	 	(720	)  	 	 	(7.3	)  	
Other income (e)	 	 	6,826 	 	 	 	8,496 	 	 	 	(1,670	)  	 	 	(19.7	)  	 	 	13,318 	 	 	 	15,756 	 	 	 	(2,438	)  	 	 	(15.5	)  	
Gain on sale of loans and debt repurchases (f)	 	 	—	 	 	 	8,759 	 	 	 	(8,759	)  	 	 	(100.0	)  	 	 	8,307 	 	 	 	18,936 	 	 	 	(10,629	)  	 	 	(56.1	)  	
Derivative market value and foreign currency adjustments (g)	 	 	(16,813	)  	 	 	(7,231	)  	 	 	(9,582	)  	 	 	132.5 	 	 	 	(15,697	)  	 	 	(3,126	)  	 	 	(12,571	)  	 	 	402.1 	 	
Derivative settlements, net (h)	 	 	(3,522	)  	 	 	(3,377	)  	 	 	(145	)  	 	 	4.3 	 	 	 	(7,674	)  	 	 	(5,800	)  	 	 	(1,874	)  	 	 	32.3 	 	
Total other income	 	$	75,302	 	 	 	96,996 	 	 	 	(21,694	)  	 	 	(22.4	) %	 	$	180,715	 	 	 	207,506 	 	 	 	(26,791	)  	 	 	(12.9	) %	
 
 	(a)	“Loan and guaranty servicing revenue” increased for the three months ended June 30, 2011 compared to the same period in 2010 due to an increase in servicing revenue from the Department of Education, partially offset by decreases in FFELP servicing and guaranty servicing revenue. “Loan and guaranty servicing revenue” remained relatively flat for the six months ended June 30, 2011 compared to the same period in 2010 due to decreases in FFELP servicing and guaranty servicing revenues, offset by an increase in government servicing revenue. See Item 2 under “Student Loan and Guaranty Servicing Operating Segment – Results of Operations” for additional information.	

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 	(b)	“Tuition payment processing and campus commerce revenue” increased due to an increase in the number of managed tuition payment plans and an increase in campus commerce customers as discussed in this Item 2 under “Tuition Payment Processing and Campus Commerce Operating Segment – Results of Operations.”	

 	(c)	“Enrollment services revenue” decreased due to a decrease in interactive marketing services volume, as further discussed in this Item 2 under “Enrollment Services Operating Segment – Results of Operations.” Growth in enrollment services revenue has been affected by the current regulatory uncertainty in the for-profit college industry, which has caused schools to decrease spending on marketing efforts.	

 	(d)	“Software services revenue” decreased due to a reduction in the number of projects for existing customers and the loss of customers due to legislative developments in the student loan industry throughout 2010 and 2011.	

 	(e)	The following table summarizes the components of “other income”.	
 
 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Borrower late fee income	 	$	3,222	 	 	 	2,979	 	 	 	6,812	 	 	 	6,237	 	
Investment advisory fees	 	 	1,180	 	 	 	—	 	 	 	1,180	 	 	 	—	 	
529 Plan administration fees	 	 	439	 	 	 	1,141	 	 	 	1,571	 	 	 	2,558	 	
Other	 	 	1,985	 	 	 	4,376	 	 	 	3,755	 	 	 	6,961	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
        Other income	 	$	6,826	 	 	 	8,496	 	 	 	13,318	 	 	 	15,756	 	

(f)   “Gain on sale of loans and debt repurchases” includes the following:
 
 	 	Three months ended June 30, 2011	 	 	Six months ended June 30, 2011	 	
 	 	Notional amount	 	 	Purchase price	 	 	Gain	 	 	Notional amount	 	 	Purchase price	 	 	Gain	 	
Gains on debt repurchases:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Junior Subordinated Hybrid Securities	 	$	—	 	 	 	—	 	 	 	—	 	 	 	62,558 	 	 	 	55,651 	 	 	 	6,907	 	
     Asset-backed securities	 	 	—	 	 	 	—	 	 	 	—	 	 	 	600 	 	 	 	545 	 	 	 	55	 	
 	 	$	—	 	 	 	—	 	 	 	—	 	 	 	63,158 	 	 	 	56,196 	 	 	 	6,962	 	
Gain on sale of loans	 	 	 	 	 	 	 	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	1,345	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Gain on sale of loans and debt repurchases, net	 	 	 	 	 	 	 	 	 	$	—	 	 	 	 	 	 	 	 	 	 	$	8,307	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended June 30, 2010	 	 	Six months ended June 30, 2010	 	
 	 	Notional amount	 	 	Purchase price	 	 	Gain	 	 	Notional amount	 	 	Purchase price	 	 	Gain	 	
Gains on debt repurchases:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Asset-backed securities	 	$	117,775	 	 	 	109,016 	 	 	 	8,759	 	 	 	392,025 	 	 	 	373,089 	 	 	 	18,936	 	

Due to improvements in the capital markets, the opportunities for the Company to repurchase debt at less than par are becoming more limited.

(g)	The change in “derivative market value and foreign currency adjustments” is the result of the change in the fair value of the Company’s derivative portfolio and transaction gains/losses resulting from the re-measurement of the Company’s Euro-denominated bonds to U.S. dollars. These changes are summarized below.	
 
 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in fair value of derivatives - income (expense)	 	$	2,207	 	 	 	(100,632	)	 	 	68,658	 	 	 	(168,201	)	
Foreign currency transaction adjustment - income (expense)	 	 	(19,020	)	 	 	93,401	 	 	 	(84,355	)	 	 	165,075	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    Derivative market value and foreign currency adjustments - income (expense)	 	$	(16,813	)	 	 	(7,231	)	 	 	(15,697	)	 	 	(3,126	)	
 
 	(h)	Further detail of the components of derivative settlements is included in Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”  The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Management has structured the majority of the Company’s derivative transactions with the intent that each is economically effective; however, the Company’s derivative instruments do not qualify for hedge accounting.  Derivative settlements for each applicable period should be evaluated with the Company’s net interest income.	

38

Operating Expenses

As shown below, operating expenses decreased for the three and six months ended June 30, 2011 compared to the same periods in 2010.

 	 	Three months ended June 30,	 	 	Change	 	
 	 	2011	 	 	2010	 	 	  $	 	 	 	%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits (a)	 	$	42,881	 	 	 	40,962 	 	 	 	1,919 	 	 	 	4.7	%	
Cost to provide enrollment services (b)	 	 	22,140 	 	 	 	24,111 	 	 	 	(1,971	)  	 	 	(8.2	)	
Depreciation and amortization (c)	 	 	6,769 	 	 	 	9,728 	 	 	 	(2,959	)  	 	 	(30.4	)	
Restructure expense (d)	 	 	—	 	 	 	72 	 	 	 	(72	)  	 	 	(100.0	)	
Other expenses (e)	 	 	28,767 	 	 	 	33,348 	 	 	 	(4,581	)  	 	 	(13.7	)	
  Total operating expenses	 	$	100,557	 	 	 	108,221 	 	 	 	(7,664	)  	 	 	(7.1	)  %	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six months ended June 30,	 	 	Change	 	
 	 	 	2011	 	 	 	2010	 	 	 	 	 	 	 	%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits (a)	 	$	86,793	 	 	 	81,606 	 	 	 	5,187 	 	 	 	6.4	%	
Cost to provide enrollment services (b)	 	 	44,979 	 	 	 	46,136 	 	 	 	(1,157	)  	 	 	(2.5	)	
Depreciation and amortization (c)	 	 	13,545 	 	 	 	20,511 	 	 	 	(6,966	)  	 	 	(34.0	)	
Restructure expense (d)	 	 	—	 	 	 	1,269 	 	 	 	(1,269	)  	 	 	(100.0	)	
Other expenses (e)	 	 	54,872 	 	 	 	62,403 	 	 	 	(7,531	)  	 	 	(12.1	)	
  Total operating expenses	 	$	200,189	 	 	 	211,925 	 	 	 	(11,736	)  	 	 	(5.5	)  %	

 	(a)	Salaries and benefits increased as a result of supporting the increase in government servicing volume in the Student Loan and Guaranty Servicing operating segment.	
 
 	(b)	Cost to provide enrollment services decreased as a result of a decrease in interactive marketing services volume.	

 	(c)	Depreciation and amortization decreased due to decreases in the amortization of intangible assets and student list costs.  In 2010, the Company accelerated the amortization of student list costs to better reflect the pattern in which the economic benefit of this asset is used to generate revenue.	

 	(d)	Restructure expenses incurred in 2010 were related to a 2009 restructuring plan. This plan was completed during the third quarter of 2010.	

 	(e)	Other expenses decreased due to a decrease in collection costs related to loan rehabilitation revenue, as well as a decrease in consulting and professional fees, primarily legal costs associated with the previously disclosed Oberg litigation.	

Income Taxes

The Company’s effective tax rate was 36.3% and 37.0% for the three and six months ended June 30, 2011, respectively, compared to 37.5% for the same periods in 2010. The effective tax rate for 2011 decreased compared to the same periods in 2010 due to state incentive tax credits and an overall reduction of the state effective tax rate.

Segment Operating Results

Additional information on the Company’s results of operations is included with the discussion of the Company’s operating segments in this Item 2 under “Operating Segments.”

39

Financial Condition as of June 30, 2011 compared to December 31, 2010

 	 	As of	 	 	As of	 	 	 	 	
 	 	June 30,	 	 	December 31,	 	 	Change	 	
 	 	2011	 	 	2010	 	 	Dollars	 	 	Percent	 	
Assets:	 	 	 	 	 	 	 	 	 	 	 	 	
Student loans receivable, net	 	$	23,228,778	 	 	 	23,948,014 	 	 	 	(719,236	)  	 	 	(3.0	) %	
Student loans receivable - held for sale	 	 	—	 	 	 	84,987 	 	 	 	(84,987	)  	 	 	(100.0	)	
Cash, cash equivalents, and investments	 	 	823,187 	 	 	 	1,084,322 	 	 	 	(261,135	)  	 	 	(24.1	)	
Goodwill	 	 	117,118 	 	 	 	117,118 	 	 	 	—	 	 	 	—	 	
Intangible assets, net	 	 	37,564 	 	 	 	38,712 	 	 	 	(1,148	)  	 	 	(3.0	)	
Fair value of derivative instruments	 	 	182,450 	 	 	 	118,346 	 	 	 	64,104 	 	 	 	54.2	 	
Other assets	 	 	482,414 	 	 	 	502,393 	 	 	 	(19,979	)  	 	 	(4.0	)	
Total assets	 	$	24,871,511	 	 	 	25,893,892 	 	 	 	(1,022,381	)  	 	 	(3.9	) %	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Bonds and notes payable	 	$	23,605,413	 	 	 	24,672,472 	 	 	 	(1,067,059	)  	 	 	(4.3	) %	
Fair value of derivative instruments	 	 	23,383 	 	 	 	16,089 	 	 	 	7,294 	 	 	 	45.3	 	
Other liabilities	 	 	253,931 	 	 	 	298,698 	 	 	 	(44,767	)  	 	 	(15.0	)	
Total liabilities	 	 	23,882,727 	 	 	 	24,987,259 	 	 	 	(1,104,532	)  	 	 	(4.4	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Shareholders' equity	 	 	988,784 	 	 	 	906,633 	 	 	 	82,151 	 	 	 	9.1	 	
Total liabilities and shareholders' equity	 	$	24,871,511	 	 	 	25,893,892 	 	 	 	(1,022,381	)  	 	 	(3.9	) %	

Total assets and total liabilities decreased during 2011.  The decrease in total assets was primarily due to the decrease of student loans receivable which occurred as a result of repayments and the loss of loans to consolidation to external parties partially offset by the acquisition of loan portfolios from third parties. The decrease in total liabilities was primarily due to the Company paying down bonds and notes payable. See the activity of loans acquired in this Item 2 under “Asset Generation and Management – Results of Operations.”

OPERATING SEGMENTS

The Company earns fee-based revenue through its Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, and Enrollment Services operating segments. In addition, the Company earns net interest income on its student loan portfolio in its Asset Generation and Management operating segment. The Company’s operating segments are defined by the products and services they offer or the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management.

The accounting policies of the Company’s operating segments are the same as those described in note 2 in the notes to the consolidated financial statements included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2010. Intersegment revenues are charged by a segment to another segment that provides the product or service.  Intersegment revenues and expenses are included within each segment consistent with the income statement presentation provided to management.  Changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial information. The Company allocates certain corporate overhead expenses to the individual operating segments.  These expenses include certain corporate activities related to executive management, human resources, accounting, legal, occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and services.

The management reporting process measures the performance of the Company’s operating segments based on the management structure of the Company as well as the methodology used by management to evaluate performance and allocate resources.  Management, including the Company’s chief operating decision maker, evaluates the performance of the Company’s operating segments based on their profitability.  As discussed further below, management measures the profitability of the Company’s operating segments based on “base net income.”  Accordingly, information regarding the Company’s operating segments is provided based on “base net income.”  The Company’s “base net income” is not a defined term within generally accepted accounting principles (“GAAP”) and may not be comparable to similarly titled measures reported by other companies.  Unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting.

“Base net income” is the primary financial performance measure used by management to develop the Company’s financial plans, track results, and establish corporate performance targets and incentive compensation.  While “base net income” is not a substitute for reported results under GAAP, the Company relies on “base net income” in operating its business because “base net income” permits management to make meaningful period-to-period comparisons of the operational and performance indicators that are most closely assessed by management.  Management believes this information provides additional insight into the financial performance of the core business activities of the Company’s operating segments.

40

Accordingly, the tables presented below reflect “base net income” which is reviewed and utilized by management to manage the business for each of the Company’s operating segments.  Reconciliation of the segment totals to the Company’s consolidated operating results in accordance with GAAP are also included in the tables below.  Included below under “Non-GAAP Performance Measures” is further discussion regarding “base net income” and its limitations, including a table that details the differences between “base net income” and GAAP net income by operating segment.

Income Taxes

For segment reporting, income taxes are applied based on 38% of income (loss) before taxes for each individual operating segment. The difference between the consolidated income tax expense and the sum of taxes calculated for each operating segment is included in income taxes in Corporate Activity and Overhead.

Reclassifications

Certain amounts previously reported within operating expenses have been reclassified to conform to the current period presentation. These reclassifications had no effect on any of the segments’ net income or assets and liabilities.

Segment Results and Reconciliations to GAAP

 	 	Three months ended June 30, 2011	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Tuition	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	 	Payment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Loan	 	 	Processing	 	 	 	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	and
Guaranty	 	 	and
Campus	 	 	Enrollment	 	 	Total
Fee-	 	 	Generation
and	 	 	Activity
and	 	 	 	 	 	Base Net	 	 	Adjustments
to GAAP	 	 	GAAP
Results of	 	
 	 	Servicing	 	 	Commerce	 	 	Services	 	 	Based	 	 	Management	 	 	Overhead	 	 	Eliminations	 	 	Income	 	 	Results	 	 	Operations	 	

Total interest income	 	$	12	 	 	 	2	 	 	 	—	 	 	 	14	 	 	 	139,284	 	 	 	1,147	 	 	 	(655	)	 	 	139,790	 	 	 	—	 	 	 	139,790	 	
Interest expense	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	49,269	 	 	 	2,440	 	 	 	(655	)	 	 	51,054	 	 	 	—	 	 	 	51,054	 	
Net interest income (loss)	 	 	12	 	 	 	2	 	 	 	—	 	 	 	14	 	 	 	90,015	 	 	 	(1,293	)	 	 	—	 	 	 	88,736	 	 	 	—	 	 	 	88,736	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	5,250	 	 	 	—	 	 	 	—	 	 	 	5,250	 	 	 	—	 	 	 	5,250	 	
Net interest income (loss) after provision for loan losses	 	 	12	 	 	 	2	 	 	 	—	 	 	 	14	 	 	 	84,765	 	 	 	(1,293	)	 	 	—	 	 	 	83,486	 	 	 	—	 	 	 	83,486	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing revenue	 	 	37,389	 	 	 	—	 	 	 	—	 	 	 	37,389	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	37,389	 	 	 	—	 	 	 	37,389	 	
Intersegment servicing revenue	 	 	16,793	 	 	 	—	 	 	 	—	 	 	 	16,793	 	 	 	—	 	 	 	—	 	 	 	(16,793	)	 	 	—	 	 	 	—	 	 	 	—	 	
Tuition payment processing and campus commerce revenue	 	 	—	 	 	 	14,761	 	 	 	—	 	 	 	14,761	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	14,761	 	 	 	—	 	 	 	14,761	 	
Enrollment services revenue	 	 	—	 	 	 	—	 	 	 	32,315	 	 	 	32,315	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	32,315	 	 	 	—	 	 	 	32,315	 	
Software services revenue	 	 	4,346	 	 	 	—	 	 	 	—	 	 	 	4,346	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	4,346	 	 	 	—	 	 	 	4,346	 	
Other income	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	3,997	 	 	 	2,829	 	 	 	—	 	 	 	6,826	 	 	 	—	 	 	 	6,826	 	
Gain on sale of loans and debt repurchases	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Derivative market value and foreign currency adjustments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(16,813	)	 	 	(16,813	)	
Derivative settlements, net	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(3,274	)	 	 	(248	)	 	 	—	 	 	 	(3,522	)	 	 	—	 	 	 	(3,522	)	
Total other income (expense)	 	 	58,528	 	 	 	14,761	 	 	 	32,315	 	 	 	105,604	 	 	 	723	 	 	 	2,581	 	 	 	(16,793	)	 	 	92,115	 	 	 	(16,813	)	 	 	75,302	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	24,731	 	 	 	7,249	 	 	 	5,931	 	 	 	37,911	 	 	 	709	 	 	 	4,261	 	 	 	—	 	 	 	42,881	 	 	 	—	 	 	 	42,881	 	
Cost to provide enrollment services	 	 	—	 	 	 	—	 	 	 	22,140	 	 	 	22,140	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	22,140	 	 	 	—	 	 	 	22,140	 	
Depreciation and amortization	 	 	1,336	 	 	 	345	 	 	 	780	 	 	 	2,461	 	 	 	—	 	 	 	349	 	 	 	—	 	 	 	2,810	 	 	 	3,959	 	 	 	6,769	 	
Restructure expense	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Other	 	 	14,605	 	 	 	2,327	 	 	 	2,442	 	 	 	19,374	 	 	 	5,139	 	 	 	4,254	 	 	 	—	 	 	 	28,767	 	 	 	—	 	 	 	28,767	 	
Intersegment expenses, net	 	 	1,060	 	 	 	1,118	 	 	 	959	 	 	 	3,137	 	 	 	17,047	 	 	 	(3,391	)	 	 	(16,793	)	 	 	—	 	 	 	—	 	 	 	—	 	
Total operating expenses	 	 	41,732	 	 	 	11,039	 	 	 	32,252	 	 	 	85,023	 	 	 	22,895	 	 	 	5,473	 	 	 	(16,793	)	 	 	96,598	 	 	 	3,959	 	 	 	100,557	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes and corporate overhead allocation	 	 	16,808	 	 	 	3,724	 	 	 	63	 	 	 	20,595	 	 	 	62,593	 	 	 	(4,185	)	 	 	—	 	 	 	79,003	 	 	 	(20,772	)	 	 	58,231	 	
Corporate overhead allocation	 	 	(1,233	)	 	 	(411	)	 	 	(411	)	 	 	(2,055	)	 	 	(2,054	)	 	 	4,109	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Income (loss) before income taxes	 	 	15,575	 	 	 	3,313	 	 	 	(348	)	 	 	18,540	 	 	 	60,539	 	 	 	(76	)	 	 	—	 	 	 	79,003	 	 	 	(20,772	)	 	 	58,231	 	
Income tax (expense) benefit	 	 	(5,917	)	 	 	(1,259	)	 	 	132	 	 	 	(7,044	)	 	 	(23,412	)	 	 	1,457	 	 	 	—	 	 	 	(28,999	)	 	 	7,893	 	 	 	(21,106	)	
Net income (loss)	 	$	9,658	 	 	 	2,054	 	 	 	(216	)	 	 	11,496	 	 	 	37,127	 	 	 	1,381	 	 	 	—	 	 	 	50,004	 	 	 	(12,879	)	 	 	37,125	 	

41

 	 	Three months ended June 30, 2010	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Tuition	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	 	Payment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Loan	 	 	Processing	 	 	 	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	and
Guaranty	 	 	and
Campus	 	 	Enrollment	 	 	Total
Fee-	 	 	Generation
and	 	 	Activity
and	 	 	 	 	 	Base
Net	 	 	Adjustments
to GAAP	 	 	GAAP
Results of	 	
 	 	Servicing	 	 	Commerce	 	 	Services	 	 	Based	 	 	Management	 	 	Overhead	 	 	Eliminations	 	 	Income	 	 	Results	 	 	Operations	 	

Total interest income	 	$	17	 	 	 	4	 	 	 	—	 	 	 	21	 	 	 	155,701	 	 	 	1,922	 	 	 	(987	)	 	 	156,657	 	 	 	—	 	 	 	156,657	 	
Interest expense	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	54,105	 	 	 	6,125	 	 	 	(987	)	 	 	59,243	 	 	 	—	 	 	 	59,243	 	
Net interest income (loss)	 	 	17	 	 	 	4	 	 	 	—	 	 	 	21	 	 	 	101,596	 	 	 	(4,203	)	 	 	—	 	 	 	97,414	 	 	 	—	 	 	 	97,414	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	6,200	 	 	 	—	 	 	 	—	 	 	 	6,200	 	 	 	—	 	 	 	6,200	 	
Net interest income (loss) after provision for loan losses	 	 	17	 	 	 	4	 	 	 	—	 	 	 	21	 	 	 	95,396	 	 	 	(4,203	)	 	 	—	 	 	 	91,214	 	 	 	—	 	 	 	91,214	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing revenue	 	 	36,652	 	 	 	—	 	 	 	—	 	 	 	36,652	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	36,652	 	 	 	—	 	 	 	36,652	 	
Intersegment servicing revenue	 	 	21,969	 	 	 	—	 	 	 	—	 	 	 	21,969	 	 	 	—	 	 	 	—	 	 	 	(21,969	)	 	 	—	 	 	 	—	 	 	 	—	 	
Tuition payment processing and campus commerce revenue	 	 	—	 	 	 	12,795	 	 	 	—	 	 	 	12,795	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	12,795	 	 	 	—	 	 	 	12,795	 	
Enrollment services revenue	 	 	—	 	 	 	—	 	 	 	35,403	 	 	 	35,403	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	35,403	 	 	 	—	 	 	 	35,403	 	
Software services revenue	 	 	5,499	 	 	 	—	 	 	 	—	 	 	 	5,499	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	5,499	 	 	 	—	 	 	 	5,499	 	
Other income	 	 	295	 	 	 	—	 	 	 	—	 	 	 	295	 	 	 	4,636	 	 	 	3,565	 	 	 	—	 	 	 	8,496	 	 	 	—	 	 	 	8,496	 	
Gain on sale of loans and debt repurchases	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	8,759	 	 	 	—	 	 	 	—	 	 	 	8,759	 	 	 	—	 	 	 	8,759	 	
Derivative market value and foreign currency adjustments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(7,231	)	 	 	(7,231	)	
Derivative settlements, net	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(3,377	)	 	 	—	 	 	 	—	 	 	 	(3,377	)	 	 	—	 	 	 	(3,377	)	
Total other income (expense)	 	 	64,415	 	 	 	12,795	 	 	 	35,403	 	 	 	112,613	 	 	 	10,018	 	 	 	3,565	 	 	 	(21,969	)	 	 	104,227	 	 	 	(7,231	)	 	 	96,996	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	23,327	 	 	 	6,594	 	 	 	6,447	 	 	 	36,368	 	 	 	1,286	 	 	 	3,808	 	 	 	(500	)	 	 	40,962	 	 	 	—	 	 	 	40,962	 	
Cost to provide enrollment services	 	 	—	 	 	 	—	 	 	 	24,111	 	 	 	24,111	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	24,111	 	 	 	—	 	 	 	24,111	 	
Depreciation and amortization	 	 	1,157	 	 	 	339	 	 	 	1,616	 	 	 	3,112	 	 	 	—	 	 	 	384	 	 	 	—	 	 	 	3,496	 	 	 	6,232	 	 	 	9,728	 	
Restructure expense	 	 	84	 	 	 	—	 	 	 	—	 	 	 	84	 	 	 	—	 	 	 	(12	)	 	 	—	 	 	 	72	 	 	 	—	 	 	 	72	 	
Other	 	 	18,668	 	 	 	2,272	 	 	 	2,449	 	 	 	23,389	 	 	 	2,992	 	 	 	6,967	 	 	 	—	 	 	 	33,348	 	 	 	—	 	 	 	33,348	 	
Intersegment expenses, net	 	 	1,149	 	 	 	879	 	 	 	641	 	 	 	2,669	 	 	 	21,891	 	 	 	(3,091	)	 	 	(21,469	)	 	 	—	 	 	 	—	 	 	 	—	 	
Total operating expenses	 	 	44,385	 	 	 	10,084	 	 	 	35,264	 	 	 	89,733	 	 	 	26,169	 	 	 	8,056	 	 	 	(21,969	)	 	 	101,989	 	 	 	6,232	 	 	 	108,221	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes and corporate overhead allocation	 	 	20,047	 	 	 	2,715	 	 	 	139	 	 	 	22,901	 	 	 	79,245	 	 	 	(8,694	)	 	 	—	 	 	 	93,452	 	 	 	(13,463	)	 	 	79,989	 	
Corporate overhead allocation	 	 	(1,484	)	 	 	(495	)	 	 	(495	)	 	 	(2,474	)	 	 	(2,473	)	 	 	4,947	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Income (loss) before income taxes	 	 	18,563	 	 	 	2,220	 	 	 	(356	)	 	 	20,427	 	 	 	76,772	 	 	 	(3,747	)	 	 	—	 	 	 	93,452	 	 	 	(13,463	)	 	 	79,989	 	
Income tax (expense) benefit	 	 	(7,053	)	 	 	(844	)	 	 	135	 	 	 	(7,762	)	 	 	(29,173	)	 	 	1,823	 	 	 	—	 	 	 	(35,112	)	 	 	5,116	 	 	 	(29,996	)	
Net income (loss)	 	$	11,510	 	 	 	1,376	 	 	 	(221	)	 	 	12,665	 	 	 	47,599	 	 	 	(1,924	)	 	 	 	 	 	 	58,340	 	 	 	(8,347	)	 	 	49,993	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Additional information:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	11,510	 	 	 	1,376	 	 	 	(221	)	 	 	12,665	 	 	 	47,599	 	 	 	(1,924	)	 	 	—	 	 	 	58,340	 	 	 	(8,347	)	 	 	49,993	 	
Plus:Restructure expense (a)	 	 	84	 	 	 	—	 	 	 	—	 	 	 	84	 	 	 	—	 	 	 	(12	)	 	 	—	 	 	 	72	 	 	 	(72	)	 	 	—	 	
Less: Net tax effect	 	 	(32	)	 	 	—	 	 	 	—	 	 	 	(32	)	 	 	—	 	 	 	5	 	 	 	—	 	 	 	(27	)	 	 	27	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss), excluding restructure expense	 	$	11,562	 	 	 	1,376	 	 	 	(221	)	 	 	12,717	 	 	 	47,599	 	 	 	(1,931	)	 	 	—	 	 	 	58,385	 	 	 	(8,392	)	 	 	49,993	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(a) During the second quarter of 2010, the Company recorded restructuring charges associated with previously implemented restructuring plans.

 
42

 
 
 	 	Six months ended June 30, 2011	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Tuition	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	 	Payment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Loan	 	 	Processing	 	 	 	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	and
Guaranty	 	 	and
Campus	 	 	Enrollment	 	 	Total
Fee-	 	 	Generation
and	 	 	Activity
and	 	 	 	 	 	Base Net	 	 	Adjustments
to GAAP	 	 	GAAP
Results of	 	
 	 	Servicing	 	 	Commerce	 	 	Services	 	 	Based	 	 	Management	 	 	Overhead	 	 	Eliminations	 	 	Income	 	 	Results	 	 	Operations	 	

Total interest income	 	$	27	 	 	 	8 	 	 	 	—	 	 	 	35 	 	 	 	276,923 	 	 	 	2,293 	 	 	 	(1,377	)  	 	 	277,874 	 	 	 	—	 	 	 	277,874 	 	
 Interest expense	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	98,985 	 	 	 	5,753 	 	 	 	(1,377	)  	 	 	103,361 	 	 	 	—	 	 	 	103,361 	 	
 Net interest income (loss)	 	 	27 	 	 	 	8 	 	 	 	—	 	 	 	35 	 	 	 	177,938 	 	 	 	(3,460	)  	 	 	—	 	 	 	174,513 	 	 	 	—	 	 	 	174,513 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 Less provision for loan losses	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	9,000 	 	 	 	—	 	 	 	—	 	 	 	9,000 	 	 	 	—	 	 	 	9,000 	 	
 Net interest income (loss) after provision for loan losses	 	 	27 	 	 	 	8 	 	 	 	—	 	 	 	35 	 	 	 	168,938 	 	 	 	(3,460	)  	 	 	—	 	 	 	165,513 	 	 	 	—	 	 	 	165,513 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 Loan and guaranty servicing revenue	 	 	73,025 	 	 	 	—	 	 	 	—	 	 	 	73,025 	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	73,025 	 	 	 	—	 	 	 	73,025 	 	
 Intersegment servicing revenue	 	 	34,650 	 	 	 	—	 	 	 	—	 	 	 	34,650 	 	 	 	—	 	 	 	—	 	 	 	(34,650	)  	 	 	—	 	 	 	—	 	 	 	—	 	
 Tuition payment processing and campus commerce revenue	 	 	—	 	 	 	34,130 	 	 	 	—	 	 	 	34,130 	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	34,130 	 	 	 	—	 	 	 	34,130 	 	
 Enrollment services revenue	 	 	—	 	 	 	—	 	 	 	66,183 	 	 	 	66,183 	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	66,183 	 	 	 	—	 	 	 	66,183 	 	
 Software services revenue	 	 	9,123 	 	 	 	—	 	 	 	—	 	 	 	9,123 	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	9,123 	 	 	 	—	 	 	 	9,123 	 	
 Other income	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	8,133 	 	 	 	5,185 	 	 	 	—	 	 	 	13,318 	 	 	 	—	 	 	 	13,318 	 	
 Gain on sale of loans and debt repurchases	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	1,400 	 	 	 	6,907 	 	 	 	—	 	 	 	8,307 	 	 	 	—	 	 	 	8,307 	 	
 Derivative market value and foreign currency adjustments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(15,697	)  	 	 	(15,697	)  	
 Derivative settlements, net	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(7,312	)  	 	 	(362	)  	 	 	—	 	 	 	(7,674	)  	 	 	—	 	 	 	(7,674	)  	
 Total other income (expense)	 	 	116,798 	 	 	 	34,130 	 	 	 	66,183 	 	 	 	217,111 	 	 	 	2,221 	 	 	 	11,730 	 	 	 	(34,650	)  	 	 	196,412 	 	 	 	(15,697	)  	 	 	180,715 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 Salaries and benefits	 	 	50,119 	 	 	 	14,401 	 	 	 	12,188 	 	 	 	76,708 	 	 	 	1,487 	 	 	 	8,598 	 	 	 	—	 	 	 	86,793 	 	 	 	—	 	 	 	86,793 	 	
 Cost to provide enrollment services	 	 	—	 	 	 	—	 	 	 	44,979 	 	 	 	44,979 	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	44,979 	 	 	 	—	 	 	 	44,979 	 	
 Depreciation and amortization	 	 	2,642 	 	 	 	681 	 	 	 	1,593 	 	 	 	4,916 	 	 	 	—	 	 	 	694 	 	 	 	—	 	 	 	5,610 	 	 	 	7,935 	 	 	 	13,545 	 	
 Restructure expense	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 Other	 	 	29,184 	 	 	 	4,961 	 	 	 	4,760 	 	 	 	38,905 	 	 	 	6,677 	 	 	 	9,290 	 	 	 	—	 	 	 	54,872 	 	 	 	—	 	 	 	54,872 	 	
 Intersegment expenses, net	 	 	2,429 	 	 	 	2,211 	 	 	 	1,777 	 	 	 	6,417 	 	 	 	35,194 	 	 	 	(6,961	)  	 	 	(34,650	)  	 	 	—	 	 	 	—	 	 	 	—	 	
 Total operating expenses	 	 	84,374 	 	 	 	22,254 	 	 	 	65,297 	 	 	 	171,925 	 	 	 	43,358 	 	 	 	11,621 	 	 	 	(34,650	)  	 	 	192,254 	 	 	 	7,935 	 	 	 	200,189 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 Income (loss) before income taxes and corporate overhead allocation	 	 	32,451 	 	 	 	11,884 	 	 	 	886 	 	 	 	45,221 	 	 	 	127,801 	 	 	 	(3,351	)  	 	 	—	 	 	 	169,671 	 	 	 	(23,632	)  	 	 	146,039 	 	
 Corporate overhead allocation	 	 	(1,986	)  	 	 	(662	)  	 	 	(662	)  	 	 	(3,310	)  	 	 	(3,309	)  	 	 	6,619 	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 Income (loss) before income taxes	 	 	30,465 	 	 	 	11,222 	 	 	 	224 	 	 	 	41,911 	 	 	 	124,492 	 	 	 	3,268 	 	 	 	—	 	 	 	169,671 	 	 	 	(23,632	)  	 	 	146,039 	 	
 Income tax (expense) benefit	 	 	(11,575	)  	 	 	(4,264	)  	 	 	(85	)  	 	 	(15,924	)  	 	 	(47,714	)  	 	 	624 	 	 	 	—	 	 	 	(63,014	)  	 	 	8,980 	 	 	 	(54,034	)  	
 Net income (loss)	 	$	18,890	 	 	 	6,958 	 	 	 	139 	 	 	 	25,987 	 	 	 	76,778 	 	 	 	3,892 	 	 	 	—	 	 	 	106,657 	 	 	 	(14,652	)  	 	 	92,005 	 	

43

 	 	Six months ended June 30, 2010	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Tuition	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	 	Payment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Loan	 	 	Processing	 	 	 	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	and
Guaranty	 	 	and
Campus	 	 	Enrollment	 	 	Total
Fee-	 	 	Generation
and	 	 	Activity
and	 	 	 	 	 	Base net	 	 	Adjustments
to GAAP	 	 	GAAP
Results of	 	
 	 	Servicing	 	 	Commerce	 	 	Services	 	 	Based	 	 	Management	 	 	Overhead	 	 	Eliminations	 	 	income	 	 	Results	 	 	Operations	 	

Total interest income	 	$	30	 	 	 	12	 	 	 	—	 	 	 	42	 	 	 	290,963	 	 	 	3,520	 	 	 	(1,900	)	 	 	292,625	 	 	 	—	 	 	 	292,625	 	
Interest expense	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	99,761	 	 	 	12,241	 	 	 	(1,900	)	 	 	110,102	 	 	 	—	 	 	 	110,102	 	
Net interest income (loss)	 	 	30	 	 	 	12	 	 	 	—	 	 	 	42	 	 	 	191,202	 	 	 	(8,721	)	 	 	—	 	 	 	182,523	 	 	 	—	 	 	 	182,523	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	11,200	 	 	 	—	 	 	 	—	 	 	 	11,200	 	 	 	—	 	 	 	11,200	 	
Net interest income (loss) after provision for loan losses	 	 	30	 	 	 	12	 	 	 	—	 	 	 	42	 	 	 	180,002	 	 	 	(8,721	)	 	 	—	 	 	 	171,323	 	 	 	—	 	 	 	171,323	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing revenue	 	 	73,300	 	 	 	—	 	 	 	—	 	 	 	73,300	 	 	 	—	 	 	 	(254	)	 	 	—	 	 	 	73,046	 	 	 	—	 	 	 	73,046	 	
Intersegment servicing revenue	 	 	43,549	 	 	 	—	 	 	 	—	 	 	 	43,549	 	 	 	—	 	 	 	—	 	 	 	(43,549	)	 	 	—	 	 	 	—	 	 	 	—	 	
Tuition payment processing and campus commerce revenue	 	 	—	 	 	 	30,177	 	 	 	—	 	 	 	30,177	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	30,177	 	 	 	—	 	 	 	30,177	 	
Enrollment services revenue	 	 	—	 	 	 	—	 	 	 	68,674	 	 	 	68,674	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	68,674	 	 	 	—	 	 	 	68,674	 	
Software services revenue	 	 	9,843	 	 	 	—	 	 	 	—	 	 	 	9,843	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	9,843	 	 	 	—	 	 	 	9,843	 	
Other income	 	 	519	 	 	 	—	 	 	 	—	 	 	 	519	 	 	 	9,404	 	 	 	5,833	 	 	 	—	 	 	 	15,756	 	 	 	—	 	 	 	15,756	 	
Gain on sale of loans and debt repurchases	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	18,936	 	 	 	—	 	 	 	—	 	 	 	18,936	 	 	 	—	 	 	 	18,936	 	
Derivative market value and foreign currency adjustments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(3,126	)	 	 	(3,126	)	
Derivative settlements, net	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(5,800	)	 	 	—	 	 	 	—	 	 	 	(5,800	)	 	 	—	 	 	 	(5,800	)	
Total other income (expense)	 	 	127,211	 	 	 	30,177	 	 	 	68,674	 	 	 	226,062	 	 	 	22,540	 	 	 	5,579	 	 	 	(43,549	)	 	 	210,632	 	 	 	(3,126	)	 	 	207,506	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	46,909	 	 	 	13,212	 	 	 	12,518	 	 	 	72,639	 	 	 	2,644	 	 	 	7,925	 	 	 	(1,602	)	 	 	81,606	 	 	 	—	 	 	 	81,606	 	
Cost to provide enrollment services	 	 	—	 	 	 	—	 	 	 	46,136	 	 	 	46,136	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	46,136	 	 	 	—	 	 	 	46,136	 	
Depreciation and amortization	 	 	2,176	 	 	 	672	 	 	 	4,120	 	 	 	6,968	 	 	 	3	 	 	 	792	 	 	 	—	 	 	 	7,763	 	 	 	12,748	 	 	 	20,511	 	
Restructure expense	 	 	1,289	 	 	 	—	 	 	 	—	 	 	 	1,289	 	 	 	—	 	 	 	(20	)	 	 	—	 	 	 	1,269	 	 	 	—	 	 	 	1,269	 	
Other	 	 	33,168	 	 	 	4,380	 	 	 	5,007	 	 	 	42,555	 	 	 	7,210	 	 	 	12,638	 	 	 	—	 	 	 	62,403	 	 	 	—	 	 	 	62,403	 	
Intersegment expenses, net	 	 	2,992	 	 	 	1,653	 	 	 	1,074	 	 	 	5,719	 	 	 	42,716	 	 	 	(6,488	)	 	 	(41,947	)	 	 	—	 	 	 	—	 	 	 	—	 	
Total operating expenses	 	 	86,534	 	 	 	19,917	 	 	 	68,855	 	 	 	175,306	 	 	 	52,573	 	 	 	14,847	 	 	 	(43,549	)	 	 	199,177	 	 	 	12,748	 	 	 	211,925	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes and corporate overhead allocation	 	 	40,707	 	 	 	10,272	 	 	 	(181	)	 	 	50,798	 	 	 	149,969	 	 	 	(17,989	)	 	 	—	 	 	 	182,778	 	 	 	(15,874	)	 	 	166,904	 	
Corporate overhead allocation	 	 	(2,673	)	 	 	(891	)	 	 	(891	)	 	 	(4,455	)	 	 	(4,454	)	 	 	8,909	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Income (loss) before income taxes	 	 	38,034	 	 	 	9,381	 	 	 	(1,072	)	 	 	46,343	 	 	 	145,515	 	 	 	(9,080	)	 	 	—	 	 	 	182,778	 	 	 	(15,874	)	 	 	166,904	 	
Income tax (expense) benefit	 	 	(14,453	)	 	 	(3,566	)	 	 	408	 	 	 	(17,611	)	 	 	(55,296	)	 	 	4,286	 	 	 	—	 	 	 	(68,621	)	 	 	6,032	 	 	 	(62,589	)	
Net income (loss)	 	$	23,581	 	 	 	5,815	 	 	 	(664	)	 	 	28,732	 	 	 	90,219	 	 	 	(4,794	)	 	 	—	 	 	 	114,157	 	 	 	(9,842	)	 	 	104,315	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Additional information:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	23,581	 	 	 	5,815	 	 	 	(664	)	 	 	28,732	 	 	 	90,219	 	 	 	(4,794	)	 	 	—	 	 	 	114,157	 	 	 	(9,842	)	 	 	104,315	 	
Plus: Restructure expense (a)	 	 	1,289	 	 	 	—	 	 	 	—	 	 	 	1,289	 	 	 	—	 	 	 	(20	)	 	 	—	 	 	 	1,269	 	 	 	(1,269	)	 	 	—	 	
Less: Net tax effect	 	 	(490	)	 	 	—	 	 	 	—	 	 	 	(490	)	 	 	—	 	 	 	8	 	 	 	—	 	 	 	(482	)	 	 	482	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss), excluding restructure expense	 	$	24,380	 	 	 	5,815	 	 	 	(664	)	 	 	29,531	 	 	 	90,219	 	 	 	(4,806	)	 	 	—	 	 	 	114,944	 	 	 	(10,629	)	 	 	104,315	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(a) During the first six months of 2010, the Company recorded restructuring charges associated with previously implemented restructuring plans.
 
Non-GAAP Performance Measures
 
In accordance with the rules and regulations of the Securities and Exchange Commission, the Company prepares financial statements in accordance with generally accepted accounting principles. In addition to evaluating the Company’s GAAP-based financial information, management also evaluates the Company’s operating segments on a non-GAAP performance measure referred to as “base net income” for each operating segment. While “base net income” is not a substitute for reported results under GAAP, the Company relies on “base net income” to manage each operating segment because management believes these measures provide additional information regarding the operational and performance indicators that are most closely assessed by management.

“Base net income” is the primary financial performance measure used by management to develop financial plans, establish corporate performance targets, allocate resources, track results, evaluate performance, and determine incentive compensation.  Accordingly, financial information is reported to management on a “base net income” basis by operating segment, as these are the measures used regularly by the Company’s chief operating decision maker.  The Company’s board of directors utilizes “base net income” to set performance targets and evaluate management’s performance.  The Company also believes analysts, rating agencies, and creditors use “base net income” in their evaluation of the Company’s results of operations.  While “base net income” is not a substitute for reported results under GAAP, the Company utilizes “base net income” in operating its business because “base net income” permits management to make meaningful period-to-period comparisons by eliminating the temporary volatility in the Company’s performance that arises from certain items that are primarily affected by factors beyond the control of management.  Management believes “base net income” provides additional insight into the financial performance of the core business activities of the Company’s operations.

44

Limitations of “Base Net Income”

While GAAP provides a uniform, comprehensive basis of accounting, for the reasons discussed above, management believes that “base net income” is an important additional tool for providing a more complete understanding of the Company’s results of operations.  Nevertheless, “base net income” is subject to certain general and specific limitations that investors should carefully consider.  For example, as stated above, unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting.  The Company’s “base net income” is not a defined term within GAAP and may not be comparable to similarly titled measures reported by other companies.  Investors, therefore, may not be able to compare the Company’s performance with that of other companies based upon “base net income.”  “Base net income” results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely monitored and used by the Company’s management and board of directors to assess performance and information which the Company believes is important to analysts, rating agencies, and creditors.

Other limitations of “base net income” arise from the specific adjustments that management makes to GAAP results to derive “base net income” results.  These differences are described below.

The adjustments required to reconcile from the Company’s “base net income” measure to its GAAP results of operations relate to differing treatments for derivatives, foreign currency transaction adjustments, and amortization of intangible assets. These items are excluded from management’s evaluation of the Company’s operating results. The following table reflects adjustments associated with these areas by operating segment and Corporate Activity and Overhead:

 	 	Student	 	 	Tuition	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Loan	 	 	Payment	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	
 	 	and	 	 	Processing	 	 	 	 	 	Generation	 	 	Activity	 	 	 	 	
 	 	Guaranty	 	 	and Campus	 	 	Enrollment	 	 	and	 	 	and	 	 	 	 	
 	 	Servicing	 	 	Commerce	 	 	Services	 	 	Management	 	 	Overhead	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended June 30, 2011	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value and foreign currency adjustments	 	$	—	 	 	 	—	 	 	 	—	 	 	 	12,531 	 	 	 	4,282 	 	 	 	16,813 	 	
Amortization of intangible assets	 	 	2,100 	 	 	 	981 	 	 	 	878 	 	 	 	—	 	 	 	—	 	 	 	3,959 	 	
Net tax effect (a)	 	 	(798	)  	 	 	(373	)  	 	 	(334	)  	 	 	(4,762	)  	 	 	(1,626	)  	 	 	(7,893	)  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total adjustments to GAAP	 	$	1,302	 	 	 	608 	 	 	 	544 	 	 	 	7,769 	 	 	 	2,656 	 	 	 	12,879 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended June 30, 2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value and foreign currency adjustments	 	$	—	 	 	 	—	 	 	 	—	 	 	 	550 	 	 	 	6,681 	 	 	 	7,231 	 	
Amortization of intangible assets	 	 	2,114 	 	 	 	1,591 	 	 	 	2,527 	 	 	 	—	 	 	 	—	 	 	 	6,232 	 	
Net tax effect (a)	 	 	(803	)  	 	 	(605	)  	 	 	(958	)  	 	 	(209	)  	 	 	(2,541	)  	 	 	(5,116	)  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total adjustments to GAAP	 	$	1,311	 	 	 	986 	 	 	 	1,569 	 	 	 	341 	 	 	 	4,140 	 	 	 	8,347 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six months ended June 30, 2011	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value and foreign currency adjustments	 	$	—	 	 	 	—	 	 	 	—	 	 	 	13,120 	 	 	 	2,577 	 	 	 	15,697 	 	
Amortization of intangible assets	 	 	4,200 	 	 	 	1,979 	 	 	 	1,756 	 	 	 	—	 	 	 	—	 	 	 	7,935 	 	
Net tax effect (a)	 	 	(1,596	)  	 	 	(752	)  	 	 	(667	)  	 	 	(4,986	)  	 	 	(979	)  	 	 	(8,980	)  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total adjustments to GAAP	 	$	2,604	 	 	 	1,227 	 	 	 	1,089 	 	 	 	8,134 	 	 	 	1,598 	 	 	 	14,652 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six months ended June 30, 2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value and foreign currency adjustments	 	$	—	 	 	 	—	 	 	 	—	 	 	 	(4,011	)  	 	 	7,137 	 	 	 	3,126 	 	
Amortization of intangible assets	 	 	4,350 	 	 	 	3,516 	 	 	 	4,882 	 	 	 	—	 	 	 	—	 	 	 	12,748 	 	
Net tax effect (a)	 	 	(1,653	)  	 	 	(1,337	)  	 	 	(1,858	)  	 	 	1,524 	 	 	 	(2,708	)  	 	 	(6,032	)  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total adjustments to GAAP	 	$	2,697	 	 	 	2,179 	 	 	 	3,024 	 	 	 	(2,487	)  	 	 	4,429 	 	 	 	9,842 	 	
 
 	(a)	Income taxes are applied based on 38% for the individual operating segments.	

45

Differences between GAAP and “Base Net Income”

Management’s financial planning and evaluation of operating results does not take into account the following items because their volatility and/or inherent uncertainty affect the period-to-period comparability of the Company’s results of operations.  A more detailed discussion of the differences between GAAP and “base net income” follows.

Derivative market value and foreign currency adjustments:  “ Base net income” excludes the periodic unrealized gains and losses that are caused by the change in fair value on derivatives used in the Company’s risk management strategy in which the Company does not qualify for “hedge treatment” under GAAP.  As such, the Company recognizes changes in fair value of derivative instruments currently in earnings. The Company maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility.  Derivative instruments primarily used by the Company to manage interest rate risk includes interest rate swaps and basis swaps. Management has structured the majority of the Company’s derivative transactions with the intent that each is economically effective. However, the Company does not qualify its derivatives for “hedge treatment,” and the stand-alone derivative must be marked-to-market in the income statement with no consideration for the corresponding change in fair value of the hedged item.  The Company believes these point-in-time estimates of asset and liability values that are subject to interest rate fluctuations make it difficult to evaluate the ongoing results of operations against its business plan and affect the period-to-period comparability of the results of operations.  Included in “base net income” are the economic effects of the Company’s derivative instruments, which includes any cash paid or received being recognized as an expense or revenue upon actual derivative settlements.  These settlements are included in “derivative market value and foreign currency adjustments and derivative settlements, net” on the Company’s consolidated statements of income.

“Base net income” excludes the foreign currency transaction gains or losses caused by the re-measurement of the Company’s Euro-denominated bonds to U.S. dollars.  In connection with the issuance of the Euro-denominated bonds, the Company has entered into cross-currency interest rate swaps.  Under the terms of these agreements, the principal payments on the Euro-denominated notes will effectively be paid at the exchange rate in effect at the issuance date of the bonds.  The cross-currency interest rate swaps also convert the floating rate paid on the Euro-denominated bonds (EURIBOR index) to an indice based on LIBOR. Included in “base net income” are the economic effects of any cash paid or received being recognized as an expense or revenue upon actual settlements of the cross-currency interest rate swaps. These settlements are included in “derivative market value and foreign currency adjustments and derivative settlements, net” on the Company’s consolidated statements of income.  However, the gains or losses caused by the re-measurement of the Euro-denominated bonds to U.S. dollars and the change in market value of the cross-currency interest rate swaps are excluded from “base net income” as the Company believes the point-in-time estimates of value that are subject to currency rate fluctuations related to these financial instruments make it difficult to evaluate the ongoing results of operations against the Company’s business plan and affect the period-to-period comparability of the results of operations.  The re-measurement of the Euro-denominated bonds generally correlates with the change in fair value of the cross-currency interest rate swaps.  However, the Company will experience unrealized gains or losses related to the cross-currency interest rate swaps if the two underlying indices (and related forward curve) do not move in parallel.

The gains and/or losses included in “derivative market value and foreign currency adjustments and derivative settlements, net” on the Company’s consolidated statements of income are primarily caused by interest rate and currency volatility, as well as the volume and terms of derivatives not receiving hedge treatment. “Base net income” excludes these unrealized gains and losses and isolates the effect of interest rate and currency volatility related to the fair value of such instruments during the period.  Under GAAP, the effects of these factors on the fair value of the derivative instruments (but not the underlying hedged item) tend to show more volatility in the short term.

Amortization of intangible assets:   “Base net income” excludes the amortization of acquired intangibles, which arises primarily from the acquisition of definite life intangible assets in connection with the Company’s acquisitions, since the Company feels that such charges do not drive the Company’s operating performance on a long-term basis and can affect the period-to-period comparability of the results of operations.

STUDENT LOAN AND GUARANTY SERVICING OPERATING SEGMENT – RESULTS OF OPERATIONS

The following are the primary service offerings the Company offers as part of its Student Loan and Guaranty Servicing segment:

 	·	Servicing FFELP loans	
 	·	Originating and servicing non-federally insured student loans	
 	·	Servicing federally-owned student loans for the Department of Education	
 	·	Servicing and outsourcing services for guaranty agencies	
 	·	Student loan servicing software and other information technology products and services	

The Student Loan and Guaranty Servicing operating segment provides for the servicing of the Company’s student loan portfolio and the portfolios of third parties. The loan servicing activities include loan origination activities, loan conversion activities, application processing, borrower updates, payment processing, due diligence procedures, funds management reconciliations, and claim processing. These activities are performed internally for the Company’s portfolio in addition to generating external fee revenue when performed for third party clients.

Beginning in 2009, the Company began servicing loans for the Department of Education as further discussed below.
 
This operating segment also provides servicing activities for guarantee agencies. These activities include providing software and data center services, borrower and loan updates, default aversion tracking services, claim processing services, and post-default collection services.

46

This operating segment also develops student loan servicing software, which is used internally by the Company and also licensed to third party student loan holders and servicers. In addition, this operating segment provides information technology products and services, with core areas of business in educational loan software solutions, technical consulting services, and Enterprise content management solutions.

In addition, the Company is offering a hosted servicing software solution to third parties that can be used by third parties to service various types of student loans including Federal Direct Program and FFEL Program loans.  Currently, the Company has agreements with third parties, including a contract with an incumbent Direct Loan Program service provider, to add more than 12 million borrowers to its hosted servicing software solution. Timing of conversion has not been finalized; however, the Company believes it will begin recognizing revenue in 2012.

Direct Loan Servicing Contract

In June 2009, the Company was one of four private sector companies awarded a student loan servicing contract by the Department of Education to provide additional servicing capacity for loans owned by the Department. These loans included Direct Loan Program loans and FFEL Program loans purchased by the Department under the authority granted in the ECASLA legislation. In September 2009, the Department began assigning FFEL purchased loans to the four servicers. Beginning with the second year of servicing, the Department began allocating new loan volume among the four servicers based on five performance metrics.

 	·	Three metrics measure the satisfaction among separate customer groups, including borrowers, financial aid personnel at postsecondary schools participating in the federal student loan programs, and Federal Student Aid and other federal agency personnel or contractors who work with the servicers.	

 	·	Two performance metrics measure the success of default prevention efforts as reflected by the percentage of borrowers and percentage of dollars in each servicer’s portfolio that go into default.	

Based on the first year of survey results, the Company was allocated 16% of the new loan volume originated by the Department for the period from August 15, 2010 through August 14, 2011 (the second year of the servicing contract). The Department projected an estimated 6 million new borrowers in total during the second year of this contract that would be allocated to the four servicers. Based on current survey results, the Company anticipates receiving 16% of the new loan volume originated by the Department for the period from August 15, 2011 through August 14, 2012 (the third year of the servicing contract). The Company is focused on improving survey results to increase this allocation in future periods.

The servicing contract with the Department of Education spans five years, with one five-year renewal at the option of the Department. Servicing loans under this contract will increase revenue earned by this segment.  However, as the portfolio ages, operating margins under this contract are expected to be lower than historical levels achieved.

Segment Summary of Results

The results for the three and six months ended June 30, 2011 compared to the same periods in 2010 include:

 	·	A decrease in FFELP servicing revenue due to the loss of servicing volume from third party customers.	

 	·	An increase in government servicing revenue due to increased volume from the Department.	

 	·	A decrease in guaranty servicing revenue due to a decrease in rehabilitation collection revenue and the amortization of the guaranty servicing portfolio.	

 	·	A lower operating margin as the result of the growing government servicing portfolio as a percent of the Company’s total servicing portfolio.	

47

Student Loan Servicing Volumes (dollars in millions)

 
48

Three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010

 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	 	 	 	 	 	 	Change	 	 	 	 	 	 	 	 	Change	 	
 	 	2011	 	 	2010	 	 	$	 	 	 	%	 	 	 	2011	 	 	 	2010	 	 	$	 	 	 	%	 	
Net interest income	 	$	12	 	 	 	17	 	 	 	(5	)	 	 	(29.4	) %	 	$	27	 	 	 	30	 	 	 	(3	)	 	 	(10.0	) %	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing revenue	 	 	37,389	 	 	 	36,652	 	 	 	737	 	 	 	2.0	 	 	 	73,025	 	 	 	73,300	 	 	 	(275	)	 	 	(0.4	)	
Intersegment servicing revenue	 	 	16,793	 	 	 	21,969	 	 	 	(5,176	)	 	 	(23.6	)	 	 	34,650	 	 	 	43,549	 	 	 	(8,899	)	 	 	(20.4	)	
Software services revenue	 	 	4,346	 	 	 	5,499	 	 	 	(1,153	)	 	 	(21.0	)	 	 	9,123	 	 	 	9,843	 	 	 	(720	)	 	 	(7.3	)	
Other income	 	 	—	 	 	 	295	 	 	 	(295	)	 	 	(100.0	)	 	 	—	 	 	 	519	 	 	 	(519	)	 	 	(100.0	)	
Total other income	 	 	58,528	 	 	 	64,415	 	 	 	(5,887	)	 	 	(9.1	)	 	 	116,798	 	 	 	127,211	 	 	 	(10,413	)	 	 	(8.2	)	
Salaries and benefits	 	 	24,731	 	 	 	23,327	 	 	 	1,404	 	 	 	6.0	 	 	 	50,119	 	 	 	46,909	 	 	 	3,210	 	 	 	6.8	 	
Depreciation and amortization	 	 	1,336	 	 	 	1,157	 	 	 	179	 	 	 	15.5	 	 	 	2,642	 	 	 	2,176	 	 	 	466	 	 	 	21.4	 	
Restructure expense	 	 	—	 	 	 	84	 	 	 	(84	)	 	 	(100.0	)	 	 	—	 	 	 	1,289	 	 	 	(1,289	)	 	 	(100.0	)	
Other expenses	 	 	14,605	 	 	 	18,668	 	 	 	(4,063	)	 	 	(21.8	)	 	 	29,184	 	 	 	33,168	 	 	 	(3,984	)	 	 	(12.0	)	
Intersegment expenses, net	 	 	1,060	 	 	 	1,149	 	 	 	(89	)	 	 	(7.7	)	 	 	2,429	 	 	 	2,992	 	 	 	(563	)	 	 	(18.8	)	
Total operating expenses	 	 	41,732	 	 	 	44,385	 	 	 	(2,653	)	 	 	(6.0	)	 	 	84,374	 	 	 	86,534	 	 	 	(2,160	)	 	 	(2.5	)	
"Base net income" before income taxes and corporate overhead allocation	 	 	16,808	 	 	 	20,047	 	 	 	(3,239	)	 	 	(16.2	)	 	 	32,451	 	 	 	40,707	 	 	 	(8,256	)	 	 	(20.3	)	
Corporate overhead allocation	 	 	(1,233	)	 	 	(1,484	)	 	 	251	 	 	 	(16.9	)	 	 	(1,986	)	 	 	(2,673	)	 	 	687	 	 	 	(25.7	)	
"Base net income" before income taxes	 	 	15,575	 	 	 	18,563	 	 	 	(2,988	)	 	 	(16.1	)	 	 	30,465	 	 	 	38,034	 	 	 	(7,569	)	 	 	(19.9	)	
Income tax expense	 	 	(5,917	)	 	 	(7,053	)	 	 	1,136	 	 	 	(16.1	)	 	 	(11,575	)	 	 	(14,453	)	 	 	2,878	 	 	 	(19.9	)	
"Base net income"	 	$	9,658	 	 	 	11,510	 	 	 	(1,852	)	 	 	(16.1	) %	 	$	18,890	 	 	 	23,581	 	 	 	(4,691	)	 	 	(19.9	) %	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Additional information:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
"Base net income"	 	$	9,658	 	 	 	11,510	 	 	 	(1,852	)	 	 	(16.1	) %	 	$	18,890	 	 	 	23,581	 	 	 	(4,691	)	 	 	(19.9	) %	
Restructure expense	 	 	—	 	 	 	84	 	 	 	(84	)	 	 	(100.0	)	 	 	—	 	 	 	1,289	 	 	 	(1,289	)	 	 	(100.0	)	
Net tax effect	 	 	—	 	 	 	(32	)	 	 	32	 	 	 	(100.0	)	 	 	—	 	 	 	(490	)	 	 	490	 	 	 	(100.0	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
"Base net income," excluding restructure expense	 	$	9,658	 	 	 	11,562	 	 	 	(1,904	)	 	 	(16.5	) %	 	$	18,890	 	 	 	24,380	 	 	 	(5,490	)	 	 	(22.5	) %	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin, excluding restructure expense	 	 	26.6	%	 	 	28.8	%	 	 	 	 	 	 	 	 	 	 	26.1	%	 	 	29.9	%	 	 	 	 	 	 	 	 	

Loan and guaranty servicing revenue .

 	 	Three months ended June 30,	 	
 	 	2011	 	 	2010	 	
 	 	Origination	 	 	Servicing	 	 	Total	 	 	Origination	 	 	Servicing	 	 	Total	 	
 	 	revenue	 	 	revenue	 	 	revenue	 	 	revenue	 	 	revenue	 	 	revenue	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
FFELP servicing (a)	 	$	—	 	 	 	6,741 	 	 	 	6,741 	 	 	$	88	 	 	 	8,762 	 	 	 	8,850 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Private servicing	 	 	211 	 	 	 	2,135 	 	 	 	2,346 	 	 	 	107 	 	 	 	1,932 	 	 	 	2,039 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government servicing (b)	 	 	—	 	 	 	11,916 	 	 	 	11,916 	 	 	 	—	 	 	 	6,147 	 	 	 	6,147 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Guaranty servicing (c)	 	 	—	 	 	 	16,386 	 	 	 	16,386 	 	 	 	38 	 	 	 	19,578 	 	 	 	19,616 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing revenue	 	$	211	 	 	 	37,178 	 	 	 	37,389 	 	 	$	233	 	 	 	36,419 	 	 	 	36,652 	 	

 	(a)	FFELP servicing revenue decreased in 2011 compared to 2010 due to the loss of servicing volume from third party customers as a result of these customers selling their portfolios to the Company and/or the Department under the Purchase Program.	

 	(b)	Government servicing revenue increased during 2011 compared to 2010 due to an increase in volume from the Department.	
 
 	(c)	Guaranty servicing revenue decreased in 2011 compared to 2010 due to a reduction in revenue earned from rehabilitation collections on defaulted loan assets.  For the three months ended June 30, 2011, the Company earned $9.1 million in revenue from rehabilitation collections compared to $12.3 million for the same period in 2010.	

49

 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	
 	 	Origination	 	 	Servicing	 	 	Total	 	 	Origination	 	 	Servicing	 	 	Total	 	
 	 	revenue	 	 	revenue	 	 	revenue	 	 	revenue	 	 	revenue	 	 	revenue	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
FFELP servicing (a)	 	$	—	 	 	 	13,738 	 	 	 	13,738 	 	 	$	256	 	 	 	21,218 	 	 	 	21,474 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Private servicing	 	 	484 	 	 	 	4,278 	 	 	 	4,762 	 	 	 	303 	 	 	 	3,856 	 	 	 	4,159 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government servicing (b)	 	 	—	 	 	 	24,202 	 	 	 	24,202 	 	 	 	—	 	 	 	9,687 	 	 	 	9,687 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Guaranty servicing (c)	 	 	—	 	 	 	30,323 	 	 	 	30,323 	 	 	 	120 	 	 	 	37,860 	 	 	 	37,980 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing revenue	 	$	484	 	 	 	72,541 	 	 	 	73,025 	 	 	$	679	 	 	 	72,621 	 	 	 	73,300 	 	

 	(a)	FFELP servicing revenue decreased in 2011 compared to 2010 due to the loss of servicing volume from third party customers as a result of these customers selling their portfolios to the Company and/or the Department under the Purchase Program.	

 	(b)	Government servicing revenue increased in 2011 compared to 2010 due an increase in volume from the Department.	
 
 	(c)	Guaranty servicing revenue decreased in 2011 compared to 2010 due to a reduction in revenue earned from rehabilitation collections on defaulted loan assets.  For the six months ended June 30, 2011, the Company earned $15.6 million in revenue from rehabilitation collections compared to $22.3 million for the same period in 2010.  Excluding the rehabilitation collection revenue, revenue from guaranty servicing decreased $0.9 million for the six months ended June 30, 2011 compared to the same period in 2010 due to the amortization of the guaranty servicing portfolio.	
 
Intersegment servicing revenue. Intersegment servicing revenue includes servicing revenue earned for the Student Loan and Guaranty Servicing operating segment as a result of servicing loans for the Asset Generation and Management operating segment.  This revenue decreased as a result of the Company no longer originating FFELP loans and the amortization of the Company’s FFELP portfolio.

Software services revenue. Software services revenue decreased due to a reduction in the number of projects for existing customers and the loss of customers due to legislative developments in the student loan industry throughout 2010 and 2011.

Operating expenses .   Excluding restructure expense and collection costs related to loan rehabilitation revenue, operating expenses increased $1.1 million (2.9%) and $4.7 million (6.5%) for the three and six months ended June 30, 2011, respectively, compared with the same periods in 2010.  These increases were due to incurring additional costs to support the increase in government servicing volume. M anagement expects continued compression of operating margin in this operating segment as the government servicing portfolio grows as a percent of the Company’s total servicing portfolio.

TUITION PAYMENT PROCESSING AND CAMPUS COMMERCE OPERATING SEGMENT – RESULTS OF OPERATIONS

The Company’s Tuition Payment Processing and Campus Commerce operating segment provides products and services to help students and families manage the payment of education costs at all levels (K-12 and higher education).  It also provides innovative education-focused technologies, services, and support solutions to help schools with the everyday challenges of collecting and processing commerce data.

In the K-12 market, the Company offers actively managed tuition payment plans as well as assistance with financial needs assessment, enrollment management, and donor management. The Company offers two principal products to the higher education market: actively managed tuition payment plans and campus commerce technologies and payment processing.

This segment of the Company’s business is subject to seasonal fluctuations which correspond, or are related to, the traditional school year. Tuition management revenue is recognized over the course of the academic term, but the peak operational activities take place in summer and early fall. Revenue associated with providing electronic commerce subscription services is recognized over the service period with the highest revenue months being July through September and December and January.  The Company’s operating expenses do not follow the seasonality of the revenues. This is primarily due to fixed year-round personnel costs and seasonal marketing costs. For example, generally revenue and pre-tax operating margin are higher in the first and third quarters and lower in the second and fourth quarters.

50

Segment Summary of Results

The results for the three and six months ended June 30, 2011 compared to the same periods in 2010 include:

 	·	An increase in revenue as a result of an increase in the number of managed tuition payment plans and campus commerce transactions processed.	

 	·	An improved operating margin, which includes strong revenue growth while still incurring expenses related to continued investments in new products and services.	

Three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010
 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	 	 	 	 	 	 	Change	 	 	 	 	 	 	 	 	Change	 	
 	 	2011	 	 	2010	 	 	$	 	 	 	%	 	 	 	2011	 	 	 	2010	 	 	$	 	 	 	%	 	
Net interest income	 	$	2	 	 	 	4	 	 	 	(2	)	 	 	(50.0	) %	 	$	8	 	 	 	12	 	 	 	(4	)	 	 	(33.3	) %	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Tuition payment processing and campus commerce revenue	 	 	14,761	 	 	 	12,795	 	 	 	1,966	 	 	 	15.4	 	 	 	34,130	 	 	 	30,177	 	 	 	3,953	 	 	 	13.1	 	
Salaries and benefits	 	 	7,249	 	 	 	6,594	 	 	 	655	 	 	 	9.9	 	 	 	14,401	 	 	 	13,212	 	 	 	1,189	 	 	 	9.0	 	
Depreciation and amortization	 	 	345	 	 	 	339	 	 	 	6	 	 	 	1.8	 	 	 	681	 	 	 	672	 	 	 	9	 	 	 	1.3	 	
Other expenses	 	 	2,327	 	 	 	2,272	 	 	 	55	 	 	 	2.4	 	 	 	4,961	 	 	 	4,380	 	 	 	581	 	 	 	13.3	 	
Intersegment expenses, net	 	 	1,118	 	 	 	879	 	 	 	239	 	 	 	27.2	 	 	 	2,211	 	 	 	1,653	 	 	 	558	 	 	 	33.8	 	
Total operating expenses	 	 	11,039	 	 	 	10,084	 	 	 	955	 	 	 	9.5	 	 	 	22,254	 	 	 	19,917	 	 	 	2,337	 	 	 	11.7	 	
"Base net income" before income taxes and corporate overhead allocation	 	 	3,724	 	 	 	2,715	 	 	 	1,009	 	 	 	37.2	 	 	 	11,884	 	 	 	10,272	 	 	 	1,612	 	 	 	15.7	 	
Corporate overhead allocation	 	 	(411	)	 	 	(495	)	 	 	84	 	 	 	(17.0	)	 	 	(662	)	 	 	(891	)	 	 	229	 	 	 	(25.7	)	
"Base net income" before income taxes	 	 	3,313	 	 	 	2,220	 	 	 	1,093	 	 	 	49.2	 	 	 	11,222	 	 	 	9,381	 	 	 	1,841	 	 	 	19.6	 	
Income tax expense	 	 	(1,259	)	 	 	(844	)	 	 	(415	)	 	 	49.2	 	 	 	(4,264	)	 	 	(3,566	)	 	 	(698	)	 	 	19.6	 	
"Base net income"	 	$	2,054	 	 	 	1,376	 	 	 	678	 	 	 	49.3	%	 	$	6,958	 	 	 	5,815	 	 	 	1,143	 	 	 	19.7	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin	 	 	22.4	%	 	 	17.3	%	 	 	 	 	 	 	 	 	 	 	32.9	%	 	 	31.1	%	 	 	 	 	 	 	 	 	

Tuition payment processing and campus commerce revenue . Tuition payment processing and campus commerce revenue increased for the three and six months ended June 30, 2011 compared to the same periods in 2010 as a result of an increase in the number of managed tuition payment plans as well as an increase in campus commerce customers.

Operating expenses . Operating expenses increased for the three and six months ended June 30, 2011 compared to the same periods in 2010 as a result of incurring additional costs to support the increase in the number of managed tuition payment plans and campus commerce customers.  In addition, the Company continues to invest in new products and services to meet customer needs and expand product and service offerings.  These investments increased operating expenses in 2011 compared to 2010.

ENROLLMENT SERVICES OPERATING SEGMENT – RESULTS OF OPERATIONS

 The Enrollment Services operating segment offers products and services that are focused on helping colleges recruit and retain students (interactive and list marketing services) and helping students plan and prepare for life after high school (publishing services and resource centers). Interactive marketing products and services include agency of record services, qualified inquiry generation, pay per click, and other marketing management, along with school operations consulting and call center solutions. The majority of interactive marketing revenue is derived from fees which are earned through the delivery of qualified inquiries or clicks provided to colleges and universities. List marketing services include providing lists to help higher education institutions and businesses reach the middle school, high school, college bound high school, college, and young adult market places. Publishing services include test preparation study guides, school directories and databases, and career exploration guides.  Resource centers include online courses, scholarship search and selection data, career planning, and on-line information about colleges and universities.

Certain provisions in recently promulgated regulations under the Higher Education Act could have an impact on the Company’s Enrollment Services operating segment, as a result of its services provided to for-profit schools.  The Higher Education Act provides that to be eligible to participate in Federal student financial aid programs, an educational institution, including for-profit schools, must enter into a program participation agreement with the Secretary of the Department of Education. The agreement includes a number of conditions with which an institution must comply to be granted initial and continuing eligibility to participate. Among those conditions is a prohibition on institutions providing any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments to any individual or entity engaged in recruiting or admission activities. Previous regulations promulgated under the Higher Education Act specified a number of types of compensation, or “safe harbors,” that did not constitute incentive compensation in violation of this agreement. One of those safe harbors permitted an institution to award incentive compensation for Internet-based recruitment and admission activities. The Department of Education’s newly issued regulations repeal all existing safe harbors regarding incentive compensation in recruiting, though exempting click-based payments to third parties for the provision of internet generated student contact information. Additionally, the regulations include misrepresentation standards for advertisements, offers, and communications presented to prospective students, with associated penalties for noncompliance with these standards. The regulations are effective July 1, 2011. 

51

In addition, the Department of Education recently issued final Gainful Employment regulations. The Gainful Employment regulations stipulate that for education programs offered by for-profit schools to remain eligible for Title IV funds, the programs must provide specified disclosures to potential students and must meet certain debt to income ratios and debt repayment metrics.

Approximately 95% of interactive marketing revenue included in this segment is generated from for-profit schools. These regulations may subject the Company to greater risk of liability and may increase the Company’s costs of compliance with these regulations or limit the Company’s ability to serve for-profit schools. In addition, these regulations could negatively impact enrollment at for-profit schools, which could adversely affect interactive marketing revenue.

Segment Summary of Results

The results for the three and six months ended June 30, 2011 compared to the same periods in 2010 include a decrease in revenue and operating margin due to the effects from current regulatory uncertainty in the for-profit college industry, which has caused schools to decrease spending on marketing efforts.

Three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010

 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	 	 	 	 	 	 	Change	 	 	 	 	 	 	 	 	Change	 	
 	 	2011	 	 	2010	 	 	$	 	 	 	%	 	 	 	2011	 	 	 	2010	 	 	$	 	 	 	%	 	
Enrollment services revenue	 	$	32,315	 	 	 	35,403	 	 	 	(3,088	)	 	 	(8.7	) %	 	$	66,183	 	 	 	68,674	 	 	 	(2,491	)	 	 	(3.6	) %	
Salaries and benefits	 	 	5,931	 	 	 	6,447	 	 	 	(516	)	 	 	(8.0	)	 	 	12,188	 	 	 	12,518	 	 	 	(330	)	 	 	(2.6	)	
Cost to provide enrollment services	 	 	22,140	 	 	 	24,111	 	 	 	(1,971	)	 	 	(8.2	)	 	 	44,979	 	 	 	46,136	 	 	 	(1,157	)	 	 	(2.5	)	
Depreciation and amortization	 	 	780	 	 	 	1,616	 	 	 	(836	)	 	 	(51.7	)	 	 	1,593	 	 	 	4,120	 	 	 	(2,527	)	 	 	(61.3	)	
Other expenses	 	 	2,442	 	 	 	2,449	 	 	 	(7	)	 	 	(0.3	)	 	 	4,760	 	 	 	5,007	 	 	 	(247	)	 	 	(4.9	)	
Intersegment expenses, net	 	 	959	 	 	 	641	 	 	 	318	 	 	 	49.6	 	 	 	1,777	 	 	 	1,074	 	 	 	703	 	 	 	65.5	 	
Total operating expenses	 	 	32,252	 	 	 	35,264	 	 	 	(3,012	)	 	 	(8.5	)	 	 	65,297	 	 	 	68,855	 	 	 	(3,558	)	 	 	(5.2	)	
"Base net income" before income taxes and corporate overhead allocation	 	 	63	 	 	 	139	 	 	 	(76	)	 	 	(54.7	)	 	 	886	 	 	 	(181	)	 	 	1,067	 	 	 	(589.5	)	
Corporate overhead allocation	 	 	(411	)	 	 	(495	)	 	 	84	 	 	 	(17.0	)	 	 	(662	)	 	 	(891	)	 	 	229	 	 	 	(25.7	)	
"Base net income" before income taxes	 	 	(348	)	 	 	(356	)	 	 	8	 	 	 	(2.2	)	 	 	224	 	 	 	(1,072	)	 	 	1,296	 	 	 	(120.9	)	
Income tax (expense) benefit	 	 	132	 	 	 	135	 	 	 	(3	)	 	 	(2.2	)	 	 	(85	)	 	 	408	 	 	 	(493	)	 	 	(120.8	)	
"Base net income"	 	$	(216	)	 	 	(221	)	 	 	5	 	 	 	(2.3	) %	 	$	139	 	 	 	(664	)	 	 	803	 	 	 	(120.9	) %	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin	 	 	(1.1	)%	 	 	(1.0	)%	 	 	 	 	 	 	 	 	 	 	1.3	%	 	 	(1.6	)%	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin (a)	 	 	2.3	%	 	 	4.5	%	 	 	 	 	 	 	 	 	 	 	3.4	%	 	 	5.2	%	 	 	 	 	 	 	 	 	
 
(a) Excludes student list cost amortization expense.

  Enrollment services revenue, cost to provide enrollment services, and gross profit
 
 	 	Three months ended June 30, 2011	 	
 	 	 	 	 	 	 	 	 	 	 	Resource	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	centers	 	 	 	 	
 	 	Interactive	 	 	Publishing	 	 	 	 	 	and list	 	 	 	 	
 	 	marketing (a)	 	 	services (b)	 	 	Subtotal	 	 	marketing	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Enrollment services revenue	 	$	27,455	 	 	 	1,877	 	 	 	29,332	 	 	 	2,983	 	 	 	32,315	 	
Cost to provide enrollment services	 	 	21,748	 	 	 	392	 	 	 	22,140	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross profit	 	$	5,707	 	 	 	1,485	 	 	 	7,192	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross profit %	 	 	20.8	%	 	 	79.1	%	 	 	24.5	%	 	 	 	 	 	 	 	 	

52

 
 	 	Three months ended June 30, 2010	 	
 	 	 	 	 	 	 	 	 	 	 	Resource	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	centers	 	 	 	 	
 	 	Interactive	 	 	Publishing	 	 	 	 	 	and list	 	 	 	 	
 	 	marketing (a)	 	 	services (b)	 	 	Subtotal	 	 	marketing	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Enrollment services revenue	 	$	30,507	 	 	 	1,792	 	 	 	32,299	 	 	 	3,104	 	 	 	35,403	 	
Cost to provide enrollment services	 	 	23,439	 	 	 	672	 	 	 	24,111	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross profit	 	$	7,068	 	 	 	1,120	 	 	 	8,188	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross profit %	 	 	23.2	%	 	 	62.5	%	 	 	25.4	%	 	 	 	 	 	 	 	 	

 	 	Six months ended June 30, 2011	 	
 	 	 	 	 	 	 	 	 	 	 	Resource	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	centers	 	 	 	 	
 	 	Interactive	 	 	Publishing	 	 	 	 	 	and list	 	 	 	 	
 	 	marketing (a)	 	 	services (b)	 	 	Subtotal	 	 	marketing	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Enrollment services revenue	 	$	56,419	 	 	 	3,586	 	 	 	60,005	 	 	 	6,178	 	 	 	66,183	 	
Cost to provide enrollment services	 	 	44,073	 	 	 	906	 	 	 	44,979	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross profit	 	$	12,346	 	 	 	2,680	 	 	 	15,026	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross profit %	 	 	21.9	%	 	 	74.7	%	 	 	25.0	%	 	 	 	 	 	 	 	 	
 
 	 	Six months ended June 30, 2010	 	
 	 	 	 	 	 	 	 	 	 	 	Resource	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	centers	 	 	 	 	
 	 	Interactive	 	 	Publishing	 	 	 	 	 	and list	 	 	 	 	
 	 	marketing (a)	 	 	services (b)	 	 	Subtotal	 	 	marketing	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Enrollment services revenue	 	$	58,274	 	 	 	4,186	 	 	 	62,460	 	 	 	6,214	 	 	 	68,674	 	
Cost to provide enrollment services	 	 	44,637	 	 	 	1,499	 	 	 	46,136	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross profit	 	$	13,637	 	 	 	2,687	 	 	 	16,324	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross profit %	 	 	23.4	%	 	 	64.2	%	 	 	26.1	%	 	 	 	 	 	 	 	 	

 	(a)	Interactive marketing revenue decreased $3.1 million (10.0%) and $1.9 million (3.2%) for the three and six months ended June 30, 2011 compared to the same periods in 2010 as a result of a decrease in interactive marketing services volume. The gross profit margin for the three and six months ended June 30, 2011 compared to the same periods in 2010 decreased as a result of more competitive pricing. Revenue and profit margin have been affected by the current regulatory uncertainty in the for-profit college industry, which has caused schools to decrease spending on marketing efforts.	

 	(b)	Publishing services revenue increased $0.1 million (4.7%) and decreased $0.6 million (14.3%) for the three and six months ended June 30, 2011 compared to the same periods in 2010. The decrease is due to competition related to online delivery of similar products. The gross profit margin for publishing and editing services increased as a result of a shift in the mix of products sold.	

Depreciation and amortization .   Depreciation and amortization for the three and six months ended June 30, 2011 and 2010 includes $0.7 million and $1.3 million, respectively, and $1.4 million and $3.7 million, respectively, of amortization expense related to student list costs. In 2010, the Company accelerated the amortization of student list costs to better reflect the pattern in which the economic benefit of this asset is used to generate revenue.

Operating expenses .   Excluding the cost to provide enrollment services and student list cost amortization expense, operating expenses for the three and six months ended June 30, 2011 and 2010 remained relatively flat due to a reduction in facilities costs, offset by investment in new products and services to meet customer needs and expand service offerings.

53

ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT – RESULTS OF OPERATIONS

The Asset Generation and Management Operating Segment includes the acquisition, management, and ownership of the Company’s student loan assets, which has historically been the Company’s largest product and service offering. The Company generates a substantial portion of its earnings from the spread, referred to as the Company’s student loan spread, between the yield it receives on its student loan portfolio and the associated costs to finance such portfolio. The student loan assets are held in a series of education lending subsidiaries designed specifically for this purpose. In addition to the student loan spread earned on its portfolio, all costs and activity associated with managing the portfolio, such as servicing of the assets and debt maintenance are included in this segment.

As a result of legislation (the Reconciliation Act of 2010), effective July 1, 2010, all new federal loan originations are made through the Direct Loan Program and the Company no longer originates FFELP loans. This legislation does not alter or affect the terms and conditions of existing FFELP loans.

Segment Summary of Results

The results for the three and six months ended June 30, 2011 compared to the same periods in 2010 include:

 	·	Continued recognition of significant fixed rate floor income due to historically low interest rates.	

 	·	The purchase of $683.1 million of FFELP student loans during the first six months of 2011 from various third parties.	

 	·	The repurchase of $392.0 million of asset-backed securities resulting in a gain of $18.9 million in the first six months of 2010. Due to improvements in the capital markets, the opportunities for the Company to repurchase debt at less than par are becoming more limited. During the first six months of 2011, the Company repurchased $0.6 million of its asset-backed securities resulting in a gain of approximately $55,000.	

Student Loan Portfolio

The tables below outline the components of the Company’s student loan portfolio:

 	 	As of June 30, 2011	 	 	As of December 31, 2010	 	
 	 	Held for investment	 	 	Held for investment	 	 	Held for sale (a)	 	
Federally insured loans:	 	 	 	 	 	 	 	 	 	
Stafford and other	 	$	7,743,675	 	 	 	7,927,525 	 	 	 	—	 	
Consolidation	 	 	15,339,482 	 	 	 	15,830,174 	 	 	 	—	 	
Total	 	 	23,083,157 	 	 	 	23,757,699 	 	 	 	—	 	
Non-federally insured loans	 	 	30,655 	 	 	 	26,370 	 	 	 	84,987 	 	
 	 	 	23,113,812 	 	 	 	23,784,069 	 	 	 	84,987 	 	
Unamortized loan discount/premiums and deferred origination costs, net	 	 	157,266 	 	 	 	207,571 	 	 	 	—	 	
Allowance for loan losses – federally insured loans	 	 	(31,968	)  	 	 	(32,908	)  	 	 	—	 	
Allowance for loan losses – non-federally insured loans	 	 	(10,332	)  	 	 	(10,718	)  	 	 	—	 	
 	 	$	23,228,778	 	 	 	23,948,014 	 	 	 	84,987 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Allowance for federally insured loans - held for investment as a percentage of such loans	 	 	0.14	%	 	 	0.14	%	 	 	 	 	
Allowance for non-federally insured loans as a percentage of such loans	 	 	33.70	%	 	 	40.64	%	 	 	 	 	
 
 	(a)	On January 13, 2011, the Company sold a portfolio of non-federally insured loans for proceeds of $91.3 million (100% of par value).  The Company retained credit risk related to this portfolio and will pay cash to purchase back any loans which become 60 days delinquent.  As of December 31, 2010, the Company classified this portfolio as held-for-sale and the loans were carried at fair value.	

54

Origination and Acquisition

The following table sets forth the activity of loans classified as “held for investment”:
 
 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Beginning balance (loans held for investment)	 	$	23,391,196	 	 	 	24,551,152 	 	 	 	23,784,069 	 	 	 	23,635,874 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan originations	 	 	—	 	 	 	201,491 	 	 	 	—	 	 	 	788,974 	 	
Loan acquisitions	 	 	442,354 	 	 	 	2,198,429 	 	 	 	683,087 	 	 	 	3,161,687 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total originations and acquisitions	 	 	442,354 	 	 	 	2,399,920 	 	 	 	683,087 	 	 	 	3,950,661 	 	
Repayments, claims, capitalized interest, participations, and other	 	 	(565,443	)  	 	 	(309,256	)  	 	 	(990,339	)  	 	 	(800,809	)  	
Consolidation loans lost to external parties	 	 	(154,295	)  	 	 	(125,024	)  	 	 	(360,005	)  	 	 	(248,902	)  	
Loans sold	 	 	—	 	 	 	(1,004	)  	 	 	(3,000	)  	 	 	(21,036	)  	
Ending balance (loans held for investment)	 	$	23,113,812	 	 	 	26,515,788 	 	 	 	23,113,812 	 	 	 	26,515,788 	 	

As discussed previously, the Reconciliation Act of 2010 resulted in the Company discontinuing originations of new loans effective July 1, 2010 under the FFEL Program.   However, the Company believes there will be opportunities to continue to purchase FFELP loan portfolios from current FFELP participants looking to adjust their FFELP businesses.

For example, as previously discussed, on July 8, 2011, the Company purchased the residual interest in $1.9 billion of FFELP loans. The purchase of these loans is not included in the table above.

Activity in the Allowance for Loan Losses

The provision for loan losses represents the periodic expense of maintaining an allowance sufficient to absorb losses, net of recoveries, inherent in the portfolio of student loans. Activity in the allowance for loan losses is shown below.

 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of period	 	$	41,097	 	 	 	49,400 	 	 	 	43,626 	 	 	 	50,887 	 	
Provision for loan losses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Federally insured loans	 	 	5,000 	 	 	 	5,200 	 	 	 	8,500 	 	 	 	9,200 	 	
Non-federally insured loans	 	 	250 	 	 	 	1,000 	 	 	 	500 	 	 	 	2,000 	 	
Total provision for loan losses	 	 	5,250 	 	 	 	6,200 	 	 	 	9,000 	 	 	 	11,200 	 	
Charge-offs:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Federally insured loans	 	 	(4,585	)  	 	 	(4,971	)  	 	 	(9,440	)  	 	 	(9,039	)  	
Non-federally insured loans	 	 	(1,226	)  	 	 	(2,383	)  	 	 	(2,220	)  	 	 	(3,763	)  	
Total charge-offs	 	 	(5,811	)  	 	 	(7,354	)  	 	 	(11,660	)  	 	 	(12,802	)  	
Recoveries:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non-federally insured loans	 	 	283 	 	 	 	331 	 	 	 	653 	 	 	 	582 	 	
Total recoveries	 	 	283 	 	 	 	331 	 	 	 	653 	 	 	 	582 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchase of federally insured loans	 	 	—	 	 	 	2,000 	 	 	 	—	 	 	 	2,710 	 	
Purchase of non-federally insured loans	 	 	—	 	 	 	220 	 	 	 	—	 	 	 	220 	 	
Transfer to/from repurchase obligation related to loans sold/purchased, net	 	 	1,481 	 	 	 	—	 	 	 	681 	 	 	 	(2,000	)  	
Balance at end of period	 	$	42,300	 	 	 	50,797 	 	 	 	42,300 	 	 	 	50,797 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allocation of the allowance for loan losses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Federally insured loans	 	$	31,968	 	 	 	32,972 	 	 	 	31,968 	 	 	 	32,972 	 	
Non-federally insured loans	 	 	10,332 	 	 	 	17,825 	 	 	 	10,332 	 	 	 	17,825 	 	
Total allowance for loan losses	 	$	42,300	 	 	 	50,797 	 	 	 	42,300 	 	 	 	50,797 	 	

Repurchase Obligations

As of June 30, 2011, the Company had participated a cumulative amount of $117.1 million of non-federally insured loans to third parties. Loans participated under these agreements have been accounted for by the Company as loan sales. Accordingly, the participation interests sold are not included on the Company’s consolidated balance sheets. Per the terms of the servicing agreements, the Company’s servicing operations are obligated to repurchase loans subject to the participation interests in the event such loans become 60 or 90 days delinquent.

55

In addition, on January 13, 2011, the Company sold a portfolio of non-federally insured loans for proceeds of $91.3 million (100% par value).  The Company retained credit risk related to this portfolio and will pay cash to purchase back any loans which become 60 days delinquent.

The Company’s estimate related to its obligation to repurchase these loans is included in “other liabilities” in the Company’s consolidated balance sheet. The activity related to this accrual is detailed below.

 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Beginning balance	 	$	19,670	 	 	 	12,600	 	 	 	12,600	 	 	 	10,600	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Repurchase obligation transferred to/from the allowance for loan losses related to loans purchased/sold, net	 	 	(1,481	)	 	 	—	 	 	 	(681	)	 	 	2,000	 	
Repurchase obligation associated with loans sold (a)	 	 	—	 	 	 	—	 	 	 	6,270	 	 	 	—	 	
Current period expense (b)	 	 	2,500	 	 	 	—	 	 	 	2,500	 	 	 	—	 	
Ending balance	 	$	20,689	 	 	 	12,600	 	 	 	20,689	 	 	 	12,600	 	
 
 	(a)	As discussed previously, on January 13, 2011, the Company sold a portfolio of loans and retained all credit risk related to this portfolio. These loans were classified as held for sale as of December 31, 2010 and the loans were carried at fair value. Upon sale, the Company established a repurchase obligation associated with those loans that are estimated to become 60 days delinquent.	

 	(b)	The current period expense is included in “other” under operating expenses in the accompanying consolidated statements of income. During the three months ended June 30, 2011, the Company recorded an expense of $2.5 million related to its obligation to repurchase non-federally insured loans.	

Student Loan Status and Delinquencies

Delinquencies have the potential to adversely impact the Company’s earnings through increased servicing and collection costs and account charge-offs.  The table below shows the Company’s student loan delinquency amounts on loans held for investment.
 
 	 	As of June 30, 2011	 	 	As of December 31, 2010	 	
 	 	Dollars	 	 	Percent	 	 	Dollars	 	 	Percent	 	
Federally Insured Loans:	 	 	 	 	 	 	 	 	 	 	 	 	
Loans in-school/grace/deferment (a)	 	$	4,061,955	 	 	 	 	 	$	4,358,616	 	 	 	 	
Loans in forebearance (b)	 	 	3,263,802 	 	 	 	 	 	 	2,984,869 	 	 	 	 	
Loans in repayment status:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loans current	 	 	13,748,083 	 	 	 	87.2	%	 	 	14,309,480 	 	 	 	87.2 	%	
Loans delinquent 31-60 days (c)	 	 	583,443 	 	 	 	3.7 	 	 	 	794,140 	 	 	 	4.8 	 	
Loans delinquent 61-90 days (c)	 	 	358,539 	 	 	 	2.3 	 	 	 	306,853 	 	 	 	1.9 	 	
Loans delinquent 91 days or greater (d)	 	 	1,067,335 	 	 	 	6.8 	 	 	 	1,003,741 	 	 	 	6.1 	 	
Total loans in repayment	 	 	15,757,400 	 	 	 	100.0	%	 	 	16,414,214 	 	 	 	100.0 	%	
Total federally insured loans	 	$	23,083,157	 	 	 	 	 	 	$	23,757,699	 	 	 	 	 	
Non-Federally Insured Loans:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loans in-school/grace/deferment (a)	 	$	3,749	 	 	 	 	 	 	$	3,500	 	 	 	 	 	
Loans in forebearance (b)	 	 	510 	 	 	 	 	 	 	 	292 	 	 	 	 	 	
Loans in repayment status:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loans current	 	 	22,221 	 	 	 	84.2	%	 	 	16,679 	 	 	 	73.9 	%	
Loans delinquent 31-60 days (c)	 	 	624 	 	 	 	2.4 	 	 	 	1,546 	 	 	 	6.8 	 	
Loans delinquent 61-90 days (c)	 	 	587 	 	 	 	2.2 	 	 	 	1,163 	 	 	 	5.2 	 	
Loans delinquent 91 days or greater	 	 	2,964 	 	 	 	11.2 	 	 	 	3,190 	 	 	 	14.1 	 	
Total loans in repayment	 	 	26,396 	 	 	 	100.0	%	 	 	22,578 	 	 	 	100.0 	%	
Total non-federally insured loans	 	$	30,655	 	 	 	 	 	 	$	26,370	 	 	 	 	 	

 	(a)	Loans for borrowers who still may be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g. , residency periods for medical students or a grace period for bar exam preparation for law students.	

 	(b)	Loans for borrowers who have temporarily ceased making full payments due to hardship or other factors, according to a schedule approved by the servicer consistent with the established loan program servicing procedures and policies.	

 	(c)	The period of delinquency is based on the number of days scheduled payments are contractually past due and relate to repayment loans, that is, receivables not charged off, and not in school, grace, deferment, or forbearance.	

 	(d)	Loans delinquent 91 days or greater include federally insured loans in claim status, which are loans that have gone into default and have been submitted to the guaranty agency.	

56

Student Loan Spread Analysis

The following table analyzes the student loan spread on the Company’s portfolio of student loans and represents the spread on assets earned in conjunction with the liabilities and derivative instruments used to fund the assets.
 
 	 	 	Three months ended	 	Six months ended	 	
 	 	 	June 30,	 	March 31,	 	June 30,	 	June 30,	 	June 30,	 	
 	 	 	2011	 	2011	 	2010	 	2011	 	2010	 	
Variable student loan yield, gross	 	 	2.57   	%	2.60   	%	2.72   	%	2.58   	%	2.64   	% 	
Consolidation rebate fees	 	 	(0.71)  	 	(0.72)  	 	(0.67)  	 	(0.72)  	 	(0.69)  	 	
Premium/discount and deferred origination costs amortization	 	(0.14)  	 	(0.17)  	 	(0.19)  	 	(0.15)  	 	(0.23)  	 	
   Variable student loan yield, net	 	 	1.72   	 	1.71   	 	1.86   	 	1.71   	 	1.72   	 	
Student loan cost of funds - interest expense	 	 	(0.83)  	 	(0.83)  	 	(0.81)  	 	(0.83)  	 	(0.78)  	 	
Student loan cost of funds - derivative settlements	 	0.05   	 	0.03   	 	0.01   	 	0.04   	 	0.02   	 	
   Variable student loan spread	 	 	0.94   	 	0.91   	 	1.06   	 	0.92   	 	0.96   	 	
Fixed rate floor income, net of settlements on derivatives	 	 	0.57   	 	0.55   	 	0.48   	 	0.56   	 	0.53   	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Core student loan spread	 	 	1.51   	%	1.46   	%	1.54   	%	1.48   	%	1.49   	% 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Average balance of student loans	 	 $	23,293,870   	 	23,586,250   	 	25,931,220   	 	23,440,060   	 	25,006,012   	 	
Average balance of debt outstanding	 	 	23,510,072   	 	23,853,620   	 	26,124,574   	 	23,680,897   	 	25,166,222   	 	

A trend analysis of the Company’s core and variable student loan spreads is summarized below.

 	(a)	The interest earned on the majority of the Company’s FFELP student loan assets is indexed to the three-month commercial paper indice. The Company funds the majority of its assets with three-month LIBOR indexed floating rate securities. The relationship between these two indices has a significant impact on student loan spread. This table (the right axis) shows the difference between the average three-month LIBOR and commercial paper indices by quarter.	

The Company’s variable student loan spread decreased during 2011 compared to the same periods in 2010 due to a widening of the CP/LIBOR spread. This decrease was partially offset due to:

 	·	A decrease in the amortization of loan premiums/discounts and deferred origination costs as a result of loans purchased at a discount, reducing the net costs being amortized.	

 	·	A decrease in lower yielding loan assets (loans originated on or after October, 1, 2007) with the sale of $2.1 billion of student loans to the Department under the Purchase Program in October of 2010.	

57

The primary difference between variable student loan spread and core student loan spread is fixed rate floor income, net of settlements on derivatives.  A summary of fixed rate floor income and its contribution to core student spread follows:
 	 	Three months ended	 	 	Six months ended	 	
 	 	June 30,	 	 	March 31,	 	 	June 30,	 	 	June 30,	 	 	June 30,	 	
 	 	2011	 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed rate floor income, gross	 	$	39,146	 	 	 	37,900	 	 	 	35,340	 	 	 	77,046	 	 	 	74,467	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative settlements (a)	 	 	(6,345	)	 	 	(6,218	)	 	 	(4,286	)	 	 	(12,563	)	 	 	(8,142	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed rate floor income, net	 	$	32,801	 	 	 	31,682	 	 	 	31,054	 	 	 	64,483	 	 	 	66,325	 	

Fixed rate floor income contribution to spread, net	 	 	0.57	%	 	 	0.55	%	 	 	0.48	%	 	 	0.56	%	 	 	0.53	%	

 	(a)	Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income.	
 
The high levels of fixed rate floor income earned during 2011 and 2010 are due to historically low interest rates.  If interest rates remain low, the Company anticipates continuing to earn significant fixed rate floor income in future periods.  See Item 3, “Quantitative and Qualitative Disclosures about Market Risk” which provides additional detail on the Company’s portfolio earning fixed rate floor income and the derivatives used by the Company to hedge these loans.

Three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010

 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	 	 	 	 	 	 	Change	 	 	 	 	 	 	 	 	Change	 	
 	 	2011	 	 	2010	 	 	$	 	 	 	%	 	 	 	2011	 	 	 	2010	 	 	$	 	 	 	%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income after provision for loan losses	 	$	84,765	 	 	 	95,396	 	 	 	(10,631	)	 	 	(11.1	) %	 	$	168,938	 	 	 	180,002	 	 	 	(11,064	)	 	 	(6.1	) %	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income	 	 	3,997	 	 	 	4,636	 	 	 	(639	)	 	 	(13.8	)	 	 	8,133	 	 	 	9,404	 	 	 	(1,271	)	 	 	(13.5	)	
Gain on sale of loans and debt repurchases	 	 	—	 	 	 	8,759	 	 	 	(8,759	)	 	 	(100.0	)	 	 	1,400	 	 	 	18,936	 	 	 	(17,536	)	 	 	(92.6	)	
Derivative settlements, net	 	 	(3,274	)	 	 	(3,377	)	 	 	103	 	 	 	(3.1	)	 	 	(7,312	)	 	 	(5,800	)	 	 	(1,512	)	 	 	26.1	 	
Total other income	 	 	723	 	 	 	10,018	 	 	 	(9,295	)	 	 	(92.8	)	 	 	2,221	 	 	 	22,540	 	 	 	(20,319	)	 	 	(90.1	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	709	 	 	 	1,286	 	 	 	(577	)	 	 	(44.9	)	 	 	1,487	 	 	 	2,644	 	 	 	(1,157	)	 	 	(43.8	)	
Other expenses	 	 	5,139	 	 	 	2,992	 	 	 	2,147	 	 	 	71.8	 	 	 	6,677	 	 	 	7,213	 	 	 	(536	)	 	 	(7.4	)	
Intersegment expenses, net	 	 	17,047	 	 	 	21,891	 	 	 	(4,844	)	 	 	(22.1	)	 	 	35,194	 	 	 	42,716	 	 	 	(7,522	)	 	 	(17.6	)	
Total operating expenses	 	 	22,895	 	 	 	26,169	 	 	 	(3,274	)	 	 	(12.5	)	 	 	43,358	 	 	 	52,573	 	 	 	(9,215	)	 	 	(17.5	)	

"Base net income" before income taxes and corporate overhead allocation	 	 	62,593	 	 	 	79,245	 	 	 	(16,652	)	 	 	(21.0	)	 	 	127,801	 	 	 	149,969	 	 	 	(22,168	)	 	 	(14.8	)	
Corporate overhead allocation	 	 	(2,054	)	 	 	(2,473	)	 	 	419	 	 	 	(16.9	)	 	 	(3,309	)	 	 	(4,454	)	 	 	1,145	 	 	 	(25.7	)	
"Base net income" before income taxes	 	 	60,539	 	 	 	76,772	 	 	 	(16,233	)	 	 	(21.1	)	 	 	124,492	 	 	 	145,515	 	 	 	(21,023	)	 	 	(14.4	)	
Income tax expense	 	 	(23,412	)	 	 	(29,173	)	 	 	5,761	 	 	 	(19.7	)	 	 	(47,714	)	 	 	(55,296	)	 	 	7,582	 	 	 	(13.7	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
"Base net income"	 	$	37,127	 	 	 	47,599	 	 	 	(10,472	)	 	 	(22.0	) %	 	$	76,778	 	 	 	90,219	 	 	 	(13,441	)	 	 	(14.9	) %	

Net interest income after provision for loan losses (net of settlements on derivatives) .

 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	 	 	 	 	 	 	Change	 	 	 	 	 	 	 	 	Change	 	
 	 	2011	 	 	2010	 	 	  $	 	 	 	%	 	 	 	2011	 	 	 	2010	 	 	  $	 	 	 	%	 	
Variable student loan interest, net of settlements on derivatives (a)	 	$	152,081	 	 	 	176,686 	 	 	 	(24,605	)  	 	 	(13.9	) %	 	$	305,490	 	 	 	332,490 	 	 	 	(27,000	)  	 	 	(8.1	) %	
Consolidation rebate fees (b)	 	 	(41,329	)  	 	 	(43,215	)  	 	 	1,886 	 	 	 	(4.4	)  	 	 	(83,113	)  	 	 	(85,665	)  	 	 	2,552 	 	 	 	(3.0	)  	
Amortization of loan premiums/discounts and deferred origination costs (c)	 	 	(7,893	)  	 	 	(12,548	)  	 	 	4,655 	 	 	 	(37.1	)  	 	 	(17,881	)  	 	 	(28,630	)  	 	 	10,749 	 	 	 	(37.5	)  	
Interest on bonds and notes payable (d)	 	 	(48,615	)  	 	 	(53,118	)  	 	 	4,503 	 	 	 	(8.5	)  	 	 	(97,608	)  	 	 	(97,860	)  	 	 	252 	 	 	 	(0.3	)  	
Variable student loan interest margin, net of settlements on derivatives	 	 	54,244 	 	 	 	67,805 	 	 	 	(13,561	)  	 	 	(20.0	)  	 	 	106,888 	 	 	 	120,335 	 	 	 	(13,447	)  	 	 	(11.2	)  	
Fixed rate floor income, net of settlements on derivatives (e)	 	 	32,801 	 	 	 	31,054 	 	 	 	1,747 	 	 	 	5.6 	 	 	 	64,483 	 	 	 	66,325 	 	 	 	(1,842	)  	 	 	(2.8	)  	
Investment interest	 	 	351 	 	 	 	347 	 	 	 	4 	 	 	 	1.2 	 	 	 	632 	 	 	 	642 	 	 	 	(10	)  	 	 	(1.6	)  	
Intercompany interest	 	 	(655	)  	 	 	(987	)  	 	 	332 	 	 	 	(33.6	)  	 	 	(1,377	)  	 	 	(1,900	)  	 	 	523 	 	 	 	(27.5	)  	
Provision for loan losses (f)	 	 	(5,250	)  	 	 	(6,200	)  	 	 	950 	 	 	 	(15.3	)  	 	 	(9,000	)  	 	 	(11,200	)  	 	 	2,200 	 	 	 	(19.6	)  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income after provision for loan losses (net of settlements on derivatives (g) )	 	$	81,491	 	 	 	92,019 	 	 	 	(10,528	)  	 	 	(11.4	) %	 	$	161,626	 	 	 	174,202 	 	 	 	(12,576	)  	 	 	(7.2	) %	

 	(a)	Variable student loan interest, net of settlements on derivatives, decreased as a result of a decrease in the average student loan portfolio of $2.6 billion (10.2%) and $1.6 billion (6.3%) for the three and six months ended June 30, 2011 compared to the same periods in 2010.  In addition, the yield earned on student loans, net of settlements on derivatives, decreased to 2.62% for the three and six months ended June 30, 2011 from 2.73% and 2.66% compared to the same periods in 2010.  	

58

 	(b)	Consolidation rebate fees decreased for the three and six months ended June 30, 2011 compared to the same periods in 2010 due to a decrease in the average consolidation loan portfolio for which these fees are paid.	

 	(c)	The amortization of loan premiums/discounts and deferred origination costs decreased as a result of the purchase of loans at a discount during 2010 and 2011, which has reduced the net costs being amortized.	

 	(d)	Interest expense decreased as a result of a decrease in average debt outstanding of $2.6 billion (10.0%) and $1.5 billion (5.9%) for the three and six months ended June 30, 2011, respectively, compared to the same periods in 2010.  This decrease was offset by an increase in interest rates on the Company’s variable rate debt, which increased the Company’s cost of funds (excluding net derivative settlements) to 0.83% for the three and six months ended June 30, 2011 compared to 0.81% and 0.78% for the same periods in 2010.	
 
 	(e)	Depending on the type of loan and when it was originated, the borrower rate on student loans is either fixed to term or is reset to an annual rate each July 1. As a result, for loans where the borrower rate is fixed to term, the Company may earn floor income for an extended period of time, which the Company refers to as fixed rate floor income.  A summary of fixed rate floor income follows.	
 
 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed rate floor income, gross	 	$	39,146	 	 	 	35,340	 	 	 	77,046	 	 	 	74,467	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative settlements (a)	 	 	(6,345	)	 	 	(4,286	)	 	 	(12,563	)	 	 	(8,142	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed rate floor income, net	 	$	32,801	 	 	 	31,054	 	 	 	64,483	 	 	 	66,325	 	

 	(a)	Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income.	

The high levels of fixed rate floor income earned during the three and six months ended June 30, 2011 and 2010 are due to historically low interest rates.

 	(f)	The provision for loan losses represents the periodic expense of maintaining an allowance sufficient to absorb losses inherent in the Company's portfolio of loans.  The provision for loan losses recognized by the Company decreased during the three and six months ended June 30, 2011 compared to the same periods in 2010 primarily due to a decrease in the non-federally insured loan provision due to a decrease in the dollar amount of the Company's student loan portfolio, including those loans in repayment, as well as continued aging of the portfolio.	

 	(g)	The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Management has structured the majority of the Company’s derivative transactions with the intent that each is economically effective; however, the Company’s derivative instruments do not qualify for hedge accounting. Derivative settlements for each applicable period should be evaluated with the Company’s net interest income.	

Other income. The following table summarizes the components of “other income”.

 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Borrower late fee income	 	$	3,222	 	 	 	2,979	 	 	 	6,812	 	 	 	6,237	 	
Other	 	 	775	 	 	 	1,657	 	 	 	1,321	 	 	 	3,167	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
        Other income	 	$	3,997	 	 	 	4,636	 	 	 	8,133	 	 	 	9,404	 	

 
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Gain on sale of loans and debt repurchases .  A summary of gains from the sale of loans and debt repurchases follows:

 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Gain on sale of loans	 	$	—	 	 	 	—	 	 	 	1,345 	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gain on debt repurchases - asset-backed securities (a)	 	 	—	 	 	 	8,759 	 	 	 	55 	 	 	 	18,936 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Gain on sale of loans and debt repurchases	 	$	—	 	 	 	8,759 	 	 	 	1,400 	 	 	 	18,936 	 	

 
 	(a)	During the six months ended June 30, 2011, the Company repurchased asset-backed securities of $0.6 million.  During the three and six months ended June 30, 2010, the Company repurchased asset-backed securities of $117.8 million and $392.0 million, respectively. Due to improvements in the capital markets, the opportunities for the Company to repurchase debt at less than par are becoming more limited.	

Salaries and benefits and other expenses .   During the three months ended June 30, 2011, the Company recorded an expense of $2.5 million related to its obligation to repurchase non-federally insured loans.  This expense was recorded due to management’s projected performance of the portfolio of loans subject to the repurchase obligation.  Excluding this expense, “salaries and benefits” and “other expenses” decreased for the three and six months ended June 30, 2011 compared with the same periods in 2010 as a result of continued focus by the Company on managing costs and gaining efficiencies as well as a reduction in marketing costs due the elimination of new loan originations under the FFELP Program.

Intersegment expenses, net .   Intersegment expenses include fees paid to the Student Loan and Guaranty Servicing operating segment for the servicing of the Company’s student loan portfolio.  These fees decreased for the three and six months ended June 30, 2011 compared to the same periods in 2010 as a result of the Company no longer originating FFELP loans and the amortization of the Company’s FFELP portfolio.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s fee generating businesses are non-capital intensive and all produce positive operating cash flows. As such, a minimal amount of debt and equity capital is allocated to the fee-based segments and any liquidity or capital needs are satisfied using cash flow from operations. Therefore, the Liquidity and Capital Resources discussion is concentrated on the Company’s liquidity and capital needs to meet existing debt obligations, primarily unsecured corporate debt and debt facilities in the Asset Generation and Management operating segment.

The Company may issue equity and debt securities in the future in order to improve capital, increase liquidity, refinance upcoming maturities, or provide for general corporate purposes. Moreover, the Company may from time-to-time repurchase certain amounts of its outstanding secured and unsecured debt securities, including debt securities which the Company may issue in the future, for cash and/or through exchanges for other securities. Such repurchases or exchanges may be made in open market transactions, privately negotiated transactions, or otherwise. Any such repurchases or exchanges will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions, compliance with securities laws, and other factors. The amounts involved in any such transactions may be material.

The Company has historically utilized operating cash flow, secured financing transactions (which include warehouse facilities, asset-backed securitizations, and liquidity programs offered by the Department), operating lines of credit, and other borrowing arrangements to fund its Asset Generation and Management operations and student loan acquisitions. In addition, the Company has used operating cash flow, borrowings on its unsecured line of credit, and unsecured debt offerings to fund corporate activities, business acquisitions, and repurchases of common stock.  The Company has also used its common stock to partially fund certain business acquisitions. The Company has a universal shelf registration statement with the SEC which allows the Company to sell up to $825.0 million of securities that may consist of common stock, preferred stock, unsecured debt securities, warrants, stock purchase contracts, and stock purchase units. The terms of any securities are established at the time of the offering.

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The following table summarizes the Company’s debt obligations as of June 30, 2011:

 	 	Carrying	 	 	Interest rate	 	 	
 	 	amount	 	 	range	 	Final maturity	
Asset Generation and Management:	 	 	 	 	 	 	 	
Bonds and notes issued in asset-backed securitizations	 	$	20,346,991	 	 	 	0.10% - 6.90	%	5/26/14 - 7/27/48	
FFELP warehouse facility	 	 	469,578 	 	 	 	0.18% - 0.29	%	7/29/13	
Department of Education Conduit	 	 	2,497,198 	 	 	 	0.25	%	5/8/14	
Other borrowings	 	 	13,649 	 	 	 	3.50% - 5.10	%	11/14/11 - 11/11/15	
 	 	 	23,327,416 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
Unsecured Corporate Debt:	 	 	 	 	 	 	 	 	 	
Unsecured line of credit	 	 	177,300 	 	 	 	0.56	%	5/8/12	
Junior Subordinated Hybrid Securities	 	 	100,697 	 	 	 	7.40	%	9/15/61	
 	 	 	277,997 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
 	 	$	23,605,413	 	 	 	 	 	 	

Liquidity Needs

The Company has two primary liquidity needs:

·	Satisfy unsecured debt obligations, specifically its unsecured line of credit	
·	Satisfy debt obligations secured by student loan assets and related collateral	

Liquidity Needs and Sources of Liquidity Available to Satisfy Unsecured Debt Obligations

Excluding the Junior Subordinated Hybrid Securities (which have a maturity in 2061), the Company has the following unsecured debt obligation:

 	 	Balance outstanding	 	
 	 	as of June 30, 2011	 	
Unsecured Corporate Debt:	 	 	 	
Unsecured line of credit - due May 2012	 	$	177,300	 	
 
Sources of liquidity currently available to satisfy unsecured debt obligations

The following table details the Company’s sources of liquidity currently available:

 	 	As of June 30, 2011	 	
Sources of primary liquidity:	 	 	 	
Cash and cash equivalents	 	$	116,341	 	
Investments - trading securities	 	 	31,664 	 	
Unencumbered FFELP student loan assets	 	 	63,266 	 	
Unencumbered private student loan assets	 	 	21,644 	 	
Asset-backed security investments - Class B subordinated notes (a)	 	 	76,513 	 	
Asset-backed security investments (b)	 	 	61,650 	 	
 	 	 	 	 	
Total sources of primary liquidity	 	$	371,078	 	

 	(a)	As part of the Company’s issuance of asset-backed securitizations in 2008, due to credit market conditions when these notes were issued, the Company purchased the Class B subordinated notes of $76.5 million (par value). These notes are not included on the Company’s consolidated balance sheet. If the credit market conditions continue to improve, the Company anticipates selling these notes to third parties. Upon a sale to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale. The amount included in the table above is the par value of these subordinated notes and may not represent market value upon sale of the notes.	

 	(b)	The Company has repurchased its own asset-backed securities (bonds and notes payable).  For accounting purposes, these notes are effectively retired and are not included on the Company’s consolidated balance sheet.  However, as of June 30, 2011, $61.7 million of these securities are legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated by the trust estate.  Upon a sale to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale.  The amount included in the table above is the par value of these notes and may not represent market value upon sale of the notes.	

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Cash generated from operations

In addition to current sources of liquidity, the Company plans to use cash generated from operations to satisfy its unsecured debt obligations.  The Company has historically generated positive cash flow from operations.  For the six months ended June 30, 2011 and year ended December 31, 2010, the Company had net cash flow from operating activities of $171.8 million and $194.9 million, respectively.

Liquidity Needs and Sources of Liquidity Available to Satisfy Debt Obligations Secured by Student Loan Assets and Related Collateral

The Company had the following debt obligations outstanding that are secured by student loan assets and related collateral.
 
 	 	As of June 30, 2011	
 	 	Carrying	 	 	
 	 	amount	 	Final maturity	
Asset Generation and Management:	 	 	 	 	
Bonds and notes issued in asset-backed securitizations	 	$	20,346,991	 	5/26/14 - 7/27/48	
FFELP warehouse facility	 	 	469,578 	 	7/29/13	
Department of Education Conduit	 	 	2,497,198 	 	5/8/14	
Other borrowings	 	 	13,649 	 	11/14/11 - 11/11/15	
 	 	$	23,327,416	 	 	

Bonds and notes issued in asset-backed securitizations

The majority of the Company’s portfolio of student loans is funded in asset-backed securitizations that are structured to substantially match the maturity of the funded assets, thereby minimizing liquidity risk. In addition, due to (i) the difference between the yield the Company receives on the loans and cost of financing within these transactions, and (ii) the excess servicing and administration fees the Company earns from these transactions, the Company has created a portfolio that will generate earnings and significant cash flow over the life of these transactions.

As of June 30, 2011, based on cash flow models developed to reflect management’s current estimate of, among other factors, prepayments, defaults, deferment, forbearance, and interest rates, the Company currently expects future undiscounted cash flows from its portfolio to be approximately $1.63 billion as detailed below.  The $1.63 billion includes approximately $350 million (as of June 30, 2011) of overcollateralization included in the asset-backed securitizations.  These excess net asset positions are reflected variously in the following balances on the consolidated balance sheet:  "student loans receivable," "restricted cash and investments," and "accrued interest receivable."

The forecasted cash flow presented below includes all loans currently funded in asset-backed securitizations.  As of June 30, 2011, the Company had $20.1 billion of loans included in asset-backed securitizations, which represented 87 percent of its total FFELP student loan portfolio. The forecasted cash flow does not include cash flows that the Company expects to receive related to loans funded through the Department of Education’s Conduit Program and other warehouse facilities or loans originated and/or acquired subsequent to June 30, 2011.

As previously discussed, on July 8, 2011, the Company purchased the residual interest in $1.9 billion of FFELP student loans.  The table below does not include the estimated future cash flow from this portfolio. The Company estimates these loans will add approximately $90 million to $120 million in future cash flow to the Company in addition to the amounts summarized below.

 
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 	(a)	The Company uses various assumptions, including prepayments and future interest rates, when preparing its cash flow forecast.  These assumptions are further discussed below.	

Prepayments :  The primary variable in establishing a life of loan estimate is the level and timing of prepayments. Prepayment rates equal the percentage of loans that prepay annually as a percentage of the beginning of period balance, net of scheduled principal payments.  A number of factors can affect estimated prepayment rates, including the level of consolidation activity and default rates.  Should any of these factors change, management may revise its assumptions, which in turn would impact the projected future cash flow. The Company’s cash flow forecast above assumes prepayment rates that are generally consistent with those utilized in the Company’s recent asset-backed securities transactions. If management used a prepayment rate assumption two times greater than what was used to forecast the cash flow, the cash flow forecast would be reduced by approximately $330 million to $390 million.

Interest rates :  The Company funds the majority of its student loans with three-month LIBOR (“LIBOR”) indexed floating rate securities.  Meanwhile, the interest earned on the Company’s student loan assets are indexed primarily to a commercial paper rate (“CP”).  The different interest rate characteristics of the Company’s loan assets and liabilities funding these assets result in basis risk.  The Company’s cash flow forecast assumes LIBOR will exceed CP by 12 basis points for the life of the portfolio, which approximates the historical relationship between these indices.  If the forecast is computed assuming a spread of 24 basis points between CP and LIBOR for the life of the portfolio, the cash flow forecast would be reduced by approximately $80 million to $120 million.

The Company uses the current forward interest rate yield curve to forecast cash flows.  A change in the forward interest rate curve would impact the future cash flows generated from the portfolio.  An increase in future interest rates will reduce the amount of fixed rate floor income the Company is currently receiving.  The Company attempts to mitigate the impact of a rise in short-term rates by hedging interest rate risks. As of June 30, 2011, the net fair value of the Company’s interest rate derivatives used to hedge loans earning fixed rate floor income was a liability of $19.9 million. See Item 3, “Quantitative and Qualitative Disclosures about Market Risk — Interest Rate Risk.”

FFELP Warehouse Facilities

The Company funds a portion of its FFELP loan acquisitions using its FFELP warehouse facility. Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements. As of June 30, 2011, the Company’s FFELP warehouse facility had a maximum financing amount of $500.0 million with a revolving financing structure supported by 364-day liquidity provisions.  As of June 30, 2011, $469.6 million was outstanding under the FFELP warehouse facility, $30.4 million was available for future use, and $28.1 million was advanced as equity support.
 
On July 14, 2011, the Company renewed the liquidity agreement on its existing FFELP warehouse facility (the “NFSLW-I Warehouse”) and entered into an additional FFELP warehouse facility (the “NHELP-I Warehouse”).

Effective July 14, 2011, the Company’s NFSLW-I Warehouse facility has a maximum financing amount of $300.0 million, with a revolving financing structure supported by 364-day liquidity provisions, which expires on April  1, 2012. The final maturity date of the facility is July 1, 2014. In the event the Company is unable to renew the liquidity provisions by April 1, 2012, the facility would become a term facility at a stepped-up cost, with no additional student loans being eligible for financing, and the Company would be required to refinance the existing loans in the facility by July 1, 2014.

The NFSLW-I Warehouse facility provides for formula based advance rates depending on FFELP loan type, up to a maximum of 85 percent to 98 percent of the principal and interest of loans financed. The advance rates for collateral may increase or decrease based on market conditions, but they are subject to a minimum advance of 84.5 to 90 percent based on loan type. The facility contains financial covenants relating to levels of the Company’s consolidated net worth, ratio of adjusted EBITDA to corporate debt interest, and unencumbered cash. Any violation of these covenants could result in a requirement for the immediate repayment of any outstanding borrowings under the facility

The new NHELP-I Warehouse has a maximum financing amount of $500.0 million, with a revolving financing structure supported by 364-day liquidity provisions which expires, on October 1, 2012. The final maturity date of the facility is July 1, 2014. In the event the Company is unable to renew the liquidity provisions by October 1, 2012, the facility would become a term facility at a stepped-up cost, with no additional student loans being eligible for financing, and the Company would be required to refinance the existing loans in the facility by July 1, 2014.

The NHELP-I Warehouse facility provides for formula based advance rates depending on FFELP loan type, up to a maximum of 93 percent to 95 percent of the principal and interest of loans financed. The advance rates for collateral may increase or decrease based on market conditions, but they are subject to a minimum advance of 85 to 90 percent based on loan type. The facility contains financial covenants relating to levels of the Company’s consolidated net worth, ratio of adjusted EBITDA to corporate debt interest, and unencumbered cash. Any violation of these covenants could result in a requirement for the immediate repayment of any outstanding borrowings under the facility.

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Upon termination or expiration of the warehouse facilities, the Company would expect to access the securitization market, use operating cash, rely on sale of assets, or transfer collateral to satisfy any remaining obligations.

Department of Education Conduit

In May 2009, the Department implemented a program under which it finances eligible FFELP Stafford and PLUS loans in a conduit vehicle established to provide funding for student lenders (the “Conduit Program”).  Loans eligible for the Conduit Program had to be first disbursed on or after October 1, 2003, but not later than June 30, 2009, and fully disbursed before September 30, 2009, and meet certain other requirements. Funding for the Conduit Program is provided by the capital markets at a cost based on market rates, with the Company being advanced 97 percent of the student loan face amount. Excess amounts needed to fund the remaining 3 percent of the student loan balances were contributed by the Company. The Conduit Program expires on May 8, 2014. The Student Loan Short-Term Notes (“Student Loan Notes”) issued by the Conduit Program are supported by a combination of  (i) notes backed by FFELP loans, (ii) a liquidity agreement with the Federal Financing Bank, and (iii) a put agreement provided by the Department.  If the conduit does not have sufficient funds to pay all Student Loan Notes, then those Student Loan Notes will be repaid with funds from the Federal Financing Bank.  The Federal Financing Bank will hold the notes for a short period of time and, if at the end of that time, the Student Loan Notes still cannot be paid off, the underlying FFELP loans that serve as collateral for the Conduit Program will be sold to the Department through a put agreement at a price of 97 percent of the face amount of the loans. As of June 30, 2011, the Company had $2.5 billion borrowed under the facility and $87.9 million advanced as equity support in the facility. Effective July 1, 2010, no additional loans could be funded using the Conduit Program.

The Company expects to access the securitization market prior to the Conduit Program’s maturity to refinance the student loan collateral included in the Conduit with debt that is structured to match the maturity of the assets.

Other Liquidity Needs

On March 30, 2010, President Obama signed into law the Reconciliation Act of 2010.  Effective July 1, 2010, this law prohibits new loan originations under the FFEL Program and requires that all new federal loan originations be made through the Federal Direct Loan Program.  As a result of the Reconciliation Act of 2010, the Company no longer originates new FFELP loans.

Due to the legislative changes in the student loan industry, the Company believes there will be opportunities to purchase FFELP loan portfolios on behalf of current FFELP participants looking to adjust their FFELP businesses.

The Company plans to fund FFELP student loan acquisitions from third parties using its agreement with Union Bank, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loans (as described below); using its FFELP warehouse facilities (as described above); and continuing to access the asset-backed securities market.

Union Bank Participation Agreement

The Company maintains an agreement with Union Bank, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loans (the “FFELP Participation Agreement”). The Company has the option to purchase the participation interests from the grantor trusts at the end of a 364-day period upon termination of the participation certificate. As of June 30, 2011, $570.7 million of loans were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. The agreement automatically renews annually and is terminable by either party upon five business days notice. This agreement provides beneficiaries of Union Bank’s grantor trusts with access to investments in interests in student loans, while providing liquidity to the Company.  The Company can participate loans to Union Bank to the extent of availability under the grantor trusts, up to $750 million or an amount in excess of $750 million if mutually agreed to by both parties.  Loans participated under this agreement have been accounted for by the Company as loan sales.  Accordingly, the participation interests sold are not included on the Company’s consolidated balance sheets.

Asset-backed securities transactions

Depending on market conditions, the Company anticipates continuing to access the asset-backed securities market.  Asset-backed securities transactions would be used to refinance student loans included in the FFELP warehouse facilities, the Department of Education Conduit facility, and/or existing asset-backed security transactions.  The FFELP warehouse facilities and Department Conduit facility have advance rates that are less than par.  As of June 30, 2011, the Company had approximately $28.1 million advanced in the FFELP warehouse facility and approximately $87.9 million advanced in the Department Conduit facility.  Depending on the terms of asset-backed security transactions, refinancing loans included in these facilities could produce positive cash flow to the Company by reducing required advance rates and are contemplated by management when making student loan financing decisions.

During the first quarter of 2011, the Company completed an asset-backed securities transaction totaling $384.4 million.  Notes issued in this asset-backed securities transaction carry interest rates based on a spread to LIBOR.  The Company used the proceeds from the sale of these notes to purchase principal and interest on student loans, including loans which were previously financed in the FFELP warehouse facility.

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Although the Company has recently demonstrated its ability to access the asset-backed securities market and expects asset-backed securities transactions to remain a primary source of funding over the long term, the Company also expects its transaction volumes to be more limited and pricing less favorable than prior to the credit market dislocation that began in August 2007, with significantly reduced opportunities to place subordinated tranches of asset-backed securities with investors. At present, the Company is unable to predict when market conditions will allow for more regular, reliable, and cost-effective access to the term asset-backed securities market.  On August 5, 2011, Standard & Poor's downgraded its long-term sovereign credit rating on the United States of America one level from AAA to AA+.  For a discussion of the potential impact that this action could have on the asset-backed securities markets and overall liquidity, see Part II, Item 1A. of this report.

Description of Other Debt Facilities

Unsecured Line of Credit

The Company has a $750.0 million unsecured line of credit that terminates in May 2012. As of June 30, 2011, there was $177.3 million outstanding on this line. Upon termination in 2012, there can be no assurance that the Company will be able to maintain this line of credit, find alternative funding, or increase the amount outstanding under the line, if necessary.  The lending commitment under the Company’s unsecured line of credit is provided by a total of thirteen banks, with no individual bank representing more than 11% of the total lending commitment. The bank lending group includes Lehman Brothers Bank, a subsidiary of Lehman Brothers Holdings Inc., which represents approximately 7% of the lending commitment under the line of credit. In September 2008, Lehman Brothers Holdings Inc. filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. The Company does not expect Lehman to fund future borrowing requests. As of June 30, 2011, excluding Lehman’s lending commitment, the Company had $532.6 million available for future use under its unsecured line of credit.

The line of credit agreement contains certain financial covenants that, if not met, lead to an event of default under the agreement. The covenants include maintaining:

 	·	A minimum consolidated net worth	

 	·	A minimum adjusted EBITDA to corporate debt interest (over the last four rolling quarters)	

 	·	A limitation on subsidiary indebtedness	

 	·	A limitation on the percentage of non-guaranteed loans in the Company’s portfolio	

As of June 30, 2011, the Company was in compliance with all of these requirements. Many of these covenants are duplicated in the Company’s other lending facilities, including its FFELP warehouse facilities.

A default on the Company’s FFELP warehouse facilities would result in an event of default on the Company’s unsecured line of credit that would result in the outstanding balance on the line of credit becoming immediately due and payable.

The Company’s operating line of credit does not have any covenants related to unsecured debt ratings. However, changes in the Company’s ratings (as well as the amounts the Company borrows) have modest implications on the pricing level at which the Company obtains funding.

Junior Subordinated Hybrid Securities

In September 2006, the Company issued $200.0 million aggregate principal amount of Junior Subordinated Hybrid Securities (“Hybrid Securities”). The Hybrid Securities are unsecured obligations of the Company. The interest rate on the Hybrid Securities from the date they were issued through the optional redemption date, September 28, 2011, is 7.40%, payable semi-annually. Beginning September 29, 2011 through September 29, 2036, the “scheduled maturity date,” the interest rate on the Hybrid Securities will be equal to three-month LIBOR plus 3.375%, payable quarterly. The principal amount of the Hybrid Securities will become due on the scheduled maturity date only to the extent that the Company has received proceeds from the sale of certain qualifying capital securities prior to such date (as defined in the Hybrid Securities’ prospectus). If any amount is not paid on the scheduled maturity date, it will remain outstanding and bear interest at a floating rate as defined in the prospectus, payable monthly. On September 15, 2061, the Company must pay any remaining principal and interest on the Hybrid Securities in full whether or not the Company has sold qualifying capital securities. At the Company’s option, the Hybrid Securities are redeemable in whole at any time or in part from time to time at the redemption price described in the prospectus supplement.

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Debt Repurchases

Due to the Company’s improved cash position, the Company repurchased debt during the first quarter of 2011. Gains recorded by the Company from the purchase of debt are included in “gain on the sale of loans and debt repurchases” on the Company’s consolidated statements of income. A summary of debt repurchases follows:

 	 	Three months ended June 30, 2011	 	 	Six months ended June 30, 2011	 	
 	 	Notional amount	 	 	Purchase price	 	 	Gain	 	 	Notional amount	 	 	Purchase price	 	 	Gain	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unsecured debt - Junior Subordinated Hybrid Securities	 	$	—	 	 	 	—	 	 	 	—	 	 	 	62,558	 	 	 	55,651	 	 	 	6,907	 	
Asset-backed securities	 	 	—	 	 	 	—	 	 	 	—	 	 	 	600	 	 	 	545	 	 	 	55	 	
 	 	$	—	 	 	 	—	 	 	 	—	 	 	 	63,158	 	 	 	56,196	 	 	 	6,962	 	
 
Due to improvements in the capital markets, the opportunities for the Company to repurchase debt at less than par value are becoming more limited.

Contractual Obligations

The Company’s contractual obligations were as follows:

 	 	As of June 30, 2011	 	
 	 	Total	 	 	Less than 1 year	 	 	1 to 3 years	 	 	3 to 5 years	 	 	More than 5 years	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Bonds and notes payable	 	$	23,605,413	 	 	 	186,200	 	 	 	2,989,019	 	 	 	251,779	 	 	 	20,178,415	 	
Operating lease obligations (a)	 	 	16,513	 	 	 	6,024	 	 	 	9,378	 	 	 	1,111	 	 	 	—	 	
   Total	 	$	23,621,926	 	 	 	192,224	 	 	 	2,998,397	 	 	 	252,890	 	 	 	20,178,415	 	
 
 	(a)	The Company is committed under noncancelable operating leases for certain office and warehouse space and equipment.  Operating lease obligations are presented net of approximately $1.5 million in sublease arrangements.	

As of June 30, 2011, the Company had a reserve of $10.7 million for uncertain income tax positions (including the federal benefit received from state positions).  This obligation is not included in the above table as the timing and resolution of the income tax positions cannot be reasonably estimated at this time.

As of June 30, 2011, the Company had participated a cumulative amount of $117.1 million of non-federally insured loans to third parties.  Loans participated under these agreements have been accounted for by the Company as loan sales. Accordingly, the participation interests sold are not included on the Company’s consolidated balance sheets. Per the terms of the servicing agreements, the Company’s servicing operations are obligated to repurchase loans subject to the participation interests in the event such loans become 60 or 90 days delinquent. In addition, on January 13, 2011, the Company sold a portfolio of non-federally insured loans for proceeds of $91.3 million (100% par value).  The Company retained credit risk related to this portfolio and will pay cash to purchase back any loans which become 60 days delinquent. As of June 30, 2011, the Company has $20.7 million accrued related to these repurchase obligations which is included in “other liabilities” in the Company’s consolidated balance sheet.  These obligations are not included in the above table.

During the first quarter of 2010, the Company purchased certain assets of a software company that constituted a business combination.  The initial consideration paid by the Company was $3.0 million in cash.  In addition to the initial purchase price, additional payments are to be made by the Company based on certain operating results as defined in the purchase agreement.  These contingent payments are payable in two additional annual installments due in March 2012 and March 2013 and in total are estimated by the Company, as of June 30, 2011, to be $3.5 million.  The contingent payments will be remeasured to fair value each reporting date until the contingency is resolved, with all changes in fair value being recognized in earnings. This obligation is not included in the above table.

Dividends

Dividends of $0.07 and $0.10 per share on the Company's Class A and Class B Common Stock were paid on March 15, 2011 and June 15, 2011, respectively, to all holders of record as of March 1, 2011 and June 1, 2011, respectively. In addition, a dividend of $0.10 per share on the Company’s Class A and Class B common stock will be paid on September 15, 2011 to shareholders of record as of September 1, 2011.

The Company currently plans to continue making quarterly dividend payments, subject to future earnings, capital requirements, financial condition, and other factors.  In addition, the payment of dividends is subject to the terms of the Company’s outstanding Hybrid Securities, which generally provide that if the Company defers interest payments on those securities it cannot pay dividends on its capital stock.

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CRITICAL ACCOUNTING POLICIES

This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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. The Company bases its estimates and judgments on historical experience and on various other factors that the Company believes are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions. Note 2 of the consolidated financial statements, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, includes a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements.

On an on-going basis, management evaluates its estimates and judgments, particularly as they relate to accounting policies that management believes are most “critical” — that is, they are most important to the portrayal of the Company’s financial condition and results of operations and they require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  Management has identified the following critical accounting policies that are discussed in more detail below: allowance for loan losses, revenue recognition, impairment assessments related to goodwill and intangible assets, income taxes, and accounting for derivatives.

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of probable losses on student loans. This evaluation process is subject to numerous estimates and judgments. The Company evaluates the appropriateness of the allowance for loan losses on its federally insured loan portfolio separately from its non-federally insured loan portfolio.

The allowance for the federally insured loan portfolio is based on periodic evaluations of the Company’s loan portfolios considering loans in repayment versus those in a nonpaying status, delinquency status, trends in defaults in the portfolio based on Company and industry data, past experience, trends in student loan claims rejected for payment by guarantors, changes to federal student loan programs, current economic conditions, and other relevant factors. Should any of these factors change, the estimates made by management would also change, which in turn would impact the level of the Company’s future provision for loan losses.

In determining the appropriateness of the allowance for loan losses on the non-federally insured loans, the Company considers several factors including: loans in repayment versus those in a nonpaying status, delinquency status, type of program, trends in defaults in the portfolio based on Company and industry data, past experience, current economic conditions, and other relevant factors. Should any of these factors change, the estimates made by management would also change, which in turn would impact the level of the Company’s future provision for loan losses. The Company places a non-federally insured loan on nonaccrual status when the collection of principal and interest is 30 days past due and charges off the loan when the collection of principal and interest is 120 days past due.

The allowance for federally insured and non-federally insured loans is maintained at a level management believes is appropriate to provide for estimated probable credit losses inherent in the loan portfolio. This evaluation is inherently subjective because it requires estimates that may be susceptible to significant changes.

Revenue Recognition

Student Loan Income – The Company recognizes student loan income as earned, net of amortization of loan premiums and discounts and deferred origination costs. Loan income is recognized based upon the expected yield of the loan after giving effect to borrower utilization of incentives such as principal reductions for timely payments (“borrower benefits”) and other yield adjustments. The estimate of the borrower benefits discount is dependent on the estimate of the number of borrowers who will eventually qualify for these benefits. For competitive and liquidity purposes, the Company frequently changed the borrower benefit programs in both amount and qualification factors. These programmatic changes must be reflected in the estimate of the borrower benefit discount. Loan premiums/discounts, deferred origination costs, and borrower benefits are included in the carrying value of the student loan on the consolidated balance sheet and are amortized over the estimated life of the loan. The most sensitive estimate for loan premiums/discounts, deferred origination costs, and borrower benefits is the estimate of the constant prepayment rate (“CPR”). CPR is a variable in the life of loan estimate that measures the rate at which loans in a portfolio pay before their stated maturity. The CPR is directly correlated to the average life of the portfolio. CPR equals the percentage of loans that prepay annually as a percentage of the beginning of period balance, net of scheduled principal payments. A number of factors can affect the CPR estimate, including the level of consolidation activity and default rates. Should any of these factors change, the estimates made by management would also change, which in turn would impact the amount of loan premium/discount and deferred origination cost amortization recognized by the Company in a particular period.

Loan and guaranty servicing revenue – Loan servicing fees are determined according to individual agreements with customers and are calculated based on the dollar value of loans, number of loans, or number of borrowers serviced for each customer. Guaranty servicing fees, generally, are calculated based on the number of loans serviced, volume of loans serviced, or amounts collected. Revenue is recognized when earned pursuant to applicable agreements, and when ultimate collection is assured.

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Tuition payment processing and campus commerce revenue – Tuition payment processing and campus commerce revenue primarily includes actively managed tuition payment solutions and online payment processing. Fees for these services are recognized over the period in which services are provided to customers.

Enrollment services revenue – Enrollment services revenue primarily consists of the following items:

 	·	Interactive marketing – Interactive marketing revenue is derived primarily from fees which are earned through the delivery of qualified inquiries or clicks. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. Delivery is deemed to have occurred at the time a qualified inquiry or click is delivered to the customer provided that no significant obligations remain. From time to time, the Company may agree to credit certain inquiries or clicks if they fail to meet the contractual or other guidelines of a particular client. The Company has established a sales reserve based on historical experience. To date, such credits have been immaterial and within management’s expectations.	

For a portion of its interactive marketing revenue, the Company has agreements with providers of online media or traffic (“Publishers”) used in the generation of inquiries or clicks. The Company receives a fee from its customers and pays a fee to Publishers either on a cost per inquiry, cost per click, or cost per number of impressions basis. The Company is the primary obligor in the transaction. As a result, the fees paid by the Company’s customers are recognized as revenue and the fees paid to its Publishers are included in “cost to provide enrollment services” in the Company’s consolidated statements of income.

 	·	List marketing - Revenue from the sale of lists is generally earned and recognized, net of estimated returns, upon delivery.	

 	·	Publishing services - Revenue from the sale of print products is generally earned and recognized, net of estimated returns, upon shipment or delivery.	

 	·	Resource centers – Resource centers services include online courses, scholarship search and selection data, career planning, and online information about colleges and universities. The majority of these services are sold based on subscriptions and/or are performance based. Revenues from sales of subscription and performance based services are recognized ratably over the term of the contract as earned. Subscription and performance based revenues received or receivable in advance of the delivery of services is included in deferred revenue.	

Software Services Revenue – Software services revenue is determined from individual agreements with customers and includes license and maintenance fees associated with student loan software products.  Computer and software consulting services are recognized over the period in which services are provided to customers.

Fees associated with the majority of the services described above are recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectability is reasonably assured. The Company’s service fees are determined based on written price quotations or service agreements having stipulated terms and conditions that do not require management to make any significant judgments or assumptions regarding any potential uncertainties.

The Company assesses collectability of revenues and its allowance for doubtful accounts based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. An allowance for doubtful accounts is established to record accounts receivable at estimated net realizable value. If the Company determines that collection of revenues is not reasonably assured at or prior to delivery of the Company’s services, revenue is recognized upon the receipt of cash.

Goodwill and Intangible Assets – Impairment Assessments

The Company reviews goodwill for impairment annually (every November 30) and whenever triggering events or changes in circumstances indicate its carrying value may not be recoverable. The Company performs a two-step impairment test on goodwill. In the first step, the Company compares the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to the difference.

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Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. Actual future results may differ from those estimates.

The Company makes judgments about the recoverability of purchased intangible assets annually and whenever triggering events or changes in circumstances indicate that an other than temporary impairment may exist. Each quarter the Company evaluates the estimated remaining useful lives of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. Recoverability of these assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

Assumptions and estimates about future values and remaining useful lives of the Company’s intangible and other long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in the Company’s business strategy and internal forecasts. Although the Company believes the historical assumptions and estimates used are reasonable and appropriate, different assumptions and estimates could materially impact the reported financial results.

Income Taxes

The Company is subject to the income tax laws of the U.S and its states and municipalities in which the Company operates. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities. In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of these inherently complex tax laws. The Company must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit. The Company reviews these balances quarterly and as new information becomes available, the balances are adjusted, as appropriate.

Derivative Accounting

The Company records derivative instruments at fair value on the balance sheet as either an asset or liability. The Company determines the fair value for its derivative contracts using either (i) pricing models that consider current market conditions and the contractual terms of the derivative contract or (ii) counterparty valuations. These factors include interest rates, time value, forward interest rate curve, and volatility factors, as well as foreign exchange rates. Pricing models and their underlying assumptions impact the amount and timing of unrealized gains and losses recognized, and the use of different pricing models or assumptions could produce different financial results. Management has structured the majority of the Company’s derivative transactions with the intent that each is economically effective. However, the Company’s derivative instruments do not qualify for hedge accounting. Accordingly, changes in the fair value of derivative instruments are reported in current period earnings. Net settlements on derivatives are included in “derivative market value and foreign currency adjustments and derivative settlements, net” on the consolidated statements of income.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2011, the FASB issued ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring . This ASU amends FASB ASC Topic 310, Receivables , to clarify when a loan restructuring constitutes a troubled debt restructuring. Under the new guidance, student loans for which concessions are granted may now be considered troubled debt restructurings that were previously not. This guidance is effective July 1, 2011, applied retrospectively to January 1, 2011. As of the filing date of this report, the Company had not completed its evaluation of the effect of this new guidance on its student loan receivable portfolio.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(All dollars are in thousands, except share amounts, unless otherwise noted)

Interest Rate Risk

The Company’s primary market risk exposure arises from fluctuations in its borrowing and lending rates, the spread between which could impact the Company due to shifts in market interest rates. Because the Company generates a significant portion of its earnings from its student loan spread, the interest sensitivity of the balance sheet is a key profitability driver.

The following table sets forth the Company’s loan assets and debt instruments by rate characteristics:

 	 	As of June 30, 2011	 	 	As of December 31, 2010	 	
 	 	Dollars	 	 	Percent	 	 	Dollars	 	 	Percent	 	
Fixed-rate loan assets	 	$	9,768,692	 	 	 	42.3	%	 	$	8,525,279	 	 	 	35.7	%	
Variable-rate loan assets	 	 	13,345,120 	 	 	 	57.7 	 	 	 	15,343,777 	 	 	 	64.3 	 	
   Total	 	$	23,113,812	 	 	 	100.0	%	 	$	23,869,056	 	 	 	100.0	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed-rate debt instruments	 	$	100,697	 	 	 	0.4	%	 	$	163,255	 	 	 	0.7	%	
Variable-rate debt instruments	 	 	23,504,716 	 	 	 	99.6 	 	 	 	24,509,217 	 	 	 	99.3 	 	
   Total	 	$	23,605,413	 	 	 	100.0	%	 	$	24,672,472	 	 	 	100.0	%	

Loans originated prior to April 1, 2006 generally earn interest at the higher of a floating rate based on the Special Allowance Payment or SAP formula set by the Department and the borrower rate, which is fixed over a period of time. The SAP formula is based on an applicable indice plus a fixed spread that is dependent upon when the loan was originated, the loan’s repayment status, and funding sources for the loan. The Company generally finances its student loan portfolio with variable rate debt. In low and/or declining interest rate environments, when the fixed borrower rate is higher than the rate produced by the SAP formula, the Company’s student loans earn at a fixed rate while the interest on the variable rate debt typically continues to decline. In these interest rate environments, the Company may earn additional spread income that it refers to as floor income.

Depending on the type of loan and when it was originated, the borrower rate is either fixed to term or is reset to an annual rate each July 1. As a result, for loans where the borrower rate is fixed to term, the Company may earn floor income for an extended period of time, which the Company refers to as fixed rate floor income, and for those loans where the borrower rate is reset annually on July 1, the Company may earn floor income to the next reset date, which the Company refers to as variable rate floor income. In accordance with legislation enacted in 2006, lenders are required to rebate fixed rate floor income and variable rate floor income to the Department for all new FFELP loans first originated on or after April 1, 2006. A summary of fixed rate floor income follows.

 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed rate floor income, gross	 	$	39,146	 	 	 	35,340	 	 	 	77,046	 	 	 	74,467	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative settlements (a)	 	 	(6,345	)	 	 	(4,286	)	 	 	(12,563	)	 	 	(8,142	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed rate floor income, net	 	$	32,801	 	 	 	31,054	 	 	 	64,483	 	 	 	66,325	 	

 	(a)	Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income.	

The high levels of fixed rate floor income earned during 2010 and 2011 are due to historically low interest rates.  If interest rates remain low, the Company anticipates continuing to earn significant fixed rate floor income in future periods.

Absent the use of derivative instruments, a rise in interest rates may reduce the amount of floor income received and this may have an impact on earnings due to interest margin compression caused by increasing financing costs, until such time as the federally insured loans earn interest at a variable rate in accordance with their special allowance payment formulas. In higher interest rate environments, where the interest rate rises above the borrower rate and fixed rate loans effectively become variable rate loans, the impact of the rate fluctuations is reduced.

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The following graph depicts fixed rate floor income for a borrower with a fixed rate of 6.75% and a SAP rate of 2.64%:

The following table shows the Company’s student loan assets that are earning fixed rate floor income as of June 30, 2011:

 	 	 	Borrower/	 	Estimated	 	Balance of	 	
Fixed	 	lender	 	variable	 	assets earning fixed-rate	 	
interest	 	weighted	 	conversion	 	floor income as of	 	
rate range	 	average yield	 	rate (a)	 	June 30, 2011	 	
 	 	 	 	 	 	 	 	 	 	 	
<3.0%	 	  2.87 %	 	  0.23 %	 	$	1,528,366	 	
  3.0 - 3.49 %	 	  3.21 %	 	  0.57 %	 	 	1,738,261	 	
  3.5 - 3.99 %	 	  3.65 %	 	  1.01 %	 	 	1,775,005	 	
  4.0 - 4.49 %	 	  4.20 %	 	  1.56 %	 	 	1,391,225	 	
  4.5 - 4.99 %	 	  4.72 %	 	  2.08 %	 	 	772,220	 	
  5.0 - 5.49 %	 	  5.25 %	 	  2.61 %	 	 	520,151	 	
  5.5 - 5.99 %	 	  5.67 %	 	  3.03 %	 	 	315,462	 	
  6.0 - 6.49 %	 	  6.19 %	 	  3.55 %	 	 	367,773	 	
  6.5 - 6.99 %	 	  6.70 %	 	  4.06 %	 	 	327,867	 	
  7.0 - 7.49 %	 	  7.17 %	 	  4.53 %	 	 	115,458	 	
  7.5 - 7.99 %	 	  7.71 %	 	  5.07 %	 	 	202,937	 	
  8.0 - 8.99 %	 	  8.17 %	 	  5.53 %	 	 	454,322	 	
> 9.0%	 	  9.04 %	 	  6.40 %	 	 	259,645	 	
 	 	 	 	 	 	 	 	 	 	 	 	$	9,768,692	 	

 	(a)	The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate.  As of June 30, 2011, the short-term interest rate was 19 basis points.	

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The following table summarizes the outstanding derivatives instruments as of June 30, 2011 used by the Company to hedge fixed-rate student loan assets.

 	 	 	 	 	Weighted	 	
 	 	 	 	 	average fixed	 	
 	 	Notional	 	 	rate paid by	 	
Maturity	 	Amount	 	 	the Company (a)	 	
 	 	 	 	 	 	 	
2011	 	$	3,300,000	 	 	 	0.55	%	
2012	 	 	950,000	 	 	 	1.08	 	
2013	 	 	2,150,000	 	 	 	0.85	 	
2015	 	 	100,000	 	 	 	2.26	 	
2020	 	 	50,000	 	 	 	3.23	 	
 	 	$	6,550,000	 	 	 	0.77	%	

 	(a)	For all interest rate derivatives, the Company receives discrete three-month LIBOR.	

As of June 30, 2011, the Company had $2.9 billion of student loan assets that were eligible to earn variable-rate floor income.

The Company is exposed to interest rate risk in the form of basis risk and repricing risk because the interest rate characteristics of the Company’s assets do not match the interest rate characteristics of the funding. The Company attempts to match the interest rate characteristics of certain pools of loan assets with debt instruments of substantially similar characteristics. Due to the variability in duration of the Company’s assets and varying market conditions, the Company does not attempt to perfectly match the interest rate characteristics of the entire loan portfolio with the underlying debt instruments. The Company has adopted a policy of periodically reviewing the mismatch related to the interest rate characteristics of its assets and liabilities together with the Company’s outlook as to current and future market conditions. Based on those factors, the Company uses derivative instruments as part of its overall risk management strategy. Derivative instruments used as part of the Company’s interest rate risk management strategy currently include interest rate swaps, basis swaps, and cross-currency swaps.

The following table presents the Company’s FFELP student loan assets and related funding arranged by underlying indices as of June 30, 2011:

Index	 	Frequency of variable resets	 	Assets	 	 	Debt outstanding that funded student loan assets (a)	 	
 	 	 	 	 	 	 	 	 	
3 month H15 financial commercial paper (b)	 	Daily	 	$	22,125,850	 	 	 	—	 	
3 month Treasury bill (c)	 	Varies	 	 	957,308 	 	 	 	—	 	
3 month LIBOR (d)	 	Quarterly	 	 	—	 	 	 	18,930,195 	 	
1 month LIBOR	 	Monthly	 	 	—	 	 	 	699,621 	 	
Auction-rate or remarketing (e)	 	Varies	 	 	—	 	 	 	717,175 	 	
Asset-backed commercial paper (f)	 	Varies	 	 	—	 	 	 	2,966,776 	 	
Other (g)	 	 	 	 	244,258 	 	 	 	13,649 	 	
 	 	 	 	$	23,327,416	 	 	 	23,327,416 	 	

 	(a)	The Company has certain basis swaps outstanding in which the Company receives three-month LIBOR and pays one-month LIBOR plus or minus a spread as defined in the agreements. The Company entered into these derivative instruments to better match the interest rate characteristics on its student loan assets and the debt funding such assets. The following table summarizes these derivatives as of June 30, 2011:	

Maturity	 	Notional Amounts	 	
 	 	 	 	
2021	 	$	250,000	 	
2023	 	 	1,250,000	 	
2024	 	 	250,000	 	
2028	 	 	100,000	 	
2039	 	 	150,000	 	
2040	 	 	200,000	 	
 	 	 	 	 	
 	 	$	2,200,000	 	

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 	(b)	The Company’s FFELP student loans earn interest based on the daily average H15 financial commercial paper indice calculated on a fiscal quarter.	

 	(c)	The Company has used derivative instruments to hedge both the basis and repricing risk on certain student loans in which the Company earns interest based on a treasury bill rate that resets daily and are funded with debt indexed to primarily three-month LIBOR. To hedge these loans, the Company has entered into basis swaps in which the Company receives three-month LIBOR set discretely in advance and pays a weekly treasury bill rate plus a spread as defined in the agreement. The following table summarizes these derivatives as of June 30, 2011:	
 
Maturity	 	Notional Amount	 	
 	 	 	 	
2011	 	$	225,000	 	

 	(d)	The Company has Euro-denominated notes that reprice on the EURIBOR index. The Company has entered into derivative instruments (cross-currency interest rate swaps) that convert the EURIBOR indice to three-month LIBOR. As a result, these notes are reflected in the three-month LIBOR category in the above table. See “Foreign Currency Exchange Risk.”	

 	(e)	The interest rates on certain of the Company's asset-backed securities are set and periodically reset via a "dutch auction" (“Auction Rate Securities”) or through a remarketing utilizing remarketing agents (“Variable Rate Demand Notes”). As of June 30, 2011, the Company is sponsor on $498.0 million of Auction Rate Securities and $219.2 million of Variable Rate Demand Notes.	

For Auction Rate Securities, investors and potential investors submit orders through a broker-dealer as to the principal amount of notes they wish to buy, hold, or sell at various interest rates. The broker-dealers submit their clients' orders to the auction agent, who then determines the clearing interest rate for the upcoming period. Interest rates on these Auction Rate Securities are reset periodically, generally every 7 to 35 days, by the auction agent or agents. During the first quarter of 2008, as part of the credit market crisis, auction rate securities from various issuers failed to receive sufficient order interest from potential investors to clear successfully, resulting in failed auction status. Since February 8, 2008, the Company’s Auction Rate Securities have failed in this manner. Under normal conditions, banks have historically purchased these securities when investor demand is weak. However, since February 2008, banks have been allowing auctions to fail. Currently, all of the Company’s Auction Rate Securities are in a failed auction status and the Company believes they will remain in a failed status for an extended period of time and possibly permanently.

As a result of a failed auction, the Auction Rate Securities will generally pay interest to the holder at a maximum rate as defined by the indenture. While these rates will vary, they will generally be based on a spread to LIBOR or Treasury Securities. Due to the failed auctions related to these securities, the Company could be subject to interest costs substantially above the anticipated and historical rates paid on these types of securities.

For Variable Rate Demand Notes, the remarketing agents set the price, which is then offered to investors. If there are insufficient potential bid orders to purchase all of the notes offered for sale, the Company could be subject to interest costs substantially above the anticipated and historical rates paid on these types of securities.

 	(f)	Asset-backed commercial paper consists of $469.6 million funded in the Company’s FFELP warehouse facility and $2.5 billion funded through the Department’s Conduit Program.  Funding for the Conduit Program is provided by the capital markets at a cost based on market rates.	

 	(g)	Assets include restricted cash and investments and other assets.  Debt outstanding includes other debt obligations secured by student loan assets and related collateral.	

Financial Statement Impact of Derivative Instruments

The Company recognizes changes in the fair value of derivative instruments currently in earnings unless specific hedge accounting criteria are met. Management has structured the majority of the Company’s derivative transactions with the intent that each is economically effective. However, the Company’s derivative instruments do not qualify for hedge accounting; consequently, the change in fair value of these derivative instruments is included in the Company’s operating results. Changes or shifts in the forward yield curve and fluctuations in currency rates can significantly impact the valuation of the Company’s derivatives. Accordingly, changes or shifts to the forward yield curve and fluctuations in currency rates will impact the financial position and results of operations of the Company. The change in fair value of the Company’s derivatives are included in “derivative market value and foreign currency adjustments and derivative settlements, net” in the Company’s consolidated statements of income and resulted in income of $2.2 million and $68.7 million for the three and six months ended June 30, 2011, respectively, and expenses of $100.6 million  and $168.2 million for the three and six months ended June 30, 2010, respectively.

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The following summarizes the derivative settlements included in “derivative market value and foreign currency adjustments and derivative settlements, net” on the consolidated statements of income:

 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
Settlements:	 	 	 	 	 	 	 	 	 	 	 	 	
1:3 basis swaps	 	$	373	 	 	 	80 	 	 	 	581 	 	 	 	221 	 	
T-Bill/LIBOR basis swaps	 	 	(64	)  	 	 	—	 	 	 	(194	)  	 	 	—	 	
Interest rate swaps - floor income hedges	 	 	(6,345	)  	 	 	(4,286	)  	 	 	(12,563	)  	 	 	(8,142	)  	
Interest rate swaps - hybrid debt hedges	 	 	(248	)  	 	 	(79	)  	 	 	(494	)  	 	 	(79	)  	
Cross-currency interest rate swaps	 	 	2,770 	 	 	 	917 	 	 	 	4,880 	 	 	 	2,219 	 	
Other	 	 	(8	)  	 	 	(9	)  	 	 	116 	 	 	 	(19	)  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
   Total settlements - (expense) income	 	$	(3,522	)	 	 	(3,377	)  	 	 	(7,674	)  	 	 	(5,800	)	

Sensitivity Analysis

The following tables summarize the effect on the Company’s earnings, based upon a sensitivity analysis performed by the Company assuming hypothetical increases in interest rates of 100 basis points and 300 basis points while funding spreads remain constant. In addition, as it relates to the effect on earnings, a sensitivity analysis was performed assuming the funding indice increases 10 basis points and 30 basis points while holding the asset indice constant, if the funding indice is different than the asset indice. The effect on earnings was performed on the Company’s variable rate assets (including loans earning fixed rate floor income) and liabilities. The analysis includes the effects of the Company’s interest rate and basis swaps in existence during these periods.
 
 	 	Three months ended June 30, 2011	 	
 	 	Interest rates	 	 	Asset and funding indice mismatches	 	
 	 	Change from increase of 100 basis points	 	 	Change from increase of 300 basis points	 				
 							 	Increase of 10 basis points	 	 	Increase of 30 basis points	 	
 	 	Dollar	 	 	Percent	 	 	Dollar	 	 	Percent	 	 	Dollar	 	 	Percent	 	 	Dollar	 	 	Percent	 	
Effect on earnings:	 	 	 	 	 	 	 	 	 	
Decrease in pre-tax net income before impact of derivative settlements	 	$	(16,595	)	 	 	(28.5	) %	 	$	(29,756	)	 	 	(51.1	) %	 	$	(5,861	)	 	 	(10.1	) %	 	$	(17,584	)	 	 	(30.2	) %	
Impact of derivative settlements	 	 	13,371	 	 	 	23.0	 	 	 	40,114	 	 	 	68.9	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Increase (decrease) in net income before taxes	 	$	(3,224	)	 	 	(5.5	) %	 	$	10,358	 	 	 	17.8	%	 	$	(5,861	)	 	 	(10.1	) %	 	$	(17,584	)	 	 	(30.2	) %	
Increase (decrease) in basic and diluted earnings per share	 	$	(0.04	)	 	 	 	 	 	$	0.13	 	 	 	 	 	 	$	(0.08	)	 	 	 	 	 	$	(0.23	)	 	 	 	 	

 	 	Three months ended June 30, 2010	 	
 	 	Interest rates	 	 	Asset and funding indice mismatches	 	
 	 	Change from increase of 100 basis points	 	 	Change from increase of 300 basis points	 				
 							 	Increase of 10 basis points	 	 	Increase of 30 basis points	 	
 	 	Dollar	 	 	Percent	 	 	Dollar	 	 	Percent	 	 	Dollar	 	 	Percent	 	 	Dollar	 	 	Percent	 	
Effect on earnings:	 	 	 	 	 	 	 	 	 	 	 	
Decrease in pre-tax net income before impact of derivative settlements	 	$	(16,200	)	 	 	(20.3	) %	 	$	(30,134	)	 	 	(37.7	) %	 	$	(6,513	)	 	 	(8.1	) %	 	$	(19,540	)	 	 	(24.4	) %	
Impact of derivative settlements	 	 	15,985	 	 	 	20.0	 	 	 	47,955	 	 	 	60.0	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Increase (decrease) in net income before taxes	 	$	(215	)	 	 	(0.3	) %	 	$	17,821	 	 	 	22.3	%	 	$	(6,513	)	 	 	(8.1	) %	 	$	(19,540	)	 	 	(24.4	) %	
Increase (decrease) in basic and diluted earnings per share	 	$	—	 	 	 	 	 	 	$	0.22	 	 	 	 	 	 	$	(0.08	)	 	 	 	 	 	$	(0.25	)	 	 	 	 	

 	 	Six months ended June 30, 2011	 	
 	 	Interest rates	 	 	Asset and funding indice mismatches	 	
 	 	Change from increase of 100 basis points	 	 	Change from increase of 300 basis points	 				
 							 	Increase of 10 basis points	 	 	Increase of 30 basis points	 	
 	 	Dollar	 	 	Percent	 	 	Dollar	 	 	Percent	 	 	Dollar	 	 	Percent	 	 	Dollar	 	 	Percent	 	
Effect on earnings:	 	 	 	 	 	 	 	 	 	 	 	
Decrease in pre-tax net income before impact of derivative settlements	 	$	(31,978	)	 	 	(21.9	) %	 	$	(56,508	)	 	 	(38.7	) %	 	$	(11,742	)	 	 	(8.0	) %	 	$	(35,229	)	 	 	(24.1	) %	
Impact of derivative settlements	 	 	32,268	 	 	 	22.1	 	 	 	96,805	 	 	 	66.3	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Increase (decrease) in net income before taxes	 	$	290	 	 	 	0.2	%	 	$	40,297	 	 	 	27.6	%	 	$	(11,742	)	 	 	(8.0	) %	 	$	(35,229	)	 	 	(24.1	) %	
Increase (decrease) in basic and diluted earnings per share	 	$	—	 	 	 	 	 	 	$	0.52	 	 	 	 	 	 	$	(0.15	)	 	 	 	 	 	$	(0.45	)	 	 	 	 	

74

 	 	Six months ended June 30, 2010	 	
 	 	Interest rates	 	 	 	 	 	 	 	 	 	 	
 	 	Change from increase of	 	 	Change from increase of	 	 	Asset and funding indice mismatches	 	
 	 	  100 basis points	 	 	  300 basis points	 	 	Increase of 10 basis points	 	 	Increase of 30 basis points	 	
 	 	Dollar	 	 	Percent	 	 	Dollar	 	 	Percent	 	 	Dollar	 	 	Percent	 	 	Dollar	 	 	Percent	 	
Effect on earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Decrease in pre-tax net income before impact of derivative settlements	 	$	(33,547	)	 	 	(20.1	) %	 	$	(61,602	)	 	 	(36.9	) %	 	$	(12,480	)	 	 	(7.5	) %	 	$	(37,439	)	 	 	(22.4	)%	
Impact of derivative settlements	 	 	28,353	 	 	 	17.0	 	 	 	85,060	 	 	 	51.0	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Increase (decrease) in net income before taxes	 	$	(5,194	)	 	 	(3.1	) %	 	$	23,458	 	 	 	14.1	%	 	$	(12,480	)	 	 	(7.5	) %	 	$	(37,439	)	 	 	(22.4	)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Increase (decrease) in basic and diluted earning per share	 	$	(0.07	)	 	 	 	 	 	$	0.29	 	 	 	 	 	 	$	(0.16	)	 	 	 	 	 	$	(0.47	)	 	 	 	 	
 
Foreign Currency Exchange Risk

During 2006, the Company completed separate debt offerings of student loan asset-backed securities that included 420.5 million and 352.7 million Euro-denominated notes with interest rates based on a spread to the EURIBOR index. As a result of this transaction, the Company is exposed to market risk related to fluctuations in foreign currency exchange rates between the U.S. dollar and Euro. The principal and accrued interest on these notes is re-measured at each reporting period and recorded on the Company’s balance sheet in U.S. dollars based on the foreign currency exchange rate on that date. Changes in the principal and accrued interest amounts as a result of foreign currency exchange rate fluctuations are included in the “derivative market value and foreign currency adjustments and derivative settlements, net” in the Company’s consolidated statements of income.

The Company entered into cross-currency interest rate swaps in connection with the issuance of the Euro Notes. Under the terms of these derivative instrument agreements, the Company receives from a counterparty a spread to the EURIBOR indice based on notional amounts of €420.5 million and €352.7 million and pays a spread to the LIBOR indice based on notional amounts of $500.0 million and $450.0 million, respectively. In addition, under the terms of these agreements, all principal payments on the Euro Notes will effectively be paid at the exchange rate in effect as of the issuance of the notes. The Company did not qualify these derivative instruments as hedges under accounting authoritative guidance; consequently, the change in fair value is included in the Company’s operating results.

The following table summarizes the financial statement impact as a result of the remeasurement of the Euro Notes and change in the fair value of the related derivative instruments. These amounts are included in “derivative market value and foreign currency adjustments and derivative settlements, net” on the Company’s consolidated statements of income.

 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Re-measurement of Euro Notes	 	$	(19,020	)	 	 	93,401 	 	 	 	(84,355	)  	 	 	165,075 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in fair value of cross-currency derivatives	 	 	18,734 	 	 	 	(100,946	)  	 	 	81,266 	 	 	 	(160,021	)  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total impact to statements of  income - (expense) income	 	$	(286	)	 	 	(7,545	)  	 	 	(3,089	)  	 	 	5,054 	 	

The re-measurement of the Euro-denominated bonds generally correlates with the change in fair value of the cross-currency interest rate swaps. However, the Company will experience unrealized gains or losses related to the cross-currency interest rate swaps if the two underlying indices (and related forward curve) do not move in parallel. Management intends to hold the cross-currency interest rate swaps through the maturity of the Euro-denominated bonds.

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Financial Statement Impact – Derivatives and Foreign Currency Transaction Adjustments

The following table summarizes all of the components of “derivative market value and foreign currency adjustments and derivative settlements, net” included in the consolidated statements of income.

 	 	Three months ended June 30,	 	 	Six months ended June 30,	 	
 	 	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in fair value of derivatives	 	$	2,207	 	 	 	(100,632	)	 	 	68,658	 	 	 	(168,201	)	
Foreign currency transaction adjustment (Euro Notes)	 	 	(19,020	)	 	 	93,401	 	 	 	(84,355	)	 	 	165,075	 	
Derivative settlements, net	 	 	(3,522	)	 	 	(3,377	)	 	 	(7,674	)	 	 	(5,800	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value and foreign currency adjustments and derivative settlements, net - (expense) income	 	$	(20,335	)	 	 	(10,608	)	 	 	(23,371	)	 	 	(8,926	)	

ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under supervision and with the participation of certain members of the Company’s management, including the chief executive and the chief financial officers, the Company completed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in SEC Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the Company’s principal executive and principal financial officer believe that the disclosure controls and procedures were effective as of the end of the period covered by this report with respect to timely communication to them and other members of management responsible for preparing periodic reports of material information required to be disclosed in this report as it relates to the Company and its consolidated subsidiaries.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

General

The Company is subject to various claims, lawsuits, and proceedings that arise in the normal course of business. These matters principally consist of claims by student loan borrowers disputing the manner in which their student loans have been processed and disputes with other business entities. In addition, from time to time, the Company receives information and document requests from state or federal regulators concerning its business practices. The Company cooperates with these inquiries and responds to the requests. While the Company cannot predict the ultimate outcome of any inquiry or investigation, the Company believes its activities have materially complied with applicable law, including the Higher Education Act, the rules and regulations adopted by the Department of Education thereunder, and the Department’s guidance regarding those rules and regulations. On the basis of present information, anticipated insurance coverage, and advice received from counsel, it is the opinion of the Company’s management that the disposition or ultimate determination of these claims, lawsuits, and proceedings will not have a material adverse effect on the Company’s business, financial position, or results of operations.
 
United States ex rel Vigil v. Nelnet, Inc. et al

On November 4, 2009, the Company was served with a Summons and Third Amended Complaint naming the Company as one of three defendants in an unrelated qui tam action brought by Rudy Vigil (the “Vigil Complaint”). This matter was filed under seal in the U.S. District Court for the District of Nebraska on July 11, 2007 and was unsealed on October 15, 2009 following the government’s notice that it declined to intervene in the matter. The Vigil Complaint, filed by a former employee of the Company, appeared to allege that the Company engaged in false advertising and offered prohibited inducements to student loan borrowers in order to increase the Company’s loan holdings, and subsequently submitted false claims to the Department of Education in order to obtain special allowance payments and default claim payments on such loans. The Company filed a Motion to Dismiss the Vigil Complaint, and on April 1, 2010, the Court granted the Motion, dismissing the Vigil Complaint with prejudice.

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On June 9, 2010, Mr. Vigil filed an appeal brief with the United States Court of Appeals for the Eighth Circuit (“Appeals Court”).  On May 5, 2011, the Appeals Court issued an opinion affirming the lower court’s dismissal of the Vigil Complaint.  On June 2, 2011, Mr. Vigil filed a Petition for Rehearing En Banc and Petition for Rehearing by the Appeals Court panel, and on June 24, 2011 those petitions were denied.

Unless Mr. Vigil appeals to the United States Supreme Court and the Supreme Court grants a petition for such an appeal, the Company believes this matter is essentially concluded, and will not have a material effect on the Company’s business, financial position, or results of operations.

Bais Yaakov of Spring Valley v. Peterson’s Nelnet, LLC

On January 4, 2011, a complaint against Peterson’s Nelnet, LLC (“Peterson’s”), a subsidiary of the Company, was filed in the U.S. District Court for the District of New Jersey (the “District Court”).  The complaint alleges that Peterson’s sent six advertising faxes to the named plaintiff in 2008-2009 that were not the result of express invitation or permission granted by the plaintiff and did not include certain opt out language.  The complaint also alleges that such faxes violated the federal Telephone Consumer Protection Act (the “TCPA”), purportedly entitling the plaintiff to $500 per violation, trebled for willful violations for each of the six faxes.  The complaint further alleges that Peterson’s had sent putative class members more than 10,000 faxes that violated the TCPA, amounting to more than $5 million in statutory penalty damages and more than $15 million if trebled for willful violations.  The complaint seeks to establish a class action for two different classes of plaintiffs: Class A, to whom Peterson’s sent unsolicited fax advertisements containing opt out notices similar to those contained in the faxes received by the named plaintiff; and Class B, to whom Peterson’s sent fax advertisements containing opt out notices similar to those contained in the faxes received by the named plaintiff.  As of the filing date of this report, the District Court has not established or recognized any class.

On February 16, 2011, Peterson’s filed a motion to dismiss the complaint, which was denied by the District Court on April 15, 2011 shortly after a similar motion to dismiss that had been granted in an unrelated case involving alleged TCPA violations related to faxes was reversed by the U.S. Court of Appeals for the Third Circuit (the “Appeals Court”), which has jurisdiction over the District Court.  On April 29, 2011, Peterson’s filed an answer to the complaint, but also filed a motion for reconsideration of the motion to dismiss.  On May 17, 2011, the Appeals Court granted a petition for rehearing of the motion to dismiss in the unrelated TCPA fax case, and on May 31, 2011 Peterson’s filed a motion for stay pending the outcome of that rehearing.  The motion for reconsideration and the motion for stay are pending before the District Court.

Peterson’s intends to continue to contest the suit vigorously.  Due to the preliminary stage of this matter and the uncertainty and risks inherent in class determination and the overall litigation process, the Company believes that a meaningful estimate of a reasonably possible loss, if any, or range of reasonably possible losses, if any, cannot currently be made.

 ITEM 1A.  RISK FACTORS

There have been no material changes from the risk factors described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 in response to Item 1A of Part I of such Form 10-K, except as set forth below.
 
Concerns about the downgrade of the U.S. credit rating may materially adversely affect our business, financial condition, liquidity, and results of operations.

On August 5, 2011, Standard & Poor's ("S&P") downgraded its long-term sovereign credit rating on the United States of America one level from AAA to AA+.  While U.S. lawmakers reached an agreement to raise the federal debt ceiling on August 2, 2011, the downgrade reflected S&P's view that the fiscal consolidation plan within that agreement fell short of what would be necessary to stabilize the U.S. government's medium term debt dynamics, and that further near-term progress containing the growth in public spending or on reaching an agreement on raising revenues is less likely than S&P previously assumed.  The rating may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise, or "new fiscal pressures" result in higher general government debt.

Because of the unprecedented nature of negative credit rating actions with respect to U.S. government obligations, the ultimate impact on the markets and our business, financial condition, liquidity, and results of operations are unpredictable and may not be immediately apparent.  However, such actions could materially adversely affect our liquidity, cash flows, and results of operations, increase our borrowing costs, limit our access to the capital markets, or trigger other implications under certain collateralized arrangements.  In particular, our cost of funds on new asset-backed securities and warehouse and conduit facilities collateralized with FFELP student loans could increase and we could be required to increase the amount of overcollateralization and equity support associated with newly issued FFELP asset-backed securities.   In addition, our ability to access and/or maintain existing FFELP warehouse and conduit facilities, and to efficiently sell or refinance loans previously funded through these vehicles, could be adversely affected.  For example, in the event that U.S. credit rating downgrades result in extended distressed market conditions such that we are unable to efficiently refinance loans funded through the Department's Conduit Program which expires on May 8, 2014, under which we have $2.5 billion borrowed as of June 30, 2011, the underlying FFELP loans may have to be sold to the Department through a put agreement at a price of 97 percent of the face amount of the loans.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Stock Repurchases

The following table summarizes the repurchases of Class A common stock during the second quarter of 2011 by the Company or any “affiliated purchaser” of the Company, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934.

 	 	 	 	 	 	 	 	Total number of	 	 	Maximum number	 	
 	 	 	 	 	 	 	 	shares purchased	 	 	of shares that may	 	
 	 	Total number	 	 	Average	 	 	as part of publicly	 	 	yet be purchased	 	
 	 	of shares	 	 	price paid	 	 	announced plans	 	 	under the plans	 	
Period	 	purchased (1)	 	 	per share	 	 	or programs (2)	 	 	or programs	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
April 1 - April 30, 2011	 	 	3,935 	 	 	$	22.80	 	 	 	3,820 	 	 	 	2,978,395 	 	
May 1 - May 31, 2011	 	 	5,768 	 	 	 	22.18 	 	 	 	2,047 	 	 	 	2,976,348 	 	
June 1 - June 30, 2011	 	 	276 	 	 	 	20.94 	 	 	 	276 	 	 	 	2,976,072 	 	
Total	 	 	9,979 	 	 	$	22.39	 	 	 	6,143 	 	 	 	 	 	

 	(1)	The total number of shares includes: (i) shares purchased pursuant to the 2006 Plan discussed in footnote (2) below; and (ii) shares owned and tendered by employees to satisfy tax withholding obligations upon the vesting of restricted shares. Shares of Class A common stock purchased pursuant to the 2006 Plan were 3,820 shares, 2,047 shares, and 276 shares in April, May, and June 2011, respectively, that had been issued to the Company’s 401(k) plan and allocated to employee participant accounts pursuant to the plan’s provisions for Company matching contributions in shares of Company stock, and were purchased by the Company from the plan pursuant to employee participant instructions to dispose of such shares. Shares of Class A common stock tendered by employees to satisfy tax withholding obligations included 115 shares and 3,721 shares in April and May 2011, respectively.  Unless otherwise indicated, shares owned and tendered by employees to satisfy tax withholding obligations were purchased at the closing price of the Company’s shares on the date of vesting.	

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 	(2)	On May 25, 2006, the Company announced that its Board of Directors authorized a stock repurchase program to repurchase up to a total of five million shares of the Company’s Class A common stock (the “2006 Plan”). On February 9, 2007, the Company announced that its Board of Directors increased to ten million the total number of shares of Class A common stock authorized for repurchase under the 2006 Plan. The 2006 Plan currently has an expiration date of May 24, 2012.	

Working capital and dividend restrictions/limitations

The Company’s credit facilities, including its revolving line of credit which is available through May of 2012, impose restrictions on the Company’s minimum consolidated net worth, the ratio of the Company’s Adjusted EBITDA to corporate debt interest, the indebtedness of the Company's subsidiaries, and the ratio of Non-FFELP loans to all loans in the Company's portfolio. In addition, trust indentures and other financing agreements governing debt issued by the Company's education lending subsidiaries may have general limitations on the amounts of funds that can be transferred to the Company by its subsidiaries through cash dividends.

The supplemental indenture for the Company’s Hybrid Securities issued in September 2006 provides that so long as any Hybrid Securities remain outstanding, if the Company gives notice of its election to defer interest payments but the related deferral period has not yet commenced or a deferral period is continuing, then the Company will not, and will not permit any of its subsidiaries to:

 	·	declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment regarding, any of the Company’s capital stock.	

 	·	except as required in connection with the repayment of principal, and except for any partial payments of deferred interest that may be made through the alternative payment mechanism described in the Hybrid Securities indenture, make any payment of principal of, or interest or premium, if any, on, or repay, repurchase, or redeem any of the Company’s debt securities that rank pari passu with or junior to the Hybrid Securities.	

 	·	make any guarantee payments regarding any guarantee by the Company of the subordinated debt securities of any of the Company’s subsidiaries if the guarantee ranks pari passu with or junior in interest to the Hybrid Securities.	

In addition, if any deferral period lasts longer than one year, the limitation on the Company’s ability to redeem or repurchase any of its securities that rank pari passu with or junior in interest to the Hybrid Securities will continue until the first anniversary of the date on which all deferred interest has been paid or cancelled.

If the Company is involved in a business combination where immediately after its consummation more than 50% of the surviving entity’s voting stock is owned by the shareholders of the other party to the business combination, then the immediately preceding sentence will not apply to any deferral period that is terminated on the next interest payment date following the date of consummation of the business combination.

However, at any time, including during a deferral period, the Company will be permitted to:

 	·	pay dividends or distributions in additional shares of the Company’s capital stock.	

 	·	declare or pay a dividend in connection with the implementation of a shareholders’ rights plan, or issue stock under such a plan, or redeem or repurchase any rights distributed pursuant to such a plan.	

 	·	purchase common stock for issuance pursuant to any employee benefit plans.	

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ITEM 6.  EXHIBITS
 
 	10.1	Management Agreement, dated effective as of May 1, 2011, by Whitetail Rock Capital Management, LLC and Union Bank and Trust Company. Incorporated by reference to Exhibit 10.3 to the registrant’s quarterly report on Form 10-Q filed on May 10, 2011.	
 
 	31.1*	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer Michael S. Dunlap.	
 
 	31.2*	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer Terry J. Heimes.	
 
 	32**	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	
 
*    Filed herewith
 ** Furnished herewith

79

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 	NELNET, INC.	 	
 	 	 	 	
Date: August 9, 2011 	By:	/s/ MICHAEL S. DUNLAP	 	
 	Name:	Michael S. Dunlap	 	
 	Title:	Chairman and Chief Executive Officer
Principal Executive Officer	 	

 	By:	/s/ TERRY J. HEIMES	 	
 	Name:	Terry J. Heimes	 	
 	Title: 	Chief Financial Officer
Principal Financial Officer and Principal Accounting Officer	 	

 
80

Exhibit 31.1
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
I, Michael S. Dunlap, certify that:
 
1.         I have reviewed this quarterly report on Form 10-Q of Nelnet, Inc. and subsidiaries (the “Company”);
 
 	2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 
 	3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 
 	4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
 
 	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 
 	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;	
 
 	(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 
 	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
 
 	5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
 
 	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 
 	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

Date:  August 9, 2011                                                                   /s/ MICHAEL S. DUNLAP
 Michael S. Dunlap
 Chairman and Chief Executive Officer
 Principal Executive Officer

Exhibit 31.2
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Terry J. Heimes, certify that:
 
1.         I have reviewed the quarterly report on Form 10-Q of Nelnet, Inc. and subsidiaries (the “Company”);
 
 	2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 
 	3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 
 	4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
 
 	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 
 	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;	
 
 	(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 
 	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
 
 	5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
 
 	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 
 	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

 
Date:  August 9, 2011                                                                   /s/ TERRY J. HEIMES
 Terry J. Heimes
 Chief Financial Officer
 Principal Financial Officer and Principal Accounting Officer

Exhibit 32

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Nelnet, Inc. and subsidiaries (the “Company”) on Form 10-Q for the quarter ended June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
 	1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	
 
 	2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	

 
Date: August 9, 2011  	By: /s/ MICHAEL S. DUNLAP	
Name: Michael S. Dunlap
Title:   Chairman and Chief Executive Officer
Principal Executive Officer

By: /s/ TERRY J. HEIMES
Name: Terry J. Heimes
Title:  Chief Financial Officer
Principal Financial Officer and Principal Accounting Officer