UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 2, 2009

NELNET, INC.
 (Exact name of registrant as specified in its charter)

Nebraska	 	001-31924	 	84-0748903	
(State or other Jurisdiction of Incorporation)	 	(Commission File Number)	 	(IRS Employer Identification No.)	
 	 	 	
121 South 13th Street
Suite 201
Lincoln, Nebraska	 	68508	
(Address of Principal Executive Offices)	 	(Zip Code)	
Registrant’s telephone number, including area code: (402) 458-2370

 	
(Former name or former address if changed since last report.)	
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

Item 2.02	 	Results of Operations and Financial Condition.	
On March 2, 2009, Nelnet, Inc. (the “Company”) issued a press release with respect to its financial results for the quarter and year ended December 31, 2008. A copy of the press release is furnished as Exhibit 99.1 to this report. In addition, a copy of the supplemental financial information for the quarter and year ended December 31, 2008, which was made available on the Company’s website at www.nelnetinvestors.com on March 2, 2009 in connection with the press release, is furnished as Exhibit 99.2 to this report.
The above information and Exhibits 99.1 and 99.2 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”), nor shall such information and Exhibits be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. In addition, information on the Company’s website is not incorporated by reference into this report and should not be considered part of this report.  
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits. The following exhibits are furnished as part of this report: 

Exhibit	 	 	
No.	 	Description	
99.1	 	Press Release dated March 2, 2009 – “Nelnet Reports Year-End and Fourth-Quarter 2008 Results; Strong Fee-based Revenue and Improved Liquidity”	
99.2	 	Supplemental Financial Information for the Quarter and Year Ended December 31, 2008	

 
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 hereunto duly authorized.
Dated: March 2, 2009
NELNET, INC.
By: /S/ TERRY J. HEIMES
Name: Terry J. Heimes
Title: Chief Financial Officer

 
EXHIBIT INDEX 

Exhibit	 	 	
No.	 	Description	
99.1	 	Press Release dated March 2, 2009 – “Nelnet Reports Year-End and Fourth-Quarter 2008 Results; Strong Fee-based Revenue and Improved Liquidity”	
99.2	 	Supplemental Financial Information for the Quarter and Year Ended December 31, 2008	

Exhibit 99.1
Media contact: Ben Kiser, 402.458.3024
Investor contact: Phil Morgan, 402.458.3038
Nelnet Reports Year-End and Fourth Quarter 2008 Results; Strong Fee-based Revenue and Improved Liquidity
LINCOLN, Neb., March 2, 2009 — Nelnet, Inc. (NYSE: NNI) today reported GAAP net income for the fourth quarter of 2008 of $31.0 million, or $0.63 per share, compared with $19.0 million, or $0.39 per share, for the fourth quarter of 2007. Base net income excluding discontinued operations and restructuring, impairment, and certain liquidity related charges for the fourth quarter of 2008 was $15.8 million, or $0.32 per share, compared with $16.6 million, or $0.34 per share, in the fourth quarter of 2007.
GAAP net income for 2008 was $28.7 million, or $0.58 per share, compared with $32.9 million, or $0.66 per share, for 2007. Base net income excluding discontinued operations and legislative, restructuring, impairment, and certain liquidity related charges for 2008 was $81.1 million, or $1.65 per share, compared with $85.3 million, or $1.72 per share, for 2007.
Throughout the year, Nelnet significantly improved its liquidity position by reducing the amount of student loans in its federal student loan warehouse facility from $6.6 billion at December 31, 2007, to $1.4 billion at December 31, 2008.
The company reduced the amount of student loans in this facility by issuing asset-backed securitizations and selling loans. During 2008, the company incurred charges from losses on the sale of loans of $51.4 million, of which $4.0 million were incurred in the fourth quarter. In addition, the company incurred $13.5 million of expenses in the fourth quarter of 2008 related to liquidity contingency planning.
“We are pleased with our 2008 results,” said Mike Dunlap, Chairman and Chief Executive Officer of Nelnet. “In one of the most challenging financial environments, we were profitable and improved our financial position. Specifically, our fee-based businesses performed well and have considerable operating margins and growth opportunities.”
Last week, the President announced his budget proposal, which includes a request that the federal government originate all education loans through the Direct Lending program and use private corporations only for the servicing of the loans. “While we disagree with this recommendation, the proposal is only the beginning of a budget process that will give us the opportunity to work with Congress to shape the future of the federal student loan programs,” said Dunlap. “We believe Congress will see the value of a student loan program that maintains the benefits of choice and competition and does not contribute significantly to the national debt. ”

 

Fee-based Businesses
Total revenue from fee-based businesses for the quarter and year ended December 31, 2008 was $68.7 million and $288.0 million, respectively. In recent years, the company has expanded its products and services generated from businesses that are not dependent on the federal student loan program, including the company’s enrollment services, tuition payment plan, and campus commerce businesses, in order to reduce legislative risk. In 2008, revenue from these businesses increased $25.0 million, or 20 percent, compared with the same period in 2007.
Margin Analysis
For the fourth quarter of 2008, Nelnet reported net interest income of $38.5 million, compared with $44.3 million for the fourth quarter of 2007. Net interest income for 2008 was $187.9 million compared with $244.6 million for 2007.
The company reported core student loan spread of 0.90 percent for the fourth quarter of 2008 compared with 0.93 percent in the same period of 2007 and 1.02 percent for the third quarter of 2008.
Operating Expenses
Operating expenses were $110.2 million in the fourth quarter of 2008 down from $120.3 million for the same period a year ago. For 2008, operating expenses decreased $95.0 million, or 18 percent, year over year to $440.6 million. Excluding restructuring, impairment, and liquidity related charges, operating expenses decreased $74.7 million, or 16 percent, year over year.
Student Loan Assets
At December 31, 2008, net student loan assets were $25.4 billion. Approximately 90 percent of these student loans are financed to term at rates that the company believes will generate cash flow in excess of $1.4 billion.
In addition, Nelnet has liquidity for new loan originations through the Department of Education’s loan participation and put programs, which will allow Nelnet to make loans to all eligible students through the 2009-2010 academic year.
Non-GAAP Performance Measures
A description of base net income and a reconciliation of GAAP net income to base net income can be found in supplemental financial information to this earnings release online at www.nelnetinvestors.com/releases.cfm?reltype=Financial .

 

Nelnet will host a conference call to discuss this earnings release at 3:00 p.m. (Eastern) on March 3, 2009. To access the call live, participants in the United States and Canada should dial 877.795.3610, and international callers should dial 719.325.4799 at least 15 minutes prior to the call. A live audio Webcast of the call will also be available at www.nelnetinvestors.com under the Events & Webcasts menu. A replay of the conference call will be available through March 13, 2009. To access the replay via telephone within the United States and Canada, callers should dial 888.203.1112. International callers should dial 719.457.0820. All callers accessing the replay will need to use the confirmation code 6429634. A replay of the audio Webcast will also be available at www.nelnetinvestors.com .
This press release 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 expectations and statements that assume or are dependent upon future events, are forward-looking statements. These forward-looking statements are subject to risks, uncertainties, assumptions, and other factors that may cause the actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, changes in the terms of student loans and the educational credit marketplace arising from the implementation of, or changes in, applicable laws and regulations, which may reduce the volume, average term, special allowance payments, and yields on student loans under the Federal Family Education Loan Program (the “FFEL Program” or “FFELP”) of the U.S. Department of Education (the “Department”) or result in loans being originated or refinanced under non-FFEL programs or may affect the terms upon which banks and others agree to sell FFELP loans to the Company. The Company could also be affected by changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students, and their families; the Company’s ability to maintain its credit facilities or obtain new facilities; the ability of lenders under the Company’s credit facilities to fulfill their lending commitments under these facilities; changes to the terms and conditions of the liquidity programs offered by the Department; 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 initiate, purchase, or carry education loans; losses from loan defaults; changes in prepayment rates, guaranty rates, loan floor rates, and credit spreads; incorrect estimates or assumptions by management in connection with the preparation of the consolidated financial statements; and changes in general economic conditions. Additionally, financial projections may not prove to be accurate and may vary materially. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this press release.
For more information see the company’s filings with the Securities and Exchange Commission. The company is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this press release or unforeseen events. Although the company may from time to time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so except as required by securities laws.

 
Condensed Consolidated Statements of Income
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended	 	 	Year ended	 	
 	 	December 31,	 	 	September 30,	 	 	December 31,	 	 	December 31,	 	 	December 31,	 	
 	 	2008	 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
 	 	(unaudited)	 	 	(unaudited)	 	 	(unaudited)	 	 	 	 	 	 	 	
 	 	(dollars in thousands, except share data)	 	
Interest income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan interest	 	$	286,279	 	 	 	304,226	 	 	 	437,128	 	 	 	1,224,678	 	 	 	1,755,064	 	
Variable rate floor income	 	 	—	 	 	 	1,580	 	 	 	2,416	 	 	 	42,325	 	 	 	3,013	 	
Amortization of loan premiums and deferred origination costs	 	 	(21,036	)	 	 	(21,338	)	 	 	(23,878	)	 	 	(90,620	)	 	 	(91,020	)	
Investment interest	 	 	8,084	 	 	 	9,118	 	 	 	18,988	 	 	 	37,998	 	 	 	80,219	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total interest income	 	 	273,327	 	 	 	293,586	 	 	 	434,654	 	 	 	1,214,381	 	 	 	1,747,276	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest on bonds and notes payable	 	 	234,868	 	 	 	234,016	 	 	 	390,399	 	 	 	1,026,489	 	 	 	1,502,662	 	

Net interest income	 	 	38,459	 	 	 	59,570	 	 	 	44,255	 	 	 	187,892	 	 	 	244,614	 	
Less provision for loan losses	 	 	7,000	 	 	 	7,000	 	 	 	4,550	 	 	 	25,000	 	 	 	28,178	 	

Net interest income after provision for loan losses	 	 	31,459	 	 	 	52,570	 	 	 	39,705	 	 	 	162,892	 	 	 	216,436	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	22,526	 	 	 	30,633	 	 	 	32,953	 	 	 	104,176	 	 	 	128,069	 	
Other fee-based income	 	 	46,082	 	 	 	45,887	 	 	 	44,572	 	 	 	178,699	 	 	 	160,888	 	
Software services income	 	 	3,892	 	 	 	4,217	 	 	 	5,647	 	 	 	19,757	 	 	 	22,669	 	
Other income	 	 	462	 	 	 	1,242	 	 	 	1,564	 	 	 	4,760	 	 	 	15,612	 	
Gain (loss) on sale of loans	 	 	(3,988	)	 	 	—	 	 	 	309	 	 	 	(51,414	)	 	 	3,597	 	
Derivative market value, foreign currency, and put option adjustments	 	 	46,348	 	 	 	6,085	 	 	 	14,940	 	 	 	10,827	 	 	 	26,806	 	
Derivative settlements, net	 	 	9,668	 	 	 	789	 	 	 	11,577	 	 	 	55,657	 	 	 	18,677	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other income	 	 	124,990	 	 	 	88,853	 	 	 	111,562	 	 	 	322,462	 	 	 	376,318	 	

Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	41,262	 	 	 	44,739	 	 	 	54,621	 	 	 	183,393	 	 	 	236,631	 	
Other expenses	 	 	62,413	 	 	 	52,332	 	 	 	59,256	 	 	 	212,157	 	 	 	219,048	 	
Amortization of intangible assets	 	 	6,511	 	 	 	6,598	 	 	 	6,412	 	 	 	26,230	 	 	 	30,426	 	
Impairment expense	 	 	—	 	 	 	—	 	 	 	—	 	 	 	18,834	 	 	 	49,504	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	110,186	 	 	 	103,669	 	 	 	120,289	 	 	 	440,614	 	 	 	535,609	 	

Income before income taxes	 	 	46,263	 	 	 	37,754	 	 	 	30,978	 	 	 	44,740	 	 	 	57,145	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income tax expense	 	 	16,103	 	 	 	13,969	 	 	 	11,810	 	 	 	17,896	 	 	 	21,716	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	30,160	 	 	 	23,785	 	 	 	19,168	 	 	 	26,844	 	 	 	35,429	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from discontinued operations, net of tax	 	 	837	 	 	 	—	 	 	 	(159	)	 	 	1,818	 	 	 	(2,575	)	

Net income	 	$	30,997	 	 	 	23,785	 	 	 	19,009	 	 	 	28,662	 	 	 	32,854	 	

Earnings per share, basic and diluted:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	0.61	 	 	 	0.48	 	 	 	0.39	 	 	 	0.54	 	 	 	0.71	 	
Income (loss) from discontinued operations, net of tax	 	 	0.02	 	 	 	—	 	 	 	—	 	 	 	0.04	 	 	 	(0.05	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	0.63	 	 	 	0.48	 	 	 	0.39	 	 	 	0.58	 	 	 	0.66	 	

Weighted average shares outstanding	 	 	49,075,755	 	 	 	49,176,436	 	 	 	49,047,048	 	 	 	49,099,967	 	 	 	49,618,107	 	

 
Condensed Consolidated Balance Sheets and Financial Data
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	As of	 	 	As of	 	 	As of	 	
 	 	December 31,	 	 	September 30,	 	 	December 31,	 	
 	 	2008	 	 	2008	 	 	2007	 	
 	 	(unaudited)	 	
 	 	(dollars in thousands)	 	
Assets:	 	 	 	 	 	 	 	 	 	 	 	 	
Student loans receivable, net	 	$	25,413,008	 	 	 	26,376,269	 	 	 	26,736,122	 	
Unrestricted cash and liquid investments	 	 	189,847	 	 	 	325,007	 	 	 	111,746	 	
Restricted cash, cash equivalents, and investments	 	 	1,158,257	 	 	 	1,129,874	 	 	 	1,009,092	 	
Goodwill	 	 	175,178	 	 	 	175,178	 	 	 	164,695	 	
Intangible assets, net	 	 	77,054	 	 	 	83,565	 	 	 	112,830	 	
Other assets	 	 	841,553	 	 	 	880,122	 	 	 	1,028,298	 	
 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	27,854,897	 	 	 	28,970,015	 	 	 	29,162,783	 	

Liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	
Bonds and notes payable	 	$	26,787,959	 	 	 	28,004,835	 	 	 	28,115,829	 	
Other liabilities	 	 	423,712	 	 	 	355,450	 	 	 	438,075	 	
 	 	 	 	 	 	 	 	 	 	
Total liabilities	 	 	27,211,671	 	 	 	28,360,285	 	 	 	28,553,904	 	

Shareholders’ equity	 	 	643,226	 	 	 	609,730	 	 	 	608,879	 	

Total liabilities and shareholders’ equity	 	$	27,854,897	 	 	 	28,970,015	 	 	 	29,162,783	 	

   

Exhibit 99.2
For Release: 3/2/09
Media Contact: Ben Kiser, 402.458.3024
Investor Contact: Phil Morgan, 402.458.3038
Nelnet, Inc. supplemental financial information for the fourth quarter 2008
This earnings supplement 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 expectations and statements that assume or are dependent upon future events, are forward-looking statements. These forward-looking statements are subject to risks, uncertainties, assumptions, and other factors that may cause the actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in the “Risk Factors” section of the Company’s annual report on Form 10-K for the year ended December 31, 2008, changes in the terms of student loans and the educational credit marketplace arising from the implementation of, or changes in, applicable laws and regulations, which may reduce the volume, average term, special allowance payments, and yields on student loans under the Federal Family Education Loan Program (the “FFEL Program” or “FFELP”) of the U.S. Department of Education (the “Department”) or result in loans being originated or refinanced under non-FFEL programs or may affect the terms upon which banks and others agree to sell FFELP loans to the Company. The Company could also be affected by changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students, and their families; the Company’s ability to maintain its credit facilities or obtain new facilities; the ability of lenders under the Company’s credit facilities to fulfill their lending commitments under these facilities; changes to the terms and conditions of the liquidity programs offered by the Department; 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 initiate, purchase, or carry education loans; losses from loan defaults; changes in prepayment rates, guaranty rates, loan floor rates, and credit spreads; incorrect estimates or assumptions by management in connection with the preparation of the consolidated financial statements; and changes in general economic conditions. Additionally, financial projections may not prove to be accurate and may vary materially. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this Supplement. The Company is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this Supplement or unforeseen events. Although the Company may from time to time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so except as required by securities laws.

 

Condensed Consolidated Statements of Income
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended	 	 	Year ended	 	
 	 	December 31,	 	 	September 30,	 	 	December 31,	 	 	December 31,	 	 	December 31,	 	
 	 	2008	 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
 	 	(unaudited)	 	 	(unaudited)	 	 	(unaudited)	 	 	 	 	 	 	 	
 	 	(dollars in thousands, except share data)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan interest	 	$	286,279	 	 	 	304,226	 	 	 	437,128	 	 	 	1,224,678	 	 	 	1,755,064	 	
Variable rate floor income	 	 	—	 	 	 	1,580	 	 	 	2,416	 	 	 	42,325	 	 	 	3,013	 	
Amortization of loan premiums and deferred origination costs	 	 	(21,036	)	 	 	(21,338	)	 	 	(23,878	)	 	 	(90,620	)	 	 	(91,020	)	
Investment interest	 	 	8,084	 	 	 	9,118	 	 	 	18,988	 	 	 	37,998	 	 	 	80,219	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total interest income	 	 	273,327	 	 	 	293,586	 	 	 	434,654	 	 	 	1,214,381	 	 	 	1,747,276	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest on bonds and notes payable	 	 	234,868	 	 	 	234,016	 	 	 	390,399	 	 	 	1,026,489	 	 	 	1,502,662	 	

Net interest income	 	 	38,459	 	 	 	59,570	 	 	 	44,255	 	 	 	187,892	 	 	 	244,614	 	
Less provision for loan losses	 	 	7,000	 	 	 	7,000	 	 	 	4,550	 	 	 	25,000	 	 	 	28,178	 	

Net interest income after provision for loan losses	 	 	31,459	 	 	 	52,570	 	 	 	39,705	 	 	 	162,892	 	 	 	216,436	 	

Other income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	22,526	 	 	 	30,633	 	 	 	32,953	 	 	 	104,176	 	 	 	128,069	 	
Other fee-based income	 	 	46,082	 	 	 	45,887	 	 	 	44,572	 	 	 	178,699	 	 	 	160,888	 	
Software services income	 	 	3,892	 	 	 	4,217	 	 	 	5,647	 	 	 	19,757	 	 	 	22,669	 	
Other income	 	 	462	 	 	 	1,242	 	 	 	1,564	 	 	 	4,760	 	 	 	15,612	 	
Gain (loss) on sale of loans	 	 	(3,988	)	 	 	—	 	 	 	309	 	 	 	(51,414	)	 	 	3,597	 	
Derivative market value, foreign currency, and put option adjustments	 	 	46,348	 	 	 	6,085	 	 	 	14,940	 	 	 	10,827	 	 	 	26,806	 	
Derivative settlements, net	 	 	9,668	 	 	 	789	 	 	 	11,577	 	 	 	55,657	 	 	 	18,677	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other income	 	 	124,990	 	 	 	88,853	 	 	 	111,562	 	 	 	322,462	 	 	 	376,318	 	

Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	41,262	 	 	 	44,739	 	 	 	54,621	 	 	 	183,393	 	 	 	236,631	 	
Other expenses	 	 	62,413	 	 	 	52,332	 	 	 	59,256	 	 	 	212,157	 	 	 	219,048	 	
Amortization of intangible assets	 	 	6,511	 	 	 	6,598	 	 	 	6,412	 	 	 	26,230	 	 	 	30,426	 	
Impairment expense	 	 	—	 	 	 	—	 	 	 	—	 	 	 	18,834	 	 	 	49,504	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	110,186	 	 	 	103,669	 	 	 	120,289	 	 	 	440,614	 	 	 	535,609	 	

Income before income taxes	 	 	46,263	 	 	 	37,754	 	 	 	30,978	 	 	 	44,740	 	 	 	57,145	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income tax expense	 	 	16,103	 	 	 	13,969	 	 	 	11,810	 	 	 	17,896	 	 	 	21,716	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	30,160	 	 	 	23,785	 	 	 	19,168	 	 	 	26,844	 	 	 	35,429	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from discontinued operations, net of tax	 	 	837	 	 	 	—	 	 	 	(159	)	 	 	1,818	 	 	 	(2,575	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	30,997	 	 	 	23,785	 	 	 	19,009	 	 	 	28,662	 	 	 	32,854	 	

Earnings per share, basic and diluted:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	0.61	 	 	 	0.48	 	 	 	0.39	 	 	 	0.54	 	 	 	0.71	 	
Income (loss) from discontinued operations, net of tax	 	 	0.02	 	 	 	—	 	 	 	—	 	 	 	0.04	 	 	 	(0.05	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	0.63	 	 	 	0.48	 	 	 	0.39	 	 	 	0.58	 	 	 	0.66	 	

Weighted average shares outstanding	 	 	49,075,755	 	 	 	49,176,436	 	 	 	49,047,048	 	 	 	49,099,967	 	 	 	49,618,107	 	
 
 2 

 

Condensed Consolidated Balance Sheets and Financial Data
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	As of	 	 	As of	 	 	As of	 	
 	 	December 31,	 	 	September 30,	 	 	December 31,	 	
 	 	2008	 	 	2008	 	 	2007	 	
 	 	(unaudited)
(dollars in thousands)	 	
Assets:	 	 	 	 	 	 	 	 	 	 	 	 	
Student loans receivable, net	 	$	25,413,008	 	 	 	26,376,269	 	 	 	26,736,122	 	
Unrestricted cash and liquid investments	 	 	189,847	 	 	 	325,007	 	 	 	111,746	 	
Restricted cash, cash equivalents, and investments	 	 	1,158,257	 	 	 	1,129,874	 	 	 	1,009,092	 	
Goodwill	 	 	175,178	 	 	 	175,178	 	 	 	164,695	 	
Intangible assets, net	 	 	77,054	 	 	 	83,565	 	 	 	112,830	 	
Other assets	 	 	841,553	 	 	 	880,122	 	 	 	1,028,298	 	
 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	27,854,897	 	 	 	28,970,015	 	 	 	29,162,783	 	

Liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	
Bonds and notes payable	 	$	26,787,959	 	 	 	28,004,835	 	 	 	28,115,829	 	
Other liabilities	 	 	423,712	 	 	 	355,450	 	 	 	438,075	 	
 	 	 	 	 	 	 	 	 	 	
Total liabilities	 	 	27,211,671	 	 	 	28,360,285	 	 	 	28,553,904	 	

Shareholders’ equity	 	 	643,226	 	 	 	609,730	 	 	 	608,879	 	
 	 	 	 	 	 	 	 	 	 	
Total liabilities and shareholders’ equity	 	$	27,854,897	 	 	 	28,970,015	 	 	 	29,162,783	 	
 	 	 	 	 	 	 	 	 	 	
Non-GAAP Performance Measures
In accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”), the Company prepares financial statements in accordance with generally accepted accounting principles (“GAAP”). In addition to evaluating the Company’s GAAP-based financial information, management also evaluates the Company on a non-GAAP performance measure referred to as base net income. While base net income is not a substitute for reported results under GAAP, the Company provides base net income as additional information regarding its financial results.
Base net income is the primary financial performance measure used by management to develop financial plans, allocate resources, track results, evaluate performance, establish corporate performance targets, and determine incentive compensation. 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.
 
 3 

 

The following table provides a reconciliation of GAAP net income to base net income.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended	 	 	Year ended	 	
 	 	December 31,	 	 	September 30,	 	 	December 31,	 	 	December 31,	 	 	December 31,	 	
 	 	2008	 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
 	 	(dollars in thousands, except share data)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
GAAP net income	 	$	30,997	 	 	 	23,785	 	 	 	19,009	 	 	 	28,662	 	 	 	32,854	 	
Base adjustments:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value, foreign currency, and put option adjustments	 	 	(46,348	)	 	 	(6,085	)	 	 	(14,940	)	 	 	(10,361	)	 	 	(26,806	)	
Amortization of intangible assets	 	 	6,511	 	 	 	6,598	 	 	 	6,412	 	 	 	26,230	 	 	 	30,426	 	
Compensation related to business combinations	 	 	476	 	 	 	477	 	 	 	655	 	 	 	2,999	 	 	 	2,111	 	
Variable rate floor income, net of settlements on derivatives	 	 	—	 	 	 	(1,580	)	 	 	(2,416	)	 	 	(32,360	)	 	 	(3,013	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total base adjustments before income taxes	 	 	(39,361	)	 	 	(590	)	 	 	(10,289	)	 	 	(13,492	)	 	 	2,718	 	
Net tax effect (a)	 	 	13,776	 	 	 	218	 	 	 	4,474	 	 	 	5,792	 	 	 	346	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total base adjustments	 	 	(25,585	)	 	 	(372	)	 	 	(5,815	)	 	 	(7,700	)	 	 	3,064	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Base net income	 	 	5,412	 	 	 	23,413	 	 	 	13,194	 	 	 	20,962	 	 	 	35,918	 	
Discontinued operations, net of tax	 	 	(837	)	 	 	—	 	 	 	159	 	 	 	(1,818	)	 	 	2,575	 	

Base net income, excluding discontinued operations	 	$	4,575	 	 	 	23,413	 	 	 	13,353	 	 	 	19,144	 	 	 	38,493	 	

Earnings per share, basic and diluted:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
GAAP net income	 	$	0.63	 	 	 	0.48	 	 	 	0.39	 	 	 	0.58	 	 	 	0.66	 	
Total base adjustments	 	 	(0.52	)	 	 	(0.01	)	 	 	(0.12	)	 	 	(0.15	)	 	 	0.06	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Base net income	 	 	0.11	 	 	 	0.47	 	 	 	0.27	 	 	 	0.43	 	 	 	0.72	 	
Discontinued operations, net of tax	 	 	(0.02	)	 	 	—	 	 	 	—	 	 	 	(0.04	)	 	 	0.06	 	

Base net income, excluding discontinued operations	 	$	0.09	 	 	 	0.47	 	 	 	0.27	 	 	 	0.39	 	 	 	0.78	 	

(a)	 	Beginning in 2008, tax effect is computed using the Company’s consolidated effective tax rate for each applicable quarterly period. In prior periods, tax effect was computed at 38%. The change in the value of the put options for prior periods was not tax effected as this is not deductible for income tax purposes.	
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, 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.
 
 4 

 

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, foreign currency, and put option 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. Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”), requires that changes in fair value of derivative instruments be recognized currently in earnings unless specific hedge accounting criteria, as specified by SFAS No. 133, are met. 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 include interest rate swaps, basis swaps, and cross-currency interest rate swaps. Management has structured all 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” as defined by SFAS No. 133, and the stand-alone derivative must be marked-to-market in the income statement with no consideration for the corresponding change in fair value of the hedged item. The 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 settlements, net” on the attached 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 index 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 settlements, net” on the attached 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 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.
 
 5 

 

“Base net income” also excludes the change in fair value of put options issued by the Company for certain business acquisitions. The put options are valued by the Company each reporting period using a Black-Scholes pricing model. Therefore, the fair value of these options is primarily affected by the strike price and term of the underlying option, the Company’s current stock price, and the dividend yield and volatility of the Company’s stock. The Company believes these point-in-time estimates of value that are subject to fluctuations make it difficult to evaluate the ongoing results of operations against the Company’s business plans and affects the period-to-period comparability of the results of operations.
The gains and/or losses included in “Derivative market value, foreign currency, and put option adjustments” on the attached consolidated statements of income are primarily caused by interest rate and currency volatility, changes in the value of put options based on the inputs used in the Black-Scholes pricing model, as well as the volume and terms of put options and of derivatives not receiving hedge treatment. “Base net income” excludes these unrealized gains and losses and isolates the effect of interest rate, currency, and put option volatility on the fair value of such instruments during the period. Under GAAP, the effects of these factors on the fair value of the put options and 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.
Compensation related to business combinations : The Company has structured certain business combinations in which the consideration paid has been dependent on the sellers’ continued employment with the Company. As such, the value of the consideration paid is recognized as compensation expense by the Company over the term of the applicable employment agreement. “Base net income” excludes this expense because the Company believes such charges do not drive its operating performance on a long-term basis and can affect the period-to-period comparability of the results of operations. If the Company did not enter into the employment agreements in connection with the acquisition, the amount paid to these former shareholders of the acquired entity would have been recorded by the Company as additional consideration of the acquired entity, thus, not having an effect on the Company’s results of operations.
Variable rate floor income, net of settlements on derivatives: Loans that reset annually on July 1 can generate excess spread income compared with the rate based on the special allowance payment formula in declining interest rate environments. The Company refers to this additional income as variable rate floor income. The Company excludes variable rate floor income, net of settlements paid on derivatives used to hedge student loan assets earning variable rate floor income, from its base net income since the timing and amount of variable rate floor income (if any) is uncertain, it has been eliminated by legislation for all loans originated on and after April 1, 2006, and it is in excess of expected spreads. In addition, because variable rate floor income is subject to the underlying rate for the subject loans being reset annually on July 1, it is a factor beyond the Company’s control which can affect the period-to-period comparability of results of operations.
 
 6 

 

Variable rate floor income was calculated by the Company on a statutory maximum basis. However, as a result of the disruption in the capital markets beginning in August 2007, the full benefit of variable rate floor income calculated on a statutory maximum basis has not been realized by the Company due to the widening of the spread between short term interest rate indices and the Company’s actual cost of funds. As a result of the ongoing volatility of interest rates, effective October 1, 2008, the Company changed its calculation of variable rate floor income to better reflect the economic benefit received by the Company related to this income taking into consideration the volatility of certain rate indices which offset the value received. For the year ended December 31, 2008, the economic benefit received by the Company related to variable rate floor income was $25.7 million. There was no economic benefit received by the Company related to variable rate floor income for the three months ended December 31, 2008. Variable rate floor income calculated on a statutory maximum basis for the three months and year ended December 31, 2008 was $2.2 million and $44.5 million, respectively. Beginning October 1, 2008, the economic benefit used by the Company has been used to determine core student loan spread and base net income.
Discontinued operations : In May 2007, the Company sold EDULINX. As a result of this transaction, the results of operations for EDULINX are reported as discontinued operations for all periods presented. The Company presents “base net income” excluding discontinued operations since the operations and cash flows of EDULINX have been eliminated from the ongoing operations of the Company.
The following table summarizes the impact of legislative, restructuring, and liquidity related charges to base net income.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended	 	 	Year ended	 	
 	 	December 31,	 	 	September 30,	 	 	December 31,	 	 	December 31,	 	 	December 31,	 	
 	 	2008	 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
 	 	(dollars in thousands, except share data)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Base net income, excluding discontinued operations	 	$	4,575	 	 	 	23,413	 	 	 	13,353	 	 	 	19,144	 	 	 	38,493	 	
Legislative charges, net of tax	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	34,197	 	
Restructuring charges, net of tax	 	 	(26	)	 	 	(3	)	 	 	3,270	 	 	 	17,881	 	 	 	12,580	 	
Liquidity related charges, net of tax (a)	 	 	11,300	 	 	 	—	 	 	 	—	 	 	 	44,070	 	 	 	—	 	

Base net income, excluding discontinued operations, legislative and restructuring charges (net of tax), and liquidity related charges (net of tax)	 	$	15,849	 	 	 	23,410	 	 	 	16,623	 	 	 	81,095	 	 	 	85,270	 	

Earnings per share, basic and diluted:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Base net income, excluding discontinued operations	 	$	0.09	 	 	 	0.47	 	 	 	0.27	 	 	 	0.39	 	 	 	0.78	 	
Legislative charges, net of tax	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	0.69	 	
Restructuring charges, net of tax	 	 	—	 	 	 	—	 	 	 	0.07	 	 	 	0.36	 	 	 	0.25	 	
Liquidity related charges, net of tax (a)	 	 	0.23	 	 	 	—	 	 	 	—	 	 	 	0.90	 	 	 	—	 	

Base net income, excluding discontinued operations, legislative and restructuring charges (net of tax), and liquidity related charges (net of tax)	 	$	0.32	 	 	 	0.47	 	 	 	0.34	 	 	 	1.65	 	 	 	1.72	 	

(a)	 	Liquidity related charges includes the loss on sale of loans of $4.0 million and $51.4 million ($2.5 million and $35.3 million, net of tax), for the quarter and year ended December 31, 2008, respectively, and $13.5 million ($8.8 million, net of tax), in fees paid related to liquidity contingency planning. All of these charges were incurred in order to reduce the amount of loans in the Company’s FFELP loan warehouse facility to reduce exposure related to the facility’s equity support provisions.	
 
 7 

 

Operating Segments
The Company has five operating segments as defined in Statement of Financial Accounting Standards No. 131, Disclosures about Segments of Enterprise and Related Information (“SFAS No. 131”) as follows: Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, Enrollment Services, Software and Technical Services, and Asset Generation and Management. 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 the summary of significant accounting policies included in the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. 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 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, 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 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.
In May 2007, the Company sold EDULINX, a Canadian student loan service provider and subsidiary of the Company. As a result of this transaction, the results of operations for EDULINX are reported as discontinued operations for all periods presented. The operating results of EDULINX were included in the Student Loan and Guaranty Servicing operating segment. The Company presents base net income excluding discontinued operations since the operations and cash flows of EDULINX have been eliminated from the ongoing operations of the Company. Therefore, the results of operations for the Student Loan and Guaranty Servicing segment exclude the operating results of EDULINX for all periods presented.
Fee-based Operating Segments
Historically, the Company generated the majority of its revenue from net interest income earned in its Asset Generation and Management operating segment. In recent years, the Company has made several acquisitions that have expanded the Company’s products and services and has diversified its revenue — primarily from fee-based businesses. The Company currently offers a broad range of pre-college, in-college, and post-college products and services to students, families, schools, and financial institutions. These products and services help students and families plan and pay for their education and students plan their careers. The Company’s products and services are designed to simplify the education planning and financing process and are focused on providing value to students, families, and schools throughout the education life cycle. The Company continues to diversify its sources of revenue, including those generated from businesses that are not dependent upon government programs, reducing legislative and political risk.
 
 8 

 

Student Loan and Guaranty Servicing
The Student Loan and Guaranty Servicing segment provides for the servicing of the Company’s student loan portfolios and the portfolios of third parties and servicing provided to guaranty agencies. The servicing and business process outsourcing activities include loan origination activities, application processing, borrower updates, payment processing, due diligence procedures, and claim processing. These activities are performed internally for the Company’s portfolio in addition to generating fee revenue when performed for third-party clients. The guaranty servicing, servicing support, and business process outsourcing activities include providing software and data center services, borrower and loan updates, default aversion tracking services, claim processing services, and post-default collection services to guaranty agencies. The following are the primary product and service offerings the Company offers as part of its Student Loan and Guaranty Servicing segment:

 	•	 	Origination and servicing of FFELP loans	
 		
 	•	 	Servicing of non-federally insured student loans	
 		
 	•	 	Servicing and support outsourcing for guaranty agencies	
Tuition Payment Processing and Campus Commerce
The Tuition Payment Processing and Campus Commerce segment provides products and services to help institutions and education seeking families manage the payment of education costs during the pre-college and college stages of the education life cycle. The Company provides actively managed tuition payment solutions, online payment processing, detailed information reporting, financial needs analysis, and data integration services to K-12 and higher educational institutions, families, and students. In addition, the Company provides customer-focused electronic transactions, information sharing, and account and bill presentment to colleges and universities.
Enrollment Services
The Enrollment Services segment offers products and services that are focused on helping (i) students plan and prepare for life after high school (content management) and (ii) colleges recruit and retain students (lead generation). Content management products and services include test preparation study guides and online courses, admissions consulting, licensing of scholarship data, essay and resume editing services, and call center services. Lead generation products and services include vendor lead management services, pay per click marketing management, email marketing, admissions lead generation, and list marketing services.
Software and Technical Services
The Software and Technical Services segment provides information technology products and full-service technical consulting, with core areas of business in educational loan software solutions, business intelligence, technical consulting services, and Enterprise Content Management (ECM) solutions.
 
 9 

 

Asset Generation and Management Operating Segments
The Asset Generation and Management segment includes the acquisition, management, and ownership of the Company’s student loan assets. Revenues are primarily generated from the Company’s earnings from the spread, referred to as the Company’s student loan spread, between the yield received on the student loan portfolio and the costs associated with originating, acquiring, and financing the student loan portfolio. The Company generates student loan assets through direct origination or through acquisitions. The student loan assets are held in a series of education lending subsidiaries designed specifically for this purpose. In addition to the student loan portfolio, all costs and activity associated with the generation of assets, funding of those assets, and maintenance of the debt transactions are included in this segment. This includes derivative activity and the related derivative market value and foreign currency adjustments. The Company is also able to leverage its capital market expertise by providing investment advisory services and other related services to third parties through a licensed broker dealer subsidiary. Revenues and expenses for those functions are also included in the Asset Generation and Management segment.
 
 10 

 

Segment Operating Results
The tables below reflect base net income for each of the Company’s operating segments. Reconciliation of the segment totals to the Company’s operating results in accordance with GAAP is also included in the tables below.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended December 31, 2008	 	
 	 	(dollars in thousands)	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	 	Tuition	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	"Base net	 	 	 	 	
 	 	Loan	 	 	Payment	 	 	 	 	 	 	Software	 	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	 	 	income"	 	 	 	 	
 	 	and	 	 	Processing	 	 	 	 	 	 	and	 	 	Total	 	 	Generation	 	 	Activity	 	 	Eliminations	 	 	Adjustments	 	 	GAAP	 	
 	 	Guaranty	 	 	and Campus	 	 	Enrollment	 	 	Technical	 	 	Fee-	 	 	and	 	 	and	 	 	and	 	 	to GAAP	 	 	Results of	 	
 	 	Servicing	 	 	Commerce	 	 	Services	 	 	Services	 	 	Based	 	 	Management	 	 	Overhead	 	 	Reclassifications	 	 	Results	 	 	Operations	 	
Total interest income	 	$	217	 	 	 	218	 	 	 	1	 	 	 	24	 	 	 	460	 	 	 	271,639	 	 	 	2,029	 	 	 	(801	)	 	 	—	 	 	 	273,327	 	
Interest expense	 	 	—	 	 	 	—	 	 	 	(3	)	 	 	—	 	 	 	(3	)	 	 	223,867	 	 	 	11,805	 	 	 	(801	)	 	 	—	 	 	 	234,868	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income	 	 	217	 	 	 	218	 	 	 	4	 	 	 	24	 	 	 	463	 	 	 	47,772	 	 	 	(9,776	)	 	 	—	 	 	 	—	 	 	 	38,459	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	7,000	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	7,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income after provision for loan losses	 	 	217	 	 	 	218	 	 	 	4	 	 	 	24	 	 	 	463	 	 	 	40,772	 	 	 	(9,776	)	 	 	—	 	 	 	—	 	 	 	31,459	 	

Other income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	22,663	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	22,663	 	 	 	(10	)	 	 	(127	)	 	 	—	 	 	 	—	 	 	 	22,526	 	
Other fee-based income	 	 	—	 	 	 	12,460	 	 	 	29,257	 	 	 	—	 	 	 	41,717	 	 	 	4,365	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	46,082	 	
Software services income	 	 	—	 	 	 	—	 	 	 	—	 	 	 	3,879	 	 	 	3,879	 	 	 	—	 	 	 	13	 	 	 	—	 	 	 	—	 	 	 	3,892	 	
Other income	 	 	7	 	 	 	(285	)	 	 	—	 	 	 	—	 	 	 	(278	)	 	 	(741	)	 	 	1,481	 	 	 	—	 	 	 	—	 	 	 	462	 	
Gain (loss) on sale of loans	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(5,609	)	 	 	1,621	 	 	 	—	 	 	 	—	 	 	 	(3,988	)	
Intersegment revenue	 	 	18,353	 	 	 	60	 	 	 	—	 	 	 	1,838	 	 	 	20,251	 	 	 	—	 	 	 	16,541	 	 	 	(36,792	)	 	 	—	 	 	 	—	 	
Derivative market value, foreign currency, and put option adjustments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	46,348	 	 	 	46,348	 	
Derivative settlements, net	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	9,668	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	9,668	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other income	 	 	41,023	 	 	 	12,235	 	 	 	29,257	 	 	 	5,717	 	 	 	88,232	 	 	 	7,673	 	 	 	19,529	 	 	 	(36,792	)	 	 	46,348	 	 	 	124,990	 	

Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	10,955	 	 	 	5,840	 	 	 	5,678	 	 	 	4,050	 	 	 	26,523	 	 	 	2,159	 	 	 	13,329	 	 	 	(1,225	)	 	 	476	 	 	 	41,262	 	
Restructure expense — severance and contract termination costs	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(40	)	 	 	40	 	 	 	—	 	 	 	—	 	
Other expenses	 	 	6,792	 	 	 	3,136	 	 	 	20,326	 	 	 	588	 	 	 	30,842	 	 	 	19,886	 	 	 	11,712	 	 	 	(27	)	 	 	6,511	 	 	 	68,924	 	
Intersegment expenses	 	 	6,824	 	 	 	124	 	 	 	965	 	 	 	56	 	 	 	7,969	 	 	 	19,032	 	 	 	714	 	 	 	(27,715	)	 	 	—	 	 	 	—	 	
Corporate allocations	 	 	5,873	 	 	 	228	 	 	 	740	 	 	 	705	 	 	 	7,546	 	 	 	319	 	 	 	—	 	 	 	(7,865	)	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	30,444	 	 	 	9,328	 	 	 	27,709	 	 	 	5,399	 	 	 	72,880	 	 	 	41,396	 	 	 	25,715	 	 	 	(36,792	)	 	 	6,987	 	 	 	110,186	 	

Income (loss) before income taxes	 	 	10,796	 	 	 	3,125	 	 	 	1,552	 	 	 	342	 	 	 	15,815	 	 	 	7,049	 	 	 	(15,962	)	 	 	—	 	 	 	39,361	 	 	 	46,263	 	
Income tax expense (benefit) (a)	 	 	3,779	 	 	 	1,094	 	 	 	543	 	 	 	119	 	 	 	5,535	 	 	 	2,467	 	 	 	(5,675	)	 	 	—	 	 	 	13,776	 	 	 	16,103	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss) from continuing operations	 	 	7,017	 	 	 	2,031	 	 	 	1,009	 	 	 	223	 	 	 	10,280	 	 	 	4,582	 	 	 	(10,287	)	 	 	—	 	 	 	25,585	 	 	 	30,160	 	
Income (loss) from discontinued operations, net of tax	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	837	 	 	 	837	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	7,017	 	 	 	2,031	 	 	 	1,009	 	 	 	223	 	 	 	10,280	 	 	 	4,582	 	 	 	(10,287	)	 	 	—	 	 	 	26,422	 	 	 	30,997	 	

(a) Beginning in 2008, the consolidated effective tax rate for each applicable quarterly period is used to calculate income taxes for each operating segment.	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Three months ended December 31, 2008:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin	 	 	26.2	%	 	 	25.1	%	 	 	5.3	%	 	 	6.0	%	 	 	17.8	%	 	 	14.6	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin - excluding restructure expense, loss on sale of loans, liquidity contingency planning fees, and corporate allocations	 	 	40.4	%	 	 	26.9	%	 	 	7.8	%	 	 	18.2	%	 	 	26.3	%	 	 	24.0	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Three months ended December 31, 2007:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin	 	 	36.9	%	 	 	40.4	%	 	 	17.9	%	 	 	25.5	%	 	 	30.7	%	 	 	58.1	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin -	 	 	38.1	%	 	 	40.4	%	 	 	18.6	%	 	 	25.5	%	 	 	31.5	%	 	 	58.9	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
excluding restructure expense	 	 			 	 			 	 			 	 			 	 			 	 			 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 
 11 

 

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
  	 	Three months ended December 31, 2007	 	
 	 	(dollars in thousands)	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	 	Tuition	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	"Base net	 	 	 	 	
 	 	Loan	 	 	Payment	 	 	 	 	 	 	Software	 	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	 	 	income"	 	 	 	 	
 	 	and	 	 	Processing	 	 	 	 	 	 	and	 	 	Total	 	 	Generation	 	 	Activity	 	 	Eliminations	 	 	Adjustments	 	 	GAAP	 	
 	 	Guaranty	 	 	and Campus	 	 	Enrollment	 	 	Technical	 	 	Fee-	 	 	and	 	 	and	 	 	and	 	 	to GAAP	 	 	Results of	 	
 	 	Servicing	 	 	Commerce	 	 	Services	 	 	Services	 	 	Based	 	 	Management	 	 	Overhead	 	 	Reclassifications	 	 	Results	 	 	Operations	 	
Total interest income	 	$	852	 	 	 	1,139	 	 	 	57	 	 	 	—	 	 	 	2,048	 	 	 	428,935	 	 	 	1,255	 	 	 	—	 	 	 	2,416	 	 	 	434,654	 	
Interest expense	 	 	—	 	 	 	—	 	 	 	2	 	 	 	—	 	 	 	2	 	 	 	381,091	 	 	 	9,306	 	 	 	—	 	 	 	—	 	 	 	390,399	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income	 	 	852	 	 	 	1,139	 	 	 	55	 	 	 	—	 	 	 	2,046	 	 	 	47,844	 	 	 	(8,051	)	 	 	—	 	 	 	2,416	 	 	 	44,255	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	4,550	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	4,550	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income after provision for loan losses	 	 	852	 	 	 	1,139	 	 	 	55	 	 	 	—	 	 	 	2,046	 	 	 	43,294	 	 	 	(8,051	)	 	 	—	 	 	 	2,416	 	 	 	39,705	 	

Other income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	32,947	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	32,947	 	 	 	6	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	32,953	 	
Other fee-based income	 	 	—	 	 	 	11,190	 	 	 	29,970	 	 	 	—	 	 	 	41,160	 	 	 	2,876	 	 	 	536	 	 	 	—	 	 	 	—	 	 	 	44,572	 	
Software services income	 	 	—	 	 	 	—	 	 	 	138	 	 	 	5,509	 	 	 	5,647	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	5,647	 	
Other income	 	 	(11	)	 	 	25	 	 	 	—	 	 	 	—	 	 	 	14	 	 	 	414	 	 	 	1,445	 	 	 	—	 	 	 	—	 	 	 	1,873	 	
Intersegment revenue	 	 	15,866	 	 	 	180	 	 	 	—	 	 	 	2,657	 	 	 	18,703	 	 	 	—	 	 	 	1,432	 	 	 	(20,135	)	 	 	—	 	 	 	—	 	
Derivative market value, foreign currency, and put option adjustments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	14,940	 	 	 	14,940	 	
Derivative settlements, net	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	11,577	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	11,577	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other income	 	 	48,802	 	 	 	11,395	 	 	 	30,108	 	 	 	8,166	 	 	 	98,471	 	 	 	14,873	 	 	 	3,413	 	 	 	(20,135	)	 	 	14,940	 	 	 	111,562	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	18,474	 	 	 	5,114	 	 	 	6,994	 	 	 	5,090	 	 	 	35,672	 	 	 	2,501	 	 	 	15,170	 	 	 	623	 	 	 	655	 	 	 	54,621	 	
Restructure expense — severance and contract termination costs	 	 	609	 	 	 	—	 	 	 	192	 	 	 	—	 	 	 	801	 	 	 	485	 	 	 	3,989	 	 	 	(5,275	)	 	 	—	 	 	 	—	 	
Other expenses	 	 	10,399	 	 	 	2,379	 	 	 	17,488	 	 	 	771	 	 	 	31,037	 	 	 	6,265	 	 	 	19,153	 	 	 	2,801	 	 	 	6,412	 	 	 	65,668	 	
Intersegment expenses	 	 	1,871	 	 	 	(20	)	 	 	83	 	 	 	225	 	 	 	2,159	 	 	 	15,120	 	 	 	1,005	 	 	 	(18,284	)	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	31,353	 	 	 	7,473	 	 	 	24,757	 	 	 	6,086	 	 	 	69,669	 	 	 	24,371	 	 	 	39,317	 	 	 	(20,135	)	 	 	7,067	 	 	 	120,289	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes	 	 	18,301	 	 	 	5,061	 	 	 	5,406	 	 	 	2,080	 	 	 	30,848	 	 	 	33,796	 	 	 	(43,955	)	 	 	—	 	 	 	10,289	 	 	 	30,978	 	
Income tax expense (benefit) (a)	 	 	6,954	 	 	 	1,923	 	 	 	2,054	 	 	 	790	 	 	 	11,721	 	 	 	12,842	 	 	 	(17,226	)	 	 	—	 	 	 	4,473	 	 	 	11,810	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss) from continuing operations	 	 	11,347	 	 	 	3,138	 	 	 	3,352	 	 	 	1,290	 	 	 	19,127	 	 	 	20,954	 	 	 	(26,729	)	 	 	—	 	 	 	5,816	 	 	 	19,168	 	
Income (loss) from discontinued operations, net of tax	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(159	)	 	 	(159	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	11,347	 	 	 	3,138	 	 	 	3,352	 	 	 	1,290	 	 	 	19,127	 	 	 	20,954	 	 	 	(26,729	)	 	 	—	 	 	 	5,657	 	 	 	19,009	 	

(a) Income taxes are based on 38% of net income (loss) before tax for the individual operating segment.	
 
 12 

 

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
  	 	Year ended December 31, 2008	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	 	Tuition	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	“Base net	 	 	 	 	
 	 	Loan	 	 	Payment	 	 	 	 	 	 	Software	 	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	 	 	income”	 	 	 	 	
 	 	and	 	 	Processing	 	 	 	 	 	 	and	 	 	Total	 	 	Generation	 	 	Activity	 	 	Eliminations	 	 	Adjustments	 	 	GAAP	 	
 	 	Guaranty	 	 	and Campus	 	 	Enrollment	 	 	Technical	 	 	Fee-	 	 	and	 	 	and	 	 	and	 	 	to GAAP	 	 	Results of	 	
 	 	Servicing	 	 	Commerce	 	 	Services	 	 	Services	 	 	Based	 	 	Management	 	 	Overhead	 	 	Reclassifications	 	 	Results	 	 	Operations	 	
Total interest income	 	$	1,377	 	 	 	1,689	 	 	 	17	 	 	 	24	 	 	 	3,107	 	 	 	1,164,329	 	 	 	6,810	 	 	 	(2,190	)	 	 	42,325	 	 	 	1,214,381	 	
Interest expense	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	986,556	 	 	 	42,123	 	 	 	(2,190	)	 	 	—	 	 	 	1,026,489	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income (loss)	 	 	1,377	 	 	 	1,689	 	 	 	17	 	 	 	24	 	 	 	3,107	 	 	 	177,773	 	 	 	(35,313	)	 	 	—	 	 	 	42,325	 	 	 	187,892	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	25,000	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	25,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income (loss) after provision for loan losses	 	 	1,377	 	 	 	1,689	 	 	 	17	 	 	 	24	 	 	 	3,107	 	 	 	152,773	 	 	 	(35,313	)	 	 	—	 	 	 	42,325	 	 	 	162,892	 	

Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	104,287	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	104,287	 	 	 	16	 	 	 	(127	)	 	 	—	 	 	 	—	 	 	 	104,176	 	
Other fee-based income	 	 	—	 	 	 	48,435	 	 	 	112,405	 	 	 	—	 	 	 	160,840	 	 	 	17,859	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	178,699	 	
Software services income	 	 	—	 	 	 	—	 	 	 	37	 	 	 	19,707	 	 	 	19,744	 	 	 	—	 	 	 	13	 	 	 	—	 	 	 	—	 	 	 	19,757	 	
Other income	 	 	51	 	 	 	(280	)	 	 	—	 	 	 	—	 	 	 	(229	)	 	 	(448	)	 	 	5,437	 	 	 	—	 	 	 	—	 	 	 	4,760	 	
Gain (loss) on sale of loans	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(53,035	)	 	 	1,621	 	 	 	—	 	 	 	—	 	 	 	(51,414	)	
Intersegment revenue	 	 	75,361	 	 	 	302	 	 	 	2	 	 	 	6,831	 	 	 	82,496	 	 	 	—	 	 	 	63,385	 	 	 	(145,881	)	 	 	—	 	 	 	—	 	
Derivative market value, foreign currency, and put option adjustments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	466	 	 	 	—	 	 	 	—	 	 	 	10,361	 	 	 	10,827	 	
Derivative settlements, net	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	65,622	 	 	 	—	 	 	 	—	 	 	 	(9,965	)	 	 	55,657	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other income (expense)	 	 	179,699	 	 	 	48,457	 	 	 	112,444	 	 	 	26,538	 	 	 	367,138	 	 	 	30,480	 	 	 	70,329	 	 	 	(145,881	)	 	 	396	 	 	 	322,462	 	

Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	51,320	 	 	 	23,290	 	 	 	24,379	 	 	 	18,081	 	 	 	117,070	 	 	 	8,316	 	 	 	54,910	 	 	 	98	 	 	 	2,999	 	 	 	183,393	 	
Restructure expense — severance and contract termination costs	 	 	747	 	 	 	—	 	 	 	282	 	 	 	487	 	 	 	1,516	 	 	 	1,845	 	 	 	3,706	 	 	 	(7,067	)	 	 	—	 	 	 	—	 	
Impairment expense	 	 	5,074	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	5,074	 	 	 	9,351	 	 	 	4,409	 	 	 	—	 	 	 	—	 	 	 	18,834	 	
Other expenses	 	 	33,922	 	 	 	9,879	 	 	 	76,189	 	 	 	2,489	 	 	 	122,479	 	 	 	35,679	 	 	 	53,975	 	 	 	24	 	 	 	26,230	 	 	 	238,387	 	
Intersegment expenses	 	 	25,111	 	 	 	478	 	 	 	3,240	 	 	 	37	 	 	 	28,866	 	 	 	74,609	 	 	 	3,733	 	 	 	(107,208	)	 	 	—	 	 	 	—	 	
Corporate allocations	 	 	22,626	 	 	 	919	 	 	 	3,401	 	 	 	2,286	 	 	 	29,232	 	 	 	2,496	 	 	 	—	 	 	 	(31,728	)	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	138,800	 	 	 	34,566	 	 	 	107,491	 	 	 	23,380	 	 	 	304,237	 	 	 	132,296	 	 	 	120,733	 	 	 	(145,881	)	 	 	29,229	 	 	 	440,614	 	

Income (loss) before income taxes	 	 	42,276	 	 	 	15,580	 	 	 	4,970	 	 	 	3,182	 	 	 	66,008	 	 	 	50,957	 	 	 	(85,717	)	 	 	—	 	 	 	13,492	 	 	 	44,740	 	
Income tax expense (benefit) (a)	 	 	14,321	 	 	 	5,175	 	 	 	1,730	 	 	 	1,021	 	 	 	22,247	 	 	 	18,356	 	 	 	(28,499	)	 	 	—	 	 	 	5,792	 	 	 	17,896	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss) from continuing operations	 	 	27,955	 	 	 	10,405	 	 	 	3,240	 	 	 	2,161	 	 	 	43,761	 	 	 	32,601	 	 	 	(57,218	)	 	 	—	 	 	 	7,700	 	 	 	26,844	 	
Income from discontinued operations, net of tax	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	1,818	 	 	 	1,818	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	27,955	 	 	 	10,405	 	 	 	3,240	 	 	 	2,161	 	 	 	43,761	 	 	 	32,601	 	 	 	(57,218	)	 	 	—	 	 	 	9,518	 	 	 	28,662	 	

(a) Beginning in 2008, the consolidated effective tax rate for each applicable quarterly period is used to calculate income taxes for each operating segment.	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Year ended December 31, 2008:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin	 	 	23.3	%	 	 	31.1	%	 	 	4.4	%	 	 	12.0	%	 	 	17.8	%	 	 	27.8	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin - excluding restructure expense, impairment expense, loss on sale of loans, liquidity contingency planning fees, and corporate allocations	 	 	39.1	%	 	 	32.9	%	 	 	7.7	%	 	 	22.4	%	 	 	27.5	%	 	 	55.5	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Year ended December 31, 2007:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin	 	 	35.3	%	 	 	37.2	%	 	 	(1.4	%)	 	 	26.4	%	 	 	25.0	%	 	 	40.5	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin -	 	 	36.2	%	 	 	37.2	%	 	 	10.3	%	 	 	26.6	%	 	 	28.6	%	 	 	54.8	%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
       excluding restructure expense, impairment expense, and provision for loan losses related to the loss of Exceptional Performer	 	 			 	 			 	 			 	 			 	 			 	 			 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 
 13 

 

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
  	 	Year ended December 31, 2007	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	 	Tuition	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	"Base net	 	 	 	 	
 	 	Loan	 	 	Payment	 	 	 	 	 	 	Software	 	 	 	 	 	 	Asset	 	 	Corporate	 	 	 	 	 	 	income"	 	 	 	 	
 	 	and	 	 	Processing	 	 	 	 	 	 	and	 	 	Total	 	 	Generation	 	 	Activity	 	 	Eliminations	 	 	Adjustments	 	 	GAAP	 	
 	 	Guaranty	 	 	and Campus	 	 	Enrollment	 	 	Technical	 	 	Fee-	 	 	and	 	 	and	 	 	and	 	 	to GAAP	 	 	Results of	 	
 	 	Servicing	 	 	Commerce	 	 	Services	 	 	Services	 	 	Based	 	 	Management	 	 	Overhead	 	 	Reclassifications	 	 	Results	 	 	Operations	 	
Total interest income	 	$	5,459	 	 	 	3,809	 	 	 	347	 	 	 	18	 	 	 	9,633	 	 	 	1,730,882	 	 	 	7,485	 	 	 	(3,737	)	 	 	3,013	 	 	 	1,747,276	 	
Interest expense	 	 	—	 	 	 	7	 	 	 	7	 	 	 	—	 	 	 	14	 	 	 	1,465,883	 	 	 	40,502	 	 	 	(3,737	)	 	 	—	 	 	 	1,502,662	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income (loss)	 	 	5,459	 	 	 	3,802	 	 	 	340	 	 	 	18	 	 	 	9,619	 	 	 	264,999	 	 	 	(33,017	)	 	 	—	 	 	 	3,013	 	 	 	244,614	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	28,178	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	28,178	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income (loss) after provision for loan losses	 	 	5,459	 	 	 	3,802	 	 	 	340	 	 	 	18	 	 	 	9,619	 	 	 	236,821	 	 	 	(33,017	)	 	 	—	 	 	 	3,013	 	 	 	216,436	 	

Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	127,775	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	127,775	 	 	 	294	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	128,069	 	
Other fee-based income	 	 	—	 	 	 	42,682	 	 	 	103,311	 	 	 	—	 	 	 	145,993	 	 	 	13,387	 	 	 	1,508	 	 	 	—	 	 	 	—	 	 	 	160,888	 	
Software services income	 	 	—	 	 	 	—	 	 	 	594	 	 	 	22,075	 	 	 	22,669	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	22,669	 	
Other income	 	 	—	 	 	 	84	 	 	 	—	 	 	 	—	 	 	 	84	 	 	 	4,433	 	 	 	11,095	 	 	 	—	 	 	 	—	 	 	 	15,612	 	
Gain on sale of loans	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	3,597	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	3,597	 	
Intersegment revenue	 	 	74,687	 	 	 	688	 	 	 	891	 	 	 	15,683	 	 	 	91,949	 	 	 	—	 	 	 	9,040	 	 	 	(100,989	)	 	 	—	 	 	 	—	 	
Derivative market value, foreign currency, and put option adjustments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	26,806	 	 	 	26,806	 	
Derivative settlements, net	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	6,628	 	 	 	12,049	 	 	 	—	 	 	 	—	 	 	 	18,677	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other income (expense)	 	 	202,462	 	 	 	43,454	 	 	 	104,796	 	 	 	37,758	 	 	 	388,470	 	 	 	28,339	 	 	 	33,692	 	 	 	(100,989	)	 	 	26,806	 	 	 	376,318	 	

Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	85,462	 	 	 	20,426	 	 	 	33,480	 	 	 	23,959	 	 	 	163,327	 	 	 	23,101	 	 	 	49,839	 	 	 	(1,747	)	 	 	2,111	 	 	 	236,631	 	
Restructure expense- severance and contract termination costs	 	 	1,840	 	 	 	—	 	 	 	929	 	 	 	58	 	 	 	2,827	 	 	 	2,406	 	 	 	4,998	 	 	 	(10,231	)	 	 	—	 	 	 	—	 	
Impairment expense	 	 	—	 	 	 	—	 	 	 	11,401	 	 	 	—	 	 	 	11,401	 	 	 	28,291	 	 	 	9,812	 	 	 	—	 	 	 	—	 	 	 	49,504	 	
Other expenses	 	 	36,618	 	 	 	8,901	 	 	 	60,445	 	 	 	2,995	 	 	 	108,959	 	 	 	29,205	 	 	 	77,915	 	 	 	2,969	 	 	 	30,426	 	 	 	249,474	 	
Intersegment expenses	 	 	10,552	 	 	 	364	 	 	 	335	 	 	 	775	 	 	 	12,026	 	 	 	74,714	 	 	 	5,240	 	 	 	(91,980	)	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	134,472	 	 	 	29,691	 	 	 	106,590	 	 	 	27,787	 	 	 	298,540	 	 	 	157,717	 	 	 	147,804	 	 	 	(100,989	)	 	 	32,537	 	 	 	535,609	 	

Income (loss) before income taxes	 	 	73,449	 	 	 	17,565	 	 	 	(1,454	)	 	 	9,989	 	 	 	99,549	 	 	 	107,443	 	 	 	(147,129	)	 	 	—	 	 	 	(2,718	)	 	 	57,145	 	
Income tax expense (benefit) (a)	 	 	27,910	 	 	 	6,675	 	 	 	(553	)	 	 	3,796	 	 	 	37,828	 	 	 	40,828	 	 	 	(57,285	)	 	 	—	 	 	 	345	 	 	 	21,716	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss) from continuing operations	 	 	45,539	 	 	 	10,890	 	 	 	(901	)	 	 	6,193	 	 	 	61,721	 	 	 	66,615	 	 	 	(89,844	)	 	 	—	 	 	 	(3,063	)	 	 	35,429	 	
Income (loss) from discontinued operations, net of tax	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(2,575	)	 	 	(2,575	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	45,539	 	 	 	10,890	 	 	 	(901	)	 	 	6,193	 	 	 	61,721	 	 	 	66,615	 	 	 	(89,844	)	 	 	—	 	 	 	(5,638	)	 	 	32,854	 	

(a) Income taxes are based on 38% of net income (loss) before tax for the individual operating segment.	
Corporate Activity and Overhead in the previous tables primarily 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 and overhead functions such as executive management, human resources, accounting and finance, legal, marketing, and corporate technology support	
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, amortization of intangible assets, discontinued operations, and certain other items that management does not consider in evaluating the Company’s operating results. See “Non-GAAP Performance Measures.” The following tables reflect adjustments associated with these areas by operating segment and Corporate Activity and Overhead:
 
 14 

 

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	 	Tuition	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Loan	 	 	Payment	 	 	 	 	 	 	Software	 	 	Asset	 	 	Corporate	 	 	 	 	
 	 	and	 	 	Processing	 	 	 	 	 	 	and	 	 	Generation	 	 	Activity	 	 	 	 	
 	 	Guaranty	 	 	and Campus	 	 	Enrollment	 	 	Technical	 	 	and	 	 	and	 	 	 	 	
 	 	Servicing	 	 	Commerce	 	 	Services	 	 	Services	 	 	Management	 	 	Overhead	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended December 31, 2008	
Derivative market value, foreign currency, and put option adjustments	 	$	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(46,348	)	 	 	—	 	 	 	(46,348	)	
Amortization of intangible assets	 	 	1,165	 	 	 	1,889	 	 	 	3,258	 	 	 	199	 	 	 	—	 	 	 	—	 	 	 	6,511	 	
Compensation related to business combinations	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	476	 	 	 	476	 	
Variable rate floor income, net of settlements on derivatives	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Income (loss) from discontinued operations, net of tax	 	 	(837	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(837	)	
Net tax effect (a)	 	 	(408	)	 	 	(661	)	 	 	(1,140	)	 	 	(70	)	 	 	16,222	 	 	 	(167	)	 	 	13,776	 	

Total adjustments to GAAP	 	$	(80	)	 	 	1,228	 	 	 	2,118	 	 	 	129	 	 	 	(30,126	)	 	 	309	 	 	 	(26,422	)	

 	 	Three months ended December 31, 2007	
Derivative market value, foreign currency, and put option adjustments	 	$	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(16,423	)	 	 	1,483	 	 	 	(14,940	)	
Amortization of intangible assets	 	 	1,350	 	 	 	1,443	 	 	 	2,895	 	 	 	287	 	 	 	437	 	 	 	—	 	 	 	6,412	 	
Compensation related to business combinations	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	655	 	 	 	655	 	
Variable rate floor income, net of settlements on derivatives	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(2,416	)	 	 	—	 	 	 	(2,416	)	
Income (loss) from discontinued operations, net of tax	 	 	159	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	159	 	
Net tax effect (a)	 	 	(513	)	 	 	(548	)	 	 	(1,100	)	 	 	(109	)	 	 	6,993	 	 	 	(250	)	 	 	4,473	 	

Total adjustments to GAAP	 	$	996	 	 	 	895	 	 	 	1,795	 	 	 	178	 	 	 	(11,409	)	 	 	1,888	 	 	 	(5,657	)	

 	 	Year ended December 31, 2008	
Derivative market value, foreign currency, and put option adjustments	 	$	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(13,844	)	 	 	3,483	 	 	 	(10,361	)	
Amortization of intangible assets	 	 	4,751	 	 	 	7,826	 	 	 	12,451	 	 	 	1,057	 	 	 	145	 	 	 	—	 	 	 	26,230	 	
Compensation related to business combinations	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	2,999	 	 	 	2,999	 	
Variable rate floor income, net of settlements on derivatives	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(32,360	)	 	 	—	 	 	 	(32,360	)	
Income (loss) from discontinued operations, net of tax	 	 	(1,818	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(1,818	)	
Net tax effect (a)	 	 	(1,590	)	 	 	(2,615	)	 	 	(4,185	)	 	 	(354	)	 	 	16,770	 	 	 	(2,234	)	 	 	5,792	 	

Total adjustments to GAAP	 	$	1,343	 	 	 	5,211	 	 	 	8,266	 	 	 	703	 	 	 	(29,289	)	 	 	4,248	 	 	 	(9,518	)	

 	 	Year ended December 31, 2007	
Derivative market value, foreign currency, and put option adjustments	 	$	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(24,224	)	 	 	(2,582	)	 	 	(26,806	)	
Amortization of intangible assets	 	 	5,094	 	 	 	5,815	 	 	 	12,692	 	 	 	1,191	 	 	 	5,634	 	 	 	—	 	 	 	30,426	 	
Compensation related to business combinations	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	2,111	 	 	 	2,111	 	
Variable rate floor income, net of settlements on derivatives	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(3,013	)	 	 	—	 	 	 	(3,013	)	
Income (loss) from discontinued operations, net of tax	 	 	2,575	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	2,575	 	
Net tax effect (a)	 	 	(1,936	)	 	 	(2,209	)	 	 	(4,823	)	 	 	(452	)	 	 	8,209	 	 	 	1,556	 	 	 	345	 	

Total adjustments to GAAP	 	$	5,733	 	 	 	3,606	 	 	 	7,869	 	 	 	739	 	 	 	(13,394	)	 	 	1,085	 	 	 	5,638	 	

(a)	 	Beginning in 2008, tax effect is computed using the Company’s consolidated effective tax rate for each applicable quarterly period. In prior periods, tax effect was computed at 38%. The change in the value of the put options for prior periods (included in Corporate Activity and Overhead) was not tax effected as this is not deductible for income tax purposes.	
 
 15 

 

Fee-Based Businesses
In recent years, the Company has expanded products and services generated from businesses that are not dependent upon government programs reducing legislative and political risk. This revenue is primarily generated from products and services offered in the Company’s Tuition Payment Processing and Campus Commerce and Enrollment Services operating segments. The only product and service offering in these segments that was affected by the recent student loan legislative developments is list marketing services. Excluding list marketing services, the revenue from these businesses increased $3 million, or 9 percent, and $25 million, or 20 percent, for the quarter and year ended December 31, 2008, respectively. The table below includes the Company’s revenue from fee-based businesses and shows the revenue earned by the Company’s operating segments that are less dependent upon government programs, excluding list marketing services.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended December 31,	 	 	Year ended December 31,	 	
 	 	2008	 	 	2007	 	 	$ Change	 	 	% Change	 	 	2008	 	 	2007	 	 	$ Change	 	 	% Change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Tuition Payment Processing and Campus Commerce	 	$	12,678	 	 	 	12,329	 	 	 	349	 	 	 	 	 	 	$	50,124	 	 	 	46,484	 	 	 	3,640	 	 	 	 	 	
Enrollment Services — Content Management and Lead Generation	 	 	26,225	 	 	 	23,519	 	 	 	2,706	 	 	 	 	 	 	 	103,014	 	 	 	81,649	 	 	 	21,365	 	 	 	 	 	

Total revenue from fee-based businesses less dependent upon government programs	 	 	38,903	 	 	 	35,848	 	 	$	3,055	 	 	 	8.5	%	 	 	153,138	 	 	 	128,133	 	 	$	25,005	 	 	 	19.5	%	

Enrollment Services — List Marketing Services	 	 	3,036	 	 	 	6,644	 	 	 	 	 	 	 	 	 	 	 	9,445	 	 	 	22,596	 	 	 	 	 	 	 	 	 	
Student Loan and Guaranty Servicing	 	 	22,880	 	 	 	33,799	 	 	 	 	 	 	 	 	 	 	 	105,664	 	 	 	133,234	 	 	 	 	 	 	 	 	 	
Software and Technical Services	 	 	3,903	 	 	 	5,509	 	 	 	 	 	 	 	 	 	 	 	19,731	 	 	 	22,093	 	 	 	 	 	 	 	 	 	

Total revenue from fee-based businesses	 	$	68,722	 	 	 	81,800	 	 	 	 	 	 	 	 	 	 	$	287,978	 	 	 	306,056	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Expenses
As a result of the restructuring plans implemented in September 2007 and January 2008, as well as the Company’s continued focus on capitalizing on the operating leverage of the Company’s business structure and strategies, operating expenses decreased $10 million and $95 million for the quarter and year ended December 31, 2008, respectively, compared to the same periods a year ago. Excluding restructuring expense, impairment expense, and liquidity contingency fees, operating expenses decreased $18 million, or 16%, and $75 million, or 16%, for the quarter and year ended December 31, 2008, respectively, compared to the same periods in 2007.
 
 16 

 

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended December 31,	 	 	Year ended December 31,	 	
 	 	2008	 	 	2007	 	 	$ Change	 	 	% Change	 	 	2008	 	 	2007	 	 	$ Change	 	 	% Change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	$	41,302	 	 	 	53,094	 	 	 	(11,792	)	 	 	 	 	 	$	177,724	 	 	 	230,316	 	 	 	(52,592	)	 	 	 	 	
Other expenses	 	 	55,399	 	 	 	61,920	 	 	 	(6,521	)	 	 	 	 	 	 	223,464	 	 	 	245,558	 	 	 	(22,094	)	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses, excluding restructure expense, impairment expense, and liquidity related fees	 	 	96,701	 	 	 	115,014	 	 	$	(18,313	)	 	 	(15.9	)%	 	 	401,188	 	 	 	475,874	 	 	$	(74,686	)	 	 	(15.7	)%	

Restructure expense	 	 	(40	)	 	 	5,275	 	 	 	 	 	 	 	 	 	 	 	7,067	 	 	 	10,231	 	 	 	 	 	 	 	 	 	
Impairment expense	 	 	—	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	18,834	 	 	 	49,504	 	 	 	 	 	 	 	 	 	
Liquidity related fees	 	 	13,525	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	13,525	 	 	 	—	 	 	 	 	 	 	 	 	 	

Total operating expenses	 	$	110,186	 	 	 	120,289	 	 	 	 	 	 	 	 	 	 	$	440,614	 	 	 	535,609	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Student Loans Receivable
Student loans receivable includes all student loans owned by or on behalf of the Company and includes the unamortized cost of acquisition or origination less an allowance for loan losses. The following table describes the components of the Company’s loan portfolio:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	As of December 31, 2008	 	 	As of September 30, 2008	 	 	As of December 31, 2007	 	
 	 	Dollars	 	 	Percent	 	 	Dollars	 	 	Percent	 	 	Dollars	 	 	Percent	 	
Federally insured: (a) (b)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Stafford	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Originated prior to 10/1/07	 	$	6,641,817	 	 	 	26.1	%	 	$	6,780,214	 	 	 	25.7	%	 	$	6,624,009	 	 	 	24.8	%	
Originated on or after 10/1/07	 	 	960,751	 	 	 	3.8	 	 	 	689,097	 	 	 	2.6	 	 	 	101,901	 	 	 	0.4	 	
PLUS/SLS	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Originated prior to 10/1/07	 	 	412,142	 	 	 	1.6	 	 	 	428,037	 	 	 	1.6	 	 	 	414,708	 	 	 	1.5	 	
Originated on or after 10/1/07	 	 	115,528	 	 	 	0.5	 	 	 	85,066	 	 	 	0.3	 	 	 	15,233	 	 	 	0.1	 	
Consolidation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Originated prior to 10/1/07	 	 	16,614,950	 	 	 	65.3	 	 	 	17,427,448	 	 	 	66.2	 	 	 	18,646,993	 	 	 	69.8	 	
Originated on or after 10/1/07	 	 	42,753	 	 	 	0.2	 	 	 	316,031	 	 	 	1.2	 	 	 	251,554	 	 	 	0.9	 	
Non-federally insured	 	 	273,108	 	 	 	1.1	 	 	 	275,520	 	 	 	1.0	 	 	 	274,815	 	 	 	1.0	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	25,061,049	 	 	 	98.6	 	 	 	26,001,413	 	 	 	98.6	 	 	 	26,329,213	 	 	 	98.5	 	
Unamortized premiums and deferred origination costs	 	 	402,881	 	 	 	1.6	 	 	 	423,926	 	 	 	1.6	 	 	 	452,501	 	 	 	1.7	 	
Allowance for loan losses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allowance — federally insured	 	 	(25,577	)	 	 	(0.1	)	 	 	(24,366	)	 	 	(0.1	)	 	 	(24,534	)	 	 	(0.1	)	
Allowance — non-federally insured	 	 	(25,345	)	 	 	(0.1	)	 	 	(24,704	)	 	 	(0.1	)	 	 	(21,058	)	 	 	(0.1	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net	 	$	25,413,008	 	 	 	100.0	%	 	$	26,376,269	 	 	 	100.0	%	 	$	26,736,122	 	 	 	100.0	%	

(a)	 	The College Cost Reduction Act reduced the yield on federally insured loans originated on or after October 1, 2007. As of December 31, 2008, September 30, 2008, and December 31, 2007, $548.4 million, $221.6 million, and $278.9 million, respectively, of federally insured student loans are excluded from the above table as these loans are accounted for as participation interests sold under an agreement with Union Bank. As of December 31, 2008, $377.1 million of the loans accounted for as participation interests sold under this agreement were originated on or after October 1, 2007, of which $32.8 million were eligible to be participated to the Department under the Participation Program.	
 		
(b)	 	As of December 31, 2008, $637.3 million of federally insured student loans from the above table were eligible to be sold or participated to the Department under the Department’s Loan Purchase Commitment and Participation Programs, of which $622.2 million were participated to the Department under the Participation Program.	
 
 17 

 

Origination and Acquisition
The Company originates and acquires loans through various methods and channels including: (i) direct-to-consumer channel (in which the Company originates student loans directly with student and parent borrowers), (ii) campus based origination channels, and (iii) spot purchases.
The Company will originate or acquire loans through its campus based channel either directly under one of its brand names or through other originating lenders. In addition to its brands, the Company acquires student loans from lenders to whom the Company provides marketing and/or origination services established through various contracts. Branding partners are lenders for which the Company acts as a marketing agent in specified geographic areas. A forward flow lender is one for whom the Company provides origination services but provides no marketing services or whom simply agrees to sell loans to the Company under forward sale commitments. The following table sets forth the activity of loans originated or acquired through each of the Company’s channels:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended	 	 	Year ended	 	
 	 	December 31,	 	 	September 30,	 	 	December 31,	 	 	December 31,	 	 	December 31,	 	
 	 	2008	 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Beginning balance	 	$	26,001,413	 	 	 	25,612,126	 	 	 	26,179,970	 	 	 	26,329,213	 	 	 	23,414,468	 	
Direct channel:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Consolidation loan originations	 	 	5	 	 	 	44	 	 	 	280,963	 	 	 	69,078	 	 	 	3,096,754	 	
Less consolidation of existing portfolio	 	 	—	 	 	 	(27	)	 	 	(152,509	)	 	 	(28,474	)	 	 	(1,602,835	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net consolidation loan originations	 	 	5	 	 	 	17	 	 	 	128,454	 	 	 	40,604	 	 	 	1,493,919	 	
Stafford/PLUS loan originations	 	 	306,911	 	 	 	416,721	 	 	 	162,949	 	 	 	1,258,961	 	 	 	1,086,398	 	
Branding partner channel	 	 	52	 	 	 	334,685	 	 	 	79,416	 	 	 	936,044	 	 	 	662,629	 	
Forward flow channel	 	 	3	 	 	 	114,488	 	 	 	158,803	 	 	 	517,551	 	 	 	1,105,145	 	
Other channels	 	 	—	 	 	 	—	 	 	 	12,932	 	 	 	55,922	 	 	 	804,019	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total channel acquisitions	 	 	306,971	 	 	 	865,911	 	 	 	542,554	 	 	 	2,809,082	 	 	 	5,152,110	 	
Repayments, claims, capitalized interest, participations, and other	 	 	(622,702	)	 	 	(369,940	)	 	 	(208,178	)	 	 	(1,877,885	)	 	 	(1,321,055	)	
Consolidation loans lost to external parties	 	 	(86,194	)	 	 	(106,684	)	 	 	(173,505	)	 	 	(369,145	)	 	 	(800,978	)	
Loans sold	 	 	(538,439	)	 	 	—	 	 	 	(11,628	)	 	 	(1,830,216	)	 	 	(115,332	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Ending balance	 	$	25,061,049	 	 	 	26,001,413	 	 	 	26,329,213	 	 	 	25,061,049	 	 	 	26,329,213	 	

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Student Loan Spread
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	 	 	Year ended	 	
 	 	December 31,	 	 	September 30,	 	 	December 31,	 	 	December 31,	 	 	December 31,	 	
 	 	2008	 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Student loan yield	 	 	5.18	%	 	 	5.38	%	 	 	7.42	%	 	 	5.58	%	 	 	7.76	%	
Consolidation rebate fees	 	 	(0.72	)	 	 	(0.72	)	 	 	(0.76	)	 	 	(0.73	)	 	 	(0.77	)	
Premium and deferred origination costs amortization	 	 	(0.33	)	 	 	(0.33	)	 	 	(0.36	)	 	 	(0.35	)	 	 	(0.36	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Student loan net yield	 	 	4.13	 	 	 	4.33	 	 	 	6.30	 	 	 	4.50	 	 	 	6.63	 	
Student loan cost of funds	 	 	(3.23	)	 	 	(3.29	)	 	 	(5.33	)	 	 	(3.45	)	 	 	(5.49	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Student loan spread	 	 	0.90	 	 	 	1.04	 	 	 	0.97	 	 	 	1.05	 	 	 	1.14	 	
Variable rate floor income, net of settlements on derivatives	 	 	—	 	 	 	(0.02	)	 	 	(0.04	)	 	 	(0.12	)	 	 	(0.01	)	

Core student loan spread	 	 	0.90	%	 	 	1.02	%	 	 	0.93	%	 	 	0.93	%	 	 	1.13	%	

Average balance of student loans	 	$	25,516,571	 	 	 	26,035,006	 	 	 	26,173,480	 	 	 	26,044,507	 	 	 	25,143,059	 	
Average balance of debt outstanding	 	 	26,121,885	 	 	 	26,769,955	 	 	 	27,507,440	 	 	 	26,869,364	 	 	 	26,599,361	 	
 
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