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

(Mark One)

		
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 
For the quarterly period ended September 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 October 31, 2011 , there were 35,632,225 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
September 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	33	
 	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	82	
 	Item 4.	Controls and Procedures	90	
 	 	 	 	
PART II. OTHER INFORMATION	 	
 	Item 1.	Legal Proceedings	90	
 	Item 1A.	Risk Factors	91	
 	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	92	
 	Item 6.	Exhibits	94	
 	 	 	 	
Signatures	 	95	

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	
 	September 30, 2011	 	December 31, 2010	
 	(unaudited)	 	 	
Assets:	 	 	 	
Student loans receivable (net of allowance for loan losses	 	 	 	
of $45,773 and $43,626, respectively)	$	24,641,614		 	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	10,465		 	6,952		
Cash and cash equivalents - held at a related party	81,629		 	276,849		
Total cash and cash equivalents	92,094		 	283,801		
Investments - trading securities	49,834		 	43,236		
Restricted cash and investments	601,218		 	668,757		
Restricted cash - due to customers	52,300		 	88,528		
Accrued interest receivable	331,071		 	318,152		
Accounts receivable (net of allowance for doubtful accounts	 	 	 	
of $ 1,495  and $1,221, respectively)	58,894		 	52,614		
Goodwill	117,118		 	117,118		
Intangible assets, net	33,074		 	38,712		
Property and equipment, net	33,335		 	30,573		
Other assets	95,055		 	101,054		
Fair value of derivative instruments	130,620		 	118,346		
Total assets	$	26,236,227		 	25,893,892		
 	 	 	 	
Liabilities:	 		 	 		
Bonds and notes payable	$	24,926,512		 	24,672,472		
Accrued interest payable	16,965		 	19,153		
Other liabilities	179,620		 	191,017		
Due to customers	52,300		 	88,528		
Fair value of derivative instruments	49,347		 	16,089		
Total liabilities	25,224,744		 	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 35,964,088 shares as of September 30, 2011 and 36,846,353 shares as of December 31, 2010	360		 	368		
Class B, convertible, $0.01 par value. Authorized 60,000,000 shares;	 	 	 	
issued and outstanding 11,495,377 shares as of September 30, 2011 and December 31, 2010	115		 	115		
Additional paid-in capital	54,685		 	76,263		
Retained earnings	957,463		 	831,057		
Employee notes receivable	(1,140	)	 	(1,170	)	
Total shareholders' equity	1,011,483		 	906,633		
Commitments and contingencies			 			
Total liabilities and shareholders' equity	$	26,236,227		 	25,893,892		
See accompanying notes to consolidated financial statements.

2

	
													
NELNET, INC. AND SUBSIDIARIES	
CONSOLIDATED STATEMENTS OF OPERATIONS	
(Dollars in thousands, except share data)	
(unaudited)	
 	Three months	 	Nine months	
 	ended September 30,	 	ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Interest income:	 	 	 	 	 	 	 	
Loan interest	$	156,955		 	159,287		 	433,247		 	449,607		
Investment interest	672		 	1,169		 	2,254		 	3,474		
Total interest income	157,627		 	160,456		 	435,501		 	453,081		
Interest expense:	 		 	 		 	 		 	 		
Interest on bonds and notes payable	60,866		 	68,243		 	164,227		 	178,345		
Net interest income	96,761		 	92,213		 	271,274		 	274,736		
Less provision for loan losses	5,250		 	5,500		 	14,250		 	16,700		
Net interest income after provision for loan losses	91,511		 	86,713		 	257,024		 	258,036		
 	 	 	 	 	 	 	 	
Other income (expense):	 		 	 		 	 		 	 		
Loan and guaranty servicing revenue	37,927		 	33,464		 	110,952		 	106,510		
Tuition payment processing and campus commerce revenue	16,774		 	14,527		 	50,904		 	44,704		
Enrollment services revenue	35,505		 	36,439		 	101,688		 	105,113		
Software services revenue	4,622		 	4,624		 	13,745		 	14,467		
Other income	3,931		 	9,432		 	17,249		 	25,188		
Gain on sale of loans and debt repurchases	—		 	9,885		 	8,307		 	28,821		
Derivative market value and foreign currency adjustments	 	 	 	 	 	 	 	
and derivative settlements, net	(13,631	)	 	(35,391	)	 	(37,002	)	 	(44,317	)	
Total other income	85,128		 	72,980		 	265,843		 	280,486		
 	 	 	 	 	 	 	 	
Operating expenses:	 		 	 		 	 		 	 		
Salaries and benefits	44,132		 	41,085		 	130,925		 	122,691		
Litigation settlement	—		 	55,000		 	—		 	55,000		
Cost to provide enrollment services	23,825		 	23,709		 	68,804		 	69,845		
Depreciation and amortization	7,917		 	9,025		 	21,462		 	29,536		
Restructure expense	—		 	4,751		 	—		 	6,020		
Other	28,904		 	26,717		 	83,776		 	89,120		
Total operating expenses	104,778		 	160,287		 	304,967		 	372,212		
 	 	 	 	 	 	 	 	
Income (loss) before income taxes	71,861		 	(594	)	 	217,900		 	166,310		
Income tax benefit (expense)	(24,410	)	 	226		 	(78,444	)	 	(62,363	)	
 	 	 	 	 	 	 	 	
Net income (loss)	$	47,451		 	(368	)	 	139,456		 	103,947		
 	 	 	 	 	 	 	 	
Earnings (loss) per common share:	 	 	 	 	 	 	 	
Net earnings (loss) - basic	$	0.98		 	(0.01	)	 	2.88		 	2.09		
Net earnings (loss) - diluted	$	0.98		 	(0.01	)	 	2.87		 	2.08		
 	 	 	 	 	 	 	 	
Weighted average common shares outstanding:	 	 	 	 	 	 	 	
Basic	48,059,747		 	48,938,333		 	48,177,539		 	49,460,625		
Diluted	48,253,888		 	48,938,333		 	48,367,923		 	49,663,505		
 
See accompanying notes to consolidated financial statements.

3

	
																															
NELNET, INC. AND SUBSIDIARIES	
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)	
(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 June 30, 2010	—		 	37,995,006		 	11,495,377		 	$	—		 	380		 	115		 	101,232		 	773,468		 	(1,250	)	 	873,945		
Comprehensive loss:	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Net loss	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(368	)	 	—		 	(368	)	
Cash dividend on Class A and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Class B common stock - $0.07 per share	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(3,435	)	 	—		 	(3,435	)	
Issuance of common stock,	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
net of forfeitures	—		 	37,728		 	—		 	—		 	1		 	—		 	601		 	—		 	—		 	602		
Compensation expense for stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
based awards	—		 	—		 	—		 	—		 	—		 	—		 	405		 	—		 	—		 	405		
Repurchase of common stock	—		 	(1,184,261	)	 	—		 	—		 	(13	)	 	—		 	(26,602	)	 	—		 	—		 	(26,615	)	
Reduction of employee stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
notes receivable	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	80		 	80		
Balance as of September 30, 2010	—		 	36,848,473		 	11,495,377		 	$	—		 	368		 	115		 	75,636		 	769,665		 	(1,170	)	 	844,614		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of June 30, 2011	—		 	37,044,372		 	11,495,377		 	$	—		 	370		 	115		 	74,646		 	914,823		 	(1,170	)	 	988,784		
Comprehensive income:	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Net income	—		 	—		 	—		 	—		 	—		 	—		 	—		 	47,451		 	—		 	47,451		
Cash dividend on Class A and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Class B common stock - $0.10 per share	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(4,811	)	 	—		 	(4,811	)	
Issuance of common stock,	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
net of forfeitures	—		 	17,157		 	—		 	—		 	1		 	—		 	314		 	—		 	—		 	315		
Compensation expense for stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
based awards	—		 	—		 	—		 	—		 	—		 	—		 	310		 	—		 	—		 	310		
Repurchase of common stock	—		 	(1,097,441	)	 	—		 	—		 	(11	)	 	—		 	(20,585	)	 	—		 	—		 	(20,596	)	
Reduction of employee stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
notes receivable	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	30		 	30		
Balance as of September 30, 2011	—		 	35,964,088		 	11,495,377		 	$	—		 	360		 	115		 	54,685		 	957,463		 	(1,140	)	 	1,011,483		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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	—		 	—		 	—		 	—		 	—		 	—		 	—		 	103,947		 	—		 	103,947		
Cash dividend on Class A and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Class B common stock - $0.21 per share	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(10,436	)	 	—		 	(10,436	)	
Issuance of common stock,	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
net of forfeitures	—		 	312,322		 	—		 	—		 	3		 	—		 	4,834		 	—		 	—		 	4,837		
Compensation expense for stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
based awards	—		 	—		 	—		 	—		 	—		 	—		 	1,096		 	—		 	—		 	1,096		
Repurchase of common stock	—		 	(1,860,640	)	 	—		 	—		 	(19	)	 	—		 	(39,653	)	 	—		 	—		 	(39,672	)	
Reduction of employee stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
notes receivable	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	279		 	279		
Balance as of September 30, 2010	—		 	36,848,473		 	11,495,377		 	$	—		 	368		 	115		 	75,636		 	769,665		 	(1,170	)	 	844,614		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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	—		 	—		 	—		 	—		 	—		 	—		 	—		 	139,456		 	—		 	139,456		
Cash dividend on Class A and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Class B common stock - $0.27 per share	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(13,050	)	 	—		 	(13,050	)	
Contingency payment related	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
to business combination	—		 	—		 	—		 	—		 	—		 	—		 	(5,893	)	 	—		 	—		 	(5,893	)	
Issuance of common stock,	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
net of forfeitures	—		 	239,620		 	—		 	—		 	3		 	—		 	4,427		 	—		 	—		 	4,430		
Compensation expense for stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
based awards	—		 	—		 	—		 	—		 	—		 	—		 	1,007		 	—		 	—		 	1,007		
Repurchase of common stock	—		 	(1,121,885	)	 	—		 	—		 	(11	)	 	—		 	(21,119	)	 	—		 	—		 	(21,130	)	
Reduction of employee stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
notes receivable	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	30		 	30		
Balance as of September 30, 2011	—		 	35,964,088		 	11,495,377		 	$	—		 	360		 	115		 	54,685		 	957,463		 	(1,140	)	 	1,011,483		
 
See accompanying notes to consolidated financial statements.

4

	
							
NELNET, INC. AND SUBSIDIARIES	
CONSOLIDATED STATEMENTS OF CASH FLOWS	
(Dollars in thousands)	
(unaudited)	
 	Nine months ended September 30,	
 	2011	 	2010	
Net income	$	139,456		 	103,947		
Adjustments to reconcile net income to net cash provided by operating activities,	 	 	 	
net of business and asset acquisitions:	 		 	 		
Depreciation and amortization, including loan premiums/discount and deferred origination costs	54,462		 	71,696		
Provision for loan losses	14,250		 	16,700		
Derivative market value adjustment	18,683		 	94,539		
Foreign currency transaction adjustment	10,902		 	(58,608	)	
Proceeds to terminate and/or amend derivative instruments	12,369		 	15,169		
Payments to terminate and/or amend derivative instruments	(10,068	)	 	(763	)	
Gain on sale of loans	(1,345	)	 	—		
Gain from debt repurchases	(6,962	)	 	(28,821	)	
Originations and purchases of student loans-held for sale	—		 	(97,782	)	
Change in investments - trading securities, net	(6,598	)	 	(33,082	)	
Deferred income tax benefit	(15,916	)	 	(4,292	)	
Non-cash compensation expense	1,574		 	1,719		
Accrued litigation settlement	—		 	55,000		
Other non-cash items	(124	)	 	(202	)	
Decrease (increase) in accrued interest receivable	6,550		 	(88,770	)	
Decrease (increase) in accounts receivable	(6,280	)	 	(26,670	)	
Decrease (increase) in other assets	1,065		 	(7,977	)	
(Decrease) increase in accrued interest payable	(3,207	)	 	(104	)	
(Decrease) increase in other liabilities	3,135		 	4,131		
Net cash provided by operating activities	211,946		 	15,830		
 	 	 	 	
Cash flows from investing activities, net of business and asset acquisitions:	 		 	 		
Originations and purchases of student loans, including loan premiums/discounts	 	 	 	
and deferred origination costs	(820,812	)	 	(2,957,976	)	
Purchases of student loans, including loan premiums, from a related party	(59	)	 	(989,002	)	
Net proceeds from student loan repayments, claims, capitalized interest, participations, and other	1,778,729		 	1,342,963		
Proceeds from sale of student loans	95,178		 	27,191		
Purchases of property and equipment, net	(9,776	)	 	(7,496	)	
Decrease (increase) in restricted cash and investments, net	101,009		 	(67,210	)	
Business and asset acquisitions, net of cash acquired, including contingency payments/receipts, net	(14,029	)	 	(3,000	)	
Net cash provided by (used in) investing activities	1,130,240		 	(2,654,530	)	
 	 	 	 	
Cash flows from financing activities:	 		 	 		
Payments on bonds and notes payable	(2,386,461	)	 	(2,541,883	)	
Proceeds from issuance of bonds and notes payable	995,644		 	5,104,517		
Payments on bonds payable due to a related party	(107,050	)	 	—		
Proceeds from issuance of bonds payable due to a related party	—		 	111,675		
Payments of debt issuance costs	(2,282	)	 	(7,971	)	
Dividends paid	(13,050	)	 	(10,436	)	
Repurchases of common stock	(21,130	)	 	(39,672	)	
Proceeds from issuance of common stock	406		 	371		
Payments received on employee stock notes receivable	30		 	279		
Net cash (used in) provided by financing activities	(1,533,893	)	 	2,616,880		
 	 	 	 	
Net decrease in cash and cash equivalents	(191,707	)	 	(21,820	)	
Cash and cash equivalents, beginning of period	283,801		 	338,181		
Cash and cash equivalents, end of period	$	92,094		 	316,361		
 	 	 	 	
Supplemental disclosures of cash flow information:	 		 	 		
Interest paid	$	153,167		 	171,656		
Income taxes paid, net of refunds	$	97,640		 	77,774		
Supplemental disclosures of non-cash operating, investing, and financing activities regarding the Company's acquisition of student loans from an affiliate of Greystone & Co., Inc. are contained in note 2.	
See accompanying notes to consolidated financial statements.	 	 	 	

5

NELNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 2011 and for the three and nine months ended
September 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 September 30, 2011 and for the three and nine months ended September 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 nine months ended September 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 September 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 September 30, 2011	 	As of December 31, 2010	
 	Held for investment	 	Held for investment	 	Held for sale (a)	
Federally insured loans	$	24,655,652		 	23,757,699		 	—		
Non-federally insured loans	29,061		 	26,370		 	84,987		
 	24,684,713		 	23,784,069		 	84,987		
Unamortized loan premiums/discounts and deferred origination costs, net	2,674		 	207,571		 	—		
Allowance for loan losses – federally insured loans	(35,190	)	 	(32,908	)	 	—		
Allowance for loan losses – non-federally insured loans	(10,583	)	 	(10,718	)	 	—		
 	$	24,641,614		 	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	36.42	%	 	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.	

Loan Purchase

On July 8, 2011, the Company purchased the residual interest in $1.9 billion of securitized federally insured 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 federally insured 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").

On July 8, 2011, the SLIMS Trust included $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.

The Company has consolidated these trusts on its consolidated balance sheet because management has determined the Company is the primary beneficiary of the trusts. Upon acquisition, the Company recorded all assets and liabilities of the trusts at fair value, resulting in the recognition of a student loan fair value discount of $146 million and a bonds and notes payable fair value discount of $167 million. All other assets acquired and liabilities assumed (restricted cash, accrued interest receivable/payable, and other assets/liabilities) were recorded at cost which approximates 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.

7

	
													
 	Three months ended September 30,	 	Nine months ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Balance at beginning of period	$	42,300		 	50,797		 	43,626		 	50,887		
Provision for loan losses:	 		 	 		 	 		 	 		
Federally insured loans	5,000		 	4,500		 	13,500		 	13,700		
Non-federally insured loans	250		 	1,000		 	750		 	3,000		
Total provision for loan losses	5,250		 	5,500		 	14,250		 	16,700		
Charge-offs:	 		 	 		 	 		 	 		
Federally insured loans	(3,978	)	 	(4,510	)	 	(13,418	)	 	(13,549	)	
Non-federally insured loans	(1,175	)	 	(1,933	)	 	(3,395	)	 	(5,696	)	
Total charge-offs	(5,153	)	 	(6,443	)	 	(16,813	)	 	(19,245	)	
 	 	 	 	 	 	 	 	
Recoveries - Non-federally insured loans	350		 	358		 	1,003		 	940		
Purchases:	 	 	 	 	 	 	 	
Federally insured loans	2,200		 	—		 	2,200		 	2,710		
Non-federally insured loans	—		 	—		 	—		 	220		
Transfer to/from repurchase obligation related	 	 	 	 	 	 	 	
to loans sold/purchased, net	826		 	—		 	1,507		 	(2,000	)	
Balance at end of period	$	45,773		 	50,212		 	45,773		 	50,212		
 	 	 	 	 	 	 	 	
Allocation of the allowance for loan losses:	 		 	 		 	 		 	 		
Federally insured loans	$	35,190		 	32,962		 	35,190		 	32,962		
Non-federally insured loans	10,583		 	17,250		 	10,583		 	17,250		
Total allowance for loan losses	$	45,773		 	50,212		 	45,773		 	50,212		

Repurchase Obligations

As of September 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.

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

	
													
 	Three months ended September 30,	 	Nine months ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Beginning balance	$	20,689		 	12,600		 	12,600		 	10,600		
Repurchase obligation transferred to/from the allowance	 	 	 	 	 	 	 	
for loan losses related to loans purchased/sold, net	(826	)	 	—		 	(1,507	)	 	2,000		
Repurchase obligation associated with loans sold (a)	—		 	—		 	6,270		 	—		
Current period expense (b)	—		 	—		 	2,500		 	—		
Ending balance	$	19,863		 	12,600		 	19,863		 	12,600		

8

		
(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 operations. During the nine months ended September 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 September 30, 2011	 	As of December 31, 2010	
 	Dollars	 	Percent	 	Dollars	 	Percent	
Federally Insured Loans:	 	 	 	 	 	 	 	
Loans in-school/grace/deferment (a)	$	4,358,786		 	 	 	$	4,358,616		 	 	
Loans in forbearance (b)	3,390,367		 	 	 	2,984,869		 	 	
Loans in repayment status:	 		 	 	 	 		 	 	
Loans current	14,555,949		 	86.1	%	 	14,309,480		 	87.2	%	
Loans delinquent 31-60 days (c)	675,053		 	4.0		 	794,140		 	4.8		
Loans delinquent 61-90 days (c)	366,831		 	2.2		 	306,853		 	1.9		
Loans delinquent 91 days or greater (d)	1,308,666		 	7.7		 	1,003,741		 	6.1		
Total loans in repayment	16,906,499		 	100.0	%	 	16,414,214		 	100.0	%	
Total federally insured loans	$	24,655,652		 	 		 	$	23,757,699		 	 		
 	 	 	 	 	 	 	 	
Non-Federally Insured Loans:	 		 	 		 	 		 	 		
Loans in-school/grace/deferment (a)	$	2,944		 	 		 	$	3,500		 	 		
Loans in forbearance (b)	473		 	 		 	292		 	 		
Loans in repayment status:	 		 	 		 	 		 	 		
Loans current	19,209		 	74.9	%	 	16,679		 	73.9	%	
Loans delinquent 31-60 days (c)	893		 	3.5		 	1,546		 	6.8		
Loans delinquent 61-90 days (c)	1,344		 	5.2		 	1,163		 	5.2		
Loans delinquent 91 days or greater	4,198		 	16.4		 	3,190		 	14.1		
Total loans in repayment	25,644		 	100.0	%	 	22,578		 	100.0	%	
Total non-federally insured loans	$	29,061		 	 		 	$	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)	A portion of loans included in 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.	

9

3.     Bonds and Notes Payable

The following tables summarize the Company’s outstanding debt obligations by type of instrument:

	
								
 	As of September 30, 2011	
 	Carrying
amount	 	Interest rate
range	 	Final maturity	
Variable-rate bonds and notes (a):	 	 	 	 	 	
Bonds and notes based on indices	$	20,703,892		 	0.29% - 6.90%	 	11/25/15 - 7/27/48	
Bonds and notes based on auction or remarketing	970,575		 	0.16% - 2.14%	 	5/1/28 - 5/25/42	
Total variable-rate bonds and notes	21,674,467		 	 	 	 	
Commercial paper - FFELP warehouse facilities	719,668		 	0.22% - 0.45%	 	7/1/14	
Department of Education Conduit	2,398,456		 	0.30%	 	5/8/14	
Unsecured line of credit	149,390		 	0.63%	 	5/8/12	
Unsecured debt - Junior Subordinated Hybrid Securities	100,697		 	3.74%	 	9/15/61	
Other borrowings	43,510		 	3.58 % - 5.72%	 	11/14/11 - 3/1/22	
 	25,086,188		 	 	 	 	
Discount on bonds and notes payable	(159,676	)	 	 	 	 	
Total	$	24,926,512		 	 	 	 	

	
								
 	As of December 31, 2010	
 	Carrying
amount	 	Interest rate
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 loan warehouse facilities, 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.

10

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 facilities. Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements.

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”).

When the Company renewed the liquidity agreement on its NFSLW-I Warehouse facility on July 14, 2011, it had a maximum financing amount of $300.0 million which was increased to $500.0 million on August 10, 2011. The NFSLW-I Warehouse has 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. As of September 30, 2011 , $362.1 million was outstanding under the NFSLW-I Warehouse facility, $137.9 million was available for future use, and $30.9 million was advanced as equity support.

The 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. As of September 30, 2011 , $357.6 million was outstanding under the NHELP-I Warehouse facility, $142.4 million was available for future use, and $18.5 million was advanced as equity support.

The FFELP warehouse facilities contain 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 facilities.

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 NFSLW-I Warehouse facility.

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

11

through a put agreement at a price of 97 percent of the face amount of the loans.   As of September 30, 2011 , the Company had $2.4 billion borrowed under the facility and $85.1 million advanced as equity support in the facility. Effective July 1, 2010, no additional loans could be funded using the Conduit Program.

Unsecured Line of Credit

The Company has a $750.0 million unsecured line of credit that terminates on May 8, 2012.   As of September 30, 2011 , there was $149.4 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 September 30, 2011 , excluding Lehman’s lending commitment, the Company has $558.6 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-federally insured loans in the Company’s portfolio	

As of September 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.

Junior Subordinated Hybrid Securities

On September 27, 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 September 28, 2011 was 7.40%, payable semi-annually. Beginning September 29, 2011 through September 29, 2036, the "scheduled maturity date," the interest rate on the Hybrid Securities is 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 or in part, any time on or after September 29, 2011, at their principal amount plus accrued and unpaid interest, provided in the case of a redemption in part that the principal amount outstanding after such redemption is at least $50.0 million.

12

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.   As of September 30, 2011 and December 31, 2010 , $505.1 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 $750.0 million or an amount in excess of $750.0 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 nine months of 2010 and 2011 , the Company repurchased outstanding debt as summarized in note 4, "Gain on Sale of Loans and Debt Repurchases."

13

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	 	Nine months ended	
 	September 30, 2011	 	September 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)	11,654		 	11,654		 	—		 	12,254		 	12,199		 	55		
 	$	11,654		 	11,654		 	—		 	74,812		 	67,850		 	6,962		
Gain on sale of loans	 		 	 		 	—		 	 		 	 		 	1,345		
Gain on sale of loans and debt repurchases	 		 	 		 	$	—		 	 		 	 		 	$	8,307		
 	 	 	 	 	 	 	 	 	 	 	 	
 	Three months ended	 	Nine months ended	
 	September 30, 2010	 	September 30, 2010	
 	Notional
amount	 	Purchase
price	 	Gain	 	Notional
amount	 	Purchase
price	 	Gain	
Gains on debt repurchases:	 		 	 		 	 		 	 		 	 		 	 		
Junior Subordinated Hybrid Securities	$	34,995		 	30,073		 	4,922		 	34,995		 	30,073		 	4,922		
Asset-backed securities (a)	85,675		 	80,712		 	4,963		 	477,700		 	453,801		 	23,899		
 	$	120,670		 	110,785		 	9,885		 	512,695		 	483,874		 	28,821		

(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 September 30, 2011 , the Company has purchased a cumulative amount of $72.6 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 ( $72.6 million as of September 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

14

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 September 30, 2011 , the Company had $23.7 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 $20.0 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").

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 September 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.

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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.

As of September 30, 2011 and December 31, 2010 , the Company had $11.1 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 September 30, 2011	
 	 	 	Notional	 	Weighted average fixed rate paid by the Company (a)	
 	Maturity	 	amount	 		
 	2013	 	$	2,150,000		 	0.85	%	
 	2014	 	750,000		 	0.85		
 	2015	 	100,000		 	2.26		
 	2020	 	50,000		 	3.23		
 	 	 	$	3,050,000		 	0.87	%	

	
									
 	 	 	As of December 31, 2010	
 	 	 	Notional	 	Weighted average fixed rate paid by the Company (a)	
 	Maturity	 	amount	 		
 	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 three-months LIBOR.

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 September 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 was 7.40%. Beginning September 29, 2011 through September 29, 2036, the interest rate on the Hybrid Securities is equal to three-month LIBOR plus 3.375%, payable quarterly. As of September 30, 2011 and December 31, 2010 , the Company had the following derivatives outstanding that are used to effectively convert the variable interest rate on the Hybrid Securities to a fixed rate.

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As of September 30, 2011	
Notional amount (a)	 	Weighted average fixed rate paid by the Company (b)	
	 		
$	75,000		 	4.28	%	

	
						
As of December 31, 2010	
Notional amount (a)	 	Weighted average fixed rate paid by 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.	

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

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 between the U.S. dollar and Euro 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 operations.

	
													
 	Three months ended September 30,	 	Nine months ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Re-measurement of Euro Notes	$	73,453		 	(106,468	)	 	(10,902	)	 	58,608		
Change in fair value of cross currency interest rate swaps	(53,142	)	 	107,531		 	28,125		 	(52,491	)	
Total impact to statements of income - income (expense)	$	20,311		 	1,063		 	17,223		 	6,117		

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

17

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 operations. 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 operations and are accounted for as a change in fair value of such derivative. During the three and nine months ended September 30, 2011 , the Company terminated and/or amended certain derivatives for net payments of $9.5 million and net proceeds of $2.3 million , respectively. During the three and nine months ended September 30, 2010 , the Company terminated and/or amended certain derivatives for net proceeds of $0.4 million and $14.4 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	 	As of	 	As of	 	As of	
 	September 30, 2011	 	December 31, 2010	 	September 30, 2011	 	December 31, 2010	
1:3 basis swaps	$	7,479		 	10,489		 	770		 	44		
T-Bill/LIBOR basis swaps	13		 	—		 	7		 	201		
Interest rate swaps - floor income hedges	—		 	10,569		 	25,760		 	15,372		
Interest rate swaps - hybrid debt hedges	—		 	1,132		 	22,535		 	470		
Cross-currency interest rate swaps	123,043		 	94,918		 	—		 	—		
Other	85		 	1,238		 	275		 	2		
Total	$	130,620		 	118,346		 	49,347		 	16,089		

The following table summarizes the effect of derivative instruments in the consolidated statements of operations. 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 operations.

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Derivatives not designated as hedging	 	Three months ended September 30,	 	Nine months ended September 30,	
 	 	2011	 	2010	 	2011	 	2010	
Settlements:	 	 		 	 		 	 		 	 		
1:3 basis swaps	 	$	321		 	893		 	902		 	974		
T-Bill/LIBOR basis swaps	 	(69	)	 	—		 	(263	)	 	—		
Interest rate swaps - floor income hedges	 	(3,482	)	 	(4,040	)	 	(16,045	)	 	(12,183	)	
Interest rate swaps - hybrid debt hedges	 	(250	)	 	(242	)	 	(744	)	 	(242	)	
Cross-currency interest rate swaps	 	3,745		 	1,025		 	8,625		 	3,243		
Other	 	(8	)	 	(222	)	 	108		 	(178	)	
Total settlements - income (expense)	 	257		 	(2,586	)	 	(7,417	)	 	(8,386	)	
Change in fair value:	 	 		 	 		 	 		 	 		
1:3 basis swaps	 	1,702		 	1,258		 	(3,736	)	 	7,012		
T-Bill/LIBOR basis swaps	 	87		 	(221	)	 	208		 	15		
Interest rate swaps - floor income hedges	 	(15,423	)	 	(26,736	)	 	(20,137	)	 	(34,284	)	
Interest rate swaps - hybrid debt hedges	 	(20,747	)	 	(6,031	)	 	(23,196	)	 	(11,352	)	
Cross-currency interest rate swaps	 	(53,142	)	 	107,531		 	28,125		 	(52,491	)	
Other	 	182		 	(2,138	)	 	53		 	(3,439	)	
Total change in fair value - (expense) income	 	(87,341	)	 	73,663		 	(18,683	)	 	(94,539	)	
 	 	 	 	 	 	 	 	 	
Re-measurement of Euro Notes (foreign currency	 	 	 	 	 	 	 	 	
transaction adjustment) - income (expense)	 	73,453		 	(106,468	)	 	(10,902	)	 	58,608		
 	 	 	 	 	 	 	 	 	
Derivative market value and foreign currency	 	 	 	 	 	 	 	 	
adjustments and derivative settlements - (expense) income	 	$	(13,631	)	 	(35,391	)	 	(37,002	)	 	(44,317	)	

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 September 30, 2011 , the Company had $48.5 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 September 30, 2011 , the trustee for the Company’s asset-backed securities transactions held $100.3 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 September 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 September 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 September 30, 2011 and December 31, 2010 , the Company had $9.6 million and $4.9 million , respectively,  invested in the trusts, and such investments 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 September 30, 2011 , the outstanding balance of investments in the trusts was $326.1 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 and nine months ended September 30, 2011 , the Company recognized $2.9 million and $4.1 million , respectively, of fee revenue related to this agreement which is included in “other income” in the accompanying consolidated statements of income.

7.    Intangible Assets

Intangible assets consist of the following:

	
										
 	Weighted
average
remaining
useful life as of
September 30,
2011 (months)	 	As of September 30, 2011	 	As of December 31, 2010	
Amortizable intangible assets:	 	 	 	
Customer relationships (net of accumulated amortization of	 	 	 	 	 	
$58,450 and $49,743, respectively)	64		 	$	26,656		 	28,576		
Computer software (net of accumulated amortization of	 	 	 	 	 	
$4,399 and $2,419, respectively)	16		 	3,519		 	5,499		
Trade names (net of accumulated amortization of	 	 	 	 	 	
$8,694 and $6,956, respectively)	15		 	2,899		 	4,637		
Total - amortizable intangible assets	54		 	$	33,074		 	38,712		

The Company recorded amortization expense on its intangible assets of $4.5 million and $5.4 million for the three months ended September 30, 2011 and 2010 , respectively, and $12.4 million and $18.1 million for the nine months ended September 30, 2011 and 2010 , respectively. The Company will continue to amortize intangible assets over their remaining useful lives.  As of September 30, 2011 , the Company estimates it will record amortization expense as follows:

	
				
2011 (October 1 - December 31)	$	4,491		
2012	17,531		
2013	4,286		
2014	2,429		
2015	925		
2016 and thereafter	3,412		
 	$	33,074		

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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 September 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 initial purchase price is subject to adjustment based on customer retention.  In September 2011, the Company received approximately $51,000 as an adjustment to the purchase price. The final adjustment to purchase price, if any, will occur on May 31, 2012.  Substantially all of the purchase price was allocated to a customer relationship intangible asset that is being amortized over three years.

8.    Goodwill

The following table summarizes the Company’s allocation of goodwill by operating segment as of September 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 , $ 0.10 , and $0.10 per share on the Company’s Class A and Class B common stock were paid on March 15, 2011 , June 15, 2011 , and September 15, 2011 respectively, to all holders of record as of March 1, 2011 , June 1, 2011 , and September 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 December 15, 2011 to all holders of record as of December 1, 2011 .

Stock Repurchases

Shares repurchased by the Company during 2011 are shown in the table below.

												
 	 	Total shares repurchased	 	Purchase price (in thousands)	 	Average price of shares repurchased (per share)	
 	 		 		 		
Three months ended March 31, 2011	 	14,465		 	$	310		 	$	21.44		
 	 	 	 	 	 	 	
Three months ended June 30, 2011	 	9,979		 	224		 	22.39		
 	 	 	 	 	 	 	
Three months ended September 30, 2011	 	1,097,441		 	20,596		 	18.77		
 	 	 	 	 	 	 	
Nine months ended September 30, 2011	 	1,121,885		 	$	21,130		 	$	18.83		

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

21

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 September 30,	 	Nine months ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Net income (loss) attributable to Nelnet, Inc.	$	47,451		 	(368	)	 	139,456		 	103,947		
Less earnings (loss) allocated to holders of unvested	 	 	 	 	 	 	 	
restricted stock	303		 	(4	)	 	873		 	671		
Net income (loss) available to common stockholders	$	47,148		 	(364	)	 	138,583		 	103,276		
 	 	 	 	 	 	 	 	
Weighted average common shares outstanding - basic	48,059,747		 	48,938,333		 	48,177,539		 	49,460,625		
Dilutive effect of the assumed vesting of	 	 	 	 	 	 	 	
restricted stock awards	194,141		 	—		 	190,384		 	202,880		
Weighted average common shares outstanding - diluted	48,253,888		 	48,938,333		 	48,367,923		 	49,663,505		
 	 	 	 	 	 	 	 	
Basic earnings (loss) per common share	$	0.98		 	(0.01	)	 	2.88		 	2.09		
 	 	 	 	 	 	 	 	
Diluted earnings (loss) per common share	$	0.98		 	(0.01	)	 	2.87		 	2.08		

No diluted effect of the assumed vesting of restricted stock awards is presented for the three months ended September 30, 2010 as the Company reported a net loss and including these shares would have been antidilutive for the period. The dilutive effect of these shares if the Company had net income for the period was not significant.

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

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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.

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 call center solutions. The majority of interactive marketing revenue

23

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 by the Department of Education 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.

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.

24

Segment Results and Reconciliations to GAAP

																															
 	Three months ended September 30, 2011	
 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Student
Loan
and
Guaranty
Servicing	 	Tuition
Payment
Processing
and
Campus
Commerce	 	Enrollment
Services	 	Total Fee-
Based	 	Asset
Generation and
Management	 	Corporate
Activity
and
Overhead	 	Eliminations	 	Base Net
Income	 	Adjustments
to GAAP
Results	 	GAAP
Results of
Operations	
Total interest income	$	15		 	11		 	—		 	26		 	157,071		 	1,285		 	(755	)	 	157,627		 	—		 	157,627		
Interest expense	—		 	—		 	—		 	—		 	59,049		 	2,572		 	(755	)	 	60,866		 	—		 	60,866		
Net interest income (loss)	15		 	11		 	—		 	26		 	98,022		 	(1,287	)	 	—		 	96,761		 	—		 	96,761		
Less provision for loan losses	—		 	—		 	—		 	—		 	5,250		 	—		 	—		 	5,250		 	—		 	5,250		
Net interest income (loss)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
after provision for loan losses	15		 	11		 	—		 	26		 	92,772		 	(1,287	)	 	—		 	91,511		 	—		 	91,511		
Other income (expense):	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Loan and guaranty servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue	37,927		 	—		 	—		 	37,927		 	—		 	—		 	—		 	37,927		 	—		 	37,927		
Intersegment servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue	16,622		 	—		 	—		 	16,622		 	—		 	—		 	(16,622	)	 	—		 	—		 	—		
Tuition payment processing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
and campus commerce revenue	—		 	16,774		 	—		 	16,774		 	—		 	—		 	—		 	16,774		 	—		 	16,774		
Enrollment services revenue	—		 	—		 	35,505		 	35,505		 	—		 	—		 	—		 	35,505		 	—		 	35,505		
Software services revenue	4,622		 	—		 	—		 	4,622		 	—		 	—		 	—		 	4,622		 	—		 	4,622		
Other income	—		 	—		 	—		 	—		 	3,694		 	237		 	—		 	3,931		 	—		 	3,931		
Gain on sale of loans and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
debt repurchases	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		
Derivative market value and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
foreign currency adjustments	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(13,888	)	 	(13,888	)	
Derivative settlements, net	—		 	—		 	—		 	—		 	507		 	(250	)	 	—		 	257		 	—		 	257		
Total other income (expense)	59,171		 	16,774		 	35,505		 	111,450		 	4,201		 	(13	)	 	(16,622	)	 	99,016		 	(13,888	)	 	85,128		
Operating expenses:	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Salaries and benefits	25,335		 	7,594		 	6,484		 	39,413		 	694		 	4,025		 	—		 	44,132		 	—		 	44,132		
Cost to provide enrollment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
services	—		 	—		 	23,825		 	23,825		 	—		 	—		 	—		 	23,825		 	—		 	23,825		
Depreciation and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
amortization	2,005		 	286		 	784		 	3,075		 	—		 	352		 	—		 	3,427		 	4,490		 	7,917		
Restructure expense	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		
Other	14,420		 	2,302		 	2,129		 	18,851		 	3,311		 	6,742		 	—		 	28,904		 	—		 	28,904		
Intersegment expenses, net	1,291		 	1,166		 	783		 	3,240		 	16,865		 	(3,483	)	 	(16,622	)	 	—		 	—		 	—		
Total operating expenses	43,051		 	11,348		 	34,005		 	88,404		 	20,870		 	7,636		 	(16,622	)	 	100,288		 	4,490		 	104,778		
Income (loss) before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes and corporate overhead allocation	16,135		 	5,437		 	1,500		 	23,072		 	76,103		 	(8,936	)	 	—		 	90,239		 	(18,378	)	 	71,861		
Corporate overhead allocation	(963	)	 	(321	)	 	(321	)	 	(1,605	)	 	(1,605	)	 	3,210		 	—		 	—		 	—		 	—		
Income (loss) before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes	15,172		 	5,116		 	1,179		 	21,467		 	74,498		 	(5,726	)	 	—		 	90,239		 	(18,378	)	 	71,861		
Income tax (expense) benefit	(5,765	)	 	(1,944	)	 	(448	)	 	(8,157	)	 	(27,902	)	 	4,665		 	—		 	(31,394	)	 	6,984		 	(24,410	)	
Net income (loss)	$	9,407		 	3,172		 	731		 	13,310		 	46,596		 	(1,061	)	 	—		 	58,845		 	(11,394	)	 	47,451		

25

	
																															
 	Three months ended September 30, 2010	
 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Student
Loan
and
Guaranty
Servicing	 	Tuition
Payment
Processing
and
Campus
Commerce	 	Enrollment
Services	 	Total Fee-Based	 	Asset
Generation
and
Management	 	Corporate
Activity
and
Overhead	 	Eliminations	 	Base Net
Income	 	Adjustments
to GAAP
Results	 	GAAP
Results of
Operations	
Total interest income	$	13		 	12		 	—		 	25		 	159,752		 	1,919		 	(1,240	)	 	160,456		 	—		 	160,456		
Interest expense	—		 	—		 	—		 	—		 	64,302		 	5,181		 	(1,240	)	 	68,243		 	—		 	68,243		
Net interest income (loss)	13		 	12		 	—		 	25		 	95,450		 	(3,262	)	 	—		 	92,213		 	—		 	92,213		
Less provision for loan losses	—		 	—		 	—		 	—		 	5,500		 	—		 	—		 	5,500		 	—		 	5,500		
Net interest income (loss)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
after provision for loan losses	13		 	12		 	—		 	25		 	89,950		 	(3,262	)	 	—		 	86,713		 	—		 	86,713		
Other income (expense):	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Loan and guaranty servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue	33,464		 	—		 	—		 	33,464		 	—		 	—		 	—		 	33,464		 	—		 	33,464		
Intersegment servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue	20,022		 	—		 	—		 	20,022		 	—		 	—		 	(20,022	)	 	—		 	—		 	—		
Tuition payment processing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
and campus commerce revenue	—		 	14,527		 	—		 	14,527		 	—		 	—		 	—		 	14,527		 	—		 	14,527		
Enrollment services revenue	—		 	—		 	36,439		 	36,439		 	—		 	—		 	—		 	36,439		 	—		 	36,439		
Software services revenue	4,624		 	—		 	—		 	4,624		 	—		 	—		 	—		 	4,624		 	—		 	4,624		
Other income	—		 	—		 	—		 	—		 	4,710		 	4,722		 	—		 	9,432		 	—		 	9,432		
Gain on sale of loans and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
debt repurchases	—		 	—		 	—		 	—		 	4,963		 	4,922		 	—		 	9,885		 	—		 	9,885		
Derivative market value and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
foreign currency adjustments	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(32,805	)	 	(32,805	)	
Derivative settlements, net	—		 	—		 	—		 	—		 	(2,131	)	 	(455	)	 	—		 	(2,586	)	 	—		 	(2,586	)	
Total other income (expense)	58,110		 	14,527		 	36,439		 	109,076		 	7,542		 	9,189		 	(20,022	)	 	105,785		 	(32,805	)	 	72,980		
Operating expenses:	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Salaries and benefits	22,682		 	6,652		 	6,142		 	35,476		 	1,054		 	4,615		 	(60	)	 	41,085		 	—		 	41,085		
Litigation settlement	—		 	—		 	—		 	—		 	—		 	55,000		 	—		 	55,000		 	—		 	55,000		
Cost to provide enrollment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
services	—		 	—		 	23,709		 	23,709		 	—		 	—		 	—		 	23,709		 	—		 	23,709		
Depreciation and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
amortization	1,362		 	330		 	1,624		 	3,316		 	—		 	354		 	—		 	3,670		 	5,355		 	9,025		
Restructure expense	4,751		 	—		 	—		 	4,751		 	—		 	—		 	—		 	4,751		 	—		 	4,751		
Other	12,470		 	2,053		 	2,556		 	17,079		 	2,937		 	6,701		 	—		 	26,717		 	—		 	26,717		
Intersegment expenses, net	1,166		 	973		 	701		 	2,840		 	20,295		 	(3,173	)	 	(19,962	)	 	—		 	—		 	—		
Total operating expenses	42,431		 	10,008		 	34,732		 	87,171		 	24,286		 	63,497		 	(20,022	)	 	154,932		 	5,355		 	160,287		
Income (loss) before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes and corporate overhead allocation	15,692		 	4,531		 	1,707		 	21,930		 	73,206		 	(57,570	)	 	—		 	37,566		 	(38,160	)	 	(594	)	
Corporate overhead allocation	(1,676	)	 	(559	)	 	(559	)	 	(2,794	)	 	(2,793	)	 	5,587		 	—		 	—		 	—		 	—		
Income (loss) before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes	14,016		 	3,972		 	1,148		 	19,136		 	70,413		 	(51,983	)	 	—		 	37,566		 	(38,160	)	 	(594	)	
Income tax (expense) benefit	(5,326	)	 	(1,510	)	 	(436	)	 	(7,272	)	 	(26,757	)	 	19,754		 	—		 	(14,275	)	 	14,501		 	226		
Net income (loss)	$	8,690		 	2,462		 	712		 	11,864		 	43,656		 	(32,229	)	 	—		 	23,291		 	(23,659	)	 	(368	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Additional information:	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Net income (loss)	$	8,690		 	2,462		 	712		 	11,864		 	43,656		 	(32,229	)	 	—		 	23,291		 	 	 	 	
Plus: Litigation settlement (a)	—		 	—		 	—		 	—		 	—		 	55,000		 	—		 	55,000		 	 	 	 	
Plus: Restructure expense (b)	4,751		 	—		 	—		 	4,751		 	—		 	—		 	—		 	4,751		 	 	 	 	
Less: Net tax effect	(1,805	)	 	—		 	—		 	(1,805	)	 	—		 	(20,900	)	 	—		 	(22,705	)	 	 	 	 	
Net income (loss), excluding	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
litigation settlement and restructure expense	$	11,636		 	2,462		 	712		 	14,810		 	43,656		 	1,871		 	—		 	60,337		 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(a) During the third quarter of 2010, the Company recorded a $55.0 million litigation settlement charge.	
(b) During 2010, the Company recorded restructuring charges associated with previously implemented restructuring plans.	

26

	
																															
 	Nine months ended September 30, 2011	
 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Student
Loan
and
Guaranty
Servicing	 	Tuition
Payment
Processing
and
Campus
Commerce	 	Enrollment
Services	 	Total Fee-
Based	 	Asset
Generation and
Management	 	Corporate
Activity
and
Overhead	 	Eliminations	 	Base Net
Income	 	Adjustments
to GAAP
Results	 	GAAP
Results of
Operations	
Total interest income	$	42		 	19		 	—		 	61		 	433,994		 	3,578		 	(2,132	)	 	435,501		 	—		 	435,501		
Interest expense	—		 	—		 	—		 	—		 	158,034		 	8,325		 	(2,132	)	 	164,227		 	—		 	164,227		
Net interest income (loss)	42		 	19		 	—		 	61		 	275,960		 	(4,747	)	 	—		 	271,274		 	—		 	271,274		
Less provision for loan losses	—		 	—		 	—		 	—		 	14,250		 	—		 	—		 	14,250		 	—		 	14,250		
Net interest income (loss)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
after provision for loan losses	42		 	19		 	—		 	61		 	261,710		 	(4,747	)	 	—		 	257,024		 	—		 	257,024		
Other income (expense):	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Loan and guaranty servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue	110,952		 	—		 	—		 	110,952		 	—		 	—		 	—		 	110,952		 	—		 	110,952		
Intersegment servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue	51,272		 	—		 	—		 	51,272		 	—		 	—		 	(51,272	)	 	—		 	—		 	—		
Tuition payment processing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
and campus commerce revenue	—		 	50,904		 	—		 	50,904		 	—		 	—		 	—		 	50,904		 	—		 	50,904		
Enrollment services revenue	—		 	—		 	101,688		 	101,688		 	—		 	—		 	—		 	101,688		 	—		 	101,688		
Software services revenue	13,745		 	—		 	—		 	13,745		 	—		 	—		 	—		 	13,745		 	—		 	13,745		
Other income	—		 	—		 	—		 	—		 	11,827		 	5,422		 	—		 	17,249		 	—		 	17,249		
Gain on sale of loans and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
debt repurchases	—		 	—		 	—		 	—		 	1,400		 	6,907		 	—		 	8,307		 	—		 	8,307		
Derivative market value and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
foreign currency adjustments	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(29,585	)	 	(29,585	)	
Derivative settlements, net	—		 	—		 	—		 	—		 	(6,805	)	 	(612	)	 	—		 	(7,417	)	 	—		 	(7,417	)	
Total other income (expense)	175,969		 	50,904		 	101,688		 	328,561		 	6,422		 	11,717		 	(51,272	)	 	295,428		 	(29,585	)	 	265,843		
Operating expenses:	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Salaries and benefits	75,454		 	21,995		 	18,672		 	116,121		 	2,181		 	12,623		 	—		 	130,925		 	—		 	130,925		
Cost to provide enrollment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
services	—		 	—		 	68,804		 	68,804		 	—		 	—		 	—		 	68,804		 	—		 	68,804		
Depreciation and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
amortization	4,647		 	967		 	2,377		 	7,991		 	—		 	1,046		 	—		 	9,037		 	12,425		 	21,462		
Restructure expense	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		
Other	43,604		 	7,263		 	6,889		 	57,756		 	9,988		 	16,032		 	—		 	83,776		 	—		 	83,776		
Intersegment expenses, net	3,720		 	3,377		 	2,560		 	9,657		 	52,059		 	(10,444	)	 	(51,272	)	 	—		 	—		 	—		
Total operating expenses	127,425		 	33,602		 	99,302		 	260,329		 	64,228		 	19,257		 	(51,272	)	 	292,542		 	12,425		 	304,967		
Income (loss) before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes and corporate overhead allocation	48,586		 	17,321		 	2,386		 	68,293		 	203,904		 	(12,287	)	 	—		 	259,910		 	(42,010	)	 	217,900		
Corporate overhead allocation	(2,949	)	 	(983	)	 	(983	)	 	(4,915	)	 	(4,914	)	 	9,829		 	—		 	—		 	—		 	—		
Income (loss) before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes	45,637		 	16,338		 	1,403		 	63,378		 	198,990		 	(2,458	)	 	—		 	259,910		 	(42,010	)	 	217,900		
Income tax (expense) benefit	(17,340	)	 	(6,208	)	 	(533	)	 	(24,081	)	 	(75,616	)	 	5,289		 	—		 	(94,408	)	 	15,964		 	(78,444	)	
Net income (loss)	$	28,297		 	10,130		 	870		 	39,297		 	123,374		 	2,831		 	—		 	165,502		 	(26,046	)	 	139,456		

27

	
																															
 	Nine months ended September 30, 2010	
 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Student
Loan
and
Guaranty
Servicing	 	Tuition
Payment
Processing
and
Campus
Commerce	 	Enrollment
Services	 	Total Fee-Based	 	Asset
Generation
and
Management	 	Corporate
Activity
and
Overhead	 	Eliminations	 	Base Net
Income	 	Adjustments
to GAAP
Results	 	GAAP
Results of
Operations	
Total interest income	$	43		 	24		 	—		 	67		 	450,715		 	5,439		 	(3,140	)	 	453,081		 	—		 	453,081		
Interest expense	—		 	—		 	—		 	—		 	164,063		 	17,422		 	(3,140	)	 	178,345		 	—		 	178,345		
Net interest income (loss)	43		 	24		 	—		 	67		 	286,652		 	(11,983	)	 	—		 	274,736		 	—		 	274,736		
Less provision for loan losses	—		 	—		 	—		 	—		 	16,700		 	—		 	—		 	16,700		 	—		 	16,700		
Net interest income (loss)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
after provision for loan losses	43		 	24		 	—		 	67		 	269,952		 	(11,983	)	 	—		 	258,036		 	—		 	258,036		
Other income (expense):	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Loan and guaranty servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue	106,764		 	—		 	—		 	106,764		 	—		 	(254	)	 	—		 	106,510		 	—		 	106,510		
Intersegment servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue	63,571		 	—		 	—		 	63,571		 	—		 	—		 	(63,571	)	 	—		 	—		 	—		
Tuition payment processing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
and campus commerce revenue	—		 	44,704		 	—		 	44,704		 	—		 	—		 	—		 	44,704		 	—		 	44,704		
Enrollment services revenue	—		 	—		 	105,113		 	105,113		 	—		 	—		 	—		 	105,113		 	—		 	105,113		
Software services revenue	14,467		 	—		 	—		 	14,467		 	—		 	—		 	—		 	14,467		 	—		 	14,467		
Other income	519		 	—		 	—		 	519		 	14,114		 	10,555		 	—		 	25,188		 	—		 	25,188		
Gain on sale of loans and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
debt repurchases	—		 	—		 	—		 	—		 	23,899		 	4,922		 	—		 	28,821		 	—		 	28,821		
Derivative market value and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
foreign currency adjustments	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(35,931	)	 	(35,931	)	
Derivative settlements, net	—		 	—		 	—		 	—		 	(7,931	)	 	(455	)	 	—		 	(8,386	)	 	—		 	(8,386	)	
Total other income (expense)	185,321		 	44,704		 	105,113		 	335,138		 	30,082		 	14,768		 	(63,571	)	 	316,417		 	(35,931	)	 	280,486		
Operating expenses:	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Salaries and benefits	69,591		 	19,864		 	18,660		 	108,115		 	3,698		 	12,540		 	(1,662	)	 	122,691		 	—		 	122,691		
Litigation settlement	—		 	—		 	—		 	—		 	—		 	55,000		 	—		 	55,000		 	—		 	55,000		
Cost to provide enrollment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
services	—		 	—		 	69,845		 	69,845		 	—		 	—		 	—		 	69,845		 	—		 	69,845		
Depreciation and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
amortization	3,538		 	1,002		 	5,744		 	10,284		 	3		 	1,146		 	—		 	11,433		 	18,103		 	29,536		
Restructure expense	6,040		 	—		 	—		 	6,040		 	—		 	(20	)	 	—		 	6,020		 	—		 	6,020		
Other	45,638		 	6,433		 	7,563		 	59,634		 	10,147		 	19,339		 	—		 	89,120		 	—		 	89,120		
Intersegment expenses, net	4,158		 	2,626		 	1,775		 	8,559		 	63,011		 	(9,661	)	 	(61,909	)	 	—		 	—		 	—		
Total operating expenses	128,965		 	29,925		 	103,587		 	262,477		 	76,859		 	78,344		 	(63,571	)	 	354,109		 	18,103		 	372,212		
Income (loss) before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes and corporate overhead allocation	56,399		 	14,803		 	1,526		 	72,728		 	223,175		 	(75,559	)	 	—		 	220,344		 	(54,034	)	 	166,310		
Corporate overhead allocation	(4,349	)	 	(1,450	)	 	(1,450	)	 	(7,249	)	 	(7,247	)	 	14,496		 	—		 	—		 	—		 	—		
Income (loss) before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes	52,050		 	13,353		 	76		 	65,479		 	215,928		 	(61,063	)	 	—		 	220,344		 	(54,034	)	 	166,310		
Income tax (expense) benefit	(19,779	)	 	(5,076	)	 	(28	)	 	(24,883	)	 	(82,053	)	 	24,040		 	—		 	(82,896	)	 	20,533		 	(62,363	)	
Net income (loss)	$	32,271		 	8,277		 	48		 	40,596		 	133,875		 	(37,023	)	 	—		 	137,448		 	(33,501	)	 	103,947		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Additional information:	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Net income (loss)	$	32,271		 	8,277		 	48		 	40,596		 	133,875		 	(37,023	)	 	—		 	137,448		 	 	 	 	
Plus: Litigation settlement (a)	—		 	—		 	—		 	—		 	—		 	55,000		 	—		 	55,000		 	 	 	 	
Plus: Restructure expense (b)	6,040		 	—		 	—		 	6,040		 	—		 	(20	)	 	—		 	6,020		 	 	 	 	
Less: Net tax effect	(2,295	)	 	—		 	—		 	(2,295	)	 	—		 	(20,892	)	 	—		 	(23,187	)	 	 	 	 	
Net income (loss), excluding	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
litigation settlement and restructure expense	$	36,016		 	8,277		 	48		 	44,341		 	133,875		 	(2,935	)	 	—		 	175,281		 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(a) During the third quarter of 2010, the Company recorded a $55.0 million litigation settlement charge.	
(b) During 2010, the Company recorded restructuring charges associated with previously implemented restructuring plans.	

28

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
Loan
and
Guaranty
Servicing	 	Tuition
Payment
Processing
and Campus
Commerce	 	Enrollment
Services	 	Asset
Generation
and
Management	 	Corporate
Activity
and
Overhead	 	Total	
 	 	 	 	 	 	 	 	 	 	 	 	
 	Three months ended September 30, 2011	
Derivative market value and	 	 	 	 	 	 	 	 	 	 	 	
foreign currency adjustments (a)	$	—		 	—		 	—		 	(6,677	)	 	20,565		 	13,888		
Amortization of intangible	 	 	 	 	 	 	 	 	 	 	 	
assets (b)	2,099		 	1,513		 	878		 	—		 	—		 	4,490		
Net tax effect (c)	(798	)	 	(575	)	 	(334	)	 	2,537		 	(7,814	)	 	(6,984	)	
Total adjustments to GAAP	$	1,301		 	938		 	544		 	(4,140	)	 	12,751		 	11,394		
 	 	 	 	 	 	 	 	 	 	 	 	
 	Three months ended September 30, 2010	
Derivative market value and	 	 	 	 	 	 	 	 	 	 	 	
foreign currency adjustments (a)	$	—		 	—		 	—		 	24,966		 	7,839		 	32,805		
Amortization of intangible	 	 	 	 	 	 	 	 	 	 	 	
assets (b)	2,112		 	1,120		 	2,123		 	—		 	—		 	5,355		
Net tax effect (c)	(803	)	 	(426	)	 	(807	)	 	(9,487	)	 	(2,978	)	 	(14,501	)	
Total adjustments to GAAP	$	1,309		 	694		 	1,316		 	15,479		 	4,861		 	23,659		
 	 	 	 	 	 	 	 	 	 	 	 	
 	Nine months ended September 30, 2011	
Derivative market value and	 	 	 	 	 	 	 	 	 	 	 	
foreign currency adjustments (a)	$	—		 	—		 	—		 	6,443		 	23,142		 	29,585		
Amortization of intangible	 	 	 	 	 	 	 	 	 	 	 	
assets (b)	6,299		 	3,492		 	2,634		 	—		 	—		 	12,425		
Net tax effect (c)	(2,394	)	 	(1,327	)	 	(1,001	)	 	(2,448	)	 	(8,794	)	 	(15,964	)	
Total adjustments to GAAP	$	3,905		 	2,165		 	1,633		 	3,995		 	14,348		 	26,046		
 	 	 	 	 	 	 	 	 	 	 	 	
 	Nine months ended September 30, 2010	
Derivative market value and	 	 	 	 	 	 	 	 	 	 	 	
foreign currency adjustments (a)	$	—		 	—		 	—		 	20,955		 	14,976		 	35,931		
Amortization of intangible	 	 	 	 	 	 	 	 	 	 	 	
assets (b)	6,462		 	4,636		 	7,005		 	—		 	—		 	18,103		
Net tax effect (c)	(2,456	)	 	(1,763	)	 	(2,665	)	 	(7,963	)	 	(5,686	)	 	(20,533	)	
Total adjustments to GAAP	$	4,006		 	2,873		 	4,340		 	12,992		 	9,290		 	33,501		

(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.	

29

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 September 30, 2011	
 	Level 1	 	Level 2	 	Level 3	 	Total	
Assets:	 	 	 	 	 	 	 	
Investments (a)	$	14,263		 	—		 	35,571		 	49,834		
Fair value of derivative instruments (b)	—		 	130,620		 	—		 	130,620		
Total assets	$	14,263		 	130,620		 	35,571		 	180,454		
 	 	 	 	 	 	 	 	
Liabilities:	 		 	 		 	 		 	 		
Fair value of derivative instruments (b)	$	—		 	49,347		 	—		 	49,347		
Total liabilities	$	—		 	49,347		 	—		 	49,347		

	
													
 	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 that trade in active markets. 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 indicative quotes from broker dealers or 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.  	

When determining the fair value of derivatives, the Company takes into account counterparty credit risk for positions where it is exposed to the counterparty on a net basis by assessing exposure net of collateral held. The net exposures for each counterparty are adjusted based on market information available for the specific counterparty.

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

30

The following table presents a roll forward of the fair value of Level 3 assets during 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 realized and unrealized gains (losses) included in income, net (a)	(3,632	)	
Purchases	28,668		
Redemptions/Sales	(14,137	)	
 	 	
Balance at September 30, 2011	$	35,571		
 	 	
Total gains (losses) included in income attributable to the change in unrealized gains (losses) relating to Level 3 assets held at September 30, 2011: (a)	 	
 	 		
Three month period ended September 30, 2011	$	(4,303	)	
Nine month period ended September 30, 2011	(4,152	)	

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

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

	
													
 	As of September 30, 2011	 	As of December 31, 2010	
 	Fair value	 	Carrying value	 	Fair value	 	Carrying value	
Financial assets:	 	 	 	 	 	 	 	
Student loans receivable	$	24,254,401		 	24,641,614		 	24,836,538		 	23,948,014		
Student loans receivable - held for sale	—		 	—		 	84,987		 	84,987		
Cash and cash equivalents	92,094		 	92,094		 	283,801		 	283,801		
Investments - trading securities	49,834		 	49,834		 	43,236		 	43,236		
Restricted cash	375,394		 	375,394		 	453,748		 	453,748		
Restricted cash – due to customers	52,300		 	52,300		 	88,528		 	88,528		
Restricted investments	225,824		 	225,824		 	215,009		 	215,009		
Accrued interest receivable	331,071		 	331,071		 	318,152		 	318,152		
Derivative instruments	130,620		 	130,620		 	118,346		 	118,346		
 	 	 	 	 	 	 	 	
Financial liabilities:	 		 	 		 	 		 	 		
Bonds and notes payable	23,819,415		 	24,926,512		 	24,651,191		 	24,672,472		
Accrued interest payable	16,965		 	16,965		 	19,153		 	19,153		
Due to customers	52,300		 	52,300		 	88,528		 	88,528		
Derivative instruments	49,347		 	49,347		 	16,089		 	16,089		

31

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, cost of funds, required return on equity, and future interest rates and indice relationships. A number of significant inputs into the models are internally derived and not observable to market participants.

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

Bonds and notes payable are accounted for at cost in the financial statements except when denominated in a foreign currency. Foreign currency-denominated borrowings are re-measured at current spot rates in the financial statements. The fair value of bonds and notes payable was determined from quotes from broker dealers or through standard bond pricing models using the stated terms of the borrowings, observable yield curves, and market credit spreads. Fair value adjustments for unsecured corporate debt are made based on indicative quotes from observable trades.

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.

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

32

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.  On September 12, 2011, the motion for stay was granted, and the motion for reconsideration was denied by the District Court. On September 20, 2011, the named plaintiff filed a motion for reconsideration of the District Court's order, which is set for hearing on November 22, 2011.

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 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 nine months ended September 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.

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 analysis 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	

33

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, regulations, and government programs, including the discontinuance of private sector student loan originations under the FFEL Program effective July 1, 2010, the uncertain nature of the potential impact of the Department's new loan consolidation program, 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 conditions, which have recently led to higher rates of student loan defaults, changes in 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.

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.

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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 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 nine months of 2011 , the Company purchased $2.7 billion of FFELP student loans.

In addition, on October 25, 2011, The White House and the Department announced a short-term consolidation program to eligible student loan borrowers. The Department's program will allow student loan borrowers with at least one legacy FFELP loan and at least one federal student loan owned by the Department to convert those loans to Special Direct Consolidation Loans under the Federal Direct Loan Program. The Company currently owns approximately $3 billion of FFEL Program loans that the Company believes will be eligible for the new program. This program could reduce the Company's FFEL Program student loan portfolio and related net interest income. See Part II, Item 1A, "Risk Factors," for further information related to this program and the potential impact to the Company.

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. Revenue earned from servicing federally-owned student loans is included in the Student Loan and Guaranty Servicing operating segment. A summary of revenue from the Company’s fee-based businesses is shown below.

	
													
 	Three months ended September 30,	 	 	 	 	
 	2011	 	2010	 	$ Change	 	% Change	
Student Loan and Guaranty Servicing (a)	$	42,564		 	38,101		 	4,463		 	11.7	 %	
Tuition Payment Processing and Campus Commerce	16,785		 	14,539		 	2,246		 	15.4		
Enrollment Services (b)	35,505		 	36,439		 	(934	)	 	(2.6	)	
Total revenue from fee-based businesses	$	94,854		 	89,079		 	5,775		 	6.5	 %	
 	 	 	 	 	 	 	 	
 	Nine months ended September 30,	 	 		 	 		
 	2011	 	2010	 	$ Change	 	% Change	
Student Loan and Guaranty Servicing (a)	$	124,739		 	121,793		 	2,946		 	2.4	 %	
Tuition Payment Processing and Campus Commerce	50,923		 	44,728		 	6,195		 	13.9		
Enrollment Services (b)	101,688		 	105,113		 	(3,425	)	 	(3.3	)	
Total revenue from fee-based businesses	$	277,350		 	271,634		 	5,716		 	2.1	 %	

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(a)	The Student Loan and Guaranty Servicing operating segment included $8.6 million and $5.3 million of revenue earned from rehabilitation collections on defaulted loans for the three months ended September 30, 2011 and 2010 , respectively, and $24.2 million and $27.6 million for the nine months ended September 30, 2011 and 2010 , respectively.	

(b)	Enrollment services revenue has been negatively 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.”	

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.	

The Company's revenue and income before taxes related to its fee-based operating segments for the nine months ended September 30, 2011 was $336 million and $61 million, respectively.

Hosted Servicing Software Revenue

The Company offers a hosted servicing software solution that can be used by third parties to service various types of student loans, including Federal Direct Loan Program and FFEL Program loans. Currently, including a contract with an incumbent Direct Loan Program service provider, the Company has agreements with third parties to add more than 12 million borrowers to its hosted servicing software solution. The Company does not provide servicing of loans as part of these agreements. In October 2011, the Company began hosting student loan servicing volume on its servicing software platforms. As of October 31, 2011, more than 9.5 million borrowers were hosted on these platforms. The Company will begin to recognize this additional software services revenue in the fourth quarter of 2011.

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Manage Operating Costs

Excluding a litigation settlement and restructuring charges recognized in 2010, operating expenses increased $4.2 million ( 4.2% ) for the three months ended September 30, 2011 and decreased $6.2 million ( 2.0% ) for the nine months ended September 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.

The Company has earned fixed rate floor income as summarized below:

													
 	Three months ended September 30,	 	Nine months ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Fixed rate floor income, gross	$	44,080		 	38,263		 	121,126		 	112,731		
Derivative settlements (a)	(3,482	)	 	(4,040	)	 	(16,045	)	 	(12,183	)	
Fixed rate floor income, net	$	40,598		 	34,223		 	105,081		 	100,548		
 	 	 	 	 	 	 	 	
Fixed rate floor income contribution to spread, net	0.65	%	 	0.51	%	 	0.59	%	 	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 September 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 $1.83 billion as detailed below.  The $1.83 billion includes approximately $330 million (as of September 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 September 30, 2011 , the Company had $21.5 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 September 30, 2011 .

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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 $370 million to $430 million .

On October 25, 2011, The White House and the Department announced a short-term consolidation program to eligible student loan borrowers. The Department's program will allow student loan borrowers with at least one legacy FFELP loan and at least one federal student loan owned by the Department to convert those loans to Special Direct Consolidation Loans under the Federal Direct Loan Program. The Company currently owns approximately $3 billion of FFEL Program loans that the Company believes will be eligible for the new program, of which approximately $2 billion are permanently funded in asset-backed securitizations, and the forecased cash flows from these loans are included in the table above. This program could increase the prepayments on the loans eligible for this program and decrease the forecasted cash flows. See Part II, Item 1A, "Risk Factors," for further information related to this program and the potential impact to the Company.

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 September 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 $25.8 million . See Item 3, “Quantitative and Qualitative Disclosures about Market Risk — Interest Rate Risk.”

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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 stock repurchases, debt repurchases, and dividend distributions.

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

•	FFELP Student Loan Acquisitions	
		
-	Purchased $2.7 billion of FFELP student loans through September 30, 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	
		
-	Repurchased 1.1 million shares of common stock through September 30, 2011 for $21.1 million ($18.83 per share)	
		
-	Repurchased $74.8 million notional amount of debt through September 30, 2011 recognizing a gain of $7.0 million	
		
-	Raised the quarterly dividend paid on the Company’s common stock to $0.10 per share ($13.1 million of dividends paid through September 30, 2011)	

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/accretion 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.

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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.

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 and accrued interest 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.	

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•	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.

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 nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010

Net Interest Income (net of settlements on derivatives)

	
																										
 	Three months ended September 30,	 	Nine months ended September 30,	
 	 	 	 	 	Change	 	 	 	 	 	Change	
 	2011	 	2010	 	$	 	%	 	2011	 	2010	 	$	 	%	
Interest income:	 	 	 	 	 	 	 		 	 		 	 		 	 	 	 		
Loan interest	$	156,955		 	159,287		 	(2,332	)	 	(1.5	)%	 	$	433,247		 	449,607		 	(16,360	)	 	(3.6	)%	
Investment interest	672		 	1,169		 	(497	)	 	(42.5	)	 	2,254		 	3,474		 	(1,220	)	 	(35.1	)	
Total interest income	157,627		 	160,456		 	(2,829	)	 	(1.8	)	 	435,501		 	453,081		 	(17,580	)	 	(3.9	)	
Interest expense:	 		 	 		 	 	 	 	 	 		 	 		 	 	 	 	
Interest on bonds and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
notes payable	60,866		 	68,243		 	(7,377	)	 	(10.8	)	 	164,227		 	178,345		 	(14,118	)	 	(7.9	)	
Net interest income	96,761		 	92,213		 	4,548		 	4.9		 	271,274		 	274,736		 	(3,462	)	 	(1.3	)	
Provision for loan losses	5,250		 	5,500		 	(250	)	 	(4.5	)	 	14,250		 	16,700		 	(2,450	)	 	(14.7	)	
Net interest income after	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
provision for loan losses	91,511		 	86,713		 	4,798		 	5.5		 	257,024		 	258,036		 	(1,012	)	 	(0.4	)	
Derivative settlements,	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
net (a)	257		 	(2,586	)	 	2,843		 	(109.9	)	 	(7,417	)	 	(8,386	)	 	969		 	(11.6	)	
Net interest income after	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
provision for loan losses (net of settlements on derivatives)	$	91,768		 	84,127		 	7,641		 	9.1	 %	 	$	249,607		 	249,650		 	(43	)	 	—	 %	

(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.	

41

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

	
																										
 	Three months ended September 30,	 	Nine months ended September 30,	
 	 	 	 	 	Change	 	 	 	 	 	Change	
 	2011	 	2010	 	$	 	%	 	2011	 	2010	 	$	 	%	
Variable student loan interest	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
margin, net of settlements on derivatives (a)	$	58,320		 	59,416		 	(1,096	)	 	(1.8	)%	 	$	164,847		 	179,750		 	(14,903	)	 	(8.3	)%	
Fixed rate floor income,	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
net of settlements on derivatives (b)	40,598		 	34,223		 	6,375		 	18.6		 	105,081		 	100,548		 	4,533		 	4.5		
Investment interest (c)	672		 	1,169		 	(497	)	 	(42.5	)	 	2,254		 	3,474		 	(1,220	)	 	(35.1	)	
Corporate debt interest	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
expense (d)	(2,572	)	 	(5,181	)	 	2,609		 	(50.4	)	 	(8,325	)	 	(17,422	)	 	9,097		 	(52.2	)	
Provision for loan losses (e)	(5,250	)	 	(5,500	)	 	250		 	(4.5	)	 	(14,250	)	 	(16,700	)	 	2,450		 	(14.7	)	
Net interest income after	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
provision for loan losses (net of settlements on derivatives)	$	91,768		 	84,127		 	7,641		 	9.1	 %	 	$	249,607		 	249,650		 	(43	)	 	—	 %	

(a)	Variable student loan spread is impacted by variable rate student loan interest, consolidation rebate fees, amortization/accretion of loan premiums and discounts, and interest expense on bonds and notes. See Item 2 under "Asset Generation and Management Operating Segment – Results of Operations" 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 nine months ended September 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 nine months ended September 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 nine months ended September 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.	

42

Other Income

	
																										
 	Three months ended September 30,	 	Nine months ended September 30,	
 	 	 	 	 	Change	 	 	 	 	 	Change	
 	2011	 	2010	 	  $	 	%	 	2011	 	2010	 	  $	 	%	
Loan and guaranty servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue (a)	$	37,927		 	33,464		 	4,463		 	13.3	 %	 	$	110,952		 	106,510		 	4,442		 	4.2	 %	
Tuition payment processing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
and campus commerce revenue (b)	16,774		 	14,527		 	2,247		 	15.5		 	50,904		 	44,704		 	6,200		 	13.9		
Enrollment services revenue (c)	35,505		 	36,439		 	(934	)	 	(2.6	)	 	101,688		 	105,113		 	(3,425	)	 	(3.3	)	
Software services revenue (d)	4,622		 	4,624		 	(2	)	 	—		 	13,745		 	14,467		 	(722	)	 	(5.0	)	
Other income (e)	3,931		 	9,432		 	(5,501	)	 	(58.3	)	 	17,249		 	25,188		 	(7,939	)	 	(31.5	)	
Gain on sale of loans and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
debt repurchases (f)	—		 	9,885		 	(9,885	)	 	(100.0	)	 	8,307		 	28,821		 	(20,514	)	 	(71.2	)	
Derivative market value and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
foreign currency adjustments (g)	(13,888	)	 	(32,805	)	 	18,917		 	(57.7	)	 	(29,585	)	 	(35,931	)	 	6,346		 	(17.7	)	
Derivative settlements, net (h)	257		 	(2,586	)	 	2,843		 	(109.9	)	 	(7,417	)	 	(8,386	)	 	969		 	(11.6	)	
Total other income	$	85,128		 	72,980		 	12,148		 	16.6	 %	 	$	265,843		 	280,486		 	(14,643	)	 	(5.2	)%	

(a)	"Loan and guaranty servicing revenue" increased for the three months ended September 30, 2011 compared to the same period in 2010 due to an increase in servicing revenue from the Department of Education and an increase in guaranty servicing revenue, partially offset by a decrease in FFELP servicing revenue. "Loan and guaranty servicing revenue" increased for the nine months ended September 30, 2011 compared to the same period in 2010 due to an increase in government servicing revenue, partially offset by decreases in FFELP servicing and guaranty servicing revenues. See Item 2 under "Student Loan and Guaranty Servicing Operating Segment – Results of Operations" for additional information.	

(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." Enrollment services revenue has been negatively 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 September 30,	 	Nine months ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Borrower late fee income	$	2,995		 	3,133		 	9,807		 	9,370		
Investment advisory fees	2,943		 	—		 	4,123		 	—		
529 Plan administration fees	468		 	1,495		 	2,039		 	4,052		
Investments - unrealized gains/(losses), net	(4,648	)	 	1,219		 	(2,820	)	 	1,830		
Other	2,173		 	3,585		 	4,100		 	9,936		
Other income	$	3,931		 	9,432		 	17,249		 	25,188		

43

(f)   “Gain on sale of loans and debt repurchases” includes the following:

	
																					
 	Three months ended September 30, 2011	 	Nine months ended September 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	11,654		 	11,654		 	—		 	12,254		 	12,199		 	55		
 	$	11,654		 	11,654		 	—		 	74,812		 	67,850		 	6,962		
Gain on sale of loans	 		 	 		 	—		 	 		 	 		 	1,345		
Gain on sale of loans and debt repurchases, net	 		 	 		 	$	—		 	 		 	 		 	$	8,307		
 	 	 	 	 	 	 	 	 	 	 	 	
 	Three months ended September 30, 2010	 	Nine months ended September 30, 2010	
 	Notional amount	 	Purchase price	 	Gain	 	Notional amount	 	Purchase price	 	Gain	
Gains on debt repurchases:	 		 	 		 	 		 	 		 	 		 	 		
Junior Subordinated Hybrid Securities	$	34,995		 	30,073		 	4,922		 	34,995		 	30,073		 	4,922		
Asset-backed securities	85,675		 	80,712		 	4,963		 	477,700		 	453,801		 	23,899		
 	$	120,670		 	110,785		 	9,885		 	512,695		 	483,874		 	28,821		

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 September 30,	 	Nine months ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Change in fair value of derivatives - income (expense)	$	(87,341	)	 	73,663		 	(18,683	)	 	(94,539	)	
Foreign currency transaction adjustment -	 	 	 	 	 	 	 	
 income (expense)	73,453		 	(106,468	)	 	(10,902	)	 	58,608		
Derivative market value and foreign currency	 	 	 	 	 	 	 	
adjustments - income (expense)	$	(13,888	)	 	(32,805	)	 	(29,585	)	 	(35,931	)	

(h)	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.	

Further detail of the components of derivative settlements is included in Item 3, "Quantitative and Qualitative Disclosures about Market Risk."

Operating Expenses

As shown below, excluding a litigation settlement and restructuring charges recognized in 2010, operating expenses increased $4.2 million (4.2%) for the three months ended September 30, 2011 and decreased $6.2 million (2.0%) for the nine months ended September 30, 2011 compared to the same periods in 2010 .

44

	
														
 	Three months ended September 30,	 	Change	
 	2011	 	2010	 	  $	 	%	
Salaries and benefits (a)	$	44,132		 	41,085		 	3,047		 	7.4	 %	
Cost to provide enrollment services (b)	23,825		 	23,709		 	116		 	0.5		
Depreciation and amortization (c)	7,917		 	9,025		 	(1,108	)	 	(12.3	)	
Other expenses (d)	28,904		 	26,717		 	2,187		 	8.2		
Total operating expenses, excluding litigation	 	 	 	 	 	 	 	
settlement and restructure expense	104,778		 	100,536		 	$	4,242		 	4.2	 %	
Litigation settlement (e)	—		 	55,000		 	 	 	 	
Restructure expense (f)	—		 	4,751		 	 	 	 	
Total operating expenses	$	104,778		 	160,287		 	 	 	 	
 	 	 	 	 	 	 	 	
 	Nine months ended September 30,	 	Change	
 	2011	 	2010	 	  $	 	%	
Salaries and benefits (a)	$	130,925		 	122,691		 	8,234		 	6.7	 %	
Cost to provide enrollment services (b)	68,804		 	69,845		 	(1,041	)	 	(1.5	)	
Depreciation and amortization (c)	21,462		 	29,536		 	(8,074	)	 	(27.3	)	
Other expenses (d)	83,776		 	89,120		 	(5,344	)	 	(6.0	)	
Total operating expenses, excluding litigation	 	 	 	 	 	 	 	
settlement and restructure expense	304,967		 	311,192		 	$	(6,225	)	 	(2.0	)%	
Litigation settlement (e)	—		 	55,000		 	 	 	 	
Restructure expense (f)	—		 	6,020		 	 	 	 	
Total operating expenses	$	304,967		 	372,212		 	 	 	 	

(a)	Salaries and benefits increased in the Student Loan and Guaranty Servicing operating segment as a result of additional costs incurred related to the government servicing contract and preparation of support for the hosted servicing software product. Salaries and benefits also increased in the Tuition Payment and Campus Commerce operating segment as a result of supporting the increase in the number of managed tuition payment plans and campus commerce customers. These increases were partially offset by a decrease in salaries and benefits in the Asset Generation and Management operating segment as a result of continued focus by the Company on managing costs and gaining efficiencies.	

(b)	Cost to provide enrollment services is impacted by changes in interactive marketing revenues. See Item 2 under “Enrollment Services Operating Segment – Results of Operations” for additional information.	

(c)	Depreciation and amortization decreased due to decreases in the amortization of intangible assets and student list costs.  	

(d)	Other expenses increased for the three months ended September 30, 2011 compared to the same period in 2010 due to increases in collection costs related to loan rehabilitation revenue and additional costs incurred related to the government servicing contract and preparation of support for the hosted servicing software product. These costs were partially offset by a decrease in consulting and professional fees, which were primarily legal costs associated with the Oberg litigation. Other expenses decreased for the nine months ended September 30, 2011 compared to the same period in 2010 due to a decrease in collection costs related to loan rehabilitation revenue, as well as a decrease in legal fees associated with the Oberg litigation. The decrease in other expenses was partially offset by an increase in costs related to the government servicing contract and preparation of support for the hosted servicing software product. In addition, the Company recognized an expense of $2.5 million in 2011 related to the Company's obligation to repurchase non-federally insured loans. No expense related to this obligation was incurred in 2010.	

(e)	On August 13, 2010, the Company reached an agreement in principal to pay $55.0 million to settle all claims associated with the "qui tam" action brought by Jon H. Oberg on behalf of the United States of America. The settlement agreement was finalized on October 25, 2010. As a result of the settlement, the Company recorded a $55.0 million pre-tax charge during the third quarter of 2010 and paid the settlement on November 3, 2010.	

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

45

Income Taxes

The Company’s effective tax rate was 34.0% and 36.0% for the three and nine months ended September 30, 2011 , respectively, compared to 38.0% , and 37.5% for the same periods in 2010 , respectively. 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.”

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

	
													
 	As of September 30, 2011	 	As of December 31, 2010	 	Change	
 		 		 	Dollars	 	Percent	
Assets:	 	 	 	 	 	 	 	
Student loans receivable, net	$	24,641,614		 	23,948,014		 	693,600		 	2.9	 %	
Student loans receivable - held for sale	—		 	84,987		 	(84,987	)	 	(100.0	)	
Cash, cash equivalents, and investments	795,446		 	1,084,322		 	(288,876	)	 	(26.6	)	
Goodwill	117,118		 	117,118		 	—		 	—		
Intangible assets, net	33,074		 	38,712		 	(5,638	)	 	(14.6	)	
Fair value of derivative instruments	130,620		 	118,346		 	12,274		 	10.4		
Other assets	518,355		 	502,393		 	15,962		 	3.2		
Total assets	$	26,236,227		 	25,893,892		 	342,335		 	1.3	 %	
Liabilities:	 		 	 		 	 		 	 		
Bonds and notes payable	$	24,926,512		 	24,672,472		 	254,040		 	1.0	 %	
Fair value of derivative instruments	49,347		 	16,089		 	33,258		 	206.7		
Other liabilities	248,885		 	298,698		 	(49,813	)	 	(16.7	)	
Total liabilities	25,224,744		 	24,987,259		 	237,485		 	1.0		
Shareholders' equity	1,011,483		 	906,633		 	104,850		 	11.6		
Total liabilities and shareholders' equity	$	26,236,227		 	25,893,892		 	342,335		 	1.3	 %	

Total assets and total liabilities increased in 2011. The increase in total assets was primarily due to the acquisition of $2.7 billion of FFEL Program loans, partially offset by a decrease of student loans which occurred as a result of repayments and the loss of loans to consolidation to external parties. The increase in total liabilities was primarily due to funding more student loan assets, partially offset by paying down on certain 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

46

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.

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.

47

Segment Results and Reconciliations to GAAP

																															
 	Three months ended September 30, 2011	
 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Student
Loan
and
Guaranty
Servicing	 	Tuition
Payment
Processing
and
Campus
Commerce	 	Enrollment
Services	 	Total Fee-
Based	 	Asset
Generation and
Management	 	Corporate
Activity
and
Overhead	 	Eliminations	 	Base Net
Income	 	Adjustments
to GAAP
Results	 	GAAP
Results of
Operations	
Total interest income	$	15		 	11		 	—		 	26		 	157,071		 	1,285		 	(755	)	 	157,627		 	—		 	157,627		
Interest expense	—		 	—		 	—		 	—		 	59,049		 	2,572		 	(755	)	 	60,866		 	—		 	60,866		
Net interest income (loss)	15		 	11		 	—		 	26		 	98,022		 	(1,287	)	 	—		 	96,761		 	—		 	96,761		
Less provision for loan losses	—		 	—		 	—		 	—		 	5,250		 	—		 	—		 	5,250		 	—		 	5,250		
Net interest income (loss)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
after provision for loan losses	15		 	11		 	—		 	26		 	92,772		 	(1,287	)	 	—		 	91,511		 	—		 	91,511		
Other income (expense):	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Loan and guaranty servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue	37,927		 	—		 	—		 	37,927		 	—		 	—		 	—		 	37,927		 	—		 	37,927		
Intersegment servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue	16,622		 	—		 	—		 	16,622		 	—		 	—		 	(16,622	)	 	—		 	—		 	—		
Tuition payment processing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
and campus commerce revenue	—		 	16,774		 	—		 	16,774		 	—		 	—		 	—		 	16,774		 	—		 	16,774		
Enrollment services revenue	—		 	—		 	35,505		 	35,505		 	—		 	—		 	—		 	35,505		 	—		 	35,505		
Software services revenue	4,622		 	—		 	—		 	4,622		 	—		 	—		 	—		 	4,622		 	—		 	4,622		
Other income	—		 	—		 	—		 	—		 	3,694		 	237		 	—		 	3,931		 	—		 	3,931		
Gain on sale of loans and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
debt repurchases	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		
Derivative market value and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
foreign currency adjustments	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(13,888	)	 	(13,888	)	
Derivative settlements, net	—		 	—		 	—		 	—		 	507		 	(250	)	 	—		 	257		 	—		 	257		
Total other income (expense)	59,171		 	16,774		 	35,505		 	111,450		 	4,201		 	(13	)	 	(16,622	)	 	99,016		 	(13,888	)	 	85,128		
Operating expenses:	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Salaries and benefits	25,335		 	7,594		 	6,484		 	39,413		 	694		 	4,025		 	—		 	44,132		 	—		 	44,132		
Cost to provide enrollment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
services	—		 	—		 	23,825		 	23,825		 	—		 	—		 	—		 	23,825		 	—		 	23,825		
Depreciation and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
amortization	2,005		 	286		 	784		 	3,075		 	—		 	352		 	—		 	3,427		 	4,490		 	7,917		
Restructure expense	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		
Other	14,420		 	2,302		 	2,129		 	18,851		 	3,311		 	6,742		 	—		 	28,904		 	—		 	28,904		
Intersegment expenses, net	1,291		 	1,166		 	783		 	3,240		 	16,865		 	(3,483	)	 	(16,622	)	 	—		 	—		 	—		
Total operating expenses	43,051		 	11,348		 	34,005		 	88,404		 	20,870		 	7,636		 	(16,622	)	 	100,288		 	4,490		 	104,778		
Income (loss) before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes and corporate overhead allocation	16,135		 	5,437		 	1,500		 	23,072		 	76,103		 	(8,936	)	 	—		 	90,239		 	(18,378	)	 	71,861		
Corporate overhead allocation	(963	)	 	(321	)	 	(321	)	 	(1,605	)	 	(1,605	)	 	3,210		 	—		 	—		 	—		 	—		
Income (loss) before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes	15,172		 	5,116		 	1,179		 	21,467		 	74,498		 	(5,726	)	 	—		 	90,239		 	(18,378	)	 	71,861		
Income tax (expense) benefit	(5,765	)	 	(1,944	)	 	(448	)	 	(8,157	)	 	(27,902	)	 	4,665		 	—		 	(31,394	)	 	6,984		 	(24,410	)	
Net income (loss)	$	9,407		 	3,172		 	731		 	13,310		 	46,596		 	(1,061	)	 	—		 	58,845		 	(11,394	)	 	47,451		

48

	
																															
 	Three months ended September 30, 2010	
 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Student
Loan
and
Guaranty
Servicing	 	Tuition
Payment
Processing
and
Campus
Commerce	 	Enrollment
Services	 	Total Fee-Based	 	Asset
Generation
and
Management	 	Corporate
Activity
and
Overhead	 	Eliminations	 	Base Net
Income	 	Adjustments
to GAAP
Results	 	GAAP
Results of
Operations	
Total interest income	$	13		 	12		 	—		 	25		 	159,752		 	1,919		 	(1,240	)	 	160,456		 	—		 	160,456		
Interest expense	—		 	—		 	—		 	—		 	64,302		 	5,181		 	(1,240	)	 	68,243		 	—		 	68,243		
Net interest income (loss)	13		 	12		 	—		 	25		 	95,450		 	(3,262	)	 	—		 	92,213		 	—		 	92,213		
Less provision for loan losses	—		 	—		 	—		 	—		 	5,500		 	—		 	—		 	5,500		 	—		 	5,500		
Net interest income (loss)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
after provision for loan losses	13		 	12		 	—		 	25		 	89,950		 	(3,262	)	 	—		 	86,713		 	—		 	86,713		
Other income (expense):	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Loan and guaranty servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue	33,464		 	—		 	—		 	33,464		 	—		 	—		 	—		 	33,464		 	—		 	33,464		
Intersegment servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue	20,022		 	—		 	—		 	20,022		 	—		 	—		 	(20,022	)	 	—		 	—		 	—		
Tuition payment processing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
and campus commerce revenue	—		 	14,527		 	—		 	14,527		 	—		 	—		 	—		 	14,527		 	—		 	14,527		
Enrollment services revenue	—		 	—		 	36,439		 	36,439		 	—		 	—		 	—		 	36,439		 	—		 	36,439		
Software services revenue	4,624		 	—		 	—		 	4,624		 	—		 	—		 	—		 	4,624		 	—		 	4,624		
Other income	—		 	—		 	—		 	—		 	4,710		 	4,722		 	—		 	9,432		 	—		 	9,432		
Gain on sale of loans and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
debt repurchases	—		 	—		 	—		 	—		 	4,963		 	4,922		 	—		 	9,885		 	—		 	9,885		
Derivative market value and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
foreign currency adjustments	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(32,805	)	 	(32,805	)	
Derivative settlements, net	—		 	—		 	—		 	—		 	(2,131	)	 	(455	)	 	—		 	(2,586	)	 	—		 	(2,586	)	
Total other income (expense)	58,110		 	14,527		 	36,439		 	109,076		 	7,542		 	9,189		 	(20,022	)	 	105,785		 	(32,805	)	 	72,980		
Operating expenses:	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Salaries and benefits	22,682		 	6,652		 	6,142		 	35,476		 	1,054		 	4,615		 	(60	)	 	41,085		 	—		 	41,085		
Litigation settlement	—		 	—		 	—		 	—		 	—		 	55,000		 	—		 	55,000		 	—		 	55,000		
Cost to provide enrollment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
services	—		 	—		 	23,709		 	23,709		 	—		 	—		 	—		 	23,709		 	—		 	23,709		
Depreciation and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
amortization	1,362		 	330		 	1,624		 	3,316		 	—		 	354		 	—		 	3,670		 	5,355		 	9,025		
Restructure expense	4,751		 	—		 	—		 	4,751		 	—		 	—		 	—		 	4,751		 	—		 	4,751		
Other	12,470		 	2,053		 	2,556		 	17,079		 	2,937		 	6,701		 	—		 	26,717		 	—		 	26,717		
Intersegment expenses, net	1,166		 	973		 	701		 	2,840		 	20,295		 	(3,173	)	 	(19,962	)	 	—		 	—		 	—		
Total operating expenses	42,431		 	10,008		 	34,732		 	87,171		 	24,286		 	63,497		 	(20,022	)	 	154,932		 	5,355		 	160,287		
Income (loss) before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes and corporate overhead allocation	15,692		 	4,531		 	1,707		 	21,930		 	73,206		 	(57,570	)	 	—		 	37,566		 	(38,160	)	 	(594	)	
Corporate overhead allocation	(1,676	)	 	(559	)	 	(559	)	 	(2,794	)	 	(2,793	)	 	5,587		 	—		 	—		 	—		 	—		
Income (loss) before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes	14,016		 	3,972		 	1,148		 	19,136		 	70,413		 	(51,983	)	 	—		 	37,566		 	(38,160	)	 	(594	)	
Income tax (expense) benefit	(5,326	)	 	(1,510	)	 	(436	)	 	(7,272	)	 	(26,757	)	 	19,754		 	—		 	(14,275	)	 	14,501		 	226		
Net income (loss)	$	8,690		 	2,462		 	712		 	11,864		 	43,656		 	(32,229	)	 	—		 	23,291		 	(23,659	)	 	(368	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Additional information:	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Net income (loss)	$	8,690		 	2,462		 	712		 	11,864		 	43,656		 	(32,229	)	 	—		 	23,291		 	 	 	 	
Plus: Litigation settlement (a)	—		 	—		 	—		 	—		 	—		 	55,000		 	—		 	55,000		 	 	 	 	
Plus: Restructure expense (b)	4,751		 	—		 	—		 	4,751		 	—		 	—		 	—		 	4,751		 	 	 	 	
Less: Net tax effect	(1,805	)	 	—		 	—		 	(1,805	)	 	—		 	(20,900	)	 	—		 	(22,705	)	 	 	 	 	
Net income (loss), excluding	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
litigation settlement and restructure expense	$	11,636		 	2,462		 	712		 	14,810		 	43,656		 	1,871		 	—		 	60,337		 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(a) During the third quarter of 2010, the Company recorded a $55.0 million litigation settlement charge.	
(b) During 2010, the Company recorded restructuring charges associated with previously implemented restructuring plans.	

49

	
																															
 	Nine months ended September 30, 2011	
 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Student
Loan
and
Guaranty
Servicing	 	Tuition
Payment
Processing
and
Campus
Commerce	 	Enrollment
Services	 	Total Fee-
Based	 	Asset
Generation and
Management	 	Corporate
Activity
and
Overhead	 	Eliminations	 	Base Net
Income	 	Adjustments
to GAAP
Results	 	GAAP
Results of
Operations	
Total interest income	$	42		 	19		 	—		 	61		 	433,994		 	3,578		 	(2,132	)	 	435,501		 	—		 	435,501		
Interest expense	—		 	—		 	—		 	—		 	158,034		 	8,325		 	(2,132	)	 	164,227		 	—		 	164,227		
Net interest income (loss)	42		 	19		 	—		 	61		 	275,960		 	(4,747	)	 	—		 	271,274		 	—		 	271,274		
Less provision for loan losses	—		 	—		 	—		 	—		 	14,250		 	—		 	—		 	14,250		 	—		 	14,250		
Net interest income (loss)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
after provision for loan losses	42		 	19		 	—		 	61		 	261,710		 	(4,747	)	 	—		 	257,024		 	—		 	257,024		
Other income (expense):	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Loan and guaranty servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue	110,952		 	—		 	—		 	110,952		 	—		 	—		 	—		 	110,952		 	—		 	110,952		
Intersegment servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue	51,272		 	—		 	—		 	51,272		 	—		 	—		 	(51,272	)	 	—		 	—		 	—		
Tuition payment processing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
and campus commerce revenue	—		 	50,904		 	—		 	50,904		 	—		 	—		 	—		 	50,904		 	—		 	50,904		
Enrollment services revenue	—		 	—		 	101,688		 	101,688		 	—		 	—		 	—		 	101,688		 	—		 	101,688		
Software services revenue	13,745		 	—		 	—		 	13,745		 	—		 	—		 	—		 	13,745		 	—		 	13,745		
Other income	—		 	—		 	—		 	—		 	11,827		 	5,422		 	—		 	17,249		 	—		 	17,249		
Gain on sale of loans and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
debt repurchases	—		 	—		 	—		 	—		 	1,400		 	6,907		 	—		 	8,307		 	—		 	8,307		
Derivative market value and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
foreign currency adjustments	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(29,585	)	 	(29,585	)	
Derivative settlements, net	—		 	—		 	—		 	—		 	(6,805	)	 	(612	)	 	—		 	(7,417	)	 	—		 	(7,417	)	
Total other income (expense)	175,969		 	50,904		 	101,688		 	328,561		 	6,422		 	11,717		 	(51,272	)	 	295,428		 	(29,585	)	 	265,843		
Operating expenses:	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Salaries and benefits	75,454		 	21,995		 	18,672		 	116,121		 	2,181		 	12,623		 	—		 	130,925		 	—		 	130,925		
Cost to provide enrollment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
services	—		 	—		 	68,804		 	68,804		 	—		 	—		 	—		 	68,804		 	—		 	68,804		
Depreciation and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
amortization	4,647		 	967		 	2,377		 	7,991		 	—		 	1,046		 	—		 	9,037		 	12,425		 	21,462		
Restructure expense	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		
Other	43,604		 	7,263		 	6,889		 	57,756		 	9,988		 	16,032		 	—		 	83,776		 	—		 	83,776		
Intersegment expenses, net	3,720		 	3,377		 	2,560		 	9,657		 	52,059		 	(10,444	)	 	(51,272	)	 	—		 	—		 	—		
Total operating expenses	127,425		 	33,602		 	99,302		 	260,329		 	64,228		 	19,257		 	(51,272	)	 	292,542		 	12,425		 	304,967		
Income (loss) before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes and corporate overhead allocation	48,586		 	17,321		 	2,386		 	68,293		 	203,904		 	(12,287	)	 	—		 	259,910		 	(42,010	)	 	217,900		
Corporate overhead allocation	(2,949	)	 	(983	)	 	(983	)	 	(4,915	)	 	(4,914	)	 	9,829		 	—		 	—		 	—		 	—		
Income (loss) before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes	45,637		 	16,338		 	1,403		 	63,378		 	198,990		 	(2,458	)	 	—		 	259,910		 	(42,010	)	 	217,900		
Income tax (expense) benefit	(17,340	)	 	(6,208	)	 	(533	)	 	(24,081	)	 	(75,616	)	 	5,289		 	—		 	(94,408	)	 	15,964		 	(78,444	)	
Net income (loss)	$	28,297		 	10,130		 	870		 	39,297		 	123,374		 	2,831		 	—		 	165,502		 	(26,046	)	 	139,456		

50

	
																															
 	Nine months ended September 30, 2010	
 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Student
Loan
and
Guaranty
Servicing	 	Tuition
Payment
Processing
and
Campus
Commerce	 	Enrollment
Services	 	Total Fee-Based	 	Asset
Generation
and
Management	 	Corporate
Activity
and
Overhead	 	Eliminations	 	Base Net
Income	 	Adjustments
to GAAP
Results	 	GAAP
Results of
Operations	
Total interest income	$	43		 	24		 	—		 	67		 	450,715		 	5,439		 	(3,140	)	 	453,081		 	—		 	453,081		
Interest expense	—		 	—		 	—		 	—		 	164,063		 	17,422		 	(3,140	)	 	178,345		 	—		 	178,345		
Net interest income (loss)	43		 	24		 	—		 	67		 	286,652		 	(11,983	)	 	—		 	274,736		 	—		 	274,736		
Less provision for loan losses	—		 	—		 	—		 	—		 	16,700		 	—		 	—		 	16,700		 	—		 	16,700		
Net interest income (loss)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
after provision for loan losses	43		 	24		 	—		 	67		 	269,952		 	(11,983	)	 	—		 	258,036		 	—		 	258,036		
Other income (expense):	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Loan and guaranty servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue	106,764		 	—		 	—		 	106,764		 	—		 	(254	)	 	—		 	106,510		 	—		 	106,510		
Intersegment servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue	63,571		 	—		 	—		 	63,571		 	—		 	—		 	(63,571	)	 	—		 	—		 	—		
Tuition payment processing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
and campus commerce revenue	—		 	44,704		 	—		 	44,704		 	—		 	—		 	—		 	44,704		 	—		 	44,704		
Enrollment services revenue	—		 	—		 	105,113		 	105,113		 	—		 	—		 	—		 	105,113		 	—		 	105,113		
Software services revenue	14,467		 	—		 	—		 	14,467		 	—		 	—		 	—		 	14,467		 	—		 	14,467		
Other income	519		 	—		 	—		 	519		 	14,114		 	10,555		 	—		 	25,188		 	—		 	25,188		
Gain on sale of loans and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
debt repurchases	—		 	—		 	—		 	—		 	23,899		 	4,922		 	—		 	28,821		 	—		 	28,821		
Derivative market value and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
foreign currency adjustments	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(35,931	)	 	(35,931	)	
Derivative settlements, net	—		 	—		 	—		 	—		 	(7,931	)	 	(455	)	 	—		 	(8,386	)	 	—		 	(8,386	)	
Total other income (expense)	185,321		 	44,704		 	105,113		 	335,138		 	30,082		 	14,768		 	(63,571	)	 	316,417		 	(35,931	)	 	280,486		
Operating expenses:	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Salaries and benefits	69,591		 	19,864		 	18,660		 	108,115		 	3,698		 	12,540		 	(1,662	)	 	122,691		 	—		 	122,691		
Litigation settlement	—		 	—		 	—		 	—		 	—		 	55,000		 	—		 	55,000		 	—		 	55,000		
Cost to provide enrollment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
services	—		 	—		 	69,845		 	69,845		 	—		 	—		 	—		 	69,845		 	—		 	69,845		
Depreciation and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
amortization	3,538		 	1,002		 	5,744		 	10,284		 	3		 	1,146		 	—		 	11,433		 	18,103		 	29,536		
Restructure expense	6,040		 	—		 	—		 	6,040		 	—		 	(20	)	 	—		 	6,020		 	—		 	6,020		
Other	45,638		 	6,433		 	7,563		 	59,634		 	10,147		 	19,339		 	—		 	89,120		 	—		 	89,120		
Intersegment expenses, net	4,158		 	2,626		 	1,775		 	8,559		 	63,011		 	(9,661	)	 	(61,909	)	 	—		 	—		 	—		
Total operating expenses	128,965		 	29,925		 	103,587		 	262,477		 	76,859		 	78,344		 	(63,571	)	 	354,109		 	18,103		 	372,212		
Income (loss) before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes and corporate overhead allocation	56,399		 	14,803		 	1,526		 	72,728		 	223,175		 	(75,559	)	 	—		 	220,344		 	(54,034	)	 	166,310		
Corporate overhead allocation	(4,349	)	 	(1,450	)	 	(1,450	)	 	(7,249	)	 	(7,247	)	 	14,496		 	—		 	—		 	—		 	—		
Income (loss) before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes	52,050		 	13,353		 	76		 	65,479		 	215,928		 	(61,063	)	 	—		 	220,344		 	(54,034	)	 	166,310		
Income tax (expense) benefit	(19,779	)	 	(5,076	)	 	(28	)	 	(24,883	)	 	(82,053	)	 	24,040		 	—		 	(82,896	)	 	20,533		 	(62,363	)	
Net income (loss)	$	32,271		 	8,277		 	48		 	40,596		 	133,875		 	(37,023	)	 	—		 	137,448		 	(33,501	)	 	103,947		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Additional information:	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Net income (loss)	$	32,271		 	8,277		 	48		 	40,596		 	133,875		 	(37,023	)	 	—		 	137,448		 	 	 	 	
Plus: Litigation settlement (a)	—		 	—		 	—		 	—		 	—		 	55,000		 	—		 	55,000		 	 	 	 	
Plus: Restructure expense (b)	6,040		 	—		 	—		 	6,040		 	—		 	(20	)	 	—		 	6,020		 	 	 	 	
Less: Net tax effect	(2,295	)	 	—		 	—		 	(2,295	)	 	—		 	(20,892	)	 	—		 	(23,187	)	 	 	 	 	
Net income (loss), excluding	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
litigation settlement and restructure expense	$	36,016		 	8,277		 	48		 	44,341		 	133,875		 	(2,935	)	 	—		 	175,281		 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(a) During the third quarter of 2010, the Company recorded a $55.0 million litigation settlement charge.	
(b) During 2010, the Company recorded restructuring charges associated with previously implemented restructuring plans.	

51

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.

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:

52

	
																			
 	Student
Loan
and
Guaranty
Servicing	 	Tuition
Payment
Processing
and Campus
Commerce	 	Enrollment
Services	 	Asset
Generation
and
Management	 	Corporate
Activity
and
Overhead	 	Total	
 	 	 	 	 	 	 	 	 	 	 	 	
 	Three months ended September 30, 2011	
Derivative market value and	 	 	 	 	 	 	 	 	 	 	 	
foreign currency adjustments	$	—		 	—		 	—		 	(6,677	)	 	20,565		 	13,888		
Amortization of intangible assets	2,099		 	1,513		 	878		 	—		 	—		 	4,490		
Net tax effect (a)	(798	)	 	(575	)	 	(334	)	 	2,537		 	(7,814	)	 	(6,984	)	
Total adjustments to GAAP	$	1,301		 	938		 	544		 	(4,140	)	 	12,751		 	11,394		
 	 	 	 	 	 	 	 	 	 	 	 	
 	Three months ended September 30, 2010	
Derivative market value and	 	 	 	 	 	 	 	 	 	 	 	
foreign currency adjustments	$	—		 	—		 	—		 	24,966		 	7,839		 	32,805		
Amortization of intangible assets	2,112		 	1,120		 	2,123		 	—		 	—		 	5,355		
Net tax effect (a)	(803	)	 	(426	)	 	(807	)	 	(9,487	)	 	(2,978	)	 	(14,501	)	
Total adjustments to GAAP	$	1,309		 	694		 	1,316		 	15,479		 	4,861		 	23,659		
 	 	 	 	 	 	 	 	 	 	 	 	
 	Nine months ended September 30, 2011	
Derivative market value and	 	 	 	 	 	 	 	 	 	 	 	
foreign currency adjustments	$	—		 	—		 	—		 	6,443		 	23,142		 	29,585		
Amortization of intangible assets	6,299		 	3,492		 	2,634		 	—		 	—		 	12,425		
Net tax effect (a)	(2,394	)	 	(1,327	)	 	(1,001	)	 	(2,448	)	 	(8,794	)	 	(15,964	)	
Total adjustments to GAAP	$	3,905		 	2,165		 	1,633		 	3,995		 	14,348		 	26,046		
 	 	 	 	 	 	 	 	 	 	 	 	
 	Nine months ended September 30, 2010	
Derivative market value and	 	 	 	 	 	 	 	 	 	 	 	
foreign currency adjustments	$	—		 	—		 	—		 	20,955		 	14,976		 	35,931		
Amortization of intangible assets	6,462		 	4,636		 	7,005		 	—		 	—		 	18,103		
Net tax effect (a)	(2,456	)	 	(1,763	)	 	(2,665	)	 	(7,963	)	 	(5,686	)	 	(20,533	)	
Total adjustments to GAAP	$	4,006		 	2,873		 	4,340		 	12,992		 	9,290		 	33,501		

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

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.

53

“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 between the U.S. dollar and Euro 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 business and asset 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.

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 offers a hosted servicing software solution that can be used by third parties to service various types of student loans, including Federal Direct Loan Program and FFEL Program loans.  Currently, including a contract with an incumbent Direct Loan Program service provider, the Company has agreements with third parties to add more than 12 million borrowers to

54

its hosted servicing software solution. The Company does not provide servicing of loans as part of these agreements. In October 2011, the Company began hosting student loan servicing volume on its servicing software platforms. As of October 31, 2011, more than 9.5 million borrowers were hosted on these platforms. The Company will begin to recognize this additional software services revenue in the fourth quarter of 2011.

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 to provide additional servicing capacity for loans owned by the Department. These loans include Direct Loan Program loans and FFEL Program loans purchased by the Department under the authority granted in the ECASLA legislation. The Company earns a monthly fee from the Department for each unique borrower that has loans owned by the Department that are serviced by the Company. In September 2009, the Department began assigning FFELP 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 second year of survey results, the Company will be allocated 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 Department projected an estimated 4.1 million new borrowers in total during the third year of this contract that would be allocated to the four servicers. The Company is focused on improving survey results to increase this allocation in future periods and has and will continue to incur additional operating expenses in support of these initiatives.

The servicing contract with the Department spans five years (through June 2014), 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 federally-owned student loan portfolio becomes a larger portion of the Company's total student loan servicing portfolio, operating margins are expected to be lower than historical levels achieved.

Segment Summary of Results

The results for the three and nine months ended September 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.	

•	Excluding rehabilitation collections, a decrease in guaranty servicing revenue due to the amortization of the guaranty servicing portfolio.	

•	A decrease in operating margin due to the government servicing portfolio growing as a percentage of the Company's total servicing portfolio.	

•	An increase in operating expenses due to incurring additional costs related to the government servicing contract and the hosted servicing software product.	

55

Student Loan Servicing Volumes (dollars in millions)

	
									
Company Owned	$23,139	$24,378	$26,351	$26,183	$23,727	$23,249	$22,757	$22,503	
% of Total	61.6%	56.7%	55.3%	47.0%	38.6%	34.2%	33.0%	30.2%	
 	 	 	 	 	 	 	 	 	
Number of borrowers:	 	 	 	 	 	 	 	 	
Government Servicing:	441,913	1,055,896	1,530,308	2,510,630	2,804,502	2,814,142	2,666,183	2,966,706	
 	 	 	 	 	 	 	 	 	
FFELP servicing:	2,311,558	2,327,016	2,329,150	2,227,288	1,912,748	1,870,538	1,837,272	1,812,582	
 	 	 	 	 	 	 	 	 	
Total:	2,753,471	3,382,912	3,859,458	4,737,918	4,717,250	4,684,680	4,503,455	4,779,288	

56

Three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010

	
																										
 	Three months ended September 30,	 	Nine months ended September 30,	
 	 	 	 	 	Change	 	 	 	 	 	Change	
 	2011	 	2010	 	$	 	%	 	2011	 	2010	 	$	 	%	
Net interest income	$	15		 	13		 	2		 	15.4	 %	 	$	42		 	43		 	(1	)	 	(2.3	)%	
Loan and guaranty servicing	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
revenue	37,927		 	33,464		 	4,463		 	13.3		 	110,952		 	106,764		 	4,188		 	3.9		
Intersegment servicing revenue	16,622		 	20,022		 	(3,400	)	 	(17.0	)	 	51,272		 	63,571		 	(12,299	)	 	(19.3	)	
Software services revenue	4,622		 	4,624		 	(2	)	 	—		 	13,745		 	14,467		 	(722	)	 	(5.0	)	
Other income	—		 	—		 	—		 	—		 	—		 	519		 	(519	)	 	(100.0	)	
Total other income	59,171		 	58,110		 	1,061		 	1.8		 	175,969		 	185,321		 	(9,352	)	 	(5.0	)	
Salaries and benefits	25,335		 	22,682		 	2,653		 	11.7		 	75,454		 	69,591		 	5,863		 	8.4		
Depreciation and amortization	2,005		 	1,362		 	643		 	47.2		 	4,647		 	3,538		 	1,109		 	31.3		
Restructure expense	—		 	4,751		 	(4,751	)	 	(100.0	)	 	—		 	6,040		 	(6,040	)	 	(100.0	)	
Other expenses	14,420		 	12,470		 	1,950		 	15.6		 	43,604		 	45,638		 	(2,034	)	 	(4.5	)	
Intersegment expenses, net	1,291		 	1,166		 	125		 	10.7		 	3,720		 	4,158		 	(438	)	 	(10.5	)	
Total operating expenses	43,051		 	42,431		 	620		 	1.5		 	127,425		 	128,965		 	(1,540	)	 	(1.2	)	
"Base net income" before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes and corporate overhead allocation	16,135		 	15,692		 	443		 	2.8		 	48,586		 	56,399		 	(7,813	)	 	(13.9	)	
Corporate overhead allocation	(963	)	 	(1,676	)	 	713		 	(42.5	)	 	(2,949	)	 	(4,349	)	 	1,400		 	(32.2	)	
"Base net income" before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes	15,172		 	14,016		 	1,156		 	8.2		 	45,637		 	52,050		 	(6,413	)	 	(12.3	)	
Income tax expense	(5,765	)	 	(5,326	)	 	(439	)	 	8.2		 	(17,340	)	 	(19,779	)	 	2,439		 	(12.3	)	
"Base net income"	$	9,407		 	8,690		 	717		 	8.3	 %	 	$	28,297		 	32,271		 	(3,974	)	 	(12.3	)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Additional information:	 		 	 		 	 		 	 	 	 		 	 		 	 		 	 	
"Base net income"	$	9,407		 	8,690		 	717		 	8.3	 %	 	$	28,297		 	32,271		 	(3,974	)	 	(12.3	)%	
Restructure expense	—		 	4,751		 	(4,751	)	 	(100.0	)	 	—		 	6,040		 	(6,040	)	 	(100.0	)	
Net tax effect	—		 	(1,805	)	 	1,805		 	(100.0	)	 	—		 	(2,295	)	 	2,295		 	(100.0	)	
"Base net income," excluding	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
restructure expense	$	9,407		 	11,636		 	(2,229	)	 	(19.2	)%	 	$	28,297		 	36,016		 	(7,719	)	 	(21.4	)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin,	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
excluding restructure expense	25.6	%	 	32.3	%	 	 		 	 		 	25.9	%	 	31.4	%	 	 		 	 		

Loan and guaranty servicing revenue .

	
																			
 	Three months ended September 30,	
 	2011	 	2010	
 	Origination
revenue	 	Servicing
revenue	 	Total
revenue	 	Origination
revenue	 	Servicing
revenue	 	Total
revenue	
FFELP servicing (a)	$	—		 	6,712		 	6,712		 	—		 	9,492		 	9,492		
Private servicing	729		 	2,096		 	2,825		 	742		 	1,921		 	2,663		
Government servicing (b)	—		 	12,816		 	12,816		 	—		 	8,689		 	8,689		
Guaranty servicing (c)	—		 	15,574		 	15,574		 	12		 	12,608		 	12,620		
Loan and guaranty servicing	 	 	 	 	 	 	 	 	 	 	 	
revenue	$	729		 	37,198		 	37,927		 	754		 	32,710		 	33,464		

57

		
(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 increased in 2011 compared to 2010 due to an increase in revenue earned from rehabilitation collections on defaulted loan assets.  For the three months ended September 30, 2011 , the Company earned $8.6 million in revenue from rehabilitation collections compared to $5.3 million for the same period in 2010 . Excluding the rehabilitation collection revenue, revenue from guaranty servicing decreased $0.3 million.	

	
																			
 	Nine months ended September 30,	
 	2011	 	2010	
 	Origination
revenue	 	Servicing
revenue	 	Total
revenue	 	Origination
revenue	 	Servicing
revenue	 	Total
revenue	
FFELP servicing (a)	$	—		 	20,450		 	20,450		 	254		 	30,712		 	30,966		
Private servicing	1,213		 	6,374		 	7,587		 	1,046		 	5,776		 	6,822		
Government servicing (b)	—		 	37,018		 	37,018		 	—		 	18,376		 	18,376		
Guaranty servicing (c)	—		 	45,897		 	45,897		 	131		 	50,469		 	50,600		
Loan and guaranty servicing revenue	$	1,213		 	109,739		 	110,952		 	1,431		 	105,333		 	106,764		

(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 and the amortization of the guaranty servicing portfolio.  For the nine months ended September 30, 2011 , the Company earned $24.2 million in revenue from rehabilitation collections compared to $27.6 million for the same period in 2010 .  Excluding the rehabilitation collection revenue, revenue from guaranty servicing decreased $1.2 million for the nine months ended September 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.

Operating expenses .   Excluding restructure expense and collection costs related to loan rehabilitation revenue, operating expenses increased $4.1 million ( 11.7% ) and $8.7 million ( 8.2% ) for the three and nine months ended September 30, 2011 , respectively, compared with the same periods in 2010 .  These increases were due to incurring additional costs related to:

•	Supporting the increase in government servicing volume	

•	Supporting initiatives to improve performance metrics under the government servicing contract	

•	Preparing for the additional volume that was added th the Company's servicing platforms in October 2011 related to the hosted servicing software solution	

The Company expects continued compression of operating margin in this operating segment as a result of the government servicing portfolio growing as a percentage of the Company’s total servicing portfolio.

58

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 generally 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.

Segment Summary of Results

The results for the three and nine months ended September 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 customers.	

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

59

Three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010

	
																										
 	Three months ended September 30,	 	Nine months ended September 30,	
 	 	 	 	 	Change	 	 	 	 	 	Change	
 	2011	 	2010	 	$	 	%	 	2011	 	2010	 	$	 	%	
Net interest income	$	11		 	12		 	(1	)	 	(8.3	)%	 	$	19		 	24		 	(5	)	 	(20.8	)%	
Tuition payment processing and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
campus commerce revenue	16,774		 	14,527		 	2,247		 	15.5		 	50,904		 	44,704		 	6,200		 	13.9		
Salaries and benefits	7,594		 	6,652		 	942		 	14.2		 	21,995		 	19,864		 	2,131		 	10.7		
Depreciation and amortization	286		 	330		 	(44	)	 	(13.3	)	 	967		 	1,002		 	(35	)	 	(3.5	)	
Other expenses	2,302		 	2,053		 	249		 	12.1		 	7,263		 	6,433		 	830		 	12.9		
Intersegment expenses, net	1,166		 	973		 	193		 	19.8		 	3,377		 	2,626		 	751		 	28.6		
Total operating expenses	11,348		 	10,008		 	1,340		 	13.4		 	33,602		 	29,925		 	3,677		 	12.3		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
"Base net income" before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes and corporate overhead allocation	5,437		 	4,531		 	906		 	20.0		 	17,321		 	14,803		 	2,518		 	17.0		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Corporate overhead allocation	(321	)	 	(559	)	 	238		 	(42.6	)	 	(983	)	 	(1,450	)	 	467		 	(32.2	)	
"Base net income" before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes	5,116		 	3,972		 	1,144		 	28.8		 	16,338		 	13,353		 	2,985		 	22.4		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income tax expense	(1,944	)	 	(1,510	)	 	(434	)	 	28.7		 	(6,208	)	 	(5,076	)	 	(1,132	)	 	22.3		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
"Base net income"	$	3,172		 	2,462		 	710		 	28.8	 %	 	$	10,130		 	8,277		 	1,853		 	22.4	 %	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin	30.5	%	 	27.3	%	 	 		 	 		 	32.1	%	 	29.9	%	 	 		 	 		

Tuition payment processing and campus commerce revenue . Tuition payment processing and campus commerce revenue increased for the three and nine months ended September 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 nine months ended September 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 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 new regulations issued by the Department under the Higher Education Act that became effective July 1, 2011 could have an impact on the Company's Enrollment Services operating segment, in connection with services it provides to for-profit schools.  The Higher Education Act provides that to be eligible to participate in Federal student financial aid programs, educational institutions, including for-profit schools, must enter into a program participation agreement with the Department. 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

60

to any individual or entity engaged in recruiting or admission activities, based on their success in securing enrollments. Previous regulations included a number of activities or “safe harbors,” that did not constitute prohibited incentive compensation. One of those safe harbors permitted an institution to provide 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 who provide internet generated student contact information. The new regulations also create liability for misrepresentation in advertisements, offers, and communications presented to prospective students, with associated penalties for noncompliance with these standards.

In addition, the same regulations impose strict liability on educational institutions for misrepresentations made by entities, like the Company, who contract with the institutions to provide marketing services. As a result, the Company's school customers have demanded and the Company has agreed to be subject to increased limitations of liability in its contracts as well as indemnification for actions by the Company's third-party publishers.

In addition, the Department recently issued new regulations regarding the provision of Title IV of the Higher Education Act that for-profit schools can be eligible to participate in Title IV student financial aid programs only with respect to educational programs that lead to “gainful employment” in a recognized occupation. These regulations, most of which became effective July 1, 2011, require for-profit schools to provide prospective students with each eligible program's recognized occupations, cost, completion rate, job placement rate, and median loan debt of program completers, and provide that Title IV funds may not be available to students enrolled in educational programs offered by for-profit schools if those programs do not meet certain debt-to-income ratios and loan repayment metrics to be measured beginning July 1, 2012.

Approximately 95% of interactive marketing revenue included in this segment is generated from for-profit schools. The regulations discussed above 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 nine months ended September 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.

61

Three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010

	
																										
 	Three months ended September 30,	 	Nine months ended September 30,	
 	 	 	 	 	Change	 	 	 	 	 	Change	
 	2011	 	2010	 	$	 	%	 	2011	 	2010	 	$	 	%	
Enrollment services revenue	$	35,505		 	36,439		 	(934	)	 	(2.6	)%	 	$	101,688		 	105,113		 	(3,425	)	 	(3.3	)%	
Salaries and benefits	6,484		 	6,142		 	342		 	5.6		 	18,672		 	18,660		 	12		 	0.1		
Cost to provide enrollment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
services	23,825		 	23,709		 	116		 	0.5		 	68,804		 	69,845		 	(1,041	)	 	(1.5	)	
Depreciation and amortization	784		 	1,624		 	(840	)	 	(51.7	)	 	2,377		 	5,744		 	(3,367	)	 	(58.6	)	
Other expenses	2,129		 	2,556		 	(427	)	 	(16.7	)	 	6,889		 	7,563		 	(674	)	 	(8.9	)	
Intersegment expenses, net	783		 	701		 	82		 	11.7		 	2,560		 	1,775		 	785		 	44.2		
Total operating expenses	34,005		 	34,732		 	(727	)	 	(2.1	)	 	99,302		 	103,587		 	(4,285	)	 	(4.1	)	
"Base net income" before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes and corporate overhead allocation	1,500		 	1,707		 	(207	)	 	(12.1	)	 	2,386		 	1,526		 	860		 	56.4		
Corporate overhead allocation	(321	)	 	(559	)	 	238		 	(42.6	)	 	(983	)	 	(1,450	)	 	467		 	(32.2	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
"Base net income" before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes	1,179		 	1,148		 	31		 	2.7		 	1,403		 	76		 	1,327		 	1,746.1		
Income tax (expense) benefit	(448	)	 	(436	)	 	(12	)	 	2.8		 	(533	)	 	(28	)	 	(505	)	 	1,803.6		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
"Base net income"	$	731		 	712		 	19		 	2.7	 %	 	$	870		 	48		 	822		 	1,712.5	 %	
Before Tax Operating Margin	3.3	%	 	3.2	%	 	 		 	 		 	1.4	%	 	0.1	%	 	 		 	 		
Before Tax Operating Margin (a)	5.2	%	 	7.1	%	 	 		 	 		 	3.4	%	 	5.0	%	 	 		 	 		
 
(a) Excludes student list cost amortization expense.

  Enrollment services revenue, cost to provide enrollment services, and gross profit

	
																
 	Three months ended September 30, 2011	
 	Interactive
marketing (a)	 	Publishing
services (b)	 	Subtotal	 	Resource
centers
and list
marketing	 	Total	
Enrollment services revenue	$	29,893		 	3,039		 	32,932		 	2,573		 	35,505		
Cost to provide enrollment services	22,950		 	875		 	23,825		 	 		 	 		
Gross profit	$	6,943		 	2,164		 	9,107		 	 		 	 		
Gross profit %	23.2	%	 	71.2	%	 	27.7	%	 	 		 	 		

																
 	Three months ended September 30, 2010	
 	Interactive
marketing (a)	 	Publishing
services (b)	 	Subtotal	 	Resource
centers
and list
marketing	 	Total	
Enrollment services revenue	$	30,135		 	3,617		 	33,752		 	2,687		 	36,439		
Cost to provide enrollment services	22,827		 	882		 	23,709		 	 		 	 		
Gross profit	$	7,308		 	2,735		 	10,043		 	 		 	 		
Gross profit %	24.3	%	 	75.6	%	 	29.8	%	 	 		 	 		

62

	
																
 	Nine months ended September 30, 2011	
 	Interactive
marketing (a)	 	Publishing
services (b)	 	Subtotal	 	Resource
centers
and list
marketing	 	Total	
Enrollment services revenue	$	86,313		 	6,625		 	92,938		 	8,750		 	101,688		
Cost to provide enrollment services	67,024		 	1,780		 	68,804		 	 		 	 		
Gross profit	$	19,289		 	4,845		 	24,134		 	 		 	 		
Gross profit %	22.3	%	 	73.1	%	 	26.0	%	 	 		 	 		

																
 	Nine months ended September 30, 2010	
 	Interactive
marketing (a)	 	Publishing
services (b)	 	Subtotal	 	Resource
centers
and list
marketing	 	Total	
Enrollment services revenue	$	88,409		 	7,803		 	96,212		 	8,901		 	105,113		
Cost to provide enrollment services	67,464		 	2,381		 	69,845		 	 		 	 		
Gross profit	$	20,945		 	5,422		 	26,367		 	 		 	 		
Gross profit %	23.7	%	 	69.5	%	 	27.4	%	 	 		 	 		

(a)	Interactive marketing revenue decreased $0.2 million ( 0.8% ) and $2.1 million ( 2.4% ) for the three and nine months ended September 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 nine months ended September 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 decreased $0.6 million ( 16.0% ) and $1.2 million ( 15.1% ) for the three and nine months ended September 30, 2011 compared to the same periods in 2010 . The decrease is due to competition related to online delivery of similar products and the timing of products sold. The gross profit margin for publishing and editing services decreased for the three months ended September 30, 2011 compared to the same period in 2010 as a result of the timing of when products were sold and increased for the nine months ended September 30, 2011 compared to the same period in 2010 as a result of a shift in the mix of products sold.	

Depreciation and amortization .   Depreciation and amortization for the three months ended September 30, 2011 and 2010 includes $0.7 million and $1.4 million , respectively, and for the nine months ended September 30, 2011 and 2010 includes $2.0 million and $5.2 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 nine months ended September 30, 2011 and 2010 remained flat due to a reduction in facilities costs, offset by investment in new products and services to meet customer needs and expand service offerings.

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.

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Recent Legislation

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.

In addition, on October 25, 2011, The White House and the Department announced a short-term consolidation program to eligible student loan borrowers. The Department's program will allow student loan borrowers with at least one legacy FFELP loan and at least one federal student loan owned by the Department to convert those loans to Special Direct Consolidation Loans under the Federal Direct Loan Program. The Company currently owns approximately $3 billion of FFEL Program loans that the Company believes will be eligible for the new program. This program could reduce the Company's FFEL Program student loan portfolio and related net interest income. See Part II, Item 1A, "Risk Factors," for further information related to this program and the potential impact to the Company.

Segment Summary of Results

The results for the three and nine months ended September 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 $2.7 billion of FFELP student loans during the first nine months of 2011 from various third parties, including the $1.9 billion loan purchase described below.	

•	The repurchase of $477.7 million of asset-backed securities resulting in a gain of $23.9 million in the first nine 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 nine months of 2011 , the Company repurchased $12.3 million of its asset-backed securities resulting in a gain of approximately $55,000 .	

Loan Purchase

On July 8, 2011, the Company purchased the residual interest in $1.9 billion of securitized federally insured consolidation loans. The Company acquired the ownership interest in GCO SLIMS Trust I giving the Company rights to the residual interest in GCO Education Loan Funding Trust-I (the "GCO Trust"). The GCO Trust includes federally insured consolidation loans funded to term with $1.9 billion of bonds and notes payable. The Company has consolidated these trusts on its consolidated balance sheet because management has determined the Company is the primary beneficiary of the trusts. Upon acquisition of the assets, the Company recorded the student loans and bonds and notes payable at fair value, resulting in the recognition of a student loan discount of $146 million and a bonds and notes payable discount of $167 million. These discounts will be accreted using the effective interest method over the lives of the underlying assets and liabilities. See note 2 in the accompanying consolidated financial statements included in this report for further details of this loan purchase.

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Student Loan Portfolio

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

	
										
 	As of	 	As of	
 	September 30, 2011	 	December 31, 2010	
 	Held for investment	 	Held for investment	 	Held for sale (a)	
Federally insured loans:	 	 	 	 	 	
Stafford and other	$	7,573,717		 	7,927,525		 	—		
Consolidation	17,081,935		 	15,830,174		 	—		
Total	24,655,652		 	23,757,699		 	—		
Non-federally insured loans	29,061		 	26,370		 	84,987		
 	24,684,713		 	23,784,069		 	84,987		
Unamortized loan discount/premiums and	 	 	 	 	 	
deferred origination costs, net	2,674		 	207,571		 	—		
Allowance for loan losses – federally insured loans	(35,190	)	 	(32,908	)	 	—		
Allowance for loan losses – non-federally insured loans	(10,583	)	 	(10,718	)	 	—		
 	$	24,641,614		 	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	36.42	%	 	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.	

Origination and Acquisition

The following table sets forth the activity of loans classified as “held for investment”:

	
													
 	Three months ended September 30,	 	Nine months ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Beginning balance (loans held for investment)	$	23,113,812		 	26,515,788		 	23,784,069		 	23,635,874		
 	 	 	 	 	 	 	 	
Loan originations	—		 	42,074		 	—		 	831,048		
Loan acquisitions	1,999,333		 	82,540		 	2,682,420		 	3,244,227		
Total originations and acquisitions	1,999,333		 	124,614		 	2,682,420		 	4,075,275		
Repayments, claims, capitalized interest, participations, and other	(325,064	)	 	(105,591	)	 	(1,315,403	)	 	(906,400	)	
Consolidation loans lost to external parties	(103,321	)	 	(187,661	)	 	(463,326	)	 	(436,563	)	
Loans sold	(47	)	 	(6,155	)	 	(3,047	)	 	(27,191	)	
Ending balance (loans held for investment)	$	24,684,713		 	26,340,995		 	24,684,713		 	26,340,995		

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.

65

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 September 30,	 	Nine months ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Balance at beginning of period	$	42,300		 	50,797		 	43,626		 	50,887		
Provision for loan losses:	 		 	 		 	 		 	 		
Federally insured loans	5,000		 	4,500		 	13,500		 	13,700		
Non-federally insured loans	250		 	1,000		 	750		 	3,000		
Total provision for loan losses	5,250		 	5,500		 	14,250		 	16,700		
Charge-offs:	 		 	 		 	 		 	 		
Federally insured loans	(3,978	)	 	(4,510	)	 	(13,418	)	 	(13,549	)	
Non-federally insured loans	(1,175	)	 	(1,933	)	 	(3,395	)	 	(5,696	)	
Total charge-offs	(5,153	)	 	(6,443	)	 	(16,813	)	 	(19,245	)	
 	 		 	 		 	 		 	 		
Recoveries - Non-federally insured loans	350		 	358		 	1,003		 	940		
Purchases:			 			 			 			
Federally insured loans	2,200		 	—		 	2,200		 	2,710		
Non-federally insured loans	—		 	—		 	—		 	220		
Transfer to/from repurchase obligation related to	 	 	 	 	 	 	 	
loans sold/purchased, net	826		 	—		 	1,507		 	(2,000	)	
Balance at end of period	$	45,773		 	50,212		 	45,773		 	50,212		
 	 	 	 	 	 	 	 	
Allocation of the allowance for loan losses:	 		 	 		 	 		 	 		
Federally insured loans	$	35,190		 	32,962		 	35,190		 	32,962		
Non-federally insured loans	10,583		 	17,250		 	10,583		 	17,250		
Total allowance for loan losses	$	45,773		 	50,212		 	45,773		 	50,212		

Repurchase Obligations

As of September 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.

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 September 30,	 	Nine months ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Beginning balance	$	20,689		 	12,600		 	12,600		 	10,600		
Repurchase obligation transferred to/from the allowance	 	 	 	 	 	 	 	
for loan losses related to loans purchased/sold, net	(826	)	 	—		 	(1,507	)	 	2,000		
Repurchase obligation associated with loans sold (a)	—		 	—		 	6,270		 	—		
Current period expense (b)	—		 	—		 	2,500		 	—		
Ending balance	$	19,863		 	12,600		 	19,863		 	12,600		

66

 
		
(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 nine months ended September 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 September 30, 2011	 	As of December 31, 2010	
 	Dollars	 	Percent	 	Dollars	 	Percent	
Federally Insured Loans:	 	 	 	 	 	 	 	
Loans in-school/grace/deferment (a)	$	4,358,786		 	 	 	$	4,358,616		 	 	
Loans in forbearance (b)	3,390,367		 	 	 	2,984,869		 	 	
Loans in repayment status:	 		 	 	 	 		 	 	
Loans current	14,555,949		 	86.1	%	 	14,309,480		 	87.2	%	
Loans delinquent 31-60 days (c)	675,053		 	4.0		 	794,140		 	4.8		
Loans delinquent 61-90 days (c)	366,831		 	2.2		 	306,853		 	1.9		
Loans delinquent 91 days or greater (d)	1,308,666		 	7.7		 	1,003,741		 	6.1		
Total loans in repayment	16,906,499		 	100.0	%	 	16,414,214		 	100.0	%	
Total federally insured loans	$	24,655,652		 	 		 	$	23,757,699		 	 		
 	 	 	 	 	 	 	 	
Non-Federally Insured Loans:	 		 	 		 	 		 	 		
Loans in-school/grace/deferment (a)	$	2,944		 	 		 	$	3,500		 	 		
Loans in forbearance (b)	473		 	 		 	292		 	 		
Loans in repayment status:	 		 	 		 	 		 	 		
Loans current	19,209		 	74.9	%	 	16,679		 	73.9	%	
Loans delinquent 31-60 days (c)	893		 	3.5		 	1,546		 	6.8		
Loans delinquent 61-90 days (c)	1,344		 	5.2		 	1,163		 	5.2		
Loans delinquent 91 days or greater	4,198		 	16.4		 	3,190		 	14.1		
Total loans in repayment	25,644		 	100.0	%	 	22,578		 	100.0	%	
Total non-federally insured loans	$	29,061		 	 		 	$	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)	A portion of loans included in 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.	

67

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	 	Nine months ended	
 	September 30,
2011	 	June 30,
2011	 	September 30,
2010	 	September 30,
2011	 	September 30,
2010	
Variable student loan yield, gross	2.57	 %	 	2.57	 %	 	2.63	 %	 	2.58	 %	 	2.64	 %	
Consolidation rebate fees	(0.73	)	 	(0.71	)	 	(0.64	)	 	(0.72	)	 	(0.68	)	
Premium/discount and deferred origination	 	 	 	 	 	 	 	 	 	
costs amortization/accretion (a)	(0.03	)	 	(0.14	)	 	(0.18	)	 	(0.11	)	 	(0.21	)	
Variable student loan yield, net	1.81		 	1.72		 	1.81		 	1.75		 	1.75		
Student loan cost of funds - interest expense	(0.82	)	 	(0.83	)	 	(0.94	)	 	(0.83	)	 	(0.83	)	
Student loan cost of funds - bonds and	 	 	 	 	 	 	 	 	 	
notes payable discount accretion (a)	(0.11	)	 	—		 	—		 	(0.04	)	 	—		
Student loan cost of funds -	 	 	 	 	 	 	 	 	 	
derivative settlements	0.06		 	0.05		 	0.03		 	0.05		 	0.02		
Variable student loan spread	0.94		 	0.94		 	0.90		 	0.93		 	0.94		
Fixed rate floor income, net of settlements	 	 	 	 	 	 	 	 	 	
on derivatives	0.65		 	0.57		 	0.51		 	0.59		 	0.53		
Core student loan spread	1.59	 %	 	1.51	 %	 	1.41	 %	 	1.52	 %	 	1.47	 %	
 	 	 	 	 	 	 	 	 	 	
Average balance of student loans	$	24,794,416		 	23,298,870		 	26,548,957		 	23,891,512		 	25,520,327		
 	 	 	 	 	 	 	 	 	 	
Average balance of debt outstanding	24,979,332		 	23,510,072		 	26,636,184		 	24,118,465		 	25,661,594		

(a)	As previously disclosed, on July 8, 2011, the Company purchased the residual interest in $1.9 billion of consolidation loans and recorded the loans and related debt at fair value resulting in the recognition of a significant student loan discount and bonds and notes payable discount. These discounts are being accreted using the effective interest method over the lives of the underlying assets/liabilities.	

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	 	Nine months ended	
 	September 30, 2011	 	June 30, 2011	 	September 30, 2010	 	September 30, 2011	 	September 30, 2010	
Fixed rate floor income, gross	$	44,080		 	39,146		 	38,263		 	121,126		 	112,731		
Derivative settlements (a)	(3,482	)	 	(6,345	)	 	(4,040	)	 	(16,045	)	 	(12,183	)	
Fixed rate floor income, net	$	40,598		 	32,801		 	34,223		 	105,081		 	100,548		
Fixed rate floor income contribution	 	 	 	 	 	 	 	 	 	
to spread, net	0.65	%	 	0.57	%	 	0.51	%	 	0.59	%	 	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.

68

Three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010

																										
 	Three months ended September 30,	 	Nine months ended September 30,	
 	 	 	 	 	Change	 	 	 	 	 	Change	
 	2011	 	2010	 	$	 	%	 	2011	 	2010	 	$	 	%	
Net interest income after	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
provision for loan losses	$	92,772		 	89,950		 	2,822		 	3.1	 %	 	$	261,710		 	269,952		 	(8,242	)	 	(3.1	)%	
Other income	3,694		 	4,710		 	(1,016	)	 	(21.6	)	 	11,827		 	14,114		 	(2,287	)	 	(16.2	)	
Gain on sale of loans and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
debt repurchases	—		 	4,963		 	(4,963	)	 	(100.0	)	 	1,400		 	23,899		 	(22,499	)	 	(94.1	)	
Derivative settlements, net	507		 	(2,131	)	 	2,638		 	(123.8	)	 	(6,805	)	 	(7,931	)	 	1,126		 	(14.2	)	
Total other income	4,201		 	7,542		 	(3,341	)	 	(44.3	)	 	6,422		 	30,082		 	(23,660	)	 	(78.7	)	
Salaries and benefits	694		 	1,054		 	(360	)	 	(34.2	)	 	2,181		 	3,698		 	(1,517	)	 	(41.0	)	
Other expenses	3,311		 	2,937		 	374		 	12.7		 	9,988		 	10,150		 	(162	)	 	(1.6	)	
Intersegment expenses, net	16,865		 	20,295		 	(3,430	)	 	(16.9	)	 	52,059		 	63,011		 	(10,952	)	 	(17.4	)	
Total operating expenses	20,870		 	24,286		 	(3,416	)	 	(14.1	)	 	64,228		 	76,859		 	(12,631	)	 	(16.4	)	
"Base net income" before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes and corporate overhead allocation	76,103		 	73,206		 	2,897		 	4.0		 	203,904		 	223,175		 	(19,271	)	 	(8.6	)	
Corporate overhead allocation	(1,605	)	 	(2,793	)	 	1,188		 	(42.5	)	 	(4,914	)	 	(7,247	)	 	2,333		 	(32.2	)	
"Base net income" before	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income taxes	74,498		 	70,413		 	4,085		 	5.8		 	198,990		 	215,928		 	(16,938	)	 	(7.8	)	
Income tax expense	(27,902	)	 	(26,757	)	 	(1,145	)	 	4.3		 	(75,616	)	 	(82,053	)	 	6,437		 	(7.8	)	
"Base net income"	$	46,596		 	43,656		 	2,940		 	6.7	 %	 	$	123,374		 	133,875		 	(10,501	)	 	(7.8	)%	

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

	
																										
 	Three months ended September 30,	 	Nine months ended September 30,	
 	 	 	 	 	Change	 	 	 	 	 	Change	
 	2011	 	2010	 	  $	 	%	 	2011	 	2010	 	  $	 	%	
Variable student loan interest,	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
net of settlements on derivatives (a)	$	164,580		 	177,847		 	(13,267	)	 	(7.5	)%	 	$	470,072		 	510,336		 	(40,264	)	 	(7.9	)%	
Consolidation rebate fees (b)	(45,863	)	 	(42,993	)	 	(2,870	)	 	6.7		 	(128,976	)	 	(128,658	)	 	(318	)	 	0.2		
Amortization/accretion of	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
loan premiums/discounts and deferred origination costs, net (c)	(1,854	)	 	(11,921	)	 	10,067		 	(84.4	)	 	(19,736	)	 	(40,550	)	 	20,814		 	(51.3	)	
Interest on bonds and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
notes payable (d)	(51,340	)	 	(63,062	)	 	11,722		 	(18.6	)	 	(148,949	)	 	(160,922	)	 	11,973		 	(7.4	)	
Bonds and notes payable	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
discount accretion (e)	(6,953	)	 	—		 	(6,953	)	 	100.0		 	(6,953	)	 	—		 	(6,953	)	 	100.0		
Variable student loan interest	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
margin, net of settlements on derivatives	58,570		 	59,871		 	(1,301	)	 	(2.2	)	 	165,458		 	180,206		 	(14,748	)	 	(8.2	)	
Fixed rate floor income,	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
net of settlements on derivatives (f)	40,598		 	34,223		 	6,375		 	18.6		 	105,081		 	100,548		 	4,533		 	4.5		
Investment interest	116		 	465		 	(349	)	 	(75.1	)	 	748		 	1,107		 	(359	)	 	(32.4	)	
Intercompany interest	(755	)	 	(1,240	)	 	485		 	(39.1	)	 	(2,132	)	 	(3,140	)	 	1,008		 	(32.1	)	
Provision for loan losses (g)	(5,250	)	 	(5,500	)	 	250		 	(4.5	)	 	(14,250	)	 	(16,700	)	 	2,450		 	(14.7	)	
Net interest income after	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
provision for loan losses (net of settlements on derivatives (h))	$	93,279		 	87,819		 	5,460		 	6.2	 %	 	$	254,905		 	262,021		 	(7,116	)	 	(2.7	)%	

69

		
(a)	Variable student loan interest, net of settlements on derivatives, decreased as a result of a decrease in the average student loan portfolio of $1.8 billion ( 6.6% ) and $1.6 billion ( 6.4% ) for the three and nine months ended September 30, 2011 compared to the same periods in 2010 .  In addition, the yield earned on student loans, net of settlements on derivatives, decreased to 2.63% for the three and nine months ended September 30, 2011 from 2.66% compared to the same periods in 2010 .  	

(b)	Consolidation rebate fees increased for the three and nine months ended September 30, 2011 compared to the same periods in 2010 due to the purchase of the residual interest in $1.9 billion of consolidation loans in July 2011.	

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

(d)	Interest expense decreased as a result of a decrease in average debt outstanding of $1.7 billion ( 6.2% ) and $1.5 billion ( 6.0% ) for the three and nine months ended September 30, 2011 , respectively, compared to the same periods in 2010 .  In addition, interest rates on the Company’s variable rate debt decreased, which decreased the Company’s cost of funds for the three and nine months ended September 30, 2011 compared to the same periods in 2010 .	

(e)	During July 2011, the Company recorded a discount on bonds and notes payable assumed as a result of the purchase of the residual interest on $1.9 billion of student loans and related debt. The bonds and notes payable discount is being accreted using the effective interest method over the lives of the bonds and notes payable.	

(f)	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 September 30,	 	Nine months ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Fixed rate floor income, gross	$	44,080		 	38,263		 	121,126		 	112,731		
Derivative settlements (a)	(3,482	)	 	(4,040	)	 	(16,045	)	 	(12,183	)	
Fixed rate floor income, net	$	40,598		 	34,223		 	105,081		 	100,548		

(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 nine months ended September 30, 2011 and 2010 are due to historically low interest rates.

(g)	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 nine months ended September 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.	

(h)	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.	

70

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

													
 	Three months ended September 30,	 	Nine months ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Borrower late fee income	$	2,995		 	3,133		 	9,807		 	9,370		
Other	699		 	1,577		 	2,020		 	4,744		
Other income	$	3,694		 	4,710		 	11,827		 	14,114		

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

													
 	Three months ended September 30,	 	Nine months ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Gain on sale of loans	$	—		 	—		 	1,345		 	—		
Gain on debt repurchases - asset-backed securities (a)	—		 	4,963		 	55		 	23,899		
Gain on sale of loans and debt repurchases	$	—		 	4,963		 	1,400		 	23,899		

(a)	During the three and nine months ended September 30, 2011 , the Company repurchased asset-backed securities of $11.7 million and $12.3 million , respectively.  During the three and nine months ended September 30, 2010 , the Company repurchased asset-backed securities of $85.7 million and $477.7 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 nine months ended September 30, 2011 , the Company recorded an other 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 nine months ended September 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. The decrease was partially offset by an increase in fees paid to third parties for the servicing of the Company's student loan portfolio.

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 nine months ended September 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

71

business acquisitions. The Company currently 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. The universal shelf registration statement expires in December 2011, and the Company is currently evaluating whether to renew the universal shelf.

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

								
 	Carrying
amount	 	Interest rate
range	 	Final maturity	
Asset Generation and Management:	 	 	 	 	 	
Bonds and notes issued in asset-backed securitizations	$	21,674,467		 	0.16% - 6.90%	 	11/25/15 - 7/27/48	
FFELP warehouse facilities	719,668		 	0.22% - 0.45%	 	7/1/14	
Department of Education Conduit	2,398,456		 	0.30%	 	5/8/14	
Other borrowings	43,510		 	3.58 % - 5.72%	 	11/14/11 - 3/1/22	
 	24,836,101		 	 	 	 	
Unsecured Corporate Debt:	 		 	 	 	 	
Unsecured line of credit	149,390		 	0.63%	 	5/8/12	
Junior Subordinated Hybrid Securities	100,697		 	3.74%	 	9/15/61	
 	250,087		 	 	 	 	
 	$	25,086,188		 	 	 	 	

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 September 30, 2011	
Unsecured Corporate Debt:	 		
Unsecured line of credit - due May 2012	$	149,390		
 
Sources of liquidity currently available to satisfy unsecured debt obligations

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

				
 	As of September 30, 2011	
Sources of primary liquidity:	 	
Cash and cash equivalents	$	92,094		
Investments - trading securities	49,834		
Unencumbered FFELP student loan assets	406		
Unencumbered private student loan assets	19,873		
Asset-backed security investments - Class B subordinated notes (a)	76,513		
Asset-backed security investments (b)	72,649		
Total sources of primary liquidity	$	311,369		

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(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 September 30, 2011 , $72.6 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.	

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 nine months ended September 30, 2011 and year ended December 31, 2010 , the Company had net cash flow from operating activities of $211.9 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 September 30, 2011	
 	Carrying
amount	 	Final maturity	
Asset Generation and Management:	 	 	 	
Bonds and notes issued in asset-backed securitizations	$	21,674,467		 	11/25/15 - 7/27/48	
FFELP warehouse facilities	719,668		 	7/1/14	
Department of Education Conduit	2,398,456		 	5/8/14	
Other borrowings	43,510		 	11/14/11 - 3/1/22	
 	$	24,836,101		 	 	

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 September 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 $1.83 billion as detailed below.  The $1.83 billion includes approximately $330 million (as of September 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 September 30, 2011 , the Company had $21.5 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 September 30, 2011 .

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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 $370 million to $430 million .

On October 25, 2011, The White House and the Department announced a short-term consolidation program to eligible student loan borrowers. The Department's program will allow student loan borrowers with at least one legacy FFELP loan and at least one federal student loan owned by the Department to convert those loans to Special Direct Consolidation Loans under the Federal Direct Loan Program. The Company currently owns approximately $3 billion of FFEL Program loans that the Company believes will be eligible for the new program, of which approximately $2 billion are permanently funded in asset-backed securitizations, and the forecased cash flows from these loans are included in the table above. This program could increase the prepayments on the loans eligible for this program and decrease the forecasted cash flows. See Part II, Item 1A, "Risk Factors," for further information related to this program and the potential impact to the Company.

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 September 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 $25.8 million . See Item 3, "Quantitative and Qualitative Disclosures about Market Risk — Interest Rate Risk."

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FFELP Warehouse Facilities

The Company funds a portion of its FFELP loan acquisitions using its FFELP warehouse facilities. Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements.
 
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").

The Company's NFSLW-I Warehouse facility has a maximum financing amount of $500.0 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. As of September 30, 2011 , $362.1 million was outstanding under the NFSLW-I Warehouse facility, $137.9 million was available for future use, and $30.9 million was advanced as equity support.

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. As of September 30, 2011 , $357.6 million was outstanding under the NHELP-I Warehouse facility, $142.4 million was available for future use, and $18.5 million was advanced as equity support.

The FFELP warehouse facilities contain 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 facilities.

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 September 30, 2011 , the Company had $2.4 billion borrowed under the facility and $85.1 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.

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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"). As of September 30, 2011 , $505.1 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 September 30, 2011 , the Company had approximately $49.5 million advanced in the FFELP warehouse facilities and approximately $85.1 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 NFSLW-I Warehouse facility.

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, "Risk Factors," included in this report.

Description of Other Debt Facilities

Unsecured Line of Credit

The Company has a $750.0 million unsecured line of credit that terminates on May 8, 2012. As of September 30, 2011 , there was $149.4 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

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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 September 30, 2011 , excluding Lehman’s lending commitment, the Company had $558.6 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-federally insured loans in the Company’s portfolio	

As of September 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, was 7.40%, payable semi-annually. Beginning September 29, 2011 through September 29, 2036, the "scheduled maturity date," the interest rate on the Hybrid Securities is equal to three-month LIBOR plus 3.375%, payable quarterly, which was 3.74% at September 30, 2011. 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 or in part, any time on or after September 29, 2011, at their principal amount plus accrued and unpaid interest, provided in the case of a redemption in part that the principal amount outstanding after such redemption is at least $50.0 million.

Debt Repurchases

Due to the Company’s improved cash position, the Company repurchased debt during the first three quarters 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:

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 	Three months ended	 	Nine months ended	
 	September 30, 2011	 	September 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	11,654		 	11,654		 	—		 	12,254		 	12,199		 	55		
 	$	11,654		 	11,654		 	—		 	74,812		 	67,850		 	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.

Stock Repurchases

During 2006, the Company's Board of Directors authorized a stock repurchase program to repurchase shares of the Company's Class A common stock. As of November 8, 2011, approximately 1,570,000 shares may still be purchased under the program. The program has an expiration date of May 24, 2012. Certain share repurchases reflected in the table below were made pursuant to a trading plan adopted by the Company in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934.

Shares repurchased by the Company during 2011 are shown in the table below.

	
												
 	 	Total shares repurchased	 	Purchase price (in thousands)	 	Average price of shares repurchased (per share)	
 	 		 		 		
Three months ended March 31, 2011	 	14,465		 	$	310		 	$	21.44		
 	 	 	 	 	 	 	
Three months ended June 30, 2011	 	9,979		 	224		 	22.39		
 	 	 	 	 	 	 	
Three months ended September 30, 2011	 	1,097,441		 	20,596		 	18.77		
 	 	 	 	 	 	 	
Nine months ended September 30, 2011	 	1,121,885		 	21,130		 	18.83		
 	 	 	 	 	 	 	
October 1, 2011 - November 8, 2011	 	311,524		 	5,935		 	19.06		
 	 	 	 	 	 	 	
January 1, 2011 - November 8, 2011	 	1,433,409		 	$	27,065		 	$	18.88		

Contractual Obligations

The Company’s contractual obligations were as follows:

	
																
 	As of September 30, 2011	
 	Total	 	Less than  1 year	 	1 to 3 years	 	3 to 5 years	 	More than  5 years	
Bonds and notes payable	$	25,086		 	158		 	3,118		 	238		 	21,572		
Operating lease obligations (a)	16,125		 	6,629		 	8,629		 	867		 	—		
Total	$	41,211		 	6,787		 	11,747		 	1,105		 	21,572		

(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 $1.3 million in sublease arrangements.	

As of September 30, 2011 , the Company had a reserve of $13.3 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 September 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

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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 September 30, 2011 , the Company has $19.9 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 September 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 , $ 0.10 , and $0.10 per share on the Company’s Class A and Class B common stock were paid on March 15, 2011 , June 15, 2011 , and September 15, 2011 respectively, to all holders of record as of March 1, 2011 , June 1, 2011 , and September 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 December 15, 2011 to all holders of record as of December 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.

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.

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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 and accrued interest 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.

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.	

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•	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.

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

81

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 became effective July 1, 2011, applied retrospectively to January 1, 2011. During the third quarter of 2011, the Company completed its evaluation of this new guidance and determined that it has no impact on its student loan receivable portfolio.

In April 2011, the FASB issued ASU 2011-08, Intangibles - Goodwill and Other: Testing for Goodwill Impairment. This ASU amends FASB ASC Topic 350, Intangibles - Goodwill and Other, to simplify how an entity tests for goodwill impairment by allowing entities to first assess certain qualitative factors to determine whether the existence of certain events or circumstances would lead to a determination that it would be more likely than not that the fair value of a reporting unit is less than its carrying amount, instead of first performing a fair value analysis for each reporting unit. Entities that conclude, after assessing the totality of events and circumstances, that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount are not required to perform the two-step impairment test. This guidance became effective on September 15, 2011 for annual and interim impairment tests for fiscal years beginning after December 15, 2011, and early adoption is permitted. As of the filing of this report, the Company is evaluating this guidance. The Company's next annual goodwill impairment review is November 30, 2011.

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.

82

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

	
														
 	As of September 30, 2011	 	As of December 31, 2010	
 	Dollars	 	Percent	 	Dollars	 	Percent	
Fixed-rate loan assets	$	11,063,303		 	44.8	%	 	$	8,525,279		 	35.7	%	
Variable-rate loan assets	13,621,410		 	55.2		 	15,343,777		 	64.3		
Total	$	24,684,713		 	100.0	%	 	$	23,869,056		 	100.0	%	
 	 	 	 	 	 	 	 	
Fixed-rate debt instruments	$	29,884		 	0.1	%	 	$	163,255		 	0.7	%	
Variable-rate debt instruments	25,056,304		 	99.9		 	24,509,217		 	99.3		
Total	$	25,086,188		 	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 September 30,	 	Nine months ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Fixed rate floor income, gross	$	44,080		 	38,263		 	121,126		 	112,731		
Derivative settlements (a)	(3,482	)	 	(4,040	)	 	(16,045	)	 	(12,183	)	
Fixed rate floor income, net	$	40,598		 	34,223		 	105,081		 	100,548		

(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 September 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)	 	September 30, 2011	
< 3.0%	 	2.88%	 	0.24%	 	$	1,748,492		 	
3.0 - 3.49%	 	3.20%	 	0.56%	 	2,031,640		 	
3.5 - 3.99%	 	3.65%	 	1.01%	 	1,993,143		 	
4.0 - 4.49%	 	4.20%	 	1.56%	 	1,527,216		 	
4.5 - 4.99%	 	4.72%	 	2.08%	 	866,947		 	
5.0 - 5.49%	 	5.24%	 	2.60%	 	578,132		 	
5.5 - 5.99%	 	5.67%	 	3.03%	 	351,143		 	
6.0 - 6.49%	 	6.18%	 	3.54%	 	410,195		 	
6.5 - 6.99%	 	6.70%	 	4.06%	 	365,508		 	
7.0 - 7.49%	 	7.17%	 	4.53%	 	143,939		 	
7.5 - 7.99%	 	7.70%	 	5.06%	 	241,515		 	
8.0 - 8.99%	 	8.17%	 	5.53%	 	546,593		 	
> 9.0%	 	9.04%	 	6.40%	 	258,840		 	
 	 	 	 	 	 	$	11,063,303		 	

(a)	The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate.  As of September 30, 2011 , the short-term interest rate was 20 basis points.	

The following table summarizes the outstanding derivative instruments as of September 30, 2011 used by the Company to hedge loans earning fixed rate floor income.

84

	
									
 	 	 	Notional	 	Weighted average fixed rate paid by the Company (a)	
 	Maturity	 	amount	 		
 	2013	 	$	2,150,000		 	0.85	%	
 	2014	 	750,000		 	0.85		
 	2015	 	100,000		 	2.26		
 	2020	 	50,000		 	3.23		
 	 	 	$	3,050,000		 	0.87	%	

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

As of September 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 September 30, 2011 :

										
Index	 	Frequency of variable resets	 	Assets	 	Debt outstanding that funded student loan assets (a)	
3 month H15 financial commercial paper (b)	 	Daily	 	$	23,687,939		 	—		
3 month Treasury bill (c)	 	Varies	 	967,713		 	—		
3 month LIBOR (d)	 	Quarterly	 	—		 	20,023,771		
1 month LIBOR	 	Monthly	 	—		 	680,121		
Auction-rate or remarketing (e)	 	Varies	 	—		 	970,575		
Asset-Backed commercial paper (f)	 	Varies	 	—		 	3,118,124		
Other (g)	 		 	180,449		 	43,510		
 	 	 	 	$	24,836,101		 	24,836,101		

(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 September 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		

85

		
(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 September 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 September 30, 2011 , the Company is sponsor on $751.4 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, or the Net Loan Rate as defined in the financing documents. 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.

Included in the $751.4 million of Auction Rate Securities on the Company's balance sheet as of September 30, 2011, is approximately $250 million of Auction Rate Securities assumed in the purchase of the residual interest of the GCO Trust. These Auction Rate Securities are also in a failed auction status.

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 $719.7 million funded in the Company’s FFELP warehouse facilities and $2.4 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.	

86

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 an expense of $87.3 million and $18.7 million for the three and nine months ended September 30, 2011 , respectively, and income of $73.7 million  and expense of $94.5 million for the three and nine months ended September 30, 2010 , respectively.

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 September 30,	 	Nine months ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Settlements:	 	 	 	 	 	 	 	
1:3 basis swaps	$	321		 	893		 	902		 	974		
T-Bill/LIBOR basis swaps	(69	)	 	—		 	(263	)	 	—		
Interest rate swaps - floor income hedges	(3,482	)	 	(4,040	)	 	(16,045	)	 	(12,183	)	
Interest rate swaps - hybrid debt hedges	(250	)	 	(242	)	 	(744	)	 	(242	)	
Cross-currency interest rate swaps	3,745		 	1,025		 	8,625		 	3,243		
Other	(8	)	 	(222	)	 	108		 	(178	)	
Total settlements - (expense) income	$	257		 	(2,586	)	 	(7,417	)	 	(8,386	)	

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.

87

	
																												
 	Three months ended September 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	$	(18,867	)	 	(26.3	)%	 	$	(34,639	)	 	(48.2	)%	 	$	(6,296	)	 	(8.8	)%	 	$	(18,888	)	 	(26.3	)%	
Impact of derivative	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
settlements	10,784		 	15.0		 	32,351		 	45.0		 	—		 	—		 	—		 	—		
Increase (decrease) in net	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income before taxes	$	(8,083	)	 	(11.3	)%	 	$	(2,288	)	 	(3.2	)%	 	$	(6,296	)	 	(8.8	)%	 	$	(18,888	)	 	(26.3	)%	
Increase (decrease) in	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
basic and diluted earnings per share	$	(0.10	)	 	 	 	$	(0.03	)	 	 	 	$	(0.08	)	 	 	 	$	(0.24	)	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Three months ended September 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	$	(17,036	)	 	(2,867.8	)%	 	$	(31,616	)	 	(5,322.6	)%	 	$	(6,714	)	 	(1,130.3	)%	 	$	(20,141	)	 	(3,390.8	)%	
Impact of derivative	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
settlements	19,810		 	3,334.9		 	59,429		 	10,004.8		 	—		 	—		 	—		 	—		
Increase (decrease) in net	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income before taxes	$	2,774		 	467.1	 %	 	$	27,813		 	4,682.2	 %	 	$	(6,714	)	 	(1,130.3	)%	 	$	(20,141	)	 	(3,390.8	)%	
Increase (decrease) in	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
basic and diluted earnings per share	$	0.04		 	 	 	$	0.35		 	 	 	$	(0.09	)	 	 	 	$	(0.26	)	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Nine months ended September 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	$	(50,845	)	 	(23.3	)%	 	$	(91,147	)	 	(41.8	)%	 	$	(18,039	)	 	(8.3	)%	 	$	(54,118	)	 	(24.8	)%	
Impact of derivative	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
settlements	43,052		 	19.8		 	129,156		 	59.3		 	—		 	—		 			 	—		
Increase (decrease) in net	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income before taxes	$	(7,793	)	 	(3.5	)%	 	$	38,009		 	17.5	 %	 	$	(18,039	)	 	(8.3	)%	 	$	(54,118	)	 	(24.8	)%	
Increase (decrease) in	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
basic and diluted earnings per share	$	(0.10	)	 	 	 	$	0.49		 	 	 	$	(0.23	)	 	 	 	$	(0.70	)	 	 	

88

	
																												
 	Nine months ended September 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	$	(50,582	)	 	(30.5	)%	 	$	(93,219	)	 	(56.1	)%	 	$	(19,193	)	 	(11.5	)%	 	$	(57,580	)	 	(34.6	)%	
Impact of derivative	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
settlements	48,163		 	29.0		 	144,489		 	86.9		 	—		 	—		 	—		 	—		
Increase (decrease) in net	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
income before taxes	$	(2,419	)	 	(1.5	)%	 	$	51,270		 	30.8	 %	 	$	(19,193	)	 	(11.5	)%	 	$	(57,580	)	 	(34.6	)%	
Increase (decrease) in	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
basic and diluted earnings per share	$	(0.03	)	 	 	 	$	0.65		 	 	 	$	(0.24	)	 	 	 	$	(0.73	)	 	 	
 
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 between the U.S. dollar and Euro 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 September 30,	 	Nine months ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Re-measurement of Euro Notes	$	73,453		 	(106,468	)	 	(10,902	)	 	58,608		
Change in fair value of cross currency interest rate swaps	(53,142	)	 	107,531		 	28,125		 	(52,491	)	
Total impact to statements of income - income (expense)	$	20,311		 	1,063		 	17,223		 	6,117		

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.

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 operations.

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 	Three months ended September 30,	 	Nine months ended September 30,	
 	2011	 	2010	 	2011	 	2010	
Change in fair value of derivatives	$	(87,341	)	 	73,663		 	(18,683	)	 	(94,539	)	
Foreign currency transaction adjustment (Euro Notes)	73,453		 	(106,468	)	 	(10,902	)	 	58,608		
Derivative settlements, net	257		 	(2,586	)	 	(7,417	)	 	(8,386	)	
Derivative market value and foreign currency	 	 	 	 	 	 	 	
adjustments and derivative settlements, net - (expense) income	$	(13,631	)	 	(35,391	)	 	(37,002	)	 	(44,317	)	

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 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 officers concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed in reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to the Company's management, including the chief executive and chief financial officers, as appropriate to allow timely decisions regarding required disclosure.

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.

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;

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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.  On September 12, 2011, the motion for stay was granted, and the motion for reconsideration was denied by the District Court. On September 20, 2011, the named plaintiff filed a motion for reconsideration of the District Court's order, which is set for hearing on November 22, 2011.

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 $2.4 billion borrowed as of September 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.

Higher rates of prepayments of student loans, including consolidation by the Department through the Federal Direct Loan Program, would reduce our net interest income.

On October 25, 2011, The White House and the Department announced a short-term consolidation program to eligible student loan borrowers beginning in January 2012 and ending June 30, 2012.  The Department's program will allow student loan borrowers with at least one legacy FFELP loan and at least one federal student loan owned by the Department to convert those loans to Special Direct Consolidation Loans under the Federal Direct Loan Program. As an incentive to participate, borrowers are expected to receive an additional 0.25 percent interest rate reduction on their Special Direct Consolidation Loans.  We expect to market and promote this program to eligible borrowers starting in January 2012.  At this time, the costs and pricing for participating in the program are not known. If we participate in the program, we anticipate servicing these Special Direct Consolidation Loans for borrowers already serviced by us through our servicing contract with the Department.

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In addition to servicing loans for the Department, we also own a portfolio of FFELP student loans of $24.7 billion and service $5.5 billion of FFELP student loans for third parties, both of which could be partially impacted by this program.  We believe that less than $3 billion of the $24.7 billion of FFELP loans that we currently own will be eligible for the new program, of which approximately $1 billion are not permanently funded in asset-backed securitizations. In addition, virtually none of the loans eligible for the program are subject to floor interest earnings. In addition, we believe that less than $700 million of the $5.5 billion of FFELP loans that we service for third parties will be eligible for the new program.  Our profits could be adversely impacted by a reduction in our FFELP student loan portfolio and third party servicing volume by reducing net interest income and servicing revenue, respectively.  

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 third 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.

														
Period	 	Total number of shares purchased (1)	 	Average price paid per share	 	Total number of shares purchased as part of publicly announced plans or programs (2)	 	Maximum number of shares that may yet be purchased under the plans or programs	
July 1 - July 31, 2011	 	2,839		 	$	21.98		 	2,109		 	2,973,963		
August 1 - August 31, 2011	 	419,965		 	18.79		 	419,965		 	2,553,998		
September 1 - September 30, 2011	 	674,637		 	18.74		 	674,591		 	1,879,407		
Total	 	1,097,441		 	$	18.77		 	1,096,665		 	 		

(1)	The total number of shares includes: (i) shares purchased pursuant to the stock repurchase program 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 stock repurchase program included 939 shares, 2,565 shares, and 91 shares in July , August , and September 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 730 shares, 0 shares, and 46 shares in July , August , and September 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.	

(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. 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 program. The program currently has an expiration date of May 24, 2012. Certain share repurchases included in the table above were made pursuant to a trading plan adopted by the Company in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934.	

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:

92

		
•	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 canceled.

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.	

93

ITEM 6.  EXHIBITS

	
			
 	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	

94

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:	November 8, 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	 	

95

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)	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;	
		
(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:	November 8, 2011	/s/ MICHAEL S. DUNLAP	
 	 	Michael S. Dunlap
Chairman and Chief Executive Officer
Principal Executive Officer	

 
Exhibit 31.1
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
I, Terry J. Heimes, 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)	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;	
		
(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:	November 8, 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 September 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:	November 8, 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